Day 11, Part 1: Davis continues to tell story of fraud scheme

By Patsy R. Brumfield / Daily Journal

HOUSTON, Texas – Former Stanford CFO James Davis said Allen Stanford made plans to convince depositors of sound finances this morning as his testimony continued in the massive investor fraud trial.
Davis is the government’s witness prosecutors claim was closest to the $7.2 billion Ponzi scheme, which cost 22,000 investors worldwide their life savings and retirement funds.
More than 1,000 are Mississippians who bought CDs through Stanford offices in Tupelo, Jackson and Memphis from Stanford International Bank Ltd. in Antigua.
Stanford insists he knew nothing about it and blames Davis. His attorneys will get their chance to question Davis as soon as the government rests.
Judge David Hittner presides. Main prosecutors are assistant U.S. attorneys Gregg Costa, Andrew Warren and John Schellmach. Chief defense attorneys are Ali Fazel, John Parra and Robert Scardino.
(Below is a running account from the courtroom. Please excuse the typos and glitches likely as I type fast.)
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10:07 a.m. – Judge, jury in.
(Schellmach – … asking about Hewlett, who died Jan. 1, 2009? RAS said?) He said he’s the lucky one. (Going on at bank per CD redemptions then?) Very very high rate, compared to any time in history. (CD sales?) At a lower rate than much of past 5-6 years. (RAS focused on CD sales?) Very focused. (Going back with SFG?) 1995, toward end. (Prior, RAS ever talk about opening brokerage firm in US?) Yes. (Before, ability to open one?) Among other things, said probably be very difficult. (Why?) Because of his bankruptcy. (Fro ‘80s?) Yes.
(In 1995, opened one?) Yes. (Money to do that?) CD deposit holders. (Jay Como and Al Trulinka?) Initial hires for new brokerage as co-presidents. Came from Merrill-Lynch. (How RAS persuaded them to come?) Better opportunity, pay, op to elevate their positions. (Pay?) Yes. Pay was very competitive. (Based in?) Baton Rouge. (Open others?) Yes. (Money to do that?) CD deposit holders. (Bank any ownership in brokerage?) No. (Did it repay bank?) No. RAS owned it, all of it. (Brokerage 95-96, start selling CDs?) 4 years, maybe 5 max (Who decided to CDs there?) Mr. Stanford, he was the chairman. Well, he said that would be a huge market for CD sales. (Assets under management, term?) SGC was broker/dealer. Had financial advisers who represented hundreds of clients. Clients had investments, range from stocks bonds, invesmtne funds, metals. Known as assets, would move to brokerage when clients became customers of broker/dealer. Assets managed by advisers were “assets under managements.”
(End 08-09, how much assets under mgt?) $40Billion. (Those assets owned by clients or RAS?) Clients. (Did RAS take any of the assets under mgt, to repay CD depositors?) No. (Didn’t own all assets?) Correct. (How many AUM put into CDs?) Early days, probaly $20-25Million. Early days as much as 85% of AUM. (Was he comfortable with that?) RAS desired increased CD sales by broker/dealer and others. (Did he say uncomfortable that broker/dealer assets in CDs?) Early years, RAS … discussed percentage and that it would not be an ongoing percentage to maintain… so high … was flagged very closely by regulators – NASD, SEC. NASD is National Assn. of Securities Dealers… self-regulating arm of industry. (Concern by NASD? What basis for understanding here?) Sources were compliance officer of broker/dealer as well as Mr. Como. (Concerns, what about RAS?) Yes, he was aware. (What about concerns?) Concerns… looked like broker/dealer set up just to sell CDs.. because of percentage of revenue that came from them alone. (Exhibit – letter June 9, 2005, SEC letter to Leroy King … look at it… was amount of CD sales by broker/dealer getting SEC attention? 2005?) Yes. (RAS said about this?) Not specifically. (Tell us what he said?) That the brokerage needed to expand in terms of AUM so percentage could be lower? (RAS say why?) Yes. (What said?) He wanted, he said, CD sales percentage down so regulator scrutiny would be an acceptable scrutiny so brokerages could continue. (Did RAS say it could bring inquiry into bank?) Don’t remember that specifically.
(In letter to King?) It was point the could ahve raised.
