TD bank denies wrongdoing after court convicts U.S. fraudster in $7B Ponzi scheme

Adrian Humphreys Jul 27, 2012

Robert Allen Stanford was convicted in a US$7-billion Ponzi scheme and sentenced to 110 years in prison.

Allen Stanford was the stereotype of a Texas tycoon, oozing the extravagance billions of dollars buys: a fleet of private jets, yachts and helicopters; mansions, castles and a private island; mixing with celebrities and world despots; being knighted and hosting a world sports tournament where he put up the US$20-million purse.

At the height of his outsized life, however, his banking empire collapsed and, last month, a U.S. court exposed his US$7-billion fraud, sentencing the 63-year-old to 110 years in prison.

Now, attention is turning to the role a respected Canadian bank may have played in allowing Stanford to strip 21,000 investors of their savings.

The court-designated liquidators of Stanford’s crumbling assets claim the Toronto-Dominion Bank was the principal foreign banking partner for Stanford as he flowed more than US$9-billion through its accounts in Canada while looting his way to notoriety as a Ponzi schemer second only to Bernie Madoff.

TD, Canada’s second-largest lender, is accused of maintaining a relationship with Stanford International Bank (SIB) even as other financial institutions shunned the Antigua-based bank over concerns over money laundering and shady dealing.

“The vast bulk of the money from the fraud would have flowed through the TD Bank,” said Marcus Wide, managing director of Grant Thornton in the British Virgin Islands, one of the joint liquidators of SIB’s assets.

Bernie Madoff, who was sentenced in 2009 to 150 years in prison for his role in a ponzi scheme that saw investors lose an estimated US$18-billion.

Court actions, on behalf of all of SIB’s investors around the world, are now underway in Ontario and Quebec.

In Quebec, the liquidators are suing TD, claiming negligence and knowing assistance in Stanford’s fraud and seeking damages in an amount not yet determined — a minimum of $20-million but it could be in the billions, plaintiffs say.

“The 21,000 creditors’ core economic loss is US$4.4-billion. There are worldwide assets currently frozen that will ultimately be available to the creditors in the amount of approximately US$570-million. Accordingly, the claim in Canada against TD Bank could, after further investigation, potentially exceed US$3-billion,” said Martin Kenney, a Miami-based lawyer who is co-general counsel to the liquidators of the SIB estate.

In Ontario, in a separate action, they seek about $23-million that was held by TD for SIB when the scheme collapsed. The money is currently held by the court after Ontario’s Attorney General launched forfeiture proceedings.

“But for TD Bank’s conduct described herein, the SIB looting would have been discovered and prevented, the fraudulent transactions at issue would not have been completed and damages would not have been suffered by SIB and its customers,” the Quebec suit claims.

“TD Bank failed to act as a reasonable bank would have acted when confronted with the same suspicious circumstances,” it claims. Former assets of Stanford were also frozen in banks in England and Switzerland.

TD Bank declined to discuss the case with the National Post.

“Given that the matter is before the courts, we cannot comment,” said Wojtek Dabrowski, senior manager of corporate communications.

The bank has not yet filed a statement of defence in the Quebec case, where it is moving to have the case dismissed. In the Ontario case, TD admits it provided correspondent banking and other services to Stanford’s businesses for well over a decade, but denies any wrongdoing.

“Throughout the course of the relationship … TD Bank had no knowledge that Stanford was engaged in fraudulent or illegal activities, it was not wilfully blind to any such activities, and it was not reckless as to whether any such activities were taking place,” TD’s statement of defence says.

TD did not have contact with Stanford’s victims, only with their money, TD’s statement says. The bank did, however, also have contact with Stanford or his officials, an ordinary part of its practice with corresponding bank customers.

“Representatives of TD Bank made occasional visits to Stanford offices and hosted Stanford personnel at TD Bank’s offices in Toronto,” TD says. “In the course of these visits and this monitoring, TD Bank never became aware of any fraudulent or illegal activity on the part of Stanford.”

Correspondent banking involves a bank providing cash management services to other banks, often smaller institutions in foreign countries, and acting as a bank’s agent abroad.

Stanford’s banking is only part of the Canadian connection to the massive swindle.

Other than SIB’s lavish facilities in Antigua, the only other bricks-and- mortar presence for the bank was in Montreal, where it maintained an office with five employees.

From the Quebec office, investments were peddled primarily to Quebec investors. Almost US$46-million is owed by SIB to Canadian investors, 25% of them from Quebec. Another group of victims consists of Calgary-based businesses.

But Stanford’s victims spanned the globe.

SIB offered certificates of deposit (CDs) that promised low risk and generous returns. The offer convinced more than 21,000 people in 113 countries to hand over money.

