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MCU foundation rocked by Ponzi scheme

A prominent Marine charitable foundation had “more than a couple of million dollars” invested with a financial group accused of scamming billions of dollars from more than 28,000 clients in an international Ponzi scheme, the foundation’s president said.

The Marine Corps University Foundation saw the majority of its assets frozen by the U.S. Securities and Exchange Commission in February, as federal authorities seized accounts overseen by companies associated with the Stanford Financial Group, said retired Brig. Gen. Thomas Draude, the foundation’s president and CEO.

Coupled with foundation losses suffered as the stock market plunged late last year, the Quantico, Va.-based charity has been forced to cut the amount of financial support it offers Marine students and to slash its staff from six to 4.5, he said.

“We’ve had to analyze and scrutinize very carefully the support to the units that have requested it, both at the university and in the operating forces,” Draude said. “We’re taking those [requests] as we can fill them, but as you can imagine, they have slowed down substantially.”

The SEC charged several Stanford companies and officials with fraud Feb. 17, accusing them of misappropriating billions of dollars of investor funds and falsifying financial statements in an effort to conceal their alleged activities. The scheme had ties to the Stanford International Bank in the West Indies and the Houston-based Stanford Group Company, authorities said.

The SEC said Stanford International Bank had clients in 131 countries and $8.5 billion in assets. The Houston-based company had 30 offices across the U.S. The company claimed to oversee more than $50 billion worldwide.

The foundation invested with Stanford late last year after losing 20 percent of its financial portfolio as a global recession hit the U.S., Draude said. He declined to say what the foundation’s portfolio was worth, but a tax return available due to the group’s status as a tax-exempt nonprofit organization shows it had a balance of more than $10.65 million at the end of 2007 and donated more than $1.14 million to Marine Corps University and other organizations that year.

In news accounts published across the country, victims have said they were impressed with investment promises Stanford made, especially with offshore certificate of deposit accounts that offered interest rates of more than 15 percent in many cases.

There are more than 4,500 victims in Stanford’s scheme in the U.S., including numerous veterans, said Angela Shaw, founder of the Stanford Victims Coalition, which was launched to advocate for the release of victims’ funds after the SEC froze them. A majority of the victims are in Latin America, but there are clusters also in Canada and Europe, Shaw said. They have not been identified by federal authorities.

Draude said the foundation’s money was invested through Stanford “in a couple of different forms,” but mostly not in CDs. While Stanford focused primarily on offering high-yield CD accounts, it also offered others, including mutual funds, SEC officials said.

Shaw said standard stocks and bonds obtained through Stanford are real assets with full market value, but they have been frozen as authorities attempt to claw back as much money as possible from the fraudulent CDs. All but about 1,500 of those accounts have been released, she said.

In addition to the staffing cuts and filling fewer donation requests, the foundation is looking for a new financial manager and has deferred part of that salary and the salary of an instructor who teaches electives at the university and is paid through a foundation endowment, Draude said. As foundation president, Draude received $125,232 in pay and benefits in 2007, according to tax documents. He also teaches electives at the university, he said.

The foundation is “pursuing aggressively” the recovery of its assets, Draude said, and is confident it can turn its fortunes around. It still plans to hold events that have proven to be money-makers, such as a golf tournament in September and the annual black-tie Semper Fidelis Dinner, which featured Commandant Gen. James Conway as the guest of honor on March 1.

“For the Marines, they should continue to request support from the foundation, and we will support those requests as we can,” Draude said.

Inside the scam

SEC officials say that the Stanford Financial Group orchestrated an elaborate Ponzi scheme. But how does such a scheme work? A quick look:

• A financial operation is set up to entice investors by offering unrealistically high returns. In the case of Stanford Financial, most of those investments came in the form of certificate of deposit accounts that offered double-digit interest rates, SEC officials said.

• Once the scheme is off the ground, its operators offer additional financial benefits to early investors who encourage friends, family and acquaintances to invest in the scheme without knowing the dangers. Typically, returns that are paid during the scheme come from an investor’s own money or from money paid by later investors, rather than legitimate money raised by the financial operation.

• The cycle is perpetuated, with investors encouraging even more people to invest. For the financial operation to pay back returns requested along the way, an ever-increasing number of investors is needed.

• The scheme collapses, typically when authorities raise flags about promises made to investors or freeze the assets involved. In the case of Stanford Financial, this occurred in the U.S. on Feb. 17.

• The Ponzi scheme got its name from Charles Ponzi, who is considered one of the greatest scam artists in U.S. history. He emigrated from Italy in 1903 and launched his first major swindle in Boston in 1918.

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