(Financial advisers at Brokerage give incentives to sell CDS over other investments?) Yes. (Who decided?) RAS (You involved in bonuses?) No. (RAS tracked CD sales by individual brokersage?) He spoke to me freqeuntly about how sales going by country, team, individual? (You track them?) No, accoutning info related to CD sales would ahve been tracked by norman bookkeeping process. Captured in statements. (DAy to day CD, you?) NO
(How frequently did the issues of CD sales and growth come up?) Most of the time. (RAS focused on any other products?) No, he was not. (RAS replaced Como and Trulinka?) (When?) 2004-5 (Why?) RAS said growth wasn’t happening for CDs sales. Primarily. (Who replaced them?) Danny Bogard, married to my niece. Recommended him to RAS. (Prior experience?) He was a regional exec in wireless company and oversaw North and South America regions, multibillion wirelss company. (No securities experience?) No sir. (Qualified/) From a sales and organization standpoint, yes. (Who hired him?) Stanford. (Bogard – who reported to?) Stanford.
(Fall of 2000?) Yes. (Problem with CDs?) Sales while steady had not kept pace with amt. of money being taken from depositors and paying cost of other RAS entities. (Not enough pay off cash-out depositors?) Yes. (And whatever RAS was borrowing?) Yes. (How much concern for you?) A .. very great concern. (How great?) It was impacting my health in an acute way? (How?) Thought I had a heart attack … in Antigua. (Was it?) It was dehydration panic attack. (After, spoke to RAS?) Yes, I tried next day. Flew to Miami, to find him and speak about my concerns. Found him there. At his apartment across Miamim River. Concern about low level of liquidity, about cash available … large withdrawls wouldbe problem.(He said?) RAS said he would focus on it, put program together to elminate that problem. (Did he?) Quarterly Sales… named Top Performers Clyb… Top Producers Club.
(RAS said purpose of quarterly meetings?) To get sales forces excited about the CD product, incentivize sales people to sell them. Monetary incentives, RAS decided (Attend meetings?) About 100 people, financial advisers if they produced a certain level of CD sales. (Were sales of other products considered for invitation?) Not to my knowledge. (Meeting format?) Extravaganza, Hollywood, lot of sizzle, excitement. skits, videos, special speakers. (Who paid?) CD depositors. (RAS involved with organizing?) Yes, THE organizer. I knew he was. Led opening, set agenda, Most of time with meetings he would work with Creative SErvices staff. Most began late. Had doors closed and attendees waited until he was ready to open the doors.
(In addition to TPC, what about competitions for advisers to sell CDs?) Yes, severl teams competed. (Superstars, MIami Money Machine?) Aztec Eagles, Thunderbirds. RAS set the goals. (You involved?) No sir. (After TPC meeting started, sales competitions, how did sales perform?) It caused a mushrooming of CD sales. They went from thousands to hundreds of thousands per quarter. (Bank returns invesmtne on CD sales?) 13 to 13.5%. Consistent thru time.
(Lot of turmoil in market, was bank reporting consistent return on CDs? … Toward end, after 2000, what range of CD returns?) Returns on investments in the 12.7 to 14% on average. (Investing in highly liquid securites strategies?) Yes. (Did employees ever question how that was possible, given fairly liquid strategy?) Yes. (What happened when asked?) Reply would be why possible, case on the Stanford Investment Model. OBJECT – HE DOESN’T KNOW HIMSELF (Shellman, I’ll be more precise>)
(Who was Hazlett?) Miami adviser. (What told RAS about him?)Called RAS and let him know that Hazlett had incident with Laura Holt in Miami office. Hazlett, adviser, became irate in his position to express his disbelief to Holt that those returns were possible. (RAS say?) He said we’ll have to get rid of Hazlett. Fired. (Ron Rossi?) Director of Creative Services, department that came after Idea Advertising, handled promotions, printing. (Replaced Mejia?) Yes. (Was Rossi fired? Why?) Yes, RAS said Rossi and his assistant were questioning, again, returns reported on SIBL financials, materials. Also said that Rossi and asst. weren’t every capable, didn’t do that great a job.
(What happned to them?) They were fired.
(Potential clients taken to Antiqua?) Yes, RAS said taking prospective and present client to Antigua to tour bank was an effective program. No trip had failed to produce sales. CD depositors paid for the trips. SIBL depositors. (Bank $$ used for those trips?) Yes, to pay for everything. JUDGE – How got there? JD – Stanford Aviation planes, private jets. Yes.
(How late did these visits continue?) I believe January 2009. JUDGE – SEC shut it down? (Feb 2009) (Taken to bank? Were those people these stationed there?) Most were, some few were not. (Those few, based in Memphis.) Yes. (RAS say why Memphis employees there?) He said research people in the bank on rotating basis showed well, promoted the bank well to the visitors. (Showed well?) Showed activity in the bank with addiitonal individuals who were working on inestment research. Separate officing, very visible. Had glass windows very visible from hallway, passing by? (Like a fish bowl?) Yes same visual. (Visitors ever told weren’t there all the time?) I don’t know.
