MID P.M. UPDATE: Davis tells about Stanford and blood oath with bank regulators

By Patsy R. Brumfield / Daily Journal

3:45 P.M.
HOUSTON, Texas – Former Stanford CFO James Davis, who once lived west of Baldwyn, continues key government testimony in the trial of his former employer, R. Allen Stanford.
AUSA William Stellmach is questioning Davis, who pleaded guilty in August 2009 to his part in a $7.2 billion Ponzi scheme on investors who bought CDs through Stanford International Bank Ltd., based in Antigua.
Davis, wearing a suit and tie, began his much-anticipated testimony shortly before noon. He started off with a weak, trembling voice but he gained strength with time. He also looks very frail and appears to have lost a lot of weight since his 2009 plea hearing.
He faces up to 30 years in prison, but if he delivers for the government, Judge David Hittner will consider a reduction in that sentence. Meanwhile, he reports he’s been living in Michigan doing accounting work for a fruit company, but that he quit recently beause he knew he would “be away” for an extended period.
(Below, his testimony continues. Please forgive the typos and glitches likely as I take down the words as they happen. Watch my courtroom updates on Twitter.com @REALNEWSQUEEN and follow all the developments, since the trial began Jan. 23, on DJournal.com)
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2:15 – Judge back. Court likely goes to 6 p.m. Defense attorneys have issues. Scardino wants … says making a consolidation effort under way. Last witness testified to it. So govt convinces court that we shouldn’t be able to … Judge says that’s just one ruling. Govt knows that it was effort, Amadio, Davis … forus not to go into that emasculates us. Clever of them to ask not to go there. They opened door to let us get into evaluations of these affiliations. Parras – by their opening the door, saying companies had no value. We should be able to rebutt that. Doesn’t mean they didn’t have value. JUDGE – Now, why isn’t it relevant? Stellman – because RAS misled his depositors on how investing. He knew he was misleading. Doesn’t get to claim later that he had an honest belief that his lie doesn’t matter. JUDGE – Will guilt ride on that he said money was going to ABC. Putting them into XYZ, is violation of law? Stellman-knew had to prove he knew he was misleading and that lie was material. Not taking away defense. Just not legally valid. JUDGE – Explain that to me. Not allowing evaluation of other companies. My understanding … going into liquid assets only. Instead, put it into more speculative areas. Not relevant? Stellman- Fact that he believed could repay depositors thru value of undisclosed assets, that is not a defense. RAS lied as to where assets going. And that lie is material, would have mattered to depositors if they knew truth. Intent. JUDGE – Assume you will have circumstantial evidence. Stellman – Will get testimony via Davis. JUDGE – I will look at that again. Now, will allow the theory to continue. Door was opened with Amadio? All he testified and others is the flow of money. No one testified about value. Tried to put them on notice if inadvertently appears in cross-examination. Spreadsheet doesn’t go to value. JUDGE – I got it. PARRAS – His witness said none of these investments had any value. Money to companies sucking … had no value. Witness’s statement. JUDGE – You made your point. WE talked about this at beginning of trial. What can they show as pivotal factor. I want short memo, not appellate brief, 3-4 pgs max. Best one or two cases highlighted. I’ll go back over weekend. Give me the best you got. I may or may not reverse it. Stellman – Clear, questions, disagree with Amadio. Will address in our memo. JUDGE – Don’t do more than 5 pgs. Got other things to do over the weekend. PARRAS – Should rebutt Amadio. JUDGE – He said it might have had value, speulative, startups. Info came in about airlines, Venezuelan bank etc.
2:28 – Judge, bring jury in.
(Stellman – Mgt of bank’s assets. When first started, what did RAS say about assets?) RAS said majority of funds in bonds, foreign currencies, bonds and cash. (Mking realestate investments?) No (His personal companies?) No. (Would bank be making any loans?) No loans made. (RAS said who invested CD $$?) Money mgrs, specif Switzerland. Worked for other banks, public financial companies in Europe. (First started, what did RAS say about how much bank assets being managed by them?) RAS said primary corpus being invested, rest to normal operations of bank. (So, all assets managed by oversees mgr?) Yes. (RAS said who in bank was responsible for overseeing managers?) Mr. James Stanford and Mr. Allen Stanford. What RAS told me. (You, overseeing?) No (See statements from mgrs?) No sir. (Who did?) I presume and early on presumed … OBJECTION … SUSTAINED (What did you later learn who gort statements?) Allen, told me. (You weren’t?) No. (Replaced Broderick as controller?) No later than April-May 1988.
(When replaced him, responsibilities?) Primary, to acount for accounts payable for SFG Co. Also construct analyses of statements. (When use phrase accounts payable?) Local accounts in nature of rents, salaries, vendor purchasers in local area. (Payment of day to day expenses of bank?) Not in beginning. