Miami Herald: Stanford case may toughen Florida’s banking laws

The Miami Herald published this article on January 11, 2009

BY MICHAEL SALLAH AND ROB BARRY
msallah@MiamiHerald.com

Eleven years after Florida regulators gave billionaire Allen Stanford unprecedented approval to open a rogue financial center in Miami, lawmakers are pushing to ensure it never happens again.

After months of criticism, legislators are pressing for tough provisions to force regulators to investigate financial companies like Stanford’s that sold millions in sham investments from a posh downtown high rise.

The gaps in enforcement helped Stanford carry out what prosecutors are calling a $7 billion Ponzi scheme that fleeced thousands of investors.

“We need to fill this void and give it the best fix to protect the public,” said Thomas Cardwell, recently appointed commissioner of the Office of Financial Regulation. “It’s very high on my agenda.”

The legislation would force state agents to monitor all offshore finance firms in Florida — including foreign trust offices — for fraud, money laundering and the destruction of key records.

The proposal comes after a Miami Herald investigation revealed sweeping breakdowns in state oversight of Stanford’s Miami’s office that allowed the banker to run a special trust office — the only one of its kind — without government monitoring.

Over the objections of the state’s chief banking lawyer, Florida permitted the banker to operate without any fraud checks or money laundering requirements, in violation of state and federal law, the newspaper found.

In the ensuing years, Stanford’s employees sold millions in unregistered securities from the office, secretly diverting the money to pay for personal luxuries — including mansions, yachts and a fleet of private jets, court records state. The 59-year-old banker is now awaiting trial on charges of defrauding more than 21,500 people worldwide.

Office employees were stuffing checks from customers into pouches and sending the bags on jets to his bank headquarters in Antigua, shredding the records left behind, the newspaper found.

Though state regulators were alerted to the practices during office visits in 2001 and 2005, they never took action.

The new legislation, co-sponsored by Republicans Sen. Garrett Richter and Rep. Tom Grady, would stop regulators from letting companies like Stanford’s operate outside state and federal jurisdiction.

“People place their trust in these institutions,” said Richter, a longtime executive banker and chairman of the Senate Committee on Banking and Insurance. “I think this is common sense regulation.”

The proposal would ban companies like Stanford’s — known as foreign trust representative offices — from operating without being licensed and routinely inspected by state agents. In addition, it would require the offices submit to outside audits.

When Florida allowed Stanford to open his center on the 21st floor of the Miami Center — adorned with marble tables, ornate artwork and mahogany walls — it never required him to report anything to state or federal regulators.

In the first six years, the luxury offices attracted thousands of Latin American investors — drawn to the safety of a U.S. company — who bought more than $600 million in sham certificates of deposit, records show.

MONEY TO EXPAND

In the end, the office generated enough money to help Stanford’s empire expand throughout the country, said Jonathan Winer, a former deputy assistant Secretary of State who investigated Stanford’s Antiguan bank for money laundering. “Stanford really had no real presence in this country before that.”

Margie Morinaga, whose family lost more than $400,000 in the scam, said she brought her father to Stanford’s trust company because she thought the downtown Miami office was safely regulated.

She and her father, a retired jeweler, 86, who now lives in Lima, were swept in by the company’s advertisements, the firm’s expensive decor and its prime location in downtown Miami.

“Fancy office, beautiful desks, wood floors, you could see the bay,” she said. “Everything was first class.”

But while Florida officials gave the office their approval, law enforcement agents investigating money laundering in the Caribbean were stunned by the state’s decision, The Miami Herald found.

“I just couldn’t understand why the authorities in Florida had allowed him to operate the way he appeared to be operating. There’s something really wrong with that,” said Rodney Gallagher, a former member of the British High Commission in Barbados. “I thought what he was doing was completely illegal.”

While state officials said they had no choice but to allow the office to open because no laws barred foreign trust representative offices, experts say the state not only violated its own laws, it created a financial disaster.

Beyond letting Stanford move vast amounts of money offshore in violation of anti-money laundering laws, state regulators agreed to waive any rights to examine Stanford’s financial records.

In fact, the decision to open the office raised serious questions among state agents, e-mails and internal records show.

Richard Donelan, the state’s chief banking counsel, tried at least four times to change the agreement that gave Stanford the freedom to send millions of dollars to Antigua in total secrecy.

In one draft, he questioned why the state wasn’t requiring Stanford to get licensed for sending money — which would have brought his office under government regulation. But nothing was done.

`RIGHT DIRECTION’

Charlie Stutts, former general counsel for the Florida Comptroller’s Office, said the new legislation was “a step in the right direction.” He said the state’s deal with Stanford was riddled with problems.

“It’s unbelievable that they were able to pull it off,” said Stutts, a Tampa attorney who helped write Florida’s banking law. Even after the office opened, regulators could have taken action, Stutts said. Beyond finding employees shredding records, examiners discovered more than a dozen stockbrokers selling CDs.

“That should have been a red flag — that’s a tip-off,” Stutts said. “CDs are securities. They had a right to go in there and do an audit.”

Though the legislation may help future investors avoid getting scammed, Morinaga said it won’t help her father recover the money he lost from his retirement fund.

“It’s too late for us,” she said. “This should never have happened in the first place.”