Jailed businessman R. Allen Stanford knew that investments he was promoting could not be converted quickly to cash, The Houston (Texas) Chronicle reported Thursday.
An accountant testified that financial data emphasizing their liquidity was “fictional information on its face.”
The testimony came in the third day of a federal court hearing on whether Lloyd’s of London must continue paying the legal fees of Stanford and codefendants under an insurance policy covering officers and directors of Houston-based Stanford Financial Group.
SFG had offices in Tupelo. Northeast Mississippi investors were among the thousands who lost their life savings and retirement funds when the Stanford empire collapsed in 2009 under the weight of a Securities and Exchange Commission investigation.
Lloyd’s witness Mark Berenblut, a forensic accountant with NERA Economic Consulting in Toronto, said under cross-examination by Stanford attorney Robert S. Bennett that he did not uncover any written communication in which Stanford told others to falsify financial reports.
But he said investors and regulators were told certificates of deposit issued by Stanford’s offshore bank were invested in currency and other safe instruments that could be converted to cash within 48 hours, when in fact they were tied up in loans to Stanford and companies he controlled.
Even if Stanford didn’t tell anyone to misrepresent the liquidity and soundness of the CDs, “I think it’s obviously obvious” that he knew such representations were inaccurate, Berenblut testified.
Stanford said in an interview with the Chronicle last year – after the federal government accused him of fraud in a civil suit but before the criminal indictments – that he left most of the details of running his financial empire to others.
Stanford and other executives of the Stanford Financial Group, including Baldwyn native Laura Pendergest-Holt, are accused in federal indictments of running a $7.2 billion investment fraud scheme using the certificates of deposit, which were issued by Stanford International Bank on the Caribbean island of Antigua.
Lloyd’s has paid legal fees so far, but says it shouldn’t have to pay any more because the indictments include accusations of money-laundering, and legal defense against that charge isn’t covered by the policy.
Lawsuit over legal fees
This week’s hearing arises from a lawsuit in which Stanford and three co-defendants said Lloyd’s should continue paying their legal fees because they are innocent of the charges.
Holt, who lives in North Carolina, reportedly settled with Lloyd’s. She was SFG’s chief investment officer.
All four say they are innocent of the charges against them. Stanford has been jailed for more than a year as a flight risk. The others are free on bail.
Still pressing the suit along with Stanford are SFG’s former accounting chief, Gil Lopez, and its former global controller, Mark Kuhrt.
Stanford has been in federal detention without bail as a flight risk since he was arrested in June of 2009. The other defendants are free on bail.
The $1.6 billion that Stanford is accused of skimming from investor funds actually was loaned by his Antiguan bank to start-up entities and other businesses he controlled, a fraud examiner testified Wednesday.
Thursday, Stanford’s lawyers denied this was true.
Forensic accountant Alan Westheimer testified that Kuhrt and Lopez told him they believed the borrowing should have been publicly disclosed.
“The funds were being passed through as inter-company loans to the entities that were the recipients of the shareholder loans,” Westheimer said. “Within a short period, usually six months, Mr. Stanford would assume those loans and the recipient companies transferred those balances to their underlying capital.”
The borrowing companies owed Stanford, and “Stanford owed the bank,” Westheimer said. “The funds went to the entities.” Lopez and Kuhrt knew the shareholders’ loans were growing and needed to be disclosed to investors, he said.
When they advised Stanford Chief Financial Officer James M. Davis to disclose the loans in footnotes to financial statements, Westheimer said, Kurht and Lopez told him Davis refused to do so.
Davis, another Baldwyn native and Stanford’s right-hand-man, last year pleaded guilty to helping Stanford run the alleged Ponzi scheme. Prosecutors and his attorney have said he is cooperating in the investigation. He is free on bond, living in Michigan and has not yet been sentenced.
Bloomberg News and Forbes.com reports also contributed to this article.
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