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Massive Ponzi scheme involving $1.6 billion in “bogus personal loans” to Allen Stanford and “fabricated” portfolio returns used to persuade investors to buy Stanford International Bank’s high-rate CDs.

By Laurel Brubaker Calkins

March 2 (Bloomberg) -- A federal judge extended a freeze on millions of dollars held in Stanford Group Co. accounts to March 12 at the urging of U.S. regulators investigating an alleged $8 billion fraud.

U.S. District Judge David Godbey in Dallas today gave the Securities and Exchange Commission a partial victory in its bid to maintain the freeze, previously set to expire at midnight. He scheduled a March 12 hearing to decide on the SEC’s request to make the temporary injunction permanent. Lawyers for investors who have asked to have some of their money freed immediately weren’t allowed to speak at today’s hearing.

The SEC sued Stanford Chairman R. Allen Stanford, two associates and three of his companies on Feb. 17, alleging they misled investors through the sale of fraudulent certificates of deposit through Antigua-based Stanford International Bank.

Godbey last month froze all of Stanford’s personal and corporate assets and put Stanford Group, Stanford International Bank and Stanford Capital Management LLC into receivership under the control of Dallas lawyer Ralph Janvey. Today, Janvey told Godbey he will file a plan by March 16 for releasing accounts that contain less than $100,000, with some exceptions.

“This should alleviate the concerns of some of the people,’’ Janvey told Godbey. “We are very conscious of the hardship being caused to people who may be very innocent.’’

Stanford Denial

Chuck Meadows, a Dallas lawyer who said he is representing Allen Stanford over the asset freeze, asked Godbey to delay a final ruling on the issue to give his client time to respond to SEC claims he orchestrated a Ponzi scheme.

“Mr. Stanford denies that allegation,” Meadows said. The lawyer said after the hearing that he is in talks to represent Stanford in other legal matters.

Godbey agreed to the delay over the objection of SEC attorney David Reese that, “Mr. Stanford has done nothing to comply with the court’s order and refused to appear for sworn testimony.”

Hundreds of investors are asking Godbey to unlock their Stanford accounts, most of them held through Pershing LLC and J.P. Morgan Clearing Corp. After U.S. marshals raided Stanford’s Houston headquarters on Feb. 17, Jersey City, New Jersey-based Pershing told clients that they couldn’t retrieve their money until the court lifts the freeze.

The Pershing accounts “represent a substantial amount of money that doesn’t belong to Stanford,” Michael Stanley, a Houston lawyer for dozens of Stanford investors and brokers, said in an interview before the hearing. “It’s crazy that that money is tied up. We don’t think the judge meant for the receiver to take things that don’t belong to the receivership.”

‘Significant Percentage’

Investors are being inconvenienced by the freeze, especially elderly ones who rely on their accounts for living expenses, Stanley said. Nursing-home patients were in danger of being evicted, homeowners faced foreclosure, and one client couldn’t afford to bury her husband, he said.

“Our highest priority is getting as many accounts out of this estate as we can,” while holding back any accounts that may have benefited from fraud, Janvey told Godbey. “A significant percentage of Stanford clients may have invested in fraudulent products and schemes.”

The three Stanford companies and Chief Investment Officer Laura Pendergest-Holt have agreed not to violate the temporary freeze order. Pendergest-Holt was charged last week with obstructing the investigation and released on $300,000 bond. Her lawyer, Dan Cogdell, said she is innocent and had been cooperating with investigators until she was arrested Feb. 25.

‘Massive Ponzi Scheme’

Neither Allen Stanford nor Stanford Chief Financial Officer James Davis have been criminally charged for allegedly orchestrating what the SEC called a “massive Ponzi scheme” involving $1.6 billion in “bogus personal loans” to the chairman and “fabricated” portfolio returns used to persuade investors to buy Stanford International Bank’s high-rate CDs.

Davis filed court papers last week asserting his constitutional right against self-incrimination. He said he won’t provide information or answer questions about his personal assets or actions regarding Stanford’s investments or investor recruitment policies.

Allen Stanford, who was served with the SEC lawsuit on Feb. 20, hasn’t filed any court papers in response. He couldn’t be reached for comment.

The case is SEC v. Stanford International Bank, 3:09-cv- 00298-N, U.S. District Court, Northern District of Texas (Dallas).