Mexico’s National Banking and Securities Commission (Comision Nacional Bancaria y de Valores – CNBV) has commenced an investigation of Stanford International Bank Ltd.’s unit in Mexico, Stanford Fondos, S.A. de C.V., for possible violation of financial institution laws, according to the CNBV website.  The CNBV is looking into whether Stanford Fondos violated Mexican laws that forbid Mexican banks from encouraging clients to invest in unauthorized certificates of deposit abroad. 

Specifically, the laws prohibit “any person from requesting, offering or promoting the procurement of funds or resources of an undetermined person, or obtaining or soliciting funds or resources in a habitual or professional manner without having authorization from Mexican financial authorities”.  The CNBV has the authority to impose sanctions on violators of such laws.

The CNBV said it has not frozen any accounts at Stanford Fondos or otherwise interfered with the company’s operations and that its clients may request redemption of their funds at Stanford’s Mexico City offices.  A Sentido Comun report indicated that Stanford Fondos clients are being asked to complete a form and told that Stanford Fondos will process redemption requests during the week in which they are received.  Notwithstanding the report, it remains unclear whether Stanford Fondos is honoring such requests or whether the financial condition of SIB or its U.S. affiliates will affect Stanford Fondo’s ability to honor such requests.

Stanford Fondos is licensed to operate in Mexico as a distributor of investment funds, not as a full-fledged bank, according to FT.com.  It has operated in Mexico since 2005 and manages approximately US$50 million for 3,400 clients.  The whereabouts of Stanford’s founder, Sir Allen Stanford, are unknown.

Many Mexican and other Latin American investors invested significant amounts of money with the Mexican, Venezuelan, Panamanian, Peruvian and Ecuadorian affiliates of Antigua-based, Houston-headquarted, SIB hoping to escape financial instability in their home countries and on Stanford’s promise of high returns.  Bloomberg reports that in certain cases investors may have directed money to Stanford to avoid taxes in their home countries, which could affect their willingness to recoup their funds because it could attract attention from tax authorities.

Mexican and other Latin American investors who have invested money with SIB in Houston or its other U.S. affiliates, such as Stanford Capital Management and Stanford Financial Group, should consult their U.S. attorneys to determine the proper course of action and any remedies that may be available.

In January 2009, Venezuela-based financial analyst Alex Dalmady wrote a probing article in VenEconomy Monthly setting forth his arguments that the consistent market-beating investment returns posted by Sir Allen Stanford’s (pictured left with ladies) Antigua-based Stanford International Bank Ltd. (SIB) seemed to good to be true.  Business Week and FT.com Alphaville blog later raised additional questions.

In contrast to the deaf ears of the U.S. Securities and Exchange Commission (SEC) to analyst warnings as early as May 2001 about Madoff’s inflated returns, this time the SEC appears to have listened.

Yesterday, the SEC charged Sir Stanford, who was knighted by the Antiguan authorities rather than the Queen, and certain of his sundry affiliates with investment fraud.  The SEC complaint, a copy of which is available here, includes charges against SIB, Houston-based broker-dealer and investment advisor Stanford Capital Management (SCP), SIB chief financial officer James Davis, and Stanford Financial Group (SFG) chief investment officer Laura Pendergest-Holt. 

The complaint alleges, among other offenses, that the defendants misrepresented to purchasers of Certificates of Deposit (CDs) that their deposits were safe and falsely claimed that SIB re-invested client funds in “liquid” financial instruments.  At the SEC’s request, U.S. District Judge Reed O’Connor of the Northern District of Texas (Dallas) has entered a temporary restraining order, frozen the defendants’ assets, and appointed a receiver to marshal those assets.

That Mr. Dalmady first warned of SIB’s problems now seems prescient because of significant exposure to SIB instruments among Latin American investors, who today packed SIB affiliates in Venezuela, Panama, and Ecuador seeking to close their accounts, according to a Bloomberg report.

