Stanford’s Alleged Fraud Said to Be Under Investigation by FBI

U.S. regulators’ allegations of a “massive” fraud run by Houston billionaire R. Allen Stanford and companies he operated are being investigated by the FBI, a person familiar with the case said.

The U.S. Securities and Exchange Commission sued Stanford and two aides on Feb. 17, accusing them of orchestrating a fraud involving $8 billion placed by investors with Stanford International Bank and two related firms.

No criminal charges have been filed against Stanford or his co-defendants in the SEC case: Stanford Chief Financial Officer James M. Davis and Laura Pendergest-Holt, chief investment officer of the Stanford Financial Group. Federal marshals shut the Houston office of Stanford Group Co.

“The SEC case is a precursor for the criminal investigation and inevitable criminal charges,” said Dan Cogdell, a Houston attorney who defended several Enron Corp. executives against federal securities-fraud charges.

Based on allegations in the SEC complaint, prosecutors might have grounds to charge some of the defendants with mail fraud, bank fraud, securities fraud, money laundering “and a host of less felonious acts,” he said.

Houston U.S. Attorney’s Office spokeswoman Angela Dodge referred questions regarding possible charges against Stanford to the SEC. Alfredo Perez, a spokesman for the U.S. Marshal’s office in Houston, said he wasn’t aware of any arrest warrants for the three executives, which he said wouldn’t be issued until any charges are filed.

Whereabouts Unknown

The SEC said yesterday that Stanford’s whereabouts weren’t known. Federal officials were unable to say if Stanford has retained a lawyer or been served with SEC-requested court orders freezing his personal assets and those of his companies.

The SEC pressed to freeze Stanford’s assets and appoint a receiver after learning that instructions had been given within the firm last week to move more than $170 million offshore, a person familiar with the matter said. Most of the money, including an attempted transfer of $150 million on Feb. 13, didn’t get out, the person said.

Houston criminal defense lawyer Ron Woods, who helped defend former Enron CEO Jeffrey Skilling, said SEC complaints typically precede criminal charges in white-collar cases.

“With Enron, the SEC filed its case real early,” said Woods, a former U.S. attorney in Houston and an ex-agent for the Federal Bureau of Investigation. “Then, when the criminal case came along, the SEC case tagged along with it.”

CD Sales

Stanford advisers fraudulently sold as much as $8 billion in certificates of deposit linked to Antigua-based Stanford International Bank, according to the SEC complaint, which was filed in federal court in Dallas.

Stanford sales staff told investors the CDs were safe, liquid investments similar to federally insured CDs issued by U.S. banks, and were overseen by a team of company analysts and by Antiguan banking regulators, according to the SEC complaint.

“Now it appears that all of those claims were false,” said attorney George Fleming, who filed a proposed investor class-action, or group, lawsuit against Stanford and his companies in federal court in Houston on Feb. 17, hours after federal agents raided Stanford’s Houston offices.

One of the companies the SEC sued, presented hypothetical investment results as actual historical data in sales pitches to clients, Michael Zarich, a senior investment officer with Antigua-based Stanford International Bank, told SEC officials in a sworn deposition.

After the raid, nothing was removed from the building, and the offices were locked down after employees were sent home, Perez said.

Cartel Link

The FBI and others have been investigating whether Stanford was involved in laundering drug money for Mexico’s Gulf Cartel, ABC News reported yesterday. Mexican authorities detained one of Stanford’s private planes after officials found checks inside believed to be connected to the cartel, reputed to be Mexico’s most violent gang, ABC News said.

Woods, who trained FBI agents in the U.S. Virgin Islands, where Stanford maintains a home, said it is unlikely that Stanford has gone into hiding.

“He’s so high-profile, I can’t see him fleeing,” Woods said.

So many countries have extradition treaties with the U.S. that “it is very difficult to hide anywhere these days,” Woods said. “There are very few countries, none of which you’d really want to live in. People running and hiding live a miserable existence, and they usually get caught.”

The case is SEC v. Stanford International Bank Ltd, 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas).

Obama’s $75 Billion Foreclosure Plan Spells Relief for Bankers

President Barack Obama offered $75 billion of relief yesterday to homeowners facing foreclosure. He also gave bankers a reprieve.

Some lenders, including New York-based JPMorgan Chase & Co., have worried that proposed “cramdown” legislation giving judges the power to modify mortgages of those who file for bankruptcy would increase the number of filings. Obama, who said yesterday he supports a cramdown law, signaled that it would only be a last resort for struggling borrowers.

“Allowing cramdowns is a bad idea,” said Andrew Sandler, a partner in the Washington office of law firm Skadden, Arps, Slate, Meagher & Flom LLP, whose clients include mortgage companies. “Obama’s program has the potential to reduce the number of bankruptcies. The fewer loans that go to bankruptcy and are subject to cramdowns the better.”

Lenders that have large amounts of other types of consumer loans, such as home equity and credit cards, could suffer further losses because bankruptcy judges are likely to wipe out that debt, Paul Miller, analyst at Friedman, Billings, Ramsey Group Inc., said in a Jan. 26 research note.

