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Venezuelans may have had as much as $3 billion invested with Stanford, who the U.S. charged with running an $8 billion fraud. In Argentina, savers probably channeled $400 million to Bernard Madoff, accused by U.S. prosecutors of running a $50 billion Ponzi scheme.

Feb. 19, 2009 (Bloomberg) -- Investors across Latin America who placed funds offshore to escape financial instability at home have seen their strategies backfire after trusting alleged fraudsters R. Allen Stanford and Bernard Madoff.

Venezuelans may have had as much as $3 billion invested with Stanford, who the U.S. charged with running an $8 billion fraud, according to the South American country’s banking regulator. In Argentina, savers probably channeled $400 million to Bernard Madoff, accused by U.S. prosecutors of running a $50 billion Ponzi scheme, said Osvaldo Prato, a lawyer representing investors.

“I never thought this would happen, much less to a bank like Stanford with a good name,” said Celia Daniel Metta, 48, who was among 20 clients standing outside a Stanford affiliate in Mexico City yesterday. “Your money isn’t safe anywhere.”

The losses by Stanford’s and Madoff’s investors may prompt Latin Americans to seek refuge in more transparent, less risky investments, said Alberto Ramos, senior Latin America economist at Goldman Sachs Group Inc. in New York.

All six major Latin American currencies have weakened against the dollar in the past six months, with Mexico’s peso plunging 30.4 percent.

“Latin America has been hit by chronic financial crises in the past few decades,” said Alfredo Coutino, senior Latin America economist at Moody’s Economy.com. “Whatever money investors had in the region was practically erased. They learned that one way to protect themselves was to put their money in foreign currencies.”

Packed Offices

In the past two days, investors packed the offices of Stanford’s affiliates in Venezuela, Mexico, Peru, Panama and Ecuador to demand their money back.

Clients of Stanford Group Venezuela Asesores de Inversion CA were told that their accounts had been frozen, said Carlos Araujo, a Caracas-based financial adviser who said he has $80,000 invested in certificates of deposit issued by Stanford’s Antigua bank.

“There has to be a liquidation of the assets, and then we’re going to find out what percentage of our money we get back,” he said yesterday after meeting his account executive. “It’s going to take a few months.”

Bloomberg calls to Stanford’s Caracas affiliate weren’t answered yesterday.

Governments Respond

Latin American governments rushed to respond to the allegations against Houston-based Stanford. Venezuelan Finance Minister Ali Rodriguez told reporters yesterday he’ll act to prevent any “alarm” that could cause a run on Venezuelan banks.

In Colombia, the financial regulator said Stanford’s brokerage unit would halt activities on the country’s securities exchange, in a “precautionary” measure. Stanford offices in Quito, Mexico City and Panama City were closed yesterday, and clients were given notice of the U.S. investigation.

Throughout the 1980s and 1990s, Latin America suffered periodic currency devaluations, bank failures and hyperinflation, undermining investor confidence in local investments, Goldman Sachs’ Ramos said.

In 1990, Brazilian President Fernando Collor confiscated bank deposits as part of a program to fight inflation that peaked at 6,821 percent. Mexico had to bail out banks in 1995 after the peso fell 32 percent.

In the late 1990s, Colombia’s financial sector slid into its worst recession in 60 years after bad loans mounted and credit dried up. Banks were nationalized and unemployment rose to 20 percent.

Argentina’s Default

Argentina defaulted on $95 billion in debt in late 2001, and restricted withdrawals from bank accounts to prevent a run on banks. The peso lost more than 66 percent of its value against the U.S. dollar the following year.

In response to such instability, well-off individuals and companies have preferred to accumulate wealth offshore. In Brazil alone, assets held abroad in 2007 totaled $155 billion, according to the central bank.

“If you take a walk in Miami, Houston or San Diego, you’ll see thousands of properties owned by Mexicans,” said Enrique Gonzalez, a lawyer at Gonzalez Calvillo SC in Mexico City who specializes in banking and capital markets.

Latin Americans have also suffered losses from Madoff’s alleged Ponzi scheme. Argentines had about $400 million invested in his funds through Spanish lender Banco Santander SA, said Osvaldo Prato, a lawyer at Arazi, Prato, Merola y Asociados law firm that represents the Argentine Association of Financial Consumers.

Local Losses

Investors often shift money abroad to avoid taxes, leaving them little recourse to recoup funds lost to frauds because it could attract attention from authorities, Ramos said. Investing at home may not be attractive either, he said.

“Local funds have also declined,” Ramos said

Venezuelan President Hugo Chavez imposed foreign exchange controls in 2003, spawning an unregulated currency market where the bolivar is 62.6 percent weaker than the officially pegged exchange rate. In Argentina, President Cristina Fernandez de Kirchner ordered the nationalization of $24 billion of private pension funds last year.

While losses from Stanford and Madoff frauds may make Latin Americans more selective as to where they put their money, they will continue to invest offshore, said Moody’s Economy.com’s Coutino.

“Investors aren’t going to change the fact that they prefer to keep their money abroad,” he said. “They are going to be more picky, and do some research.”