Mid-day break: Inner circle 'shocked' to see existence of Tier 3 money 'hole'

By Patsy R. Brumfield / Daily Journal

1 P.M.HOUSTON, Texas – Former Stanford CFO James Davis sits 30 feet from his former boss, R. Allen Stanford, and tells a jury a story so damning they could send the former financial empire-builder to prison for the rest of his life.
A jury must decide of Stanford, 61, actually did the things Davis says he did, or if Davis is to blame for the company’s collapse, as Stanford says.
It’s Day 11 of Stanford’s trial. Davis pleaded guilty for his part in the alleged $7.2 billion Ponzi scheme. He won’t be sentenced until he’s done at this trial and one later this year for other ex-Stanford executives, including Baldwyn native Laura Pendergest-Holt.
(Below is a running account of prosecution questions and Davis’ answer in the Houston courtroom. Please excuse the typos and glitches likely as I type fast.)
• • •
11:55 – (Stellmach – About announcement that RAS had injected lots of $$ into SIBL?) Yes. (Exhibit – spreadsheet – familiar with it?) This was shown to me by our acct leaderhsip Mr. Lopez, Kuhrt, we discussed. (Related to entries talking about?) Yes. (Look at line at bottom … Desired level – $1Billion?) This was the target level I mentioned, that RAS … level he wanted was $1B. (Here written, desired level $1B?) (Wht do be done to hit it?) An entry would have to be made in 2 pieces – debit and credit. Credit into the equity as an infusion ( Contribution by RAS into capital of bank?) Yes. Offsetting would go into investments. (How … do that?) Assets around Antigua were real estate parcels, purchased months before.
(Ask JD to use flipchart and draw for us how money would go through?) Davis… moves to flipchart, using court microphone … draws 2 large circles at the top …OBJECT – I CAN’T OBJECT AS WITNESS WRITES NAMES AND DATES … judge – THAT’S HOW IT’S DONE. He draws it out and explains. SUSTAINED.
judge – EXPLAIN AS YOU WRITE IT. (Stellmach – wrote at top 2008 FLIP .. what was that?) Take real estate bank owns and moving it by legal and acocunting entries into the ownership of RAS, then returning it from RAS to the bank. (So, bank buys real estate …) Davis – first circle, SIBL real estate … just offshore. Designated for the Islands Club, a project of RAS and involved building a high-end resort … to appeal to ultra-rich of the world. They would buy parcels, pay fees … to have a place there. Water taxi access. (Real estate purchased by the bank?) Yes. (But who would own club, operate it?) Understand it was RAS (Why the bank would buy real estate for his club?) Yes. (Say?) Recall, he and general counsel Alvarado said other issues, major one being a marriage and divorce issue and …. Mr. Stanford and his wife … (So why his divorce meant bank must buy real estate?) As I was told by RAS and gen counseling and Harry Filing, RAS CPA – OBJECT -S USTAINED (WHAT RAS told you why he couldn’t do it himself?) Mr. Sanford said that bank itself was a gift from his father and thereford in a divorce settlement that gift would be exempt from distribution to his wife in a divorce settlement, reason he said it was done that way. (As opposed to his owning in his own name?) Yes. (Could he use a shellcomapny to avoid problems with divorce?) I don’t know.
(How much had bank spent to buy the land?) $63.5 million Bought 2008, early summer and third quarter. (Did RAS say price with you?) Yes, said that it was too much. He was robbed. (Next, what’s next on flipchart …) … Davis draws… The Parcel of real estate moved to ownership of Mr. Stanford. Shows $$ transfer, cost of the parcels. (Bookkeeping, how miuch RAS to pay?) Same price, cost. (Then what after transfer from bank to Mr. Stanford?) … draws arrow back from RAS to the bank. The real estate would be transferred back by RAS to bank at $3.2B (When to occur?) Fall 2008. JUDGE – Going to him for $63M and transferred back at $3.2billion? DAVIS – yes sir.
Take approximatley four months.
(Where is the value of $3.2billion coming from?) Were some small transactions in vacinity. Amount per acre of those was unit amount used in calculation to come up with $3.2B (Explain… any improvements on land?) No. (Nothing changed with land from purchase when went back to bank?) NO. (Who put value on that real estate?) The value was put by Mr. Stanford. Calculation done by accounting team under Kuhrt and Lopez. (Land ?) 1,532 acres (How was number used to get to $3.2billion? Comparable to value this real estate?) Yes. (Who decided comparison?) Mr. Kuhrt, global controller. (Any outside appraisal or expert to value it?) No sir.
(So comparable, were you familiar with it?) Yes. (How did it compare with 1500 acres?) Much smaller parcels, in an improved state. (Was it developed?) Yes. JUdge -WHT WAS ON IT?) Davis – housing, landscaping, utiliities. roads. It was on an outlying island. (This parcel, the 1500 acres by bank. Buildings? Utilities, Roads?) No sir. (Nothing had been done in four months by transfer to bank?) NO sir. (Again 2008, world economy what happening to markets?) It was the worst downturn since the great depression, markets plummetting. (Could it appreciate that much while plummeting?) …. (Transaction completed?) NO sir it was not.
