Over the last several years, we have seen the collapse of frauds and the capture of fraudsters, who have perpetuated a mind-numbing blow to the market and its participants. When we talk about Ponzi Schemes, the first name that springs to mind is, of course, Bernard Madoff. However, two years later authorities honed in on R. Allen Stanford (Stanford) and his fraudulent empire, which may have more far-reaching consequences than people think.
While the ponzi scheme developed and operated by Stanford fleeced investors of “only” eight billion dollars, it was perhaps far more damaging than the Madoff scheme. Why? Because the Stanford case pertains to everybody—not just to Stanford investors, not just the government, and not just the upper echelon of wealthy individuals. The Stanford scheme exploited one of the oldest, safest, and most universally understood financial instruments on the market—the Certificate of Deposit (CDs).
The ultimate reality of the Stanford Financial Group was that it was a Ponzi scheme. Essentially, Stanford and his co-conspirators used the Stanford Financial Group and the promise of high-return CD’s to lure investor money into different Stanford companies, where the funds were then pooled together and used for undisclosed and impermissible purposes. Federal authorities ultimately discovered Stanford’s multi-billion dollar scheme, putting an end to Stanford Financial Group and charging Stanford, civilly and criminally, with multiple counts of fraud. In March 2012, Stanford was convicted on 13 of 14 counts by a federal jury following a six-week trial and approximately three days of deliberation. It was ultimately revealed that the Stanford Financial Group was “selling” CD’s, marketed as low-risk, high return investments, but in reality, were paying distributions with subsequent investments–the prototypical pyramid scheme.
Stanford’s scheme could not operate in the absence of its clearing firm—Pershing LLC. On March 11, 2014, Gana LLP filed suit against Pershing LLC on behalf of one of Stanford’s victims. The complaint alleges that as Stanford Group Co.’s clearing broker, Pershing played an instrumental role in the Ponzi scheme and bolstered the scam to protect the profits that the firm derived from the sale of the fraudulent CD’s.
The complaint alleges that between December 2005 and December 2008, Pershing served as clearing broker and was an integral to assisting and facilitating the fraud and that it willfully turned a blind eye, as it facilitated at least $500 million of the fraudulent investments, while executing hundreds of millions in wire transfers and holding cash and securities on behalf of Stanford customers.
The accusations are predicated on the idea that Pershing chose to ignore an abundant number of red flags and conspicuous irregularities in Stanford’s operations, including offshore wire transfers and excessive commission rates on the sale of the fraudulent CD’s, so that Pershing could maintain its lucrative relationship. The complaint accuses Pershing of aiding and abetting the Stanford fraud by (a) breaching its fiduciary duty to its customers, (b) assisting in the sales of unregistered securities, and (c) violating FINRA Rule 2020, which prohibits any member firm from effecting a transaction in or inducing the purchase or sale of, any security by means of any manipulative, deceptive, or other fraudulent device or contrivance. The complaint also alleges that Pershing was negligent and violated FINRA Rule 3010, by failing to properly supervise its employees.
Culpability often extends to secondary parties in securities fraud, when those entities know or should know of the fraudulent activity, but choose to look the other way. The attorneys at Gana, LLP are experienced in investigating claims concerning securities investments. Our consultations are free of charge and the firm is only compensated if you recover.