Stanford Financial Accused of a Long-Running Scheme

By JULIE CRESWELL and CLIFFORD KRAUSS
Published: February 27, 2009

Late last fall, one of Stanford Financial Group’s top salesmen in Miami sent a frantic e-mail message to Laura Pendergest-Holt, the chief investment officer for the brokerage firm. A client with $20 million in Stanford’s Antigua-based bank affiliate had grown nervous about its financial safety and wanted to withdraw his money.

In truth, the funds were far from secure. Inside the Stanford empire, Robert Allen Stanford and his chief lieutenant, James M. Davis, were preparing to sell off large chunks of the bank’s investment portfolio and move hundreds of millions of dollars in and out of the bank’s three-tiered structure.

But Mrs. Pendergest-Holt, who had been groomed for a role at Stanford since the age of 15 by Mr. Davis, a patriarch from their hometown of Baldwyn, Miss., told the salesman he could report that nothing was wrong and that his client’s assets were safe.

On Friday, the Securities and Exchange Commission accused Mr. Stanford and Mr. Davis of executing a “massive Ponzi scheme” over the last decade, in which they misappropriated funds and made more than $1.6 billion in “bogus” loans to Mr. Stanford. The agency, in a revised complaint, also accused the men of falsifying financial statements to investors who bought $8 billion worth of certificates of deposit whose large returns turned out too good to be true.

Also Friday, Mrs. Pendergest-Holt appeared at a bail hearing in Houston after the F.B.I. arrested her for obstructing the S.E.C.’s inquiry into one of the largest suspected international financial frauds to come to light. Authorities say she failed to reveal the extent of her knowledge about where as much as $5 billion of the banks’ assets were when she testified before the agency in early February. Her defense lawyer, Dan Cogdell, said she would plead not guilty when she is arraigned in Dallas, where the criminal charge was filed. He said there was “no proof” she did not cooperate with investigators.

The government lawyer, Paul Pelletier, said, “She is one of three people who had access to $6 billion now missing to investors.”

Numerous interviews with former Stanford employees and testimony provided in court documents indicate that over time, top managers surrounded themselves with a team of friends, family and acquaintances who had little financial experience, but were as close-knit as the small Southern towns from which several of them came. On Friday, the S.E.C. said these ties created an environment that left “no independent oversight" over the Antiguan-based bank’s assets.

Indeed, the comfortable relationships meant that Mr. Stanford and Mr. Davis were almost never questioned about what they were doing with the money, according to Stanford employees.

In earlier testimony to the S.E.C., Mrs. Pendergest-Holt said that only Mr. Stanford and Mr. Davis knew the status of billions of dollars stashed in an opaque part of the bank’s portfolio known as Tier III. Tier I, roughly 10 percent of the bank’s assets, was in cash, and Tier II, another 10 percent of assets, was overseen by Mrs. Pendergest-Holt and invested with more than a dozen fund managers worldwide.

According to the F.B.I., however, only four days before testifying, Mrs. Pendergest-Holt gave a presentation in Stanford’s Miami office that was attended by Mr. Davis, as well as a number of Stanford executives and an unidentified outside lawyer representing Stanford Financial. The purpose of the meeting was to discuss the financial details she would need to present in her testimony to the S.E.C.

According to the F.B.I. affidavit, during the meeting “executive B,” or Mr. Davis, gave her a data drive showing that the Tier III asset group included more than $3 billion in real estate holdings and $1.6 billion that turned out to be a “loan to shareholder,” believed by those present to be Mr. Stanford. The information shocked and upset a number of executives present, all of whom had been told time and again that the firm’s investments were legitimate. A number of them are now cooperating with government investigators.

In her S.E.C. testimony, however, Mrs. Pendergest-Holt did not reveal these details, despite repeated questioning. Thomas V. Sjoblom, a lawyer with Proskauer Rose who represented the firm and who was present during Mrs. Pendergest-Holt’s testimony before the S.E.C., withdrew his counsel the day after her testimony. Two days later, Mr. Sjoblom, who had spent 20 years with the S.E.C. before entering private practice, disavowed all previous oral and written representations he had made to the S.E.C. on behalf of the firm.

Calls to Mr. Sjoblom’s offices were not returned. Mr. Stanford and Mr. Davis, who have not been criminally charged, could not be reached for comment.

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U.S. Agrees to Raise Its Stake in Citigroup

By ERIC DASH
Published: February 27, 2009

In its most daring bid yet to stabilize Citigroup, one of the nation’s largest and most troubled financial institutions, the Treasury Department announced on Friday that it would vastly increase its ownership of the struggling company.

After two multibillion-dollar lifelines failed to shore up Citigroup, the government will increase its stake to 36 percent, from 8 percent.

The chief executive, Vikram S. Pandit, will remain, but Citigroup will shake up its board so that it has a majority of new independent directors, a move that federal regulators had been pursuing. The announcement comes as the bank said its 2008 loss had spiraled to $27.7 billion, among the largest in corporate history. Under the deal, the Treasury Department agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock, giving taxpayers more risk, but more potential for profit if the company recovers.