Bloomberg also reported that Mexico’s National Banking and Securities Commission (Comision Nacional Bancaria y de Valores – CNBV) said that Stanford’s unit in Mexico, Stanford Fondos, is only authorized to sell funds that operate in Mexico but the CNBV did not indicate whether it was investigating Stanford Fondos.

In a press release summarized in a Sentido Comun report, Stanford Fondos assured clients that their funds were not affected by the charges against SIB and other affiliates and that its clients should have “full confidence”.  That statement may or may not be true. 

Investors in SIB, Stanford Fondos and any other Stanford affiliate should immediately consult their attorneys to decide on a proper course of action.

As the U.S. Congress begins its review of the U.S.-Mexico border trucking demonstration program and the global financial crisis continues to ripple through Mexico, U.S. and Canadian cargo transportation companies and other investors may wish to consider distressed asset investment opportunities in Mexico’s cargo transportation industry.

The following is a rough outline of the laws and rules governing foreign investment in Mexico’s cargo transportation industry, all of which (along with other laws) should be carefully considered in consultation with a licensed Mexican attorney (which I am not) before making any investment:

International Cargo Transportation Services

Mexico’s Foreign Investment Law (Ley de Inversion Extranjera) allows foreign companies to own 100% of the equity of a Mexican company that performs international cargo transportation services in Mexico, where “international cargo transportation services” generally means services involving the transport of cargo between points in Mexico and the United States or Canada but excluding services involving the transport of cargo between points within Mexico.

However, a permit from the Ministry of Communication and Transportation (Secretaria de Comunicacion y Transportes- SCT) is required to perform such international cargo transportation services and the SCT is not currently granting such permits. Indeed, the SCT has rejected all recent requests by Mexican companies with U.S. and other foreign shareholders seeking to engage in the international cargo transportation business. Several of the rejections are being contested in litigation in Mexico.

Although the requesting companies are expected to prevail in the litigation because the SCT’s rejection of their permits appears to be contrary to applicable Mexican law, the litigation could continue well into 2009 or 2010.

Domestic Cargo Transportations Services

Under the Foreign Investment law, a foreign company is not permitted to own any interest in a Mexican company that performs domestic cargo transportation services, where “domestic cargo transportation services” generally means services involving the transport of cargo between two points within Mexico.

The exception to that rule is that a foreign company may make an investment in a Mexican company that performs domestic cargo transportations services (and/or international cargo transportation services) in Mexico, provided that the investment is neutral and the Ministry of the Economy (Secretaria de la Economia) approves of the neutrality of the investment in advance. “Neutral” in this case usually means that the foreign company may own only preferred stock in the Mexican company with voting rights limited to material matters such as a change in corporate purpose, merger, acquisition, sale of assets, spin-off, etc.

The Ministry of the Economy has recently approved such neutral investments by U.S. investors in Mexican transportation companies. The Ministry almost invariably rejects the first application and requests additional information from the applicant regarding the proposed investment. The second submission of the application is often accepted. The Ministry of the Economy has 30 days to respond to each application for approval of neutral investment but generally responds within 15 days.

Demonstration Program

A third option for U.S. and Canadian cargo transportation companies that wish to do business with Mexico but not to make a direct investment in a Mexican company is to make application to the SCT for enrollment in the Mexican equivalent of the U.S.-Mexico border trucking demonstration program (programa demostrativo), which allows a U.S. or Canadian transportation company to enter Mexico with its own trucks, drivers, and trailers to perform international cargo transportation services. (The U.S. demonstration program, as promulgated by the U.S. Congress and the Department of Transportation, has allowed Mexican carriers to make deliveries into the interior of the U.S. since 2007.)

Two key requirements of the Demonstration Program are that the truck drivers of the foreign applicant be bilingual and the foreign company be a registered transportation company with the U.S. Department of Transportation or its Canadian counterpart. The applicant must provide a substantial amount of supplementary information with the application. Applications are typically adjudicated within 3-4 months after submission.