Stanford moved an astounding amount of money.

TD Bank had no knowledge that Stanford was engaged in fraudulent or illegal activities, it was not wilfully blind to any such activities — TD statement of defence Investors put about US$10-billion into SIB. To keep the scheme afloat, about US$5.6-billion was paid out in interest or redemption payments before the enterprise came to its inevitable, messy end.

That leaves a hole of US$4.4-billion in capital loss by investors.

Most of Stanford’s victims sent their money to Toronto before it made its way to Stanford or one of his companies, Mr. Wide said.

The sums are high and his banking activity in Toronto was fast and furious, documents show.

A report by Ernst & Young, acting in Canada on behalf of the U.S. court-appointed receiver in the SIB case, says Stanford’s victims who were paying in either U.S. or Canadian dollars were told to wire the money to a Stanford account with TD in Toronto. Those paying in British pounds sent their money to the HSBC in London.

“The volume and velocity of funds flowing through the [Toronto] account was very high,” the report says.

Near the painful end before the scam was halted, from Jan. 1, 2008 to Feb. 17, 2009, SIB’s primary account averaged 50 credits and 100 debits each day, together accounting for a transfer of US$9.5-billion. Despite such amounts, the net balance at the end of each month never exceeded US$50-million, the report says.

Stanford’s victims sent US$1.68-billion to the TD in just the last year of the scam, the report says.

In its 2009 indictment against Stanford in the U.S., government prosecutors listed eight bank accounts at the TD in the name of SIB.

TD’s long relationship and network of ties ought to have alerted its officials to the skulduggery, the liquidators claim. It provided TD a “privileged vantage point” into SIB’s affairs.

“This window provided TD Bank with the knowledge that, among other things, SIB at no time had any legitimate business or economic purpose for requiring or using correspondent bank accounts in Canada,” the Quebec suit claims. “As a result, TD Bank should at no time have commenced or continued its correspondent banking relationship with SIB.”

The fraud should not have come as a shock to TD, the suit claims. It was becoming obvious.

During TD’s relationship with SIB, “Antigua’s banking regulations and anti-money laundering practices were subject to extensive, sustained and public condemnation. At the same time, Stanford undertook various well-publicized manipulations of Antigua’s regulatory regime,” the suit alleges.

And if none of that set off warning bells for TD officials, the victims contend, TD’s own past experience should have given it a nudge.

TD should have been “on particularly high alert” after previous criticism of fraudsters using its foreign banking services.

In January, a US$67-million judgment was issued against TD in Florida in a case pressed by investors who claimed the bank aided a US$1.2-billion Ponzi scheme. Scott Rothstein, a former lawyer, is now serving 50 years in prison for a scheme he ran out of his Fort Lauderdale law firm, selling stakes in fictitious lawsuits.

The court awarded victims US$32-million in out-of-pocket money and US$35-million in punitive damages.

TD has filed a notice of appeal.

In the SIB case, liquidators claim TD maintained its ties to SIB when other institutions were jumping ship.

At least three U.S. banks ended their correspondent banking relationships with SIB when red flags emerged, the suit alleges.

In 2000, a Swiss bank investigating SIB as part of its due diligence concluded SIB had illicitly laundered so much money that “it would be very difficult for [the bank] to defend itself or its reputation should any problems arise in the future,” the suit claims.

In the U.S., the Securities and Exchange Commission launched an investigation in 2005. The National Association of Securities Dealers and U.S. Customs also started investigating SIB and its flamboyant founder.

The arrest and conviction brought an ignoble end for Stanford, who was born in Texas and grew up poor. He emerged from his childhood struggles with a flair for business and gained great wealth through his enterprises on the Caribbean island, where he became a banking oligarch.

With an estimated net worth of US$2-billion, he was considered one of the wealthiest Americans.

He became the largest private-sector employer on Antigua and was knighted for his service. “Sir Allen” was a household name on the island when he bankrolled an international cricket tournament, arriving in the stadium in a gold-coloured helicopter to present the $20-million prize.

In 2008, he bought the 1,500-acre Guiana Island, off Antigua’s coast, for a reported US$22-million. A year later, he was under arrest in the U.S.

He was convicted in March on 13 counts of fraud, conspiracy, money laundering and obstruction of justice after a seven-week trial. Prosecutor Gregg Costa told jurors: “Fraud is just theft wearing a business suit.”

In court in Houston last month, despite being found guilty Stanford remained defiant, countering: “I am not a thief.”

The judge was unequivocal, however. He declared the scam “one of the most egregious frauds ever presented to a trial jury in federal court.”

National Post