The Treasury will convert its stake to the extent that Citigroup can persuade private investors, including several foreign government investment funds, to go along. Treasury will match the private investors’ conversions dollar for dollar, and do so at the most favorable price and terms offered to any other private investor.

The plan was intended to reassure the markets and stabilize Citigroup, but plenty of uncertainty remains. Each rescue has made Citigroup more financially sound, yet its shares — a crucial sign of confidence in the company — continue to tumble. Shares were down 36 percent, to $1.57, on Friday afternoon, and analysts worry that regulators are running out of options.

Unlike other troubled banks, Citigroup may be both too big to fail and too unwieldy for the government to takeover. Nationalization is also politically unpalatable. Instead, analysts say, Citigroup may be forced to downsize and may require additional taxpayer support to nurse itself back to health. In others words, the ailing financial giant may just muddle along.

Mr. Pandit described the exchange as a “bridge to profitability” that was intended to appease the markets. On a conference call Friday morning with investors, he said the bank was committed to its remaining businesses and strategy. Mr. Pandit also tried to squelch concern that the government would play a more influential role at the company. “We are going to run Citi for the shareholders,” he added.

Inside Citigroup, bankers and traders are already buzzing about what life may be like if the government deepens its involvement. Investors are also worried that Citigroup’s performance will suffer.

The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup, but will probably come under intense pressure to take a much larger role in shaping the bank’s direction.

Taxpayers, after pumping more than $45 billion into the bank, have become Citigroup’s single largest shareholder. The government will not put in any additional money for now, but some analysts believe Citigroup may require more down the road.

The move is one of the most drastic steps federal officials have taken to prevent the collapse of a systemically critical institution. The government also took a major ownership stake in the American International Group, and seized control of the mortgage lending giants Fannie Mae and Freddie Mac in September. So far, not one of those deals has turned out well.

The Obama administration has tried to keep the banks in private hands and tried to stamp out talk of nationalization. But Citigroup’s plunging share price and its deteriorating financial condition made it almost inevitable the government would have to convert its stake.

The deal is expected to serve as a model for other financial institutions. Other major banks could find themselves in a similar position if a new “stress test” shows they need more capital to cope with worsening losses. Administration officials say they will convert the government’s existing preferred stock investments into common shares and, if necessary, make additional investments to stabilize the banks.

Citigroup has been pursuing similar plans with preferred stockholders, including several foreign governments investment funds. The bank has offered to exchange up to $27.5 billion of preferred stock into common shares at a price of $3.25 a share, a 32 percent premium over Thursday’s close. It will do so by issuing warrants. If the transaction is not approved by Citigroup shareholders, those securities will carry a 9 percent dividend that will increase quarterly.

On Friday, the bank announced that the government of Singapore, Prince Walid bin Talal of Saudi Arabia and Capital Research Global Investors and Capital World investors would participate in the share conversion.

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"Mortgage Loan Welfare"

Posted by: Chris Palmeri

Figuring out a solution to the foreclosure crisis is turning out to be a divisive issue. Nobody wants to see people get kicked out of their home, but as my wife said reading the paper yesterday “Can I get a reduction in my mortgage too?”

Congress is presently debating Rep. Barney Frank’s proposal and others to offer federal funds to restructure home loans. The Bush Administration says its against such a widespread bailout. FreedomWorks, a Libertarian non-profit with former House majority leader Dick Armey at its head, is busy drumming up opposition to such a bailout. Their AngryRenter.com Web site says its generated 44,000 emails from folks protesting the bailout to the White House.

They’ve got a funny video as well, telling the story of one guy (Bob) who bought more house than he could afford and a woman (Sally) who saved her pennies in the hopes she could buy a home down the road. “Tax Sally to bail out Bob?” the video asks. It’s what the site calls “Mortgage Loan Welfare.”

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What to Pay for Liability Insurance

The formula used to determine your quote depends on what type of company you run. It's worth shopping around because prices can vary dramatically
By Karen E. Klein

Our company purchases general liability coverage based upon our monthly sales total. Recently, we noticed that we have been paying the insurance based upon our total monthly sales figure, including sales tax and shipping costs. Should we be deducting the sales tax and shipping costs to get the actual monthly sales figure needed to calculate liability insurance? —M.L., Billerica, Mass.

Sales tax and shipping costs should not be included in the figure you calculate as your monthly sales for purposes of purchasing liability insurance, experts say.

If your coverage is based on your sales figures, that means yours is likely a manufacturing or distribution company. For firms like yours, your sales volume is the most significant factor determining how much coverage you need.

For professional service firms, such as consultants and attorneys, general liability insurance is typically priced based on the square footage of occupancy at the firm, says Richard B. Hagemeier, executive vice-president of Bolton & Co., a Pasadena (Calif.)-based insurance brokerage. That's because their most significant general liability risk is from an accident on the premises. "Although the more significant liability risk [of a service firm] is typically from performing their professional service, those services rarely injure people physically or cause property damage," he says. Professional services themselves are insured under an errors and omissions or professional liability policy.

