FINRA Arbitrators Dismiss Customer Claims Involving Stanford International Bank CDs

April 23, 2019

Allen Stanford may be doing his 110-year prison sentence but the pain from his Ponzi scheme persists. The recent fall-out manifests itself in the form of alleged multi-million damages sustained from victims who purchased Stanford International Bank, Ltd 's Certificates of Deposit. Adding insult to injury, a FINRA Arbitration Panel hears the claims and dismisses them -- but, perhaps arising from Wall Street's collective pang of conscience, the arbitrators raise a lament about ineffective compliance practices. There's the wound. There's the salt. Rub the latter generously and vigorously into the former.

Dredging Up The Ghost of Stanford International Bank

In a FINRA Arbitration Statement of Claim filed in November 2017, the public customer Claimants asserted:

aiding and abetting common law fraud; aiding and abetting breach of fiduciary duty; negligence (gross negligence); breach of contract; violation of FINRA Anti-Money Laundering Conduct Rule 3310; violation of FINRA Conduct Rule 2120: Manipulative, Deceptive and Fraudulent Devices; violation of NASD Conduct Rule 2110: Commercial Honor and Principles of Trade; violation of NASD Conduct Rule 3010(a): Negligent Supervision; and civil conspiracy to defraud. The causes of action related to Claimants' allegations that Respondent aided and abetted criminal activities related to a Ponzi-scheme involving Certificates of Deposit ("CDs") purchased by Claimants from Stanford International Bank, Ltd. ("SIBL"), and that, as a result of Respondent's actions, Claimants suffered substantial losses.

Claimants sought full rescission of the SIBL-issued CDs plus $4,750,000 in compensatory damages; punitive damages; interest; costs; and fees. In the Matter of the Arbitration Between Alan Airey, Brenda Alford, Debra Asher, Susan Connell, Dan Crane, Jung Ja Herding, Pierre Herding ,Dean Huntington, Stan Isbell, Karen Isbell, Paul L. Nightingale ,Carolyn M. Nightingale, Denis Smith, Mona Smith, Brian Simmons (as Trust Officer of the Trustee Premier Trust of Nevada of the Cook Family 2007 Irrevocable Spendthrift Trust), John Trabold, James Spencer Williams, Paul F. Wolfe, and Marie E. Wolfe, Claimants, v. Pershing, LLC, Respondent (FINRA Arbitration Decision 17-03145) 

FINRA member firm Respondent Pershing LLC generally denied the allegations and asserted various affirmative defenses.

A Bit of History

For those unfamiliar with the infamous Stanford International Bank, consider these comments from "Allen Stanford Gets 110 Years for Orchestrating $7 Billion Investment Fraud Scheme" (FBI Release / June 14, 2012)

R. Allen Stanford, the former board of directors chairman of Stanford International Bank (SIB), has been sentenced to a total of 110 years in prison for orchestrating a 20-year investment fraud scheme in which he misappropriated $7 billion from SIB to finance his personal businesses.
. . .

Stanford, 62, was convicted on 13 of 14 counts by a federal jury following a six-week trial before U.S. District Judge David Hittner and approximately three days of deliberation. The jury also found that 29 financial accounts located abroad and worth approximately $330 million were proceeds of Stanford's fraud and should be forfeited.

. . .

In handing down the sentence, Judge Hittner remarked that "this is one of the most egregious frauds ever presented to a trial jury in federal court."

After considering all the evidence, including more than 350 victim impact letters that were sent to the court, Judge Hittner sentenced Stanford to 20 years for conspiracy to commit wire and mail fraud; 20 years on each of the four counts of wire fraud, as well as five years for conspiring to obstruct a U.S. Securities and Exchange Commission (SEC) investigation; and five years for obstruction of an SEC investigation. Those sentences will all run consecutively. He also received 20 years for each of the five counts of mail fraud and 20 years for conspiracy to commit money laundering, which will run concurrent to the other sentences imposed today, for a total sentence of 110 years.

As part of Stanford's sentence, the court also imposed a personal money judgment of $5.9 billion, which is an ongoing obligation for Stanford to pay back the criminal proceeds. The court found that it would be impracticable to issue a restitution order at this time. However, all forfeited funds recovered by the United States will be returned to the fraud victims and credited against Stanford's money judgment.

