Davis Day 2, Part 1: Goes through mega-transfers from Swiss account

By Patsy R. Brumfield / Daily Journal

11:34 A.M.
XXX
HOUSTON, Texas – Testimony resumes for James Davis, former Stanford Financial Group chief financial officer, in the $7.2 billion fraud trial of his ex-boss, R. Allen Stanford.
Davis, who once worked out of the Memphis and Tupelo offices, is considered the government’s most important witness as far as direct knowledge of Stanford and the details of the alleged scheme, which Davis claims existed even before he went to work for Stanford in 1988.
His testimony began just before 1 p.m. Thursday and is expected to continue through the middle of next week, first with questions from the government and then from defense attorneys.
Stanford, 61, built his global financial empire from Houston real estate deals in the 1980s and opened a CD-selling bank in Montserrat, then moved it to Antigua under a cloud of questions about his history, which included a bankruptcy.
Davis, his former Baylor roommate and go-to guy, pleaded guilty to his part in the scheme in August 2009 and has worked for his father-in-law in Michigan since then. He faces up to 30 years in prison but could get leniency if U.S. District Judge David Hittner accepts a government recommendation to do so because of his “significant cooperation.”
Davis, who figured prominently in the opening of SFG’s Tupelo office, looks very thin with sunken cheeks and a shock of steely, white hair that looks almost too large for his head. He began testimony in a weak voice but gained strength as the day went on Thursday.
(FOR ROLLING ACCOUNTS of his and other trial witnesses’ testimony. click on the Allen Stanford Trial News icon at www.djournal.com. Also follow courtroom Tweets on Twitter,com @REALNEWSQUEEN.) If you have questions, email me at patsy.brumfield@journalinc.com.
(Please forgive the typos and other glitches likely, below, as I type as fast as I can.)
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10:23 A.M. – Judge in, Stellmach tells him he’s got new evidence. Parras said we were working all day to get read. JUDGE – HOW MANY MONTHS DID YOU HAVE TO PREPARE? YOU KNEW HE WAS GOING TO BE ON BOARD. Parras – said 17K docs. JUDGE – Was it among 17K? Parras – Can say. Stellmach – Some not previously produced to us… may be in millions of our discovery but no in 17K identified for us. Paras – I didn’t have op to give report to court. JUDGE – RULING’S GOING TO STAND. NO MORE, THAT’S IT. Scardino – Stellmach just referred to MILLION of docs given to us, done best we could. JUDGE – Ask govt, said they could have weekend to get up to speed. These are a pain, but I think I gave them thru the weekend. Want to be fair, but question is – bottom line, if it hurts you, let me know. Not mere inconvenience. No sir, I’m listning to them. Stellmach- Came in late last night. Parras – Scardino absent two days, couldn’t confer with him. WE’ve been working late every night. JUDGE – RESPONSE? Govt – Only objecting to narrow docs we got this morning. In middle of examination and won’t look until later. No objection to others from 17K previously. But these aren’t in there. Parras – I know it’s improper cross.. but if meet over weekend. Judge – Monday, GOING TO BE A DIFFERENT BALLGAME. COME SEE ME AFTER NOON. I SAID OVER WEEKEND BUT DIDN’T ANTICIPATE THEY WERE COMING IN AFTER MIDNIGHT. MY RULING MONDAY STANDS. ABSOLUTE. RULING. May be inconvenicne. But looking as trial goes, but for making a record, more reasonable to say you have over weekend, then it cuts off. Talk to me. Don’t assume … as you know, what appears to be hostility that I’m leaning one way .. that’s a tough read. (BIG LAUGHS). Rigid rule Monday. Today, if not prejudice your position. Absolute Monday.
10:29 – Get jury in.
(Stellmach – to Davis, explained flow of CD money out of bank to Stanford’s personal company, routed through Stanford Financial Group.?) Yes. (Also, did he take any CD money out for personal expenses?) Yes. (Account used?) Yes, account in Switzerland. Soc Gen, Societe Generale. (Did bank have accts there?) Yes. (Other accts, number for STanford?) 108731 (Other accts bank had, purpose?) Managing funds deposited from account holders. (Part of Tier 2?) Yes. (108731 – separate from them?) yes (Who knew about 108731?) RAS and myself. (That acct, accounted for by internal accountants?) No. (Who held it,name?) Stanford Financial Group Ltd., signatores RAS and myself. (Explain how used?) (Helpful if you could draw it.) DAVIS AT FLIP CHART … drawing circles with bank SIBL at top, arrow to circle in middle … OBJECT – (Stellmach – said will explain this with testimony) JUDGE – Will allow, for the moment, Otherwise may need to remove it. (Stellmach – Explain to us with diagram, how money flowed from bank to personal accts?)
