U.S. Prosecutors Try to Determine Whether Banker Operated Ponzi Scheme

R. Allen Stanford’s father James, above, says he “can’t believe these allegations” against his son

Federal prosecutors are investigating whether Texas businessman R. Allen Stanford was operating a Ponzi scheme that defrauded investors around the globe, people familiar with the matter said.

These people said the Justice Department is investigating Mr. Stanford, who was hit with civil charges Tuesday by the Securities and Exchange Commission in connection with an alleged $8 billion investment fraud.

On Thursday, Federal Bureau of Investigation agents served Mr. Stanford with the SEC civil lawsuit in Fredericksburg, Va., the FBI and SEC said. SEC officials had said this week that Mr. Stanford’s whereabouts were unknown.Mr. Stanford has yet to respond to the civil charges. No criminal charges have been filed against him, and he wasn’t considered a fugitive.

One person familiar with the matter said Mr. Stanford was staying with a friend in the Fredericksburg area and was trying to locate a lawyer after his previous lawyer resigned from the case Feb. 14.  The SEC accused Mr. Stanford of luring investors into buying certificates of deposits with promises of high returns. Its complaint said his marketing material assured investors

that their money would be put into liquid assets, but that instead he poured the money into hard-to-trade assets, including real estate and private equity. The SEC complaint didn’t use the words Ponzi scheme, which refers to a scheme in which money from new investors is used to pay off older investors.

R. Allen Stanford

Now, authorities believe the operation may have been largely a Ponzi scheme, people familiar with the matter said. The SEC’s investigation is continuing.

Since October 2006 the SEC had been investigating Mr. Stanford and his businesses, which include a brokerage firm, an investment-advisory business and Antigua-based Stanford International Bank. Federal prosecutors opened their inquiry more recently.

The investigation picked up steam in December after the Bernard Madoff case broke. Mr. Madoff told his sons he was carrying out a Ponzi scheme, according to an SEC complaint. At the same time, the Stanford bank liquidated $250 million in assets over a few weeks.

Tuesday, a federal judge in Dallas froze Mr. Stanford’s assets and at three entities under the brand Stanford Financial Group and appointed a receiver. Financial regulators across South America have since stepped in to try to prevent runs on financial institutions owned by Mr. Stanford.