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Associated Press/Photo by Carlos Hernandez

Extreme prejudice

Business | A culture of too much trust may have contributed to the Stanford financial scandal

Issue: "The schools that Arne built," April 11, 2009

Number 205. That's what some of Texas billionaire Allen Stanford's colleagues and friends started calling him when he was named No. 205 on Forbes magazine's list of the 400 richest people in the world.

Soon after he was named to the list, he appeared on CNBC, the financial network, and was asked by anchor Carl Quintanilla, "Is it fun being a billionaire?" Stanford, 58, laughed and answered, "Well, uh, yes, yes. I have to say it is fun being a billionaire."

But it got a whole lot less fun on Feb. 17. That was when the Securities and Exchange Commission (SEC) said that Stanford and his accomplices had been operating a "massive Ponzi scheme," had misappropriated billions of investors' money, and had falsified the Stanford International Bank's records to hide their fraud. The SEC was blunt in its assessment: "Stanford International Bank's financial statements, including its investment income, are fictional." Also named in the complaint were Laura Pendergest-Holt, Stanford's Chief Investment Officer, and James Davis, Stanford's Chief Financial Officer.

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So how did Allen Stanford go from being a student at Baylor University to one of the richest men in America to possibly one of the biggest frauds in the history of American finance? It is in some ways a classic Texas-sized story, with equal parts opportunism, hard work, and religion.

Stanford's father owned a small but profitable insurance agency, and when Allen graduated from Baylor he took a job in the family business. When the "oil bust" of the mid-1980s crushed the Houston real estate market, Stanford swooped in, buying up distressed properties, using money from his father and from friends.

By the mid-'90s, Stanford had made his first hundred million, as well as many millions more for friends who invested in Stanford's deals. Stanford himself began investing in real estate and other ventures in Antigua, a tax-haven, and he eventually moved there. His massive investments and civic involvement motivated the island nation's leaders to recommend Stanford for an honorary knighthood, which he received in 2006.

Perhaps because Stanford had made so many of his friends so much money in those early days in Texas, Antigua, and elsewhere, it was easy for Stanford to get them and others to invest in subsequent ventures.

It also helped that Stanford recruited his college roommate, James Davis, to be his CFO. Davis, from the small town of Baldwyn, Miss., had a reputation as a "straight arrow" with small-town values who often opened business meetings with prayer. Though Stanford was based in Houston, Davis decided to keep his office in Memphis, in part so he could remain active in nearby Baldwyn's civic life. "He had a love and a passion for the rural community," said Danny Horton, the mayor of Baldwyn.

Davis taught Sunday school at Baldwyn's First Baptist Church, and it was there that a teenager, Laura Pendergest (now Pendergest-Holt), came to his attention. Horton said she is "a fine young lady from a fine family" who went off to "The W," which is what locals call the Mississippi University for Women. She joined Stanford Financial Group and under Davis' mentorship rose quickly through the ranks. By the time she was 30, she had become the firm's Chief Investment Officer and occupied an office next to Davis' in Memphis.

But Pendergest-Holt's quick ascent-her salary at Stanford was as much as $1 million a year-was followed by an equally quick descent. On Feb. 27 she was arraigned on criminal charges of obstructing the government's investigation of Stanford. Prosecutors had asked for bail to be set at $1 million, but Pendergest-Holt's attorneys successfully argued that because her assets were frozen-as were the assets of thousands of Stanford investors-she could not make this bond. It was ultimately set at $300,000, of which she had to produce $30,000. She is currently not in custody, though she is required to wear an ankle monitor.

The fact that Pendergest-Holt and Davis first met in church was not that unusual for Stanford Financial Group. Religious faith, personal connections, and church ties were common at Stanford, which had a network of almost 30 offices, mostly in the Southeast, and more than 100 advisors. Many of the practice's leaders were outspoken Christians who recruited other "like-minded" financial advisors, according to Greg Leekley, who was a consultant to Stanford during the heyday of the recruiting process. "We weren't trying to set up a Christian financial planning practice," Leekley said. "And we weren't looking for just Christians. But when you know the same people and have the same beliefs, the trust comes more quickly."

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