Great frauds in history: Stanford’s great bank-bond heist

Robert Allen Stanford was born in Texas in 1950 and made a living running a gym before that failed and he turned to speculating in real estate in Houston in the 1980s. He made his fortune, then moved to the Caribbean island of Montserrat, setting up the Guardian International Bank, then moving it to the nearby island of Antigua and renaming it Stanford International Bank (SIB) to avoid a regulatory crackdown. He also set up a wealth-management firm, which encouraged clients to invest their money in certificates of deposits (CDs, redeemable bonds used by banks) issued by Stanford International Bank. These offered a higher interest rate than CDs offered by US banks, but were supposedly backed by insured assets.

How did the scheme work?

Instead of being invested in a wide range of assets, as promised, much of the money received by SIB was loaned out to Stanford and his companies and property schemes, which consistently lost money. As a result, SIB was forced to keep issuing new CDs in order to repay its existing creditors (in other words, it was much like a Ponzi scheme). To disguise the bank's true financial position, Stanford misreported the bank's assets and even forged an insurance certificate.

What happened next?

Thanks to aggressive marketing, Stanford managed to sell $7.2bn worth of CDs. Stanford's fraud imploded when the financial crisis led investors to seek to redeem their bonds. The crisis made it impossible for Stanford to sell any of his private firms to raise money. In a final roll of the dice he promised to inject $741m into SIB, but much of this came in the form of land originally bought for $64m a few months earlier. By February 2009 the FBI had raided Stanford's offices, and he was sentenced to 110 years in prison in 2012.

Lessons for investors

American CDs are normally protected by depositor insurance schemes, but Antigua doesn't offer similar protection. As of October 2017, receivers had managed to get back only $350m of $7bn for CD holders, roughly 5%. The scandal shows it is a bad idea to invest money in offshore banks where protection for investors is minimal and regulation inadequate. Indeed, for a time, Stanford was the chairman of Antigua's financial regulator.