Davis – SIBL CDs to slush acct 108731 at Soc Gen… OBJECT (Stellmach – see CD at top, goes to?) To 1080731. (Was it in existence when you joined Stanford?) Yes, it was. (You wrote slush fund, explain why?) Well it was an account that not within bookkeeping system of Stanford companies, not in accts of accounting staff, any companies. Personally signed, me Stanford, a slush fund. Used for … whatever holder wanted to use it for. (Arrow from fund to another, what?) Yes, well, transfers from fund would go to personal accts in name of RAS and others. (Did he tell you what do to with CD money to fund?) Yes, explnattions from him to me at times. (Said use?) RAS said to pay personal bills, infuse it into other Stanford companies. (Exhibit – saw this earlier, flow of CD $$ to Stanford’s companies. Bottom – total $2B?) (Whether CD money to slush fund in switzerland is included in $2B?) No, not included. This $2B was through accounting records. ($2B was loans to STanford, undisclosed?) Yes. (Slush fund, in addition?) Yes, this is in addition to $2B. (Later will come to, but how did RAS use $$ to further the fraud? OBJECT TO USE OF WORD FRAUD – SUSTAINED.
(DID RAS say how he used slush fund money, to further scheme?) Yes. He used it for personal expenses, also used to in one instance to populate personal acct in Bank of Antigua/Barbuda … in name of Mr. Stanford. Used it to pull cash out to pay bribes to the regulators. Lee King, regulator (Replaced Crick?) Yes. (… Davis takes seat). (Exhibit – email chain … Maldonado…) She was treasury mgr for SFG Co. in Houston. (Goes to individuals, including you. Sent to Gil Lopez) He was chief accounting ofcer for SFGC. (Kuhrt?) Global controller. (Transfer of funds… TIOC?) Two Islands One Club, real estate project. (TIOC stands for that?) Yes, it’s same letters. (What was Two Islands?) Real estate development … one of his visions for a one of kind resort for selling parcels of resort and its amenities to higher upper network individuals in world. (Where to be?) In eastern Caribbean. Part on Antigua, maybe all of it. Names changed …. one time, The Islands Club. (Email about transfers? Source?) These funds from CD holders, through SFGC, waiting here for direction as to … (She writes, asks Davis approval … next email in chain … your response?) Yes to Maldonado … Approval is probablyl Mr. Stanford. (Who not you?) (You’re CFO?) This was not included in our set of accts as a general ledger for a company. I didn’t know the particulars of this transaction. (Next pg – email to RAS … from Maldonado. she wrote?) May we have your approval for $1M and $1.275M? We plan to value tomorrow. (Next response?) Approved, RAS.
(Specific transfers Soc Gen 108731 fund … using docs… this is letter 7/24/2000 to Blaise Freely … CBG) CBG was predecessor to Soc Gen account. Soc Gen purchased CBG private banking acct. In effect, one in the same. Same bank, same account. (So when see CBG, also for 108731?) Correct, CBG was separate entity, Later, purchased by Soc Gen and became a subsidiary. (Who’s Freedly?) Banking ofcr in charge of this account. Employee of swiss bank. (Did he have position in Stanford org?) Yes, at time, he was on so-called Board of Adv to SFG. A group with similar qualifications are Freedly, some attys, some politicians in advisory group to Mr. Stanford and companies. JUDGE – did they get compensation? How much? Davis – directors fee, $5-10-15K annually.
(Stellmach – request from Davis to you about transfer. out of Swiss to Chase in Houston in name of R Allen Stanford?) Yes (Recognize acct?) No, recognize letter and acct in RAS name. (But you signatory?) No sir. ($775K going through fund was personal acct?) Yes sir. (Another transfer, amount? Dated Aug. 29 2000, how much sent thru slush fund?) $600K U.S. dollars. (Dec. 19?) $4M dollars (Was RAS paid salary by SFG?) Yes. (Were these inaddition to salary?) Yes. (Why on that date he needed $4M?) No sir, I do not.