(Ever asked to quit?) Yes (Sent him an email, 2006 or 07) Fraud that I was participating in was killing me, Access to RAS and direct time in managing these entities was at an all time low, decisionso by RAS that were pretty incredible from my perspective. And I was pretty fed up. By then, 42 people in Stanford Aviation alone. JUDGE – commecial? Davis – no. private. (Had you discussed expenses concerns with RAS prior to this?) Yes, it was an ongoing conversation for years, budgetary restraints, stick to budget, by component. (Component?) By department wthin company, country and region.
Also, frustrating that RAS decision to hire an additional “sequestered staff” from other accounting units to review expense reports. STaff of 11, mostly CPAs stationed in Orlando, Fla. to monitor travel expense forms, function already being done in Global and accounting units. Platoon of qualified people already doing it.
(Saying, that RAS set up unit of accountants, did he say why?) Told me, Jim it’s a thankless job, you don’t want to do it. Something that nobody really wants to do, your people can use their time more effectively. (What were they doing? Slush fund?) I really didn’t know. Doubt it very seriously. Would have uncovered the scam, 21 years pyramid scam. I am not sure why they were hired. (What did RAS say you wanted to quit?) Nothing. In late 2008,raised again. Directly with HR, shared feelings by email with RAS.(When RAS conversation about your son, Zach, in Memphis?) 07-08 … RAS asked me if my son Zach would continue to cook the books. I replied absolutely not. End of conversation.
Davis – believe would he continue to do what I was doing. (Son in Memphs, didhe know about fraud?) No sir.
(Spoke to HR?) told them wanted to quit. (What was your plan to leave?) Spoke to HR director for Global, process worked out for me to stayuntil end of 2009, then retire. (Concerned that if you left and sotpped with CFO, that fraud would be exposed?) OBJECT – SUSTAINED. (Have concerns if you left, that the … exposed?) Honestly, I really didn’t. RAS always put someone in necessary postions. (Why not concerend?) Knew Mr. STanford would find soeone to do what I was doing.
(2007 – by end, Tiers 1-2 added up to $1.5B) Bank owed CD $6.6B. The Hole was $5Billion. (exhibit – amount of money loaned to RAS across 5 yrs… between 2007 and 2008, how much more taken out of bank?) $400Million (So $400M borrowed why?) To establish additional or maintain present RAS companies, among other things. (Present companies? Approx costing to maintain those?) $1Million per day. (How were new CD sales performing?) Still strong (Going into 2008?) End of first quarter forward, in diminishing way. Extremely diminished by fourth quarter. (New sales down?) Especially i relation to withdrawals. (Withdrawals.) Began to increase.
(Point where more going out than coming in?) Yes. (When happened, RAS still spending $1M a day?) Yes sir. (All 2008 .. final days … so were bank returns on investments .. able to offset money RAS spending? Or rate of CDS?) No sir. (Into 2008, March/Summer, how was bank covering CD depositors?) Withdrawals were honored by securities and cash Tiers 1-2. (Tier 2?) Would mean that if no cash in Tier 1, Tier 2’s securities would be sold and turned into cash.(Situation RAS told about?) Oh, yes sir. (How?) Well, I was communicating in person, also president of the bank would have been communicating on daily basis. (Were you telling RAS about situation, the hole was growing?) Yes. Several times. (Ever email hima bout bank assets?) Very frequently, text message too. (Whentexted him, was he asking questions?) Yes, ask about Tier 1 and Tier 2, cash and primarily securities accounts. (Asking ABout Tier 3?) No sir.
(Was real estate or private equity owned by bank being sold to cover withdrawals?) No, not liquid. (Exhibit – email received by RAS and me. From Patricia Maldonado, treasury manager.) She was in charge of reporting for and routing the cash in Tier 1. (Email from her – highlighted?) $85M transfer. (On side, what says?) Left, SIBL the bank, TD is Toronto Bank account … set up in name of SIBL like checking acct. (Other?) Other financials.. HSBC, BOH bank of Houston. (Her email?) $85M … amt disbursed, withdrawals … transfers are going to come in and cover that. (From where?) Would ahve to be from Tier 2.
