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

Barbara Marquand | guest writer for GoTalkMoney

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.

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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