A knighted Texas billionaire tricked clients into pouring money into three of his companies with false promises of outsized returns, according to fraud charges filed Tuesday by the Securities and Exchange Commission.

The SEC alleges that Sir Robert Allen Stanford orchestrated a “massive” scheme, centering around $8 billion worth of certificates of deposit that promised “improbably and unsubstantiated high interest rates.” In addition to Stanford, the SEC also charged James Davis, CFO of Stanford International Bank, and Laura Pendergest-Holt, chief investment officer of Stanford Financial Group.

Stanford offered those products through an offshore firm, Stanford International Bank, claiming that the high rates were achieved through returns from his Houston-based broker-dealer firm, Stanford Group Co. However, the SEC says that Sir Allen Stanford fabricated historical return data over the past 15 years. A third company, investment adviser Stanford Capital Management, is also named in the charges.

The SEC also accuses Stanford Group Co. of conning registered investment advisers into investing in a proprietary mutual fund wrap program called Stanford Allocation Strategy based on fake performance data. Those advisers forked over $1.2 billion worth of clients’ money, according to the SEC. David Marder, a partner with Robins Kaplan Miller & Ciresi, says complicated, unrecognized products can often be red flags.

“There ain’t nothing new under the sun,” says Marder. “If you’re investing in stocks, you’re investing in stocks; if you’re investing in options, you’re investing in options; if you’re investing in bonds you’re investing in bonds. So if you’re investing in something no one’s ever heard of before, it’s probably not legit.”

R. Allen Stanford has dual citizenship in the U.S. as well as Antigua and Barbuda, but lives on St. Croix in the U.S. Virgin Islands, according to his bio on Stanford Financial’s Web site. He is the first American to have been knighted by Antigua and Barbuda, whose official head of state is Britain’s Queen Elizabeth II, at the independent country’s “Silver Jubilee” festival in November 2006, the bio says.

Echoing the Bernard Madoff scandal, the SEC says Stanford relied on close personal ties, along with the false data, to garner new inflows. Besides Stanford, Davis and Pendergest-Holt, other members of his investment committee included Stanford’s father, his college roommate and another Texan who was a car salesperson and cattle rancher. None of them had any experience with investing or financial services, according to the SEC.

SEC agents raided Stanford’s office in Houston Tuesday morning, and have frozen his assets, along with those of the three companies.

“Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” says Linda Chatman Thomsen, director of the SEC’s enforcement division. “We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors.”

The alleged fraud is just the most recent to come to light on the heels of a giant alleged Ponzi scheme run by Madoff Investment Securities, whose losses may be as high as $50 billion. The schemes have sent additional shock waves through a market whose trust and confidence has already been rattled by the global financial crisis. A market riddled with fears about the health of large financial institutions in the wake of massive infusions of government aid — like Citigroup (C Quote), Bank of America (BAC Quote), AIG (AIG Quote), Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote) — is even more vulnerable to accusations of fraud.

John Alan James, an adjunct management professor at Pace University, fears that more cases may be unveiled in coming weeks and months as the government tightens its regulatory reigns and fearful investors demand cash. He cites the “prestige or aura” that characters like Stanford and Madoff used to woo investors, as well as a startling lack of due diligence by investors, advisers, and regulators alike.

“Yes, you’re going to see some more Stanfords; you’re going to see some more Madoffs,” asserts James. “This isn’t even the tip of the iceberg, much less the iceberg.”

Espen Robak, a chartered financial analyst and president of Pluris Valuation Advisors, notes that not many banks can offer CDs at 7.5%, as Stanford International Bank had been doing, in such a low-interest rate environment. He adds that investors should be wary of buxom returns over many years from managers boasting low volatility.

Indeed, Stanford’s investment philosophy as outlined on its Web site notes that during both boom times and market crises, it bucked trends to provide steadily strong returns.

“If something sounds too good to be true, it probably is,” says Robak.

Ironically, Stanford also took pains to distance itself from the Madoff scandal, issuing a press release on Dec. 17 that said the bank “did not have any exposure to the Madoff fraud.” In the statement, Stanford International Bank President Juan Rodriguez-Tolentino also asserts that the bank is regulated by authorities in Antigua and Barbuda, as well as international bodies like the International Monetary Fund.

The stock market sank lower on Tuesday, plagued by worries about the banking sector’s solvency, economic woes and the viability of U.S. automakers General Motors (GM Quote), Chrysler and Ford (F Quote). Whether the SEC’s accusations prove correct or not, the emergence of new fraud accusations continues to fuel the cycle of fear and selling. After all, notes Marder, Ponzi schemes flourish in boom times when new capital can easily be raised and positive returns are more believable.

“Then there’s a news event like this that gets reported and people are wary of putting their money anywhere, especially when the economy is doing poorly and the markets are doing poorly,” he says.