(March 4,2008 – exhibit – email to RAS – fund requests) Commercial airlines owned by RAS. (Shut down date, email from Maldonado?) Reads … coming to you for funds for shutdown $5M, breakdown per airlines. Support attached. Approval to fund? (What didRAS tell youat this point for airlines?) Latest, his instructions … to shut themdown. (What told you?) Cash drain. (Topic discussed before?) Yes, lost more than $500Msince created. (Why RAS said shutting them?) I don’t recall specific reason. (Before, what had he said?) They were losing too much money. (Total funding $5M?) Windup costs … leases, termination cost etc. (Where money come from?) From CD depositors. (WEre they shut down? The airlines?) Yes sir, they were shut down.
(Oct. 2008 – email from Maldonado… reads, grand total? $406.8M?) Represents withdrawal requests from CD holders. (Exhibit – what numbers are?) Numbers are millions of dollars. Date shows when the customers expect to receive withdrawals. (Email to RAS – Oct. 23, 08 – read text from you?) Yes. Regarding Tier 1, project we have 35-45 banking days of funds at rate of withdrawal. Big one on Friday $44M leaving. (You were telling him?) That cash available in Tier 1 would be used up by that date at present incoming versus outgoing. Another month in cash. (Assume runrate?) Yes.
(Video clip – exhibit – TCP meeting … recall Oct. a meeting with group, advisers about bank?) Yes, probably TPC meeting then. (CLIP – same time as email …) (Video.. RAS says we’re overliquid, which is good, $5.5Billion too much?) Yes, what I heard. (Ever told him bank had $5M too much in cash?) No sir. (Oct. email – you told him what?) About 30-45 days left of cash. (Ever told him bank was TOO LIQUID?) NO SIR.
(Exhibit – Nov. 11, 2008 email – karry Patlan… to Maldonado. SIBL cash balances. Shows?) Tier 1 balances. (Shows total cash $1.736M?) Is the amount of Tier 1 cash held in SIBL check accts at that date. All the bank’s cash. (Email to you – Maldonado wrote …?) SIBL cash – see positions today. We are moving from CoMerica $10B, to draw down on Canadian and British pounds next. When can get relief from Second Tier? She’s asking that Tier 2 be sold and turned into cash, to transfer to Tier 1. (Told RAS?) Yes, he’s monitoring situation on daily basis.
(Exhibit – email Dec. 1, 08 – total $88.2M?) I believe balance of cash. (By Dec. bank had about $88M in cash? CD redemptions .. where getting money to do that?) From cash. (Tier 2?) Not a significant amount of redemptions from Tier 2, but getting close to that point. Only place to get the funds to honor withdrawal requests. (Top of exhibit – your email to RAS … update?) I am, I did. (Emails from Maldonado about cash to payout … speaking to RAS too?) Yes. (He say concerns?) Yes, we were both concerned.
(How concerned were you in summer 08?) I was very concerned, probaly near emotional and mental extreme stress levels concern. (Talking to Lopez, Kuhrt?) Yes. (Ever say Emperor has no clothes?) I did say that. (What mean?) That among other thingsk, wans’t going to be any cash infusion from chairman of board to cover this massive withdrawal strream we were seeing in these… really tough economic times.
(In 2008, into fall, talking to RAS about solutions?) Yes. (What RAS said to do?) Yes. (What, he proposed?) To announce a shareholder equity infusion into the bank, possibly forestall the insecurity of depoisitors… slow down withdrawal. (JUDGE – when?) DAVIS – right in middle of economic troubles, getting worse. (People want their money. New sales?) Down, in comparison to withdrawals. Writing was on the wall. (What RAS said about equity infusion?) Means money would come in to bank, equity section, to bolster the net value of bank. (RAS say how much to announce?) Said $600Million. Late 3rd Q of 2008. (Did he have $600M in cash?) No sir. (Did he tell you how he was going to get it?) Said to make an entry into accounting records that it had been made. Paper entry.
(Judge – people needed or lost confidence?) In world system and they were afraid. (RAS to say he’s adding money for confidence, not pull out their money and bolster CD sale?) Yes. (exhibit – monthly report Stanford, Dec. 08 … graph says?) Earnings won’t meet expectaions in 2008, SIBL srong safe fiscally sound. Depositor safety No. 1. Board made increase capital by $541M on Nov. 28 … puts bank in position to meet capital requierments to … grow. (Says $1B in shareholder equity… did RAS talk about that?) Oct 18, 2008, RAS visited me at my home in Mississippi. Well, I had 60th birthday week before, a little celebration. Also that we needed some face time because of economic dilemma and lack of cash at bank. (Said wanted to announce equity of $1B?) That was the plan. (His plan?) Tht would be formal announcement equity infusion into the bank. (Bookkeeping, no cash?) Yes.
(Was entry made?) Yes. (Actual cash or equity transfers by RAS to back it up?) No, none.
1130 – BREAK
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