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Allen Stanford arrives at the Bob Casey Federal Courthouse for sentencing in Houston in 2012. (Aaron M. Sprecher/Bloomberg)

Allen Stanford arrives at the Bob Casey Federal Courthouse for sentencing in Houston in 2012.

(Aaron M. Sprecher/Bloomberg)

BANKING

TD missed ‘warning signs’ about notorious fraudster, lawsuit alleges Add to ...

Allen Stanford, the Texas-born ex-billionaire responsible for one of the world’s largest Ponzi schemes, is serving a 110-year sentence in a Florida prison. But outside those walls, other legal battles over his massive fraud are still being waged and involve one of Canada’s largest financial institutions: Toronto-Dominion Bank.

Mr. Stanford, now 65, was once known as Sir Allen, after he was knighted in his adopted home of Antigua and Barbuda, before his title was revoked. He was supposed to be running what appeared to be a staggeringly successful private offshore bank. But in fact, he and a small group at the top of his organization were looting his Stanford International Bank Ltd., using some new investors’ money to pay returns to previous ones and living large on much of the rest.

His empire came crashing down in 2009, when his bank was exposed as a massive fraud that cost his 21,000 investors at least $5.5-billion (U.S.). But until then, he enjoyed a lifestyle worthy of a Bond villain, acquiring his own small Caribbean island for $63-million, a fleet of private jets and helicopters, and a handful of luxurious mansions that included a 57-room “castle” in South Florida, complete with a moat.

And according to allegations contained in court documents and an investigation by the Global News television program 16x9, Mr. Stanford’s fraudulent business was made possible, in part, by his lengthy relationship with TD Bank.


Watch a clip from 16x9’s ‘The Billionaire and the Bank,’ on the rise and fall of Allen Stanford

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It’s a story that illustrates the risks domestic banks face in the sometimes murky world of “correspondent banking” – the practice of offering accounts and services to offshore financial institutions. Because of increasing concerns over money laundering, it’s a line of business that has recently been facing increased scrutiny from large banks around the world.

A lawsuit filed in Ontario Superior Court by the liquidators of Stanford International Bank, who are seeking to recoup the losses for Mr. Stanford’s victims, alleges that TD Bank was Mr. Stanford’s prime correspondent bank, providing him crucial access to the U.S. financial system and accepting U.S. wire transfers on his behalf from his investors all over the world.

The statement of claim demands that TD cover the $5.5-billion, plus hand over any profit it made from handling the Stanford accounts. The claim alleges that TD was negligent and failed to perform the due diligence required by Canadian law and international banking standards on its offshore client.

TD declined to comment for this story. The allegations have not been proved in court. In a related case launched against TD on behalf of Canadians who invested in Mr. Stanford’s bank, TD filed a statement of defence in 2010 in which it denied any knowledge of the fraud until a freeze order was issued on Mr. Stanford’s accounts in February, 2009. TD said it did “ordinary and routine monitoring” of Stanford International Bank as it would have for any other correspondent banking customer.

In just the last year of Mr. Stanford’s scheme, more than $2.5-billion flowed through his offshore bank’s TD account in Toronto, according to the liquidators’ lawsuit, making Stanford International Bank TD’s single-largest correspondent-banking customer.

It’s not known how much in fees TD made from Mr. Stanford, but revenue for the division that included correspondent banking shot upward in 2006 and 2007, when Mr. Stanford’s operations grew rapidly.

Without TD, the lawsuit says, Mr. Stanford’s business would have been paralyzed. No U.S. bank would agree to accept U.S.-dollar wire transfers from Mr. Stanford’s customers around the world, the lawsuit alleges. Banks in the United States and elsewhere either cancelled his accounts or declined to do business with him, the lawsuit alleges.

“If Allen Stanford did not have access to the U.S. dollar, he could not have carried out the Ponzi scheme,” Lincoln Caylor, a Toronto lawyer with Bennett Jones LLP acting for the liquidators in the lawsuit against TD, told The Globe and Mail. “And as it turns out, the financial institution that gave him the access to the highest volume of U.S. dollars was TD Bank.”


Watch a clip from 16x9’s ‘The Billionaire and the Bank,’ on Allen Stanford’s relationship with TD

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TD was providing correspondent banking to entities owned by Mr. Stanford as far back as 1990, the lawsuit says.