Contact your insurance broker and explain that you've inadvertently been overpaying, suggests Hana Rubin, a principal at the Maxon Co., based in Irvington, N.Y., which administers medical insurance and pension plans. You may be able to request an audit of your actual sales, during which tax and shipping costs would be excluded.
Wide Range of Quotes

But if your sales are less than a certain threshold—typically $1 million—it may not matter whether you've included tax and shipping, says Edward Minkovski, a broker at ARG Insurance Services in Los Angeles. Some insurers offer a fixed price for coverage based on revenue ranges, so unless your tax and shipping costs put you into the next revenue bracket, excluding them may not make any difference in what you're paying.

Still, it's worth looking into, Minkovski says. And if your policy is expiring, or set to expire soon, make sure to shop around for new coverage. "The market during the last couple of years has been soft and the insurance companies are hungry. You'll be shocked how much the prices vary and how many good deals there are out there," he says. For instance, he says he's seen general liability quotes that vary from $500 annually to $2,100 annually from various insurers for the same exact company and coverage.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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Business Insurance for the Home Office

Homeowners Insurance is Not Enough for the Home Office
Do you have a home office? If so, how much is the equipment in that office worth? What would it cost to rebuild and reequip the office?

These are questions rarely considered by most people who rely on their home office. Statistics vary, but consistently surveys have found 50-60% of all home based businesses are uninsured. Add to that the numbers of people who telecommute or rely on a home office as a second office and those statistics rise to nearly 70% of households with a home office being uninsured.

The number one reason for this lack of protection is the belief by most home office owners (and unfortunately sometimes their agents) that their homeowner's policy is sufficient to cover any loss or damage to the home office. So let's focus on that myth first: a homeowners policy will not properly cover the loss or damage to a home office. A homeowners policy:

• is typically limited to $2500 for in office equipment and an even lower $250 away from the office (think, laptop);
• does not cover business liability;
• does not cover loss or damage due to cyber-crime;
• does not cover loss or damage of business records;
• and, does not cover damages caused by business interruption.

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What is Business Insurance?

You will not find a successful business that doesn't carry business insurance. In today's society, it is absolutely mandatory to carry some form of it, regardless of size or location.
It doesn't matter if you're performing out of your basement, or if you're a large corporation in a high-rise building. The range of business insurance coverage is huge, with issues from lawsuits to disgruntled employees. Everyday practices can backfire with enough force to cause a disabling blow to the company. Case in point: You send an employee, in his or her own vehicle, to make some deliveries at a post office down the street. In route, they are involved in an accident. Guess where the finger may, and often times points? If an incident occurs, and they are covered by auto insurance, the best coverage you get is equivalent to their range of coverage. If they do not carry any auto insurance, then it can be a world of hurt for the employer.

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Existing U.S. home sales, prices drop in January

By Lucia Mutikani

WASHINGTON (Reuters) - Sales of previously owned U.S. homes plunged in January, reversing the previous month's surprise jump, and prices spiraled down to a six-year low as the deep recession and rising joblessness took its toll.


A drop in number of unsold homes offered some hope for the housing market, the main trigger of the worst financial crisis in the post-war period.

The pace of sales of existing home fell 5.3 percent to a 4.49 million-unit annual rate in January, the National Association of Realtors (NAR) said, from the 4.74 million rate reported for December.

U.S. stocks extended losses on the dour housing report. Government bond prices, which normally rally on weak economic data, were depressed by worries about the amount of debt the Obama administration will issue to rescue the economy.

"The housing market remains the Achilles heel of the U.S. economy as prices fall and demand wanes," said Kathy Lien, director of currency research at GFT Forex in New York.

The median national home price declined 14.8 percent from a year ago to $170,300, the lowest since March 2003 when the median was $169,400, the NAR said.

Lawrence Yun, chief economist at the NAR said roughly two in five home sales were "distress" transactions where the mortgage company must erase some of the original loan amount in order to complete the sale.

"We are seeing worsening economic conditions - loss of housing wealth and in the stock market ... Very low confidence," Yun told reporters.

The collapse of the U.S. housing market and the resulting global credit crisis pushed the domestic economy into recession in December 2007.

Few buyers are willing to take advantage of the lowest home prices in several years as most households are experiencing sharp declines in wealth, compounded by rising unemployment and collapsing stock market prices.

BUYERS HOLDING BACK

"Home prices are continuing to slide. They're down 14.8 percent over the past year. That makes housing very affordable relative to income, but buyers are still holding back," said Gary Thayer, a senior economist at Wachovia Securities in St. Louis, Missouri.

"We probably need to see a little more confidence in the economy to get buyers back into the housing market and that's just not happening yet."

A separate report showed applications for mortgages fell last week as mortgage rates edged higher. The decline followed recent robust increases in applications after the government unveiled its strongest action yet to aid struggling homeowners.

The Mortgage Bankers Association's seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, fell 15.1 percent to 743.5 in the week ended February 20 after surging 45.7 percent the prior week.

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