Allen Stanford Myths Exposed

This originally appeared in realclearmarkets.com

With R. Allen Stanford, the alleged mastermind of an $8 billion fraud that has snared depositors in his offshore bank, appearances long have been deceiving.

In 1984, just two years before he opened his bank in the Caribbean, Stanford, deep in debt, filed for bankruptcy. Yet that didn’t stop the 6-foot-4-inch Stanford from passing himself off to investors as a successful businessman with a long history in the financial-services industry.

Indeed, by last year, Stanford had all the hallmarks of being one of the richest men in the world. But securities regulators—in a civil complaint—allege that much of Stanford’s $2.2 billion personal fortune may have come from treating the offshore bank he created like his own personal ATM. He hasn’t been charged with any criminal wrongdoing, but sources said the FBI continues to look into the matter. A lawyer for Stanford did not return phone calls; previously, a spokesman for Stanford Financial Group referred all questions to the SEC.
Master of Illusions?

If the Securities & Exchange Commission’s allegations are true, it means the far-flung financial empire Stanford built by selling high-yielding bank certificates of deposit was no sturdier than a giant sand castle on the beach. Yet throughout his professional life, the 58-year-old from the small Texas city of Mexia has shown a knack for rewriting his past and mastering the illusion of being successful, beginning with his very first business venture.

Two years after graduating from Baylor University in 1974, R. Allen Stanford went into the health and fitness business in Texas. He bought an existing health club in Waco and quickly expanded into a handful of other cities and small towns in the Lone Star State, including Galveston and Austin, the capital. He struck a deal with Nautilus (NLS) to become an early distributor of the pioneering weightlifting machines in the western U.S., say people familiar with Stanford.

But in the early 1980s, Stanford overreached when he tried to expand his health club business into Houston. He planned to open a giant club in a new office tower going up in the city’s downtown. But the club soon failed when the bottom fell out of the oil market and many new office buildings in Houston were left vacant. He fell behind on the rent for his health clubs. Ultimately, his Total Fitness Centers filed for bankruptcy in 1982.
Reinventing Himself

The failed foray into the health club business left Stanford, then 34, deep in the red and fending off more than 100 creditors. In February 1984, Stanford and his wife, Susan, filed for personal bankruptcy. The couple, who were married in 1975, reported having $229,735 in assets and $13.6 million in debts, according to federal court records. But by November of that year, the court discharged him from his old obligations—allowing him to make a fresh start.

Royle Berry, who worked for Stanford for six years and managed the Austin facility, says he knew the bankruptcy wouldn’t slow down his former boss. “He was quite charismatic and was able to win everybody over,” says Berry, who had to place a lien on Stanford’s house to collect on a court judgment he won during the bankruptcy proceeding. “He was an incredible salesman and loved you as long as you were making money for him.” Within time, Berry knew Stanford would find another business endeavor and ingratiate himself with a new crowd of loyalists.

It didn’t take long for Stanford to set out on a new course and reinvent himself—this time as an offshore banker with a wealth of experience in the financial-services industry. In 1985, during an extended stay in the Caribbean, where he was giving scuba diving lessons and looking for investors in a Houston-based real estate venture, Stanford met up with Frans Vingerhoedt, a European living in Aruba. The two men became fast friends and came up with the idea of starting an offshore bank in the nearby British territory of Montserrat, say people familiar with Stanford. Vingerhoedt, who has been at Stanford’s side ever since the bank opened for business, declined to comment. The SEC hasn’t accused Vingerhoedt of any wrongdoing.
The Latin Strategy

In early 1986, Stanford’s Guardian International Bank officially opened for business on the tiny island of Montserrat. Stanford’s father, James, provided $6 million in seed money and became the bank’s first chairman. A former mayor of Mexia, James made some of his money by buying up distressed Texas real estate, sources say. The elder Stanford appears in photos for early annual reports and, with his gray hair, looked the part of a veteran banker. But it was his son, Allen, fresh off his bankruptcy filing, who became the driving force behind the fledgling bank.

Guardian International almost exclusively targeted Latin American customers, running advertisements in Spanish-language newspapers featuring a woman in a bathing suit under the banner, “enjoy the pleasures of life.” Next to the woman, in large type, appeared the numbers 10.75%, the lofty yield on the bank’s CDs.

It was during those early days on Montserrat that Stanford developed the history that the bank’s roots went back to 1932—to a financial-services company started by his grandfather, Lodis. There was no mention of Stanford’s failed effort at trying to run a string of health clubs in Texas, nor the two then-recent bankruptcy filings. Instead, all the bank’s early marketing material focused on Lodis Stanford and “the wise guidance of our parent company, The Stanford Financial Group.” In 1992, a year after Guardian relocated to Antigua and was rechristened Stanford International, the bank put out a brochure that said the company was “celebrating our 60th anniversary” in helping customers find “conservative yet lucrative investments.”
Adopting Old Roots

Says a former employee who worked with Stanford more than a dozen years ago: “Allen decided to make his grandfather the anchor of the company history and ordered a picture of Grandpa to be placed in every office.” It was a tradition that continued until the SEC filed its charges on Feb. 17. By the time Stanford’s offshore bank had become an $8 billion institution in December 2008, it was long taken as gospel within the company that the firm’s roots went back more than 70 years.

But the truth appears far different. His grandfather was a barber in Mexia who later started a small insurance brokerage called Stanford Financial. The brokerage was eventually sold to a larger a company. People familiar with Stanford said there’s no evidence of any continuous link between the grandfather’s insurance business and the offshore bank and brokerage firm founded by the younger Stanford in the 1980s.

In later years, Stanford would continue to embellish his family story. For years, he would describe himself as a distant relative of Leland Stanford, the former California governor who founded Stanford University. But university officials have long said there’s no evidence of any familial link between the college and Allen Stanford’s family.

The stories about the famous family lineage and the firm’s longtime experience in financial services all served Stanford well and helped him expand his business quickly. Now, as securities regulators begin pulling back the curtains on Stanford’s failed financial empire, it’s likely that more of these efforts at myth-making will start coming to light.

Source: realclearmarkets.com