Inside the bizarre legal case of Allen Stanford

FORTUNE -- As the $7 billion financial fraud case against R. Allen Stanford slowly makes its way through the courts, the number of victims continues to pile up.

Depending on whom you believe, the latest ones are either the insurance companies paying his legal bills, the high-priced lawyers representing him, or Stanford himself. Just which can claim the mantle will likely be decided this Thursday when a federal judge will review $6 million in bills for legal work that Stanford says he never received.

U.S. District Judge Nancy Atlas, who is tasked with determining whether the insurance companies that provided Stanford with directors and officers insurance must keep footing his legal bills, promised last week that she is "going to get to the bottom of why so much money is being spent in Mr. Stanford's defense."

The insurance dispute is only the latest wrinkle in the case, which has seen Stanford churn through law firms nearly as fast as prosecutors say he burned through the cherished savings of his many penny-pinching investors. But it is a crucially important issue to Stanford, who has been charged with a 21-count indictment alleging he concocted a massive investment scheme centering on the sale of fraudulent certificates of deposit from an Antigua bank that he controlled. But the legal sideshow created by Stanford threatens to shift the focus away from the investors who claim to be the real victims in this case.

Insurance companies Lloyds of London and Arch Specialty Insurance Company have long taken a dim view of Stanford's protestations, arguing in court papers that Stanford and other executives at Stanford Financial Group voided their insurance policies by engaging in money-laundering. They will have to provide evidence of that allegation at a hearing on August 24. But Stanford, who sheepishly represented himself before Judge Atlas, says they've already cut him off, and just when he feels he's finally found a lawyer worth his salt.

It is this proactive move that has opened up Stanford's defense bills to scrutiny and provided an illuminating view of how quickly legal bills can mount when someone is charged with a high-profile white-collar crime.

Who's hired, who's fired

It's certainly been a tricky case for Stanford's revolving door of lawyers, who have had to grapple with both lingering doubts over whether they'd ever be paid, or paid fully, and who had sometimes learned of their own abrupt termination in public press releases. Now they face questioning about, as Judge Atlas puts it, their "burn rate" of the insurance money.

The high rate of burn is the one thing that Stanford and the insurance companies seem to agree on. Although Stanford has been quick to praise his currently proposed defense lawyer - Houstonian Bob Bennett - who sat with him at Judge Atlas's hearing, the defendant held little but scorn for the legal dream teams he's already discarded, grousing that he thinks "it's an obscene amount of money that's been spent on what has been produced.'' The insurance companies, meanwhile, have questioned how much of the money "has been wasted."

The issue is who's to blame. In legal papers, Stanford has pointed the finger at the insurance companies, saying they have "controlled his defense" and "thwarted his every attempt" to obtain and fund counsel of his choosing. They have, he says, kept him from getting the counsel he needs and have "effectively become" his criminal defense attorneys despite never examining the charges against him "to determine the best way to defend him."

The insurance companies have responded by calling Stanford's allegations "an egregious misrepresentation" and noting that their policy does not give Stanford "a blank check to deplete the D&O Policy proceeds." Despite "the chaos surrounding Stanford's representation" and Stanford's "penchant for accumulating attorneys" then firing them without explanation, the underwriters say that they have already paid ten different law firms -- all selected by Stanford -- more than $6 million. This is split into about $4 million for representation for his criminal case and $2 million for representation in a civil Securities and Exchange action; combined, the amount represents more than has been paid on behalf of all of the other plaintiffs. "Now," the insurance companies say, "Stanford wants to start all over with a new criminal counsel," despite having little clarity about "how much of the $4 million dollars [already] paid to Stanford's [criminal case] lawyers has been wasted."

Sealing the deal

Although the insurance companies' legal documents paint Stanford as something of an incarcerated version of the mercurial Donald Trump on The Apprentice, many of Stanford's lawyers seem to have a Grisham-like quality that leaves them equally tarred. For instance, the companies complain that Stanford suddenly fired his previous lawyers (after seven months and the payment of about $2 million in fees) and brought on the law firm of Bennett-Nguyen Joint Venture due to Bob Bennett's back-channel cajoling of Stanford's daughter. Bennett, the insurance companies say, sent her an email that "can only be described as an unabashed pitch of his legal services that openly questions the abilities of Kent Schaffer, Stanford's attorney at the time."

Bennett, meanwhile, has been besmirched by his co-counsel, Mike Essmyer, of Essmyer, Tritico & Rainey, who is asking to be released from Stanford's criminal case, citing "irreconcilable differences" with Bennett. These differences have allegedly included making decisions that the litigator believes are "detrimental to the best interests of the client." A confident Bennett told Fortune that he would be letting Stanford "respond on Thursday as to what he thinks of me and our representation."

Although the insurance companies are currently facing $711,983.36 in invoices submitted by Bennett-Nguyen for their most recent month's work, they say Essmyer's allegations give them plenty of reason to deny Stanford's request that they pay for his use of the Bennett firm.

If they are forced to grant the request, it could be an expensive couple of months. The law firm has said in its fee application that ascertaining the "exact budget and costs of the overall criminal defense of Mr. Stanford at this time would be extremely difficult, inaccurate, and unfeasible" but that "our estimation of fees on-going would be consistent with the fact that Lloyds has already paid out approximately $8-9 million for the defense costs thus far in the case for a period of five months." The criminal defense team is to consist of about 17 attorneys, 7 law clerks, 11 paralegals, a separate group of private investigators and experts, and a team of consultants led by Martin Weinberg and famed OJ Simpson attorney and Harvard law professor Alan Dershowitz (himself billing out at $1500 an hour).

Of course, Stanford, 60, can use all the help he can get at this point. He's lost his fortune, including Sea Eagle, his 112ft yacht. Antigua has rescinded his knighthood. And he's been in prison awaiting trial for almost a year. While there, Stanford has allegedly been diagnosed with an abnormal liver function, fallen into the "throes of a major depression," been stuck in solitary confinement for forty days, and reportedly been beaten by another inmate, which cost him much of his sight in his right eye. In other words, as Bennett put it, Stanford has been reduced "to a wreck of a man."

And worst of all, people seem to assume Stanford's guilty despite his continued protests to the contrary. He's repeatedly insisted he never ran a Ponzi scheme and never "ever set out to defraud a person." As he told Judge Atlas, "I can win this case."

All he needs is to find one good lawyer who can successfully argue that position in court.