(Was that withdrawal of that size unusual?) Say it’s the higher end. Don’t believe it wouldbe unusual. (Feb. 15, 2001 – amt?) $500K (Same acct of RAS?) Yes. (Says here, short-term debit to be paid March 15, you wrote?) Apparently at this time, there was not $500K available in this account, this one, but that either thru sales of securities or a transfer, the debit would be covered by March 15. (June 4 2002 – how much?) $5M (Did RAS say what type epxenses he had?) Yes, from time to time. Real estate purchases, paying personal expenses, beginning possibly compgning and capitalizing it.( April 2003 – amt?) $7.5M
(July 31 2003 ) $10M (JUDGE – HOW MUCH generally was in acct?) Davis – say generally $20-30M… end of 2007, total $130M. (Stellmach – Sept 2003 amt?) Total $22M (SCARDINO – OBJECT TO STANFORD TOOK OUT – DOC SAYS REQUEST FROM DAVIS – JUDGE – SUSTAINED, TO THAT EXTENT> (STELLMACH- -Davis, these request for transfer from fund to his accts? Did he ask you?) Every single one, would call and make this order to his personal accts. (Would he say how much? Tell you to break it up?) This is identical to his instructions to me? (Never deviated?) No sir. (Did RAS ask why had $22M in Chase acct?) NO sir. OBJECT – (Stellmach – were you directed, did he say he was surprised about amts or source?) OBJECT – ASSUMING FACTS NOT INE VIDENCE. (Stellmach – each requested by RAS) OVERRULE
(Jan 28 2004 – amt?) $4.971M (April 6 2004?) $4.654M (Who received these statements for Soc Gen acct?) Uh, I did by fax, RAS by fax or his office did. (April 6 2004 – ?) That’s $3.345M (Same day as previous, diff amt?) Yes sir. (Aug 17 2004, amt?) 2 sep transfers to Mr. Stanford, two diff banks – $2.576M and $2.499M (April 21 2006?) Also two separate transfers to sep accts – $2.985M and $3.518M (Soc Gen funded from? Cd depositor money.
(Did you get money personally out of acct?) I would receive, on occasions. bonuses from that trail of fund. RAS wrote those payments to me. (Money out yourself?) NO, I didnot skim money out of any accts. (Other paid bonuses out of it?) Yes, (why use Swiss slush fund to pay exec bonuses?) I believe it was because bonuses to execs in excess of normal bonus structure set up for company. In addition. Maybe for special .. uh, compensation off targets his, agreements with exec. (Transfers, who made decisions on that?) Mr. STanford (Did you decide bonuses?) NO sir. (When you got funds from Soc Gen acct… I mean Mr. Davis … did you receive to your own acct or what?) Believe all of those were in my name except one time, could have been in company I was signer/owner. (Why company?) I had a good teacher for one thing, followed the route that happened day to day at Stanford Group. More specific answer, it was dormant acct… Crosswalk … used as checking for two of my sons and a friend who had band, band disbanded. Years later I used as overdraft protection acct. One time, RAS paid me momey into that acct. (Didyou pay taxes on RAS $$?) Best of my knoweldge. (Personally audited?) 2003-2007, yes. Took place in 2008 from Feb.-Dec. (Did you pay penalities et?) Yes, paid $120K range in addition. IRS audit.
(Exhibit – financial chart … recognize it?) Yes, Shareholder Funding Report, meaning CD funds spent on various Stanford companies by way of diagram from yesterday. (So, when referring…. this diagram? … shows one from Thursday) Yes, that’s correct. Quarterly reports. Disussed with him, on occasion. Saw him with it, when we discussed. (Who prepared rpt?) Accounting staff for SFGC, Houston or St. Croix offices, under global controller Kuhrt or CAO Lopez. (for SFGC at top, total CD $$ as of end of 2008) $278M and some change. (In annual reports, disclosure about fees/admin expenses to SFG, recall?) Yes I do.
(Does that number include disclosed money to SFG?) That number? No, it did not. (In addition to $278M, RAS took out other money for Stanford management, $100M for Stanford Financial Group Ltd? ) JUDGE – WHY SAY IT’S IMPROPER? I’ll do this from time to time for myself and jury perhaps. Why these numbers are important to your theory of the ase. (Stellmach – RAS bait and switch, claims to depositors about how he’s investing CD money. We say he took the money and did something entirely diff with it. Made investments in companies he personally owned, didn’t disclose to investors.) JUDGE – to Def, I’ll give you chance, too, if need clarification to you. You’ll get your portion when you’re up.
(Stellmach – Stanford Development Corp?) A real estate acquisition/development company. $15M (Also .. airlines? $330M?) Yes correct. (All companies listed on spreadsheet, who owned?) RAS. (YOU?) No sir. (In exchange for $2B transferred to fund companies, did the bank get any equity or ownership?) No sir. (This $2B figure … this was on books at bank as loan to RAS personally?) Yes sir. Not on a…loan was not on the bank’s books the personal loan. Actually entry was made to move it from payments made, if you will inter-company, payments through diagram to various companies listed. At certan intervals, acct staff would move them to equity in individual companies. Offset would be the note. (Money on books?) Yes, as payable receivable.
