The word certificate of deposit means something specific in the United States. It is a bank deposit with a fixed term, issued by an insured institution, and it is among the safest instruments an ordinary person can buy.
The certificates sold by Stanford International Bank in Antigua were not that. They were unsecured obligations of a private offshore bank owned by one man, in a jurisdiction where the regulator was, as the SEC later documented, comprehensively compromised.
But they were called CDs, and they paid rates well above what an American bank offered, and around thirty thousand investors in more than a hundred countries bought about seven billion dollars of them.
The mechanism is what Kahneman calls attribute substitution. Faced with a hard question — what is the credit risk of an unregulated offshore institution with an unverifiable investment portfolio — people answer an easier one that comes to mind more readily: what is a CD. The familiar label carries a risk schema, and the schema is applied to the instrument in front of them.
Everything else Stanford built was designed to prevent the substitution from being examined.
He sponsored cricket at enormous scale, staging a twenty-million-dollar match and landing a helicopter at Lord's with a box of cash. He was knighted by Antigua and used the title. He gave to universities, hospitals and political campaigns in both American parties. He built a headquarters in Antigua whose scale implied permanence. These are chapter 7 and chapter 10 combined: authority signals and liking signals, purchased at a cost that was itself read as evidence of resources.
And he sold through affinity networks. Stanford Financial's sales force worked churches, Latin American business communities, and expatriate networks, where the introduction came from someone the buyer already trusted. The SEC's guidance on affinity fraud names this pattern precisely, and it is the third case in this part where it is the primary distribution channel.
The regulatory failure is the part that should be uncomfortable. The Antiguan regulator was, according to the receiver's findings, receiving payments from Stanford. The SEC's own inspector general reported that examiners had suspected a Ponzi scheme as early as 1997 and that enforcement action was repeatedly deferred.
It collapsed in February 2009, three months after Madoff, when the SEC finally acted. Stanford was convicted in March 2012 on thirteen counts and sentenced to a hundred and ten years. Recovery for investors has been a small fraction of losses.
The transferable rule is narrow and worth keeping. When a product is described using the name of a regulated instrument, the question is not what the name means. It is which regulator, in which jurisdiction, stands behind this specific thing — and if the answer requires more than one sentence, the name is doing work it has not earned.