“That’s what scares a lot of people, especially anybody that has second liens,” he said in an interview yesterday. “The mortgage industry does not want cramdowns because it’s going to open up a Pandora’s box.”

The foreclosure plan is part of a broader $275 billion proposal announced by Obama. The $75 billion would reduce monthly payments for borrowers, help homeowners with loans owned or backed by Fannie Mae and Freddie Mac to refinance at lower rates, and provide incentives to the industry. The government committed to buy up to $200 billion of preferred stock in each of the two housing lenders, twice as much as previously pledged.

Jamie Dimon

JPMorgan Chase Chief Executive Officer Jamie Dimon said in an interview that modification in bankruptcy will be “the last resort, not the first resort.” He called Obama’s plan an “elegant” way for homeowners to have recourse if they’re unable to change loan terms by any other means. JPMorgan held $352.4 billion in consumer loans on its books in the retail bank at the end of the fourth quarter.

Obama’s support for changing the bankruptcy rules is intended to help “borrowers who have run out of options,” according to a White House fact sheet released yesterday.

“My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair-market value -- as long as borrowers pay their debts under a court-ordered plan,” Obama said yesterday in Mesa, Arizona.

Instability

The bankruptcy change has come under criticism from investors and analysts who say modifying loan terms would add more instability to the market for debt packaged into securities.

“Cramdowns encourage more people to consider bankruptcy,” said Andrew Harding, who helps manage $20 billion as chief investment officer for fixed income at Allegiant Asset Management in Cleveland. “It might sound good to the politicians, but it’s certainly not something that behooves the securitized market.”

Mortgage securities that are rated AAA were sold with the expectation they would be the last to suffer losses, said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine. Once those securities take losses, their value will have to be marked down, he said.

Lenders may also pass on higher rates to consumers as risk increases, said David Olson, president of Wholesale Access Mortgage Research, a research firm based in Columbia, Maryland, and a former Freddie Mac economist. “You are saying that contracts can be broken, which is a dangerous concept,” he said.

Foreclosures

U.S. foreclosures reached 274,399 in January, the 10th straight month in which more than a quarter-million filings were processed, according to RealtyTrac Inc., the Irvine, California- based provider of real estate data. Last year, more than 2.3 million homeowners faced foreclosure proceedings, an 81 percent increase from 2007, and analysts say that number may soar to as many as 10 million in coming years.

The Obama plan would cut mortgage payments for as many as 9 million struggling homeowners and work with banks to reduce payments to 31 percent of a borrower’s monthly income.

“The refinancing pieces of the plan open up a new tool or opportunity for many consumers across America who really didn’t have refinancing as a viable option before,” said Mike Heid, co- president of Wells Fargo Home Mortgage in Des Moines, Iowa. “It’s a very comprehensive, very thoughtful plan that will go a long way towards helping stabilize housing in America.”

Bank of America Corp. and Citigroup Inc. said in statements they supported the government’s initiative. Citigroup, which has taken $45 billion in government funding and a $301 billion backstop on assets, said in January it supported giving bankruptcy judges the ability to alter loan terms.

In a Feb. 11 hearing before the U.S. House Financial Services Committee, chief executives of seven large banks said that while they supported modifying loans, they didn’t share Citigroup’s view that bankruptcy courts should have the leeway to change payments.

UBS Will Disclose Names, Pay $780 Million to U.S.

Switzerland’s largest bank, will pay $780 million and disclose the names of some secret account holders to avoid U.S. prosecution on a charge that it helped thousands of wealthy Americans evade taxes.

The Justice Department accused UBS of conspiring to defraud the U.S. by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, helps prosecutors and makes payments. UBS will immediately turn over names of about 250 clients, according to people familiar with the matter.

By gaining those names, the U.S. will pierce the veil of Swiss bank secrecy. The IRS, which has sought the names of all U.S. account holders since July, has met resistance from the Swiss government. The final number of account holders Zurich- based UBS must disclose will hinge on future legal battles, according to the agreement.

“UBS sincerely regrets the compliance failures,” Chairman Peter Kurer, 59, said in a statement after the accord was unsealed yesterday in federal court in Fort Lauderdale, Florida. “Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts or the identity of those clients, who, with the active assistance of bank personnel, misused the confidentiality protections.”

UBS rose 30 centimes, or 2.5 percent, to 12.51 francs by 9:21 a.m. in Swiss trading, valuing the bank at 36.7 billion francs ($31.1 billion). The stock fell 16 percent this year.

Settlement Estimates

The Securities and Exchange Commission also reached an agreement to resolve claims that UBS acted as an unregistered broker-dealer and investment adviser to U.S. citizens who held accounts directly or in the names of others.

The $780 million is lower than previous settlement estimates, which exceeded $1 billion. The U.S. government agreed to the lower amount because of the bank’s eroding financial condition, according to a person familiar with the matter. UBS said the cost of the settlement will be booked in 2008 accounts.