Long before any word of a Ponzi scheme, the lawsuit alleges, there were plenty of “clear warning signs,” including the mere fact that Mr. Stanford was based in Antigua. TD was well aware of the money-laundering risks there: In 1996, TD shut down correspondent bank accounts held by another Antiguan-based offshore bank, because the amounts involved were “too large for a legitimate bank in Antigua,” the lawsuit says. And in 1999, U.S. officials issued a warning about the risks of money laundering in Antigua.

Plus, Mr. Stanford, before he went into offshore banking, when bankrupt while running a gym chain in Texas in 1984, and a bankruptcy generally disqualifies someone from running a bank, the lawsuit says.

Court documents and the investigation by 16x9 also allege that as far back as the late 1980s, Mr. Stanford had been under investigation by the FBI, suspected of laundering drug money for Colombian cartels.

Ross Gaffney, a retired FBI agent who ran a Miami-based anti-money-laundering squad, told 16x9 in an interview that the probes never resulted in charges against Mr. Stanford, who had immense influence with Antigua’s government and even ran “counterintelligence” to keep tabs on U.S. law-enforcement actions against him.

“He was a cat with more than nine lives,” Mr. Gaffney said.

Mr. Stanford has denied he ever knowingly laundered drug money.

It’s not known precisely what inquiries TD made about its offshore account holder. But at various times over the nearly two-decade relationship, some inside TD did raise concerns.

In 2000, one TD Bank executive said “something did not seem right” with Mr. Stanford’s business, which he said TD did not understand, and urged a review, the lawsuit alleges. And in July, 2008, other executives at TD became “nervous“ about the bank’s relationship with Mr. Stanford.

According to the lawsuit and to e-mails obtained by 16x9, over the years the Canadian bank sent staff to Mr. Stanford’s offices in Antigua and in the United States, where they watched presentations about Stanford International Bank’s compliance.

But Mr. Caylor, the lawyer on the lawsuit in Ontario Superior Court, said the PowerPoint presentations he has seen that were allegedly shown to TD staff were “very superficial,” containing innocuous facts about Antigua and little about the bank’s business or underlying assets.

In e-mails obtained by 16x9 that date from 2006, TD officials ask Mr. Stanford’s people to complete a “know your client” compliance questionnaire. Stanford International Bank’s answers to at least part of TD’s request included a long list of other correspondent banks around the world with which Mr. Stanford’s enterprise said it did business.

In August, 2008, the e-mails show, a TD employee asked contacts at Stanford International Bank about a Bloomberg News story that reported the U.S. Securities and Exchange Commission was investigating Mr. Stanford’s operations.

Mr. Stanford’s chief financial officer Jim Davis – Mr. Stanford’s college roommate who would later plead guilty to his role in the fraudulent scheme – blamed the story on two disgruntled employees in his operation’s Houston office, saying in his e-mailed response that his organization was unaware of any SEC investigation.

“That’s perfect,” the TD employee replies. “Thank you for taking the time and interest into addressing this matter.”

Stanford staff also arranged a visit with TD officials in Toronto in October, 2008, dining at a Yorkville restaurant.

By December of that year, the global financial crisis was putting immense pressure on Stanford International Bank, as investors sought to pull their money out and new investors were harder to come by. Stanford International Bank was taking millions out of its TD account to try to make up the difference.

TD says in its statement of defence in the other related case that it started monitoring Stanford International Bank’s account more closely at that time, but still had no reason to suspect fraud. Many banks were facing similar pressures, TD says.

Just a few months later, on Feb. 17, 2009, the SEC announced charges against Mr. Stanford. TD would only drop their customer when the allegations became public and a U.S. court issued a freeze order, the lawsuit says.

The truth about the massive Ponzi scheme, second in size only to Bernie Madoff’s iconic fraud, was not just kept from TD. Only a small group of Stanford insiders were in on the secret, and the real financial numbers were contained on a hard drive called “the football” they kept with them at all times, court documents say.

At the end of an interview on CNBC in 2008, in which he discussed how he managed to completely avoid the U.S. subprime mortgage meltdown, Mr. Stanford was asked whether it’s fun being a billionaire. He pauses, smiles and replies: “Well, yes, yes, I have to say it’s fun being a billionaire. But it’s hard work.”

You can watch the complete story, entitled The Billionaire and the Bank, Saturday at 7 p.m. on Global’s 16x9.

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Follow on Twitter: @jeffreybgray

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