(Briefly … Stanford Eagle? total received?) $20M (What was Eagle?) The holding/shell company for a yacht, RAS owned it. He used it. Owned by him. (How big?) Three … 100 feet also 50 feet. (Why have boats?) JUDGE – THREE OR FOUR? Davis – I guess RAS would have to say exactly. I know of three.
(Stanford 20/20? What?) A company set up to track transactions of a Cricket venture. (Island Club Ltd. $4.3M?) Refers to … ultra high-end investors resort … at time referred Two Islands One Club. JUDGE – YET EXISTED? Davis – Your honor, my understanding planning fees, achitect fees, models. (Was club ever built?) Not to my knowledge. (Stanford Aviation… $2.5B, what was it?) Internal corporate transportation group, several airplanes, Expenses for it. (How many planes?) Believe 5 (Or 6?) Could have been. (Types of planes?) Jets from 4-5 passenger to 11, maybe more. (Commercial planes to sell tickets or diff from CArib Sun, Star?) Separate. These are owned by Stanford Aviation, private corp carrier. (Entry … for another Island Club and Stanford 20/20 … separately $1.4M and $12.9M … was 20/20 part of Cricket promotion?) Yes. (Did any money ever get paid from Cricket tournament to the bank?) Not to my knoweldge. (Did Eagle ever repay CD money?) Not to my knowledge. (In fact, of $2b in CD RAS took out, how much did he repay?) I dont believe he actually repaid any of the money. (Did he ever make payments?) Yes, checks written. Approx $10-20K at most, possibley more don’t recall exact numbers.
(Bottom of pg, $2B figure … some credit for Capital Marketing Assets $327M?) Yes. (Looks like it was a credit against CD money taken out?) Yes, looks like. (Explain what transfer reps?) It’s a flip of private equity holdings already purchased with CD money, and value was increased from original cost … and guess I could draw it out.
SCARDINO MOVES TO STAND BY DAVIS ATTY DAVID FINN. LOOKING AT DRAWING BY DAVIS.
Davis draws three circles across top of flip chart. Links them with lines. Writes in left two, then moves to right third with arrow back from its bottom to far left circle.
11:23 – (Stellmach – Tell us,… left box) SIBL CD money. Arrow with $132M, monies transferred to SVCHolding .. a shell company to buy private equity.. RAS owned. Not division of the bank. $132M transfers into name of RAS, his ownership (into third, far-right circle) Judge – money flows from one circle to another. (Shell purchases private equity with $132M, transfers to RAS?) Yes, him personally. No corporate entity. (Looping arrow from RAS to bank? $327M?) Through accoutants and attys, private equity $132M was inflated in value to $327M. That used as payment, bookkeeping, no dollars changed hands. Bookkeeping flip.
JUDGE – $132M .. ACTUAL MONEY? Davis – yes sir. JUDGE – $327M WAS JUST BOOKKEEPING? Davis – yes sir.
(Stellmach – so $327M credit, you say it isn’t actual cash or equiv to bank?) Not actual cash. (When took place?) Across couple of years (Transfer from SVC to RAS to bank loans?) Two or three months maximum, as long as it took legal to get paperwork completed. (Any payment, appraisal done on reevaluation?) Not independent. (Once goes to bank, private equity became asset of bank?) Yes (Disclosed in subsequent annual reports?) No (Did RAS know about transactions?) I told him verbally. Yes. (When did discdussion?) After weeks months after transaction, this entire process (on chart). He stuck out his hand … first, said who did this? Getting it handled. Said great job, shook my hand. (Why transfer, to show a credit or repayment against the loan?) Primarily because of IRS audit issues under way during this period an before. That through those IRS audit, interim findings … their position that these monies. … $2b … ordinary compensation for RAS and his tax specialists Harry Failings said they were loans and should be considered as such. If loans, have to be serviced. This would provide servicing of those loans to prove it was not compensation for RAS.
(Often discuss his need for service to show payment?) Yes. (Unless payment, IRS would consider it income?) Yes, as I understand. Speaking with his tax aacct. and other tax specialists. (Unless payment shown, he’d have to pay taxes on $2B?) Yes sir.
(We talked about loans to RAS. Ever notes or agrements that showed RAS borrowed $$ from bank?) Yes (Who’s idea?) From RAS tax accountant, Harry Failing, deceased. (Failing?) Worked had office on Southwest Freeway Houston, also in Westheimer office. (RAS say why acct. in his office?) No. (Exhibits – … NEED BREAK)
11:35 – 15 min break