FORTUNE -- If I ask you who the worst hedge fund fraudster is in the world, there's only one name that will spring to mind. The guy who allegedly looted billions of dollars from unwitting victims. The guy who had been accused of fraud for years, though the government failed to properly investigate for years. The guy who is now seemingly showing no remorse while protesting the conditions in prison. The guy who left many of his victims broke and has been beaten while incarcerated.
Madoff, right? Wrong. I'm thinking of Allen Stanford, accused of running an $8 billion Ponzi scheme. So why should the general public care a lot more about the former Sir Allen Stanford (he is no longer a Knight) than Bernard Madoff's $60 billion crime?
The sheer size of Stanford's fraud would be the easy answer. $8 billion is nothing to sneeze at. But the money is actually somewhat beside the point.
What about caring about the failures of the SEC, which is under withering scrutiny following the release of its internal investigation regarding its handling of the Stanford matter? The report, released the Friday the commission also charged Goldman Sachs with fraud, shows that SEC examiners identified Stanford as a serious risk back in 1997, only two years after Stanford Group Co. had registered as an investment advisor. The SEC also was twice warned that Mr. Stanford was running a Ponzi scheme, yet failed to act for more than a decade. But the SEC's (in)actions aren't the cause, either.
How to (almost) get away with fraud: hide it in plain sight
The Stanford case matters to everyone, not just rich people, not just the government, and not just people who bought Stanford CDs, because the core of the issue lies is the exploitation of that near universal financial instrument, the CD. That's correct - Certificates of Deposit, available from your local bank, (not CDOs or CDSs, from Wall Street investment banks).
Stanford and his firm are accused of running a scheme that pitched CDs with rates higher than those being offered by anyone else. Bernie Madoff, when describing his investment strategy, called it a "split strike conversion method." To the ordinary person, those words make most sense when heard in a bowling alley.
It has been argued that sophisticated and even unsophisticated investors probably should have been more skeptical about Madoff's product, which they clearly didn't really understand. What's more, Madoff described his fund as an "alternative" investment, something which should have been a sign that it's not a place to put your entire fortune.
The same cannot be said about investing in CDs. In fact, the CD is just about the simplest financial product to grasp: Investors pay money for a document they can later cash in for the same amount, plus interest, guaranteed by the U.S. Government. This simplicity is what makes Stanford's alleged scheme so insidious, and so scary for society.
A short history of the crimes of Allen Stanford
In February 2009, Stanford's company, Stanford Financial Group, was reported to be under investigation by the SEC, FINRA and the FBI because one entity under its umbrella, the Stanford International Bank (SIB), was consistently providing higher-than-market returns on CDs to its depositors.
The promised rate of return caught the eye of regulators, who deemed it too high for the low-risk investments that SIB advertised (a portfolio of equities, metals, currencies and derivatives, per SIB's Web site and its CD disclosures); Fortune reported that "according to the SEC complaint . . . The returns on the so-called CDs ranged from 16.5% in 1993 to 11.5% in 2005."
At one point, CD rates offered by SIB were in the double-digits; more recently, the firm was offering 4.5% (while most other bank rates hovered around 1.5% (for a one-year, $100,000 CD). That June, Stanford was indicted for "massive ongoing fraud."
Having investigated Stanford Financial and Mr. Stanford in early 2007 for a client considering a potential business transaction with the firm, the government's allegations were hardly surprising to me. Among other things, our firm's investigation revealed his complex and somewhat sordid history with Antiguan government:
Stateside, Stanford also made headlines for something he was not. In 2001, Stanford University stated that despite Mr. Stanford's claims, they did not think that he was related to Leland Stanford Jr.
Stanford was sued for his Ponzi scheme in 2006
The most devastating information, though, was public three years before Stanford was busted. In a 2006 Florida whistleblower suit, a former employee charged that he was fired after he "began asking probing questions about Stanford Financial's business model and, more specifically, how Stanford Financial earned its revenue." The employee claimed in court documents that Stanford Financial was "operating a 'Ponzi' or pyramid scheme" in which money was "laundered" in its offshore bank and then used to "finance its growing brokerage business, which did not have any profits of its own." A subsequent suit was filed in Texas by other Stanford executives making similar allegations.
Many will argue that the lawsuit and Stanford's Antiguan government issues should have been known by federal regulators tasked with protecting individual investors. That said, it would be very difficult for individual investors to easily and inexpensively find this type of information, and even if they did, to know what to do with it.
That fact, combined with the straightforward appeal of the Stanford scheme, is a terrifying thought to individual investors. While there will always be criminals preying on the unsuspecting, it has been a little hard for most people to muster tons of sympathy for super rich individuals who put their savings -- and some folks who even borrowed money to invest -- in Madoff's opaque alternative investment. Let alone for the investment firms that placed money from thousands of their customers into Madoff's funds without making sure his methods were sound.
But having sympathy for the people who bought Stanford CDs -- 28,000 of them -- is a different story. Their loss is a warning that no investment - even ones that sound completely humdrum, like a CD - can ever be 100% safe.
Randy Shain is executive vice president of First Advantage Litigation Consulting/BackTrack Reports and author of the book Hedge Fund Due Diligence: Professional Tools to Investigate Hedge Fund Managers.