Second Amended Complaint in SEC v. Stanford International Bank, Ltd., et al.


Securities and Exchange Commission

  • United States District Court for the Northern Division of Texas, Dallas Division
  • 32 pages
  • June 19, 2009

1. For at least a decade, R. Allen Stanford and James M. Davis executed a massive Ponzi scheme through entities under their control, including Stanford International Bank, Ltd. (“SIB”) and its affiliated Houston-based broker-dealers and investment advisers, Stanford Group Company (“SGC”) and Stanford Capital Management (“SCM”). Stanford and Davis, acting in concert with the other defendants, misappropriated billions of dollars of investor funds and falsified SIB’s financial statements in an effort to conceal their fraudulent conduct.

2. By year-end 2008, SIB had sold more than $7.2 billion of self-styled “certificates of deposits” (the “CD”) by touting: (i) the bank’s safety and security,’ (ii) consistent, double-digit returns on the bank’s investment portfolio; and (iii) high return rates on the CD that greatly exceeded those offered by commercial banks in the United States.

3. Contrary to SIB’s public statements, Stanford and Davis, by February 2009, had misappropriated billions of dollars of investor money and “invested” an undetermined amount of investor funds in speculative, unprofitable private businesses controlled by Stanford.

4. In an effort to conceal their fraudulent conduct and maintain the flow of investor money into SIB’s coffers, Stanford and Davis fabricated the performance of the bank’s investment portfolio and lied to investors about the nature and performance of the portfolio. Gilberto Lopez and Mark Kuhrt, accountants for Stanford-affiliated companies, fabricated the financial statements. Using a pre-determined return on investment number, typically provided by Stanford or Davis, Lopez and Kuhrt reverse-engineered the bank’s financial statements to report investment income that the bank did not actually earn. Information in SIB’s financial statements and annual reports to investors about the bank’s investment portfolio bore no relationship to the actual performance of the bank investments. SIB’s financial statements and annual reports to investors were prepared, drafted and approved by Stanford, Davis, Lopez and Kuhrt. Stanford and Davis signed these falsified financial statements.

5. Laura Pendergest-Holt, the chief investment officer of Stanford Financial Group (“SFG”) and a member of SIB’s investment committee, facilitated the fraudulent scheme by misrepresenting to investors that she managed SIB’s multi-billion investment portfolio of assets and supervised a sizeable team of analysts to monitor the portfolio. 6. Leroy King, the administrator and chief executive officer of Antigua’s Financial Services Regulatory Commission (the “FSRC”), facilitated the Ponzi scheme by ensuring that
the FSRC “looked the other way” and conducted sham audits and examinations of SIB’s books and records. In exchange for bribes paid to him over a period of several years, King made sure that the FSRC did not examine SIB’s investment portfolio. King also provided Stanford with access to the FSRC’s confidential regulatory files, including requests by the Commission for assistance in investigating SIB as a possible Ponzi scheme. King further obstructed the Commission’s investigation by allowing Stanford to dictate the substance, and even content, of the FSRC’s responses to the Commission that relayed false assurances that there was no cause for concern as to SIB and by withholding information requested by the Commission that would have revealed Stanford’s fraud.

7. In addition to sales of the CD, SGC and SCM advisers, since 2004, have sold more than $1 billion of a proprietary mutual fund wrap program, called Stanford Allocation Strategy (“SAS”), using materially false and misleading historical performance data. The false data enabled SGC/SCM to grow the SAS program from less than $ 10 million in 2004 to over $ 1.2 billion in 2009 and generate fees for SGC/SCM (and ultimately Stanford) in excess of $25 million. The fraudulent SAS performance results were also used to recruit registered financial advisers with significant books of business, who were then heavily incentivized to re-allocate their clients’ assets to SIB’s CD program.

8. By engaging in the conduct described in this Complaint, SIB, SGC, SCM, Stanford, Davis, Pendergest-Holt, Lopez and Kuhrt directly or indirectly, singly or in concert, engaged, and unless enjoined and restrained, will again engage in transactions acts, practices, and courses of business that constitute violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)], and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)], and Exchange Act Rule 10b-5 [17 C.F.R. §240.10b-5] or, in the alternative, aided and abetted such violations. Likewise, through his actions, King aided and abetted, and unless enjoined and restrained, will continue to aid and abet violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)], and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5]. In addition, through conduct described herein, Stanford, SGC, and SCM violated Section 206(1) and (2) of the Investment Advisers Act of 1940 (“Adviser’s Act”) [15 U.S.C. §§ 80b-6(l) and 80b-6(2)], and Stanford, Davis, Pendergest-Holt, Lopez, Kuhrt, and King aided and abetted such violations. Finally, through their actions, SIB and SGC violated Section 7(d) of the Investment Company Act of 1940 (“Investment Company Act”) [15 U.S.C. § 80a-7(d)].

41. These promissory notes were typically created after Davis had, at Stanford’s
direction, wired out billions dollars of SIB investor funds to Stanford or his designees. Stanford
used the money to, among other things, fund his “personal playground,” including more than
$400 million to fund personal real estate deals {e.g., The Sticky Wicket Restaurant) and more
than $36 million to subsidize Stanford 20/20, an annual cricket tournament boasting a $20
million purse.
42. Lopez and Kuhrt (in addition to Stanford and Davis) were well aware of the more
than $1.6 billion in “loans” to Stanford, tracking many of the transfers in a spreadsheet entitled
“Shareholder Funding, Assumption of Debt and Notes Payable.” Stanford made few, if any,

39. Contrary to SIB’s representations regarding the liquidity and safety of its portfolio, investors’ funds were not invested in a “well-diversified portfolio of highly marketable securities.” Instead, Stanford misappropriated a significant portion of the bank’s investment portfolio. And SIB internal records reflect that more than half of the bank’s investment portfolio was comprised of undisclosed “Private Equity Real Estate.”

