Stanford bank CDs complied with rules, witness says

By Terri Langford

HOUSTON — Certificates of deposit issued by R. Allen Stanford's offshore bank complied with regulatory requirements as to their use and marketing, a defense witness testified Wednesday in Stanford's trial on charges the CDs were fraudulent.

Mike Callahan, who has worked as a securities broker and as a compliance officer ensuring that financial companies follow laws and rules, testified that Stanford brokers who sold the CDs earned 3 percent commission. That is within guidelines set by the Financial Industry Regulatory Authority, an industry self-regulating organization, he said.

Testifying as a defense expert witness, Callahan also said that unlike stocks — which represent a share of ownership in a company — CDs are bank deposits that promise a certain return over time, but don't stipulate how the bank is to use the money.

He noted that investors in the CDs issued by Stanford International Bank in Antigua received disclosure notices explaining that the CDs weren't insured by a government agency, as are most deposits in U.S. banks, and that they carried risks, including loss of all funds invested.

“They're telling the investors these securities are not covered by SIPC,” Callahan said, referring to the Securities Investors Protection Corp., an industry organization created by Congress that protects investors in certain instances if a broker-dealer fails.

On prosecution cross-examination, Callahan agreed that disclosure statements alone don't show that an institution isn't committing fraud.

Stanford and others are accused of using the CD funds for luxury items, investments in risky business ventures and unsecured personal loans.

According to earlier prosecution testimony, Stanford International investors were told that the bank was subject to oversight by Antiguan regulators and an independent auditor.

But the indictment alleges that a regulator and auditor received bribes in exchange for favorable reports, and Callahan agreed that if that were the case, it would be false to state that the bank was monitored independently.

Lawyers for Stanford, 61, a Mexia native, have told jurors he will testify in his own defense although he isn't required to. A gag order issued by U.S. District Judge David Hittner prohibits parties from commenting on the case beyond what they say in open court.

Wednesday's court session ended early, for the second consecutive day, because Stanford appears to be suffering from a cold.

In other testimony Wednesday, a defense expert witness said that Stanford Group Co., a brokerage that marketed the bank CDs through offices in Houston and elsewhere, was overseen by the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority.

“It was a highly regulated business,” said Morris Hollander, a certified public accountant and forensic accountant — an auditor who analyzes financial documents for use as court evidence.

The Antiguan bank, however, was not subject to any U.S. government or industry authorities, Hollander said.

Hollander said he examined 20 years of financial reports for the bank, a subsidiary of Houston-based Stanford Financial Group. In preparing its financial documents from the late 1980s to the early 1990s, Hollander said, the bank used Generally Accepted Accounting Principles, the U.S. standard. It later changed to International Financial Reporting Standards, which Hollander said was appropriate since the bank had many clients in Latin America.