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February 17th, 2009

Fraudsters Are Branching Out to CDs

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The Security and Exchange Commission (SEC) filed charges against financier R. Allen Stanford for an alleged multi-billion dollar investment scheme that involved an $8 billion certificate of deposit program.

We cannot recall another instance where CDs have been used as a source of fraudulent activity. The SEC claims Stanford’s scheme made false promises and fabricated “historical return on data” information to lure investors. According to a news release from the SEC:

The SEC’s complaint, filed in federal court in Dallas, alleges that acting through a network of SGC financial advisers, SIB has sold approximately $8 billion of so-called “certificates of deposit” to investors by promising improbable and unsubstantiated high interest rates. These rates were supposedly earned through SIB’s unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years.

According to the SEC’s complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in “liquid” financial instruments (the portfolio); monitors the portfolio through a team of 20-plus analysts; and is subject to yearly audits by Antiguan regulators. Recently, as the market absorbed the news of Bernard Madoff’s massive Ponzi scheme, SIB attempted to calm its own investors by falsely claiming the bank has no “direct or indirect” exposure to the Madoff scheme.

The SEC’s complaint also alleges an additional scheme relating to $1.2 billion in sales by SGC advisers of a proprietary mutual fund wrap program, called Stanford Allocation Strategy (SAS), by using materially false historical performance data. According to the complaint, the false data helped SGC grow the SAS program from less than $10 million in 2004 to more than $1 billion, generating fees for SGC (and ultimately Stanford) of approximately $25 million in 2007 and 2008. The fraudulent SAS performance was used to recruit registered investment advisers with significant books of business, who were then heavily incentivized to reallocate their clients’ assets to SIB’s CD program.

Just as investors adjust their strategies into more “safer” sectors of the marketplace (CDs), fraudsters also adjust their schemes to take advantage of such flights to quality.

Before sending your money off to someone who’s promising you yields well above or below their market competitors, it’s time to ask some more questions. The same rule goes for loans.

Now what’s that old saying again? Ah yes, if it sounds too good to be true, it is!

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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