Lessons for Investments: What Can Be Learned From the Case of Jailed Financier Robert Allen Stanford

While jailed Texas financier Robert Allen Stanford awaits trial on a 21-count indictment for investment fraud, thousands of investors who purchased CDs from his bank try to piece together their financial lives.

"We are retirees, teachers, parents, grandparents, hard workers and positive contributors to our society," states the home Web page of the Stanford Victims Coalition USA. "We are caught between the 'massive ongoing fraud' alleged in the Stanford case and the lack of timely government action that would have saved us from financial devastation."

If you think, "That would never happen to me," then think again. Here are the tough lessons that we can all learn from the Stanford case.

1. Even Simple Investments Require Scrutiny

The certificate of deposit is considered one of the simplest and safest investment vehicles around, yet allegedly bogus CDs are at the heart of the Stanford case.

The U.S. Securities and Exchange Commission charged Stanford with investment fraud in February 2009, and federal prosecutors later charged him with criminal fraud. In its complaint, the SEC said the Stanford International Bank in Antigua sold $8 billion of CDs claiming above-market returns through a network of Stanford Group Company financial advisers. Regulators accuse Stanford of misrepresenting his bank's CDs as safe, with assets invested in securities that could be bought and sold easily, when actually a large portion of the bank's portfolio was tied up in real estate and private equity investments.

Litigation consultant Randy Shain makes a case in a recent Fortune magazine article that Stanford's alleged fraud is even worse than Bernie Madoff's crimes because it exploits a simple and trusted investment tool. Madoff's Ponzi scheme was bigger--as much as $60 billion, but his products, described as "alternative," begged skepticism, notes Shain, executive vice president of First Advantage Litigation Consulting and author of the book, Hedge Fund Due Diligence: Professional Tools to Investigate Hedge Fund Managers.

2. Too-Good-To-Be-True Investments Are Just That

Stanford's bank claimed it used a unique investment strategy to achieve double-digit returns on investments over the last 15 years, which enabled it to offer above-market returns to CD investors.

Over the last 15 years, the bank reported returns on deposits ranging from 11.5% in 2005 and 16.5% in 1993, according to the SEC complaint. Among other improbable claims: The bank reported identical returns of 15.71% in 1995 and 1996, and stated that its diversified portfolio lost only 1.3% in 2008, when the S&P 500 lost 39%.

The longstanding advice to be wary of anything that sounds too good to be true holds.

3. Prominent Financial Wizards Can't Always be Trusted

Madoff was considered an elder statesman on Wall Street and served on prominent boards and commissions, including a stint as chairman of the Nasdaq stock exchange.

Stanford, a colorful Texas billionaire, mingled with sports stars, politicians and business people and was known as Sir Allen. He was such a big shot in Antigua that he was knighted by the Antiguan prime minister, the first American to receive such an honor.

4. Don't Wait for Government Action to Protect Investments

The SEC has come under fire for missing red flags in the Madoff case, and Stanford raised regulators' suspicions for a decade before he was charged with fraud. The Dallas Morning News recently reported that an inspector general's report said the Texas SEC office failed three times to pursue a case against Stanford.

Clearly the regulatory system doesn't catch everything. Research and understand your investments.

5. FDIC insurance Is Critical

Make sure the institution selling the CD is FDIC-insured and your deposits at that institution are within insurance limits. The current limit of $250,000 per person per institution will revert to $100,000 Jan. 1, 2014.

These are not comforting lessons. But in the wake of so many financial scandals, investors can't afford to get comfortable.

There's Gold in Them Thar CDs

With the declining value of the dollar and rising gold and silver prices, it's no wonder a growing number of investors are thinking about investing in precious metals.

But how do you start?

Heavy Metal Investments

One easy way is through CDs. Everbank, headquartered in Jacksonville, Fla., is marketing a new diversified metals certificate of deposit, which lets buyers invest in platinum, gold and silver without risking principal. You must deposit at least $1,500 and wait to cash out for five years. The certificate of deposit has no fees and is FDIC insured, so your money is safe as long as you stay within the insurance limits--now at $250,000 per person per financial institution. The funding deadline for the CD was extended to June 24 with an issue date of July 7.

If precious metals prices go gangbusters, your earnings can equal up to 50 percent of your deposited principal. If prices tank, you still get your full, original deposit back at the end of the term.

These types of CDs aren't new. Indexed CDs have been around since the late 1980s, but they've attracted greater attention lately because investors are looking for new ways to make money in light of a turbulent stock market and miniscule returns on traditional savings vehicles, such as savings and money market accounts.

Everbank issued a gold-linked CD five years ago, and JP Morgan launched a certificate of deposit linked to the price of gold last year.

But don't let gold fever--or fever for any kind of earnings--cloud your judgment. Indexed CDs are more complex than traditional CDs, and with the greater promise of returns comes greater risk. Although your original deposit amount is guaranteed if you hold onto the CD through maturity, you might not earn anything if metal prices decline. With a traditional CD, you get a guaranteed rate of return no matter what happens in the economy. Weigh those risks carefully before investing.

Look Elsewhere for Liquid Investments

Indexed CDs are not liquid investments, so they never should be used for emergency savings. With a conventional CD, you forfeit some interest earnings if you cash out before the CD matures, but you get your full original deposit back. But with indexed CDs, the penalty is much harsher. Everbank's new diversified metals CD terms say you cannot withdrawn any part of the CD before maturity. If you do withdraw early, you forfeit principal and returns you might have earned.

You can find CDs linked to other indexes as well, such as the S&P 500 or U.S.Ttreasury bills. Generally indexed CDs are riskier, have longer terms and harsher early withdrawal penalties, and are harder to compare side by side than traditional CDs because it's tough to gauge how indexes will perform.

Whether you're thinking about an indexed CD linked with precious metal prices or the Dow Jones Industrial Average, read the fine print of the terms and make sure you understand the investment. Consider the following:

Indexed CD Considerations

• Term length

• Minimum deposit

• Caps on earnings

• Measurement method of the index

• FDIC insurance

• Fees

Indexed CDs might indeed be worth a look--but a decision to invest deserves more than a passing glance over the promise of returns. Make sure that all that glitters really is gold.

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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