“It is certainly a positive for the bank, that some sort of agreement has been found,” Dirk Hoffmann-Becking, an analyst at Sanford Bernstein & Co., said in a note today. “In a broader context, we doubt the saga is over. The success in getting the documentation out of Switzerland with support from the Swiss authorities is likely to encourage other tax authorities to pursue claims against the Swiss more vigorously.”

IRS Summons

UBS has announced more than 11,000 job cuts, exited parts of debt trading and commodities businesses and raised $32 billion from investors to offset record losses at the securities unit. Last week, it posted a fourth-quarter loss of 8.1 billion Swiss francs on trading losses and leveraged loan impairments.

Financial institutions worldwide have amassed $1.1 trillion of writedowns and credit losses and shed more than 274,000 jobs since the U.S. subprime-mortgage market collapsed in 2007, data compiled by Bloomberg show.

UBS will pay $380 million to disgorge profits from its cross-border business from 2001 to 2008, and $400 million in interest, penalties and restitution for unpaid taxes.

On July 1, a federal judge in Miami approved an IRS summons seeking information on thousands of UBS accounts owned or controlled by U.S. citizens. Under the deferred prosecution agreement, UBS and the government disagree on how many names the bank must disclose. The U.S. may continue to seek enforcement of the summons, and UBS may assert legal defenses.

‘Breached’ Obligations

The U.S. authorities, who have been seeking client data from Switzerland through an administrative assistance procedure, will withdraw this request, the Swiss Financial Market Supervisory Authority said in a statement today. The regulator allowed UBS to pass on some data to prevent the U.S. from filing criminal charges against the bank, it said.

“Such charges could have had drastic consequences for UBS and its liquidity situation and ultimately put its existence at risk,” the Swiss regulator said. UBS had “severely breached” its obligations to “remain fit and proper as well as adequately organized,” said the Swiss market watchdog, which also investigated the case.

UBS agreed only to the immediate disclosure of account holders involved in fraudulent or sham offshore account structures, according to people familiar with the matter.

U.S. law views tax evasion as a crime, Swiss law does not. The Swiss view tax fraud as a more serious offense. A dispute between the two governments slowed negotiations on the agreement, which was filed under seal last week and made public yesterday.

It’s “extremely likely” the government will prevail in U.S. court on the summonses, said Eileen O’Connor, who oversaw the Justice Department’s Tax Division from 2001 until 2007.

Civil Lawsuit

“We didn’t have to sue to enforce very often, but when we did we were successful,” said O’Connor, now a partner at the Washington law firm Pillsbury Winthrop Shaw Pittman.

UBS said in July it would stop providing cross-border banking services to American clients through units that aren’t licensed in the U.S. Under the accord, UBS agreed to give banking advice in the U.S. only through licensed subsidiaries and appoint an internal risk committee to oversee its “orderly and expeditious” exit from the business.

Bank executives “knew that UBS’s cross-border business violated the law,” R. Alexander Acosta, U.S. Attorney for the Southern District of Florida, said in a statement. “They refused to stop this activity, however, and in fact instructed their bankers to grow the business. The reason was money -- the business was too profitable to give up.”

Art Shows

Since at least 1999, UBS held billions of dollars for U.S. clients in accounts in Switzerland and other overseas locations while ignoring requirements that it register with the SEC, the agency said in a civil lawsuit in federal court in Washington.

The bank’s Swiss advisers traveled to the U.S. a few times a year to solicit customers at art shows, as well as yachting and other sporting events, the SEC said. To conceal their activities, advisers carried encrypted laptop computers and got training from the bank on avoiding detection, the agency said.

UBS settled the probes after a series of disclosures that followed the guilty plea last June of a former private banker, Bradley Birkenfeld.

The company reaped $200 million a year by helping high- income clients through such practices as setting up sham entities in tax havens including Switzerland, Panama, the British Virgin Islands, Hong Kong and Liechtenstein, Birkenfeld said in pleading guilty in federal court in Fort Lauderdale.

A Breakthrough

The bank helped Americans evade taxes even after signing a 2001 agreement that required it to identify account holders and their income to U.S. authorities, according to prosecutors. Birkenfeld said many clients refused to disclose their assets because it would defeat the purpose of banking with UBS -- evading taxes.

UBS announced it was ending its cross-border business in July at a hearing of the U.S. Senate Permanent Subcommittee on Investigations where the company was criticized for sending bankers to the U.S. to woo wealthy Americans. The announcement yesterday precedes another subcommittee hearing set for Feb. 24.

The agreement is “a tremendous breakthrough in the national effort to combat offshore secrecy and tax abuse,” said Senator Carl Levin, the Michigan Democrat who leads the subcommittee. “Efforts to tear away the offshore cloak of secrecy are gradually succeeding.”

In November, Switzerland-based UBS executive Raoul Weil was indicted in Florida on a charge that he helped rich Americans evade taxes. Weil attorney Aaron Marcu said it was “extremely disappointing” that the government did not drop its case.

“Mr. Weil is an innocent victim of a political dispute between the United States and Switzerland over Swiss bank secrecy,” Marcu said in a statement.