According to court documents and evidence presented at trial, the vehicle for Stanford's fraud was SIB, an offshore bank Stanford owned based in Antigua and Barbuda that sold certificates of deposit (CDs) to depositors. Stanford began operating the bank in 1985 in Montserrat, the British West Indies, under the name Guardian International Bank. He moved the bank to Antigua in 1990 and changed its name to Stanford International Bank in 1994. SIB issued CDs that typically paid a premium over interest rates on CDs issued by U.S. banks. By 2008, the bank owed its CD depositors more than $8 billion.

According to SIB's annual reports and marketing brochures, the bank purportedly invested CD proceeds in highly conservative, marketable securities, which were also highly liquid, meaning the bank could sell its assets and repay depositors very quickly. The bank also represented that all of its assets were globally diversified and overseen by money managers at top-tier financial institutions, with an additional level of oversight by SIB analysts based in Memphis, Tennessee.

As shown at trial, that purported investment strategy and management of the bank's assets was followed for only about 10-15 percent of the bank's assets. Stanford diverted billions in depositor funds into various companies that he owned personally, in the form of undisclosed "loans." Stanford was thus able to continue the operations of his personal businesses, which ran at a net loss each year totaling hundreds of millions of dollars, at the expense of depositors. These businesses were concentrated primarily in the Caribbean and included restaurants, a cricket tournament, and various real estate projects. Evidence at trial established Stanford also used the misappropriated CD money to finance a lavish lifestyle, which included a 112-foot yacht and support vessels, six private planes, and gambling trips to Las Vegas.

According to evidence presented at trial, Stanford continued the scheme by using sales from new CDs to pay existing depositors who redeemed their CDs. In 2008, when the financial crisis caused a slump in new CD sales and record redemptions, Stanford lied about personally investing $741 million in additional funds into the bank to strengthen its capital base. To support that false announcement, Stanford's internal accountants inflated on paper the value of a piece of real estate SIB had purchased for $63.5 million earlier in 2008 by 5,000 percent, to $3.1 billion, even though there were no independent appraisals or improvements to the property.

The trial evidence also showed that Stanford perpetuated his fraud by paying bribes from a Swiss slush fund at Societe Generale to C.A.S. Hewlett, SIB's auditor (now deceased), and Leroy King, the then-head of the Antiguan Financial Services Regulatory Commission.

A Belief System

The FINRA Arbitration Panel denied Claimants' claims. The arbitrators included in the Decision this "Arbitrators' Report":

Although the Panel does not find for Claimants, the Panel believes that broker dealers should ensure that they have narrowly tailored anti-money laundering compliance programs so that they enable regulators and clearing firms to more timely detect and act upon suspicious activity associated with investment vehicles sold to investors. 

Bill Singer's Comment

How nice -- the FINRA Arbitration Panel "believes" that broker-dealers "should ensure" that they have compliant AML programs -- except that's not supposed to be a Wall Street belief-system  In fact, AML is part of a mandatory compliance program for which reasonable supervision is required both by federal regulators and FINRA itself.  Let me quote from FINRA's online "Frequently Asked Questions (FAQ) regsarding anti-Money Laundering (AML),", which states, in part that:

1. What is an AML Compliance Program required to have?

The Bank Secrecy Act, among other things, requires financial institutions, including broker-dealers, to develop and implement AML compliance programs. Members are also governed by the anti-money laundering rule in FINRA Rule 3310.

FINRA Rule 3310 sets forth minimum standards for broker-dealers' AML compliance programs. It requires firms to develop and implement a written AML compliance program. The program has to be approved in writing by a member of senior management and be reasonably designed to achieve and monitor the member's ongoing compliance with the requirements of the Bank Secrecy Act and the implementing regulations promulgated thereunder. Consistent with the Bank Secrecy Act, FINRA Rule 3310 also requires firms, at a minimum, to:
    • establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions;
    • establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and implementing regulations;
    • provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member personnel or by a qualified outside party. If the firm does not execute transactions with customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts (e.g. engages solely in proprietary trading or conducts business only with other broker-dealers), the independent testing is required every two years (on a calendar-year basis);
    • designate and identify to FINRA (by name, title, mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program.  Such individual or individuals are associated persons of the firm with respect to functions undertaken on behalf of the firm.  Each member must review and, if necessary, update the information regarding a change to its AML compliance person within 30 days following the change and verify such information within 17 business days after the end of each calendar year. . . .