(So these transfers from bank to RAS and back? Was it paperwork completed to happen?) No sir. (But exhibit – announcement that bank’s capital was raised over $1Billion?) Yes. (So these entries?) Never completed. (Retake the stand … exhibit … way value calculated?) Using value of developed acreage. (Breakdowns to companies, what are they?) It’s a rather complicated analysis but basically state that the parcels were inflated dollar-wise. Once inflated, the values were used to eliminate individual capital contributions in A and B. (Back to your diagram … real estate from RAS to bank at $3.2B … breakdown here shows what?) Once bookeeping and legal was completed, starting from top Company A, $200millino… etc. announcements where no money ever changed hands. Bookkeeping announcement was to offset fictious capital infusions. (Breakdowns of how $3.2B would be split up on bank’s books?) Yes. (Loan offset?) $1.7B) Yes, elminating loans Mr. Stanford had taken out and owed to the bank. (Also used to pay off RAS loans?) Yes, the plan.
(Company D … money left over?) Yes, a balance (Plan for that money?) As I recall, to use for future boookkeeping entries… $700M (For credit etc?) Yes. (Again, this all never happened?) That’s correct. (Bank announcement or RAS, that no assets transferred?) No sir.
(Back to emails this was attached ti … Kuhrt, Lopez… ) Kuhrt working in Global HQ in St. Croix as global controller. JUDGE = Reasn why HQ not in Houston? Davis – yes, tax reasons. (Lopez?) In Houston, Texas. (Email from outside to Houston) St. Croix in U.S. Virgin Islands. (Into 2008, said SEC investigation in 2005 and 2006… In 2008, did it heat up again?) Yes sir. (How know that?) From our general counsel.
JUDGE – Did SEC ever take up on invitation to come down?) Davis – no, your honor. (Alvarado tell you about investigation?) First week JN. 2009 … THAT it was very serious to Mr. Alvarado for sure. (Did Mr. A say serious, what did he tell you about investigation?) OBJECT – PRIVILEGE – OVERRULE … (So what say to you?) He said “Jim, this is serious shit. You’ve got to get Mr. Stanford engaged. We have to hae a meeting. They have subpoenaed you and Mr. Stanford.” (Said focus?) Said focus was on their desire at SEC in Ft Worth, a complete breakdown of assets of SIBL, specifically investment assets. (After, talk to RAS?) Yes. (Wehre?) Stanford’s offices in St. Croix. (When?) Early to mid January 2009. (What did he say to you about subpoena?) I don’t recall what he said. (What did you tell him?) I told him I wasn’t going to lie to the SEC, I would tell the truth. (Even though been lying?) Yes, for 16-17 years. (Why not lieunder oath?) No. 1, I dew a line in sand. No. 2, if you lie under oath, the future is not very bright, as far as staying free and clear of multitude of issues. Never a bad time to tell the truth. Never too late. (What did he say to you?) Basiclly, that Alvarado and outside counsel were working to deal with the subpoenas and meeting. Future meeting, RAS to chair and leadership of broekrs and bank to finalize details of SEC meeting.
(Other lawyer?) Mr. Tom Sjoblum, based in washington or New York (Meeting take place with RAS, others exec?) Yes. (When?) Middle Jan. 2009. Stanford hangar, Miami airport. (Who?) Myself, Alvarado, Sjoblum, Juan Rodrigues, Danny Bogard, Lina Stinson, Laura Pendergest-Holt. (Stanford?) Not there. He called in by teleconference.
(During meeting, did Sjoblum, the lawyer, explain detail of what SEC wanted about bank?) Yes. (JUDGE – WHY ISN’T IT PRIVILEGED?) (Privilege waived by the receiver.) (What did Sjoblum say?) SEC wanted to know detail to fully describe SIBL holdings, espec every investment and house/financial instutions where held. (Did he show subpoenas by SEC for you and bank info?) They were on the table sir.
(SEC subpoena – SIBL, c/o Davis, produce?) Everything specified in this attachment to SEC officers … (see attachment … what docs wanted? generally?) Wanted a listing, itemized, of fair value of each investment or financial asset in SIBL investment portfolio. (Also wnt testimony?) Yes. (YOU?) Yes. (Holt?) Yes. (Any dicussion at meeting about who should testify?) Decision that Rodriguez and Holt, chief investment officer. Made by Mr. STanford, on phone. (Discussion about how they would testify about assets when all they knew was about Tiers 1 and 2?) Yes. (What was the talk about next step about entire portfolio/) Yes. (What about you?) My role ws to itemize the assets in socalled Tier 3 section. (Which nobody else had seen?) Yes. Section no one else had seen. (So, interms of people present there, whoknew aout Tier 3 contents?) Stanford and myself.
