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Stanford case shows foreign CD risk

By Claes Bell · 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
ruth arce
June 30, 2011 at 12:56 pm

It is absolutely amazing and distraughtfull to learn the support that SEC gave Allen Stanford for so long.....I am another non-US citizen victim affected by this terribly fraud here in Peru. Eventhough more than 2 years have gone by -the peruvian group- is organizing to make our claim known by the US governmental authorities in order to recuperate the savings of our lifes, the great majority from retired people.
Hope is the last thing we have!

Claes Bell
June 30, 2011 at 8:37 am

Alpha, I'm not without sympathy for the investors that lost a lot of money in the Stanford case. Making sound investing decisions is hard, especially when you have people representing SIB making all sorts of claims about its safety and soundness. But saying investors "had no means to verify" whether a bank is FDIC insured is just not true. The FDIC has long published a fully searchable directory of all the banks it insures online at http://www2.fdic.gov/idasp/main_bankfind.asp. Alternately, Bankrate has been publishing a database of banks' safety and soundness at http://www.bankrate.com/rates/safe-sound/ssPromo.aspx since at least 2005. No one likes doing due diligence, but with thousands of dollars on the line, it's a must.

Alpha
June 30, 2011 at 6:48 am

Dear Claes Bell,

Before you make any conclusions on why investors were 'sucked in' by Stanford, as if taken by a storm without the possibility of thinking, please read the literature circulated by SIB.

There you will find details of the insurance coverage offered by them, including FDIC, that the average citizen looking for a no-risk investment such as a saving account had no means to verify was not true.

Pellucid
June 29, 2011 at 10:38 pm

Stanford International bank was domiciled, charterd, regulated and audited in Antigua and was wholly owned by Sir Allen Stanford, Citizen and Knight of Antigua (formerly of Texas). The Antiguan Banking laws (written by a committee appointed By Sir Stanford) made any adult supervision virtually impossible. Although when a private banker pays the attorney General/Finance Minister of a small corrupt country seven times his government salary, that should have set off some warning bells!

Stanfords Forgotten Victims
June 29, 2011 at 8:01 am

Claes you really need to get your facts right before you write articles such as this.
1) Investors were assured that Stanford International Bank was insured by LLoyds of London(this turned out to be not true).
2) Investors were told by SIB that the bank came under the protection of the SEC, FDIC and had more protection than any other bank, this bank was also endorsed by George Bush,m what better recommendation could one ask for.
3) There are 28,000 victims worldwide and less than 7,000 will get SIPC (if and when it is agreed by SIPC), the rest of the investors stand to lose whatever the receiver Janvey has collected as SIPC does not give money to investors they make a loan and then go to the assets of the defendant (Stanford) to collect towards what they have paid out. This will mean that while less than 7,000 victims (mostly American) stand to collect something back the remaining 20,000+ victims will get nothing and end up paying with what little money the receiver has to subsidise the American group.
4) The receiver and forensic accountant Karyl Van Tassel has already established that no money came to Antigua and the base for Stanfords business was America.
5 The SEC stood by for 13 years and allowed Stanford to defraud investors while they did nothing. They watched the money paid into SIB rise for less than 1 Billion to over 7 Billion and reports show that they were aware this was a Ponzi scheme, how can they not be held accountable for their negligence??

Sara
June 28, 2011 at 10:33 pm

I think you are not aware that the SEC had knowledge of the Ponzi scheme (not yet proven that it was because Mr. Stanford is "sick boy" and the trial postponed several times) for over 10 years.
Now the SEC wants to be friendly to the defrauded? no sir.
The SEC is NOT a friend of the cheated, never was. Were aware of the fraud for over 10 years, you think?
Now it has been pressed by Senator Vitter, Culberson and others to justice a group of affected Stanford.
The SEC is primarily responsible for the misery of thousands of people around the world, including U.S. citizens.

Claes Bell
June 28, 2011 at 1:18 pm

Again, investing fraud like this is morally reprehensible, and any politicians who shielded or defended Stanford should have to answer for that. Also, for what it's worth, I support the SEC position on this issue and hope the victims get some kind of compensation for their losses. But just because the purchase of SIB CDs was handled through US agents doesn't mean my point about the dangers of putting money into foreign CDs is invalid. My understanding is that Stanford made clear the "bank" was domiciled in Antigua and didn't have FDIC insurance. Had the Stanford victims instead invested in lower-yielding CDs offered by an FDIC-insured bank in the US, their losses would have been covered up to $250,000 per account.

Victim
June 28, 2011 at 10:08 am

Well, I have to mention that the majority of the victims were sure the investment with Stanford was solid. Please see this information where you can see how all transactions were handled in USA and no money was sent to Antigua: http://sivg.org/article/financial_advisors.html
http://sivg.org/article/SGC_Forensic_Accounting_Van_Tassel.html

Also if you have searched (time ago) in Internet about Stanford, you will see Mr. Stanford with many American people of high and political level. That made me feels sure that my investment was secure; Look at this nice picture: http://sivg.org/article/Stanford_US-Congress.html

Regards,
Stanford International Victims Group
http://sivg.org

Claes Bell
June 28, 2011 at 9:46 am

Esperanza, thanks for reading. I'm going to have to disagree with you on the SEC position regarding Stanford investors. Check out this legal analysis put out by the SEC that pretty firmly advocates for compensation for those burned by Stanford CDs: http://www.sec.gov/rules/other/2011/stanford-sipa-analysis.pdf. Now you may feel like they have taken too long to compensate the victims, and that may be the case, but I don't think the Stanford CD buyers are blameless here. Buying CDs from a bank domiciled in a small island nation, expressly NOT insured by the FDIC, doesn't strike me as a great idea. And your assertion that Stanford CDs were only 100 basis points higher than American CD yields isn't accurate. I have a Bloomberg story in front of me that pegs the rate for a 1-year Stanford jumbo CD at 4.5 percent as of Nov. 2008. Meanwhile, Bankrate's average for a 1-year jumbo that same week was 2.64 percent. I hope that answers some of your questions.

Esperanza
June 28, 2011 at 9:30 am

My Dear Friend,
Please inform better before to write.
The SEC was not pushing. The SEC denied any payment to the investor. Senator Vitter, Culberson and others pushed a lot even keeping the nomination of two new members of the SEC in order to put pressure over the SEC for taking decision after more than two years.
Also the interest rate of the CD in the most of case were not higher than 5 % (1 point apart for the US rate at that time)
And finally I would like to tell you my dear friend, that the trial to Mr. Stanford has been delayed for several times because he was over drug in the jail ( how you can explain that?) and until now no Stanford companies have been declared in bankruptcy and no proof has been shown against Mr. Stanford.
In the meantime more than 20.000 victims remain in the limbo with any kind of information or decision from the USA government even when everybody knows that the most Stanford companies were operated in USA and the money of the investors went to USA economy.
Thanks so much