Guessing Games

Frankly, I don't know what the hell to make of the "Arbitrators' Report." I'm lost with how the FINRA arbitrators reconciled their aspirational AML compliance goals with their seemingly inconsistent decision to deny the Claimants' claim. I say "seemingly" because other than the arbitrators' dismissal of the claims, we are offered no presentation of any substantive facts in this case and no presentation of any rationale for the dismissal. It may well be that Pershing is blameless here and has been victimized by Stanford and his frauds. 

At first, I inferred from the "Arbitrators' Report" that one, two, or three of the arbitrators didn't think that Pershing had "narrowly tailored" AML procedures, which prevented federal, state, and self regulators from timely detecting Stanford's fraud. After further reflection, I wondered whether the arbitrators meant to distinguish Pershing not as a run-of-the-mill broker-dealer but more as a clearing firm, and, accordingly, Pershing was victimized by the non-compliant AML policies of its introducing broker-dealer customers. That latter line of thought might explain why the Panel dismissed the claims against Pershing but still thought it necessary to add the language about the need for effective AML compliance policies. Unfortunately, we don't really know what the arbitrators meant or intended to imply or what we should reasonably infer. As I often complain, FINRA Arbitration Decisions should not be guessing games.

Wall Street Anti-Fraud Fund

If nothing else, let me use this FINRA Arbitration Decision as yet another example of why Wall Street should have an "Anti-Fraud Fund" for the benefit of defrauded public customers who have proven the liability of a FINRA member firm but are unable to fully collect their compensatory damages, costs, and fees because of that firm's insolvency. In a recent example of my call for a Wall Street Anti-Fraud Fund, see, "$5 Million Awarded In FINRA Customer Arbitration. Now Let's Beat The Dead Horse" ( Blog, August 17, 2018)

The Blog's publisher, Bill Singer, has long advocated for the creation of an Anti-Fraud Fund on Wall Street to serve as a back-stop for defrauded public investors who obtain awards of compensatory damages against insolvent industry firms and registered representatives. Bill does not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges, but he does believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. While there may be legitimate debate as to how best to fund the anti-fraud fund, that only goes to the mechanics of doing the right thing. In the case of the Financial Industry Regulatory Authority, we have a self-regulatory-organization that needs to get behind this pro-consumer effort and with haste.  . . . FINRA's regulatory mandate is set out in FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade: "A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade." Today's Blog asks whether the self-regulatory-organization itself will observe high standards of commercial honor and just and equitable principles of trade when it comes to seeing that justice is done for defrauded public investors. 

Conman Who Pretended to Be Beverage Entrepreneur Pleads Guilty to Federal Fraud Charges Stemming from $5 Million Ponzi Scheme (DOJ Release)

Lawton Woman Pleads Guilty to Fraud Involving More Than $7 Million (DOJ Release)

FINRA Arbitrators Dismiss Customer Claims Involving Stanford International Bank CDs ( Blog)

Dickson Attorney Sentenced To Federal Prison For Stealing Over $1.36 Million From Trust Funds Of Clients / Victims Include Daughter of Tennessee State Trooper Killed in the Line of Duty (DOJ Release)

Former JP Morgan Rep Wins One and Loses One Expungement Request. In the Matter of the Arbitration Between Rhyan Khawar Young, Claimant, v. J.P. Morgan Securities, LLC, Respondent (FINRA Arbitration Decision)

SEC Charges Microcap Fraudster with Running a Pump-and-Dump Scheme (SEC Release)

Custodian of Books and Records / SEC Approves Amendments to FINRA Rule 4570 (FINRA Regulatory Notice 19-16)

FINRA Does NOT Find Untimely Disclosure of Tax Liens "Willful". In the Matter of Guy Michael Cheatham, Respondent (FINRA AWC)