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Stanford case shows foreign CD risk

By Claes Bell, CFA · Bankrate.com
Monday, June 27, 2011
Posted: 3 pm ET

Remember Allen Stanford, the billionaire financier who ended up seeing his financial empire fall among accusations of running one of the biggest Ponzi schemes in history? Unfortunately, two years after Stanford Financial Group collapsed, investors in Stanford's Antiguan CDs are still waiting to find out how -- and if -- they'll be compensated for their losses.

From Peter J. Henning at Dealbook:

The S.E.C. is pushing for investors who bought more than $7.2 billion in allegedly bogus certificates of deposit from Mr. Stanford's Antiguan bank to be treated as brokerage customers by the Securities Investor Protection Corporation. If that happens, clients could get at least some of their money back.

SIPC provides a measure of protection for customers when a broker becomes insolvent, paying up to $500,000 per customer that includes $250,000 in cash. The program, which is not intended to provide insurance against fraud, only covers the brokerage firm's customers and not those who dealt with an affiliate, like an offshore bank, that is not qualified to participate in the program.

It's easy to see why people were sucked in by Stanford. The gaudy yields on Allen's five-year dollar-denominated CDs, which reached over 7 percent in 2008, a year in which U.S. CD rates averaged around 4 percent, were probably too good to pass up for some. But the fall of the Stanford investing empire and the mess it left behind provide a couple of lessons for CD investors who might be tempted by foreign CDs.

One is that investing in foreign CDs means that if things go wrong, there's basically no one to call. Foreign currency CDs issued by U.S. banks are protected by FDIC insurance, but CDs bought overseas aren't. In fact, few countries the world over can offer the kind of ironclad protection offered by the FDIC, and many don't offer any at all.

Deposit insurance standards vary widely, with some countries providing much less than the $250,000 insurance limit offered by the FDIC, and others providing a total insurance limit per bank, rather than individual protection for each account holder. And even if they do have deposit insurance, many governments won't pay a thin dime of insurance benefits to account holders outside the country, anyway. In the Stanford case, CD investors may get something in the way of reparations because the CDs were sold to them by an American brokerage now under investigation for fraud, but other foreign CD investors who lose money aren't so lucky.

Also, although Stanford's CDs were dollar-denominated, most foreign CDs aren't. That introduces currency risk, which any currency trader will tell you is pretty tough to assess. If you choose to invest in a non-dollar-denominated CD, you'll basically be making a bet that the currency you're buying the CD in will outperform the dollar. If it doesn't, and the dollar rises, your currency losses will probably more than offset any yield you earn.

I worry that in this time of ultra-low CD yields, even some conservative investors will reach outside the U.S. for some kind of a reasonable return and latch on to foreign CDs because they sound similar to the rock-solid deposit products in the U.S. A particular foreign CD may be a sound investment or it may not be, but it's simply not comparable to an American CD, and shouldn't be treated as such by investors.

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16 Comments
Pellucid
July 04, 2011 at 6:31 pm

Victim, None of Stanford's tricks could change the country which chartered, regulated and audited Sir Allen's "bank". I never needed to do any due-diligence on Stanford, his presence on Antigua (after being kicked out of British controlled Montserrat)was proof enough in my book that he wasn't to be trusted. When I did business on Antigua, I NEVER had more than 10K(US) in cash in their banks at any time, I had WAY too much experience there to risk more.

SMITH
July 03, 2011 at 9:24 am

Claes,
Bottom line here is that we would have never flown to Antiquan to invest in a foreign bank, Period. It was the broker dealer's bank and again if you had the marketing material that we were given you would see that the BD made every claim it could to convince investors it was insured and part of the BD, not a seperate entity as one might think.

VICTIM
July 03, 2011 at 9:15 am

Naysayers,
You are crazy. It wasn't nominations that brought the crime to light. The SEC was hiding the truth about their failures. What hole have you been in? SEC OIG has 150 page investigation report out (200 footnotes) proving he stole the money. The SEC hired KVT CPA firm which did an investigation on the flow of money and concluded Stanford stole the money. Whistleblower and SEC insider's rang the alarm that Stanford was stealing customer's money for the last 12 years and the SEC did nothing. The money did not go to the USA economy. It was stolen.

VICTIM
July 03, 2011 at 8:55 am

Pellucid, You are an idiot. It wasn't so easy to fall for the CDs you idiot. We were convinced to sell our securities and buy this bogus product by an American registered broker dealer and his broker reps. We did our due diligence. We contacted the SIPC, SEC, FINRA and every other watchdog/ regulatory agency in our country before we invested in Stanford's own CD product. Much to our chagrin as you should know by now the government conducted 4 investigation; 1997, 1998, 2002 and 2004 and came to the same conclusion, that being he was running a ponzi scheme and did nothing to warn investors. Securities law demand that the Broker Dealer disclose all information about CDs or they are not allowed to market such a product. Investors did not know that the SEC let this carry own for 12 years without enforcing the law. Also, SIPC is also informed that Stanford Group Co. was in financial difficulty they are supposed to immediately liquidate the broker dealer. Bottom line: Do your homework or keep your dumb comments to yourself. You better be thankful that Vitter is there to protect dumb people like you. People a lot smarter than you will ever be invested with Stanford because the government failed to do it's job.

Pellucid
July 01, 2011 at 4:37 pm

Why is it so difficult to understand that Antigua is not one of the 50 states? It's right there in Wikipedia, look it up! Vitter is just using the end of his political career to try to bail out some constituents, but I'm sure the "teabaggers" will have his job for paying US $ for a non-American bank come next election.