(Did RAS express concerns in meeting about SEC?) No. (Did he ever say to you about capability of SEC?) Yes. (When?) Between … after meeting at hangar and first week of Feb. (He said?) I asked question of him, how this was going to take place, knowing there is no Tier 3? He responded, just give them the same report as give regulators in ANtigua. Fictious holdings. They won’t know the difference. They aren’t that smart. I told him they were and they would know. I said I’m not going to share that with them. (Another meeting, ?) At hangar meeting, RAS said, let’s meet again in two weeks and complete preparation for SEC meeting.
(Also i Jan. other meetings of TPC?) One in Miami, with foreign financil advisers. Also in Arizona, directed toward financial advisers in U.S. (Speak with RAS at either of these?) Yes. (What discussed? Which?) Both of them. (REcall talk with him about more CD sales from Libya?) Yes. (Wht did he tell you? Libyan govt?) He said connection between Libya and European office, by adviser. Were clients. Going to go to Libya to speak about additional business. (What?) Sales of CDs. (Clear about that?) Yes.
(Did he go?) Yes. (Said?) That no additional sales were obtained, to my knowledge.
(First week Feb. 2009 – were?) Miami. (Purpose?) Followup to earlier one at hangar. Meeting called to finish preparation for presentation to SEC in Ft Worth Texas. (Testimony there?) Yes. (Who at meeting?) Miami Stanford Offices, Biscayne Bay. Rodriguez, prez of bank, myself, Lina Stinson, Alvarado, Sjoblum, Danny Bogard … arrived on Monday. (Stanford?) Not on first day. (What happened that day?) Late midmorning, Mr. Alvarado and Sjoblum said that since RAS wasn’t there … decided to break since he hadn’t yet arrived. (Next day?) In addition to those people, Laura HOlt arrived. Meeting convened and about midmorning RAS had not arrived. After calls, got in touch with him. Was still in US Virgin Islands. He aksed what was going on. I said we’re waiting for you. (RAS said what?) He asked wht was going on? I said, Rodriguez has question for you. (Told him what?) On speak phone, RAs said What is it, Juan? (Answer?) He said there is a queue or line or client customers of SIBL, asking withdrawals and we need “x” money to honor them. (RAS said?) After gothte number, he said I’ll be there, get your money and be there tomorrow. (Spoke with him after?) NO.
(On Wednesday, next day? Did he show up>) No. (Try to reach him?) called again, spoke with his fiance at time. (Later, did you speak to him?) Yes. (What did he say?) He said that he had his head up his ass and that he was now ready to come ot the meeting, fly to Miami and lead us out of the Wilderness. Verbatim. (Next, what happened?) Meeting with attendees began about 9 a.m. Thursday. (Chart?) Shows Tier 3 assets. I drew this up on computer. Not distributed until it was displayed similarly for meeting attendees on overhead screen. Before he arrived. (You let them know was Tier 3?) I did. He eventually came.
(Andso, Thursday morning … put this pie chart together … $6.3B priate equity sectors and asset classes. Prepared when?) Feb. 2009. (Whyusing June 08 date?) Last closing of books for SIBL and last published report. (Why is this June 2008 information but not prepared until 209?) It was last closing of books … most current numbers to work with. (Number of breaks of assets … different assets … private equity?) Yes. (Owned by the bank/) No sir. (Owned by who?) Stanford Venture Capital Holdings also Stanford Financial Group Co. (Credited to the bank?) For purposes of this chart, Yes.
(Value – 50.7% in real estate. $3.1B?) In Antigua. Real estate we just looked at (Inflated from purchase price to flip process?) Yes. (So, values on private equities. Who came up with those?) The answer, private equity from valuation from Kuhrt and Lopez. Valuation t top private equity individual items came form a listing of Capital Markets Group. Third piece on right, Notes Receiveable, Mr. Stanford made with bank from Cd depositors. $2B and change.
(With respect to private equity…were values accurate?) Inflated above cost/ (Who did?) I did, from a listing. I took the higher values and added some onto two or three items. Real estate also inflated, about 5,000 percent. ($6.3B value – is that actual?) It’s a lie. (But for Miami meeting?) Yes. (Did you tell them it’s a lie?) I said inflated over cost. JUDGE – ACCURATE? Davis – no, inflated, a lie. JUDGE – Why inflated for these folks? DAVIS – effort to hook to total amount reported.
(So bank assets Tier 1 and Tier 2, about 25%, dropping thru 20008 to cover CDs. Now difference in what people at meeting knew.) Yes. (To cover assets reported and what people knew, this covers the hole?) Yes. (When showed people at the meeting what content of Tier 3 was, without saying they were a lie, how did they react?) Generally, they were shocked, mouths fell open, they were taken back. JUDGE – did you expect that? Davis – I think … that this is what is “there.” Value in Tier 3. Wasn’t positive shock.