So Sir Allen Stanford has been accused by the Securities and Exchange Commission of a “massive fraud” involving his Antigua-based bank, which took in $8.5bn on depositors’ money and claimed to be investing it in safe, liquid securities.

Reading the SEC’s complaint against Sir Allen and two of his employees, James Davis and Laura Pendergest-Holt, a couple of points spring out for investors.

First, be wary of investment schemes that deliver not only high but uncannily stable returns. This, you will remember, was a warning sign in the alleged $50bn fraud by Bernie Madoff.

In the case of Stanford International Bank, the SEC notes that it claims to have made a double-digit return on investments over the past 15 years and lost only 1.3 per cent during 2008, when the S&P 500 index fell by 39 per cent.

“Perhaps even more strange, SIB reports identical returns in 1995 and 1996 of exactly 15.71 per cent . . . A performance reporting consultant hired by Stanford Group Company, when asked about these ‘improbable’ returns responded simply that it is ‘impossible’ to achieve identical results on a diversified investment portfolio in consecutive years.”

Second, be careful of complex financial groups with offshore affiliates. FT Alphaville has described the complexity of the Stanford group of companies and the difficulty of working out who was in charge of what.

The SEC says that Ms Pendergest-Holt, despite being chief investment officer of one  Stanford affiliate and a member of SIB’s investment committee, did not know where “the vast majority” of the money was invested.

February 17, 2009 7:31pm in Finance | Comment