40. By year-end 2008, Stanford had misappropriated more than $1.6 billion from SIB. To conceal the theft, some of the transfers of CD investor money to Stanford were documented, after the fact, as personal “loans.” Stanford’s signature appears on at least $720 million in promissory notes to SIB that were recovered from his personal accountant’s office, including promissory notes dated December 31, 1999, December 31, 2000, December 31, 2001, December 31, 2002 and December 31, 2003. Other “loans,” particularly those in more recent years, were tracked in internal accounting records.

70. Neither Pendergest-Holt nor the SIO disclosed that the bank’s Tier 3 assets were managed and/or monitored exclusively by Stanford and Davis. Likewise, they did not disclose that Stanford and Davis surrounded themselves with a close-knit circle of family, friends and confidants, thereby eliminating any independent oversight of SIB’s assets.

71. Neither Pendergest-Holt nor the SIO disclosed to investors that the “global network” of money managers and the team of analysts did not manage any of SIB’s Tier 3 investments and, in reality, only monitored approximately 10% of SIB’s portfolio. In fact, Pendergest-Holt trained the SIO “not to divulge too much” about the oversight of SIB’s portfolio because that information “wouldn’t leave an investor with a lot of confidence.” Likewise, Davis instructed the SIO to “steer” potential CD investors away from information about SIB’s portfolio.

79. In the December 2008 Monthly Report, SIB told CD investors that the bank “had no direct or indirect exposure to any of [Bernard] Madoff s investments.”

80. Contrary to this statement, Stanford, Davis and Pendergest-Holt knew, prior to the release of the Monthly Report, that SIB had exposure to losses from investments with Madoff.

81. On December 12, 2008, and again on December 18, 2008, Pendergest-Holt received e-mails from Meridian Capital Partners, a hedge fund with which SIB had invested, detailing SIB’s exposure to Madoff-related losses.

82. On December 15, 2008, an SFG-affiliated employee notified Pendergest-Holt and Davis that SIB had exposure to Madoff-related losses in two additional funds through which SIB had invested. That same day, Davis, Pendergest-Holt and others consulted with Stanford regarding the bank’s exposure to Madoff-related losses.

83. Stanford, Davis and Pendergest-Holt never corrected this misrepresentation in the December 2008 monthly report.
Leroy King’s Role in the Fraudulent Scheme

84. Leroy King was the administrator and chief executive officer of the FSRC, which is charged with the regulation and supervision of all offshore banks licensed in Antigua, including SIB.

85. From at least February 2005, and continuing over a multi-year period, Stanford paid to King thousands of dollars in bribes, using money transferred from SIB to a Stanford controlled account at the Bank of Antigua, an onshore Antiguan bank owned and controlled by Stanford. King caused certain of these bribes to be deposited into U.S. bank accounts.

86. In addition to the cash payments, Stanford gave to King and his wife significant non-cash benefits, including: (i) use of Stanford’s fleet of private jets to travel throughout the United States and the Caribbean; (ii) use of an SIB corporate car; and (iii) 2004 Super Bowl tickets for King and a companion. Stanford subsequently hired King’s Super Bowl companion as a human resources project manager in Houston.

87. In exchange for the bribes, King facilitated SIB’s fraud by obstructing the SEC’s investigation into SIB and abdicating the FSRC’s oversight responsibilities.

88. On June 21, 2005, King, in response to an inquiry from the SEC, represented to the SEC staff that the FSRC had examined SIB and based on its examinations had concluded that “any further investigation of ‘possible’ fraudulent activities of [SIB] was unwarranted.” King continued by saying that “it is the opinion of the FSRC that [SIB] has conducted its banking business to date in a manner the FSRC considers to be fully compliant.” King had no basis for these representations. In exchange for the bribes from Stanford, King promised that the FSRC would not audit SIB’s investment portfolio. In fact, on at least one occasion in or about May 2003, King removed from an examination of an SIB affiliate an inquisitive FSRC employee that “got too close to the fire.”

89. King also provided Stanford access to the FSRC’s confidential regulatory files, including written requests by the Commission’s staff for information regarding SIB. For example, on September 25, 2006, the Commission’s staff faxed a letter to King requesting the FSRC’s assistance with its investigation of SIB. That same day, Stanford, Davis, and SFG’s general counsel discussed the Commission letter and outlined for King precisely how they wanted him to respond to the Commission staffs request.

90. On October 10, 2006, King did as Stanford instructed, sending a letter to the Commission’s staff that tracked the response dictated by Stanford, Davis and SFG’s general counsel. King’s letter falsely stated: “We wish to assure the SEC that the FSRC’s most recent onsite examination conducted just five months ago confirmed [SIB’s] compliance with all areas of depositor safety and solvency, as well as all other applicable laws and regulations. The FSRC has further confirmed through its continuous visits and supervision of [SIB] that there are no other issues or matters of concern with [SIB.]” In fact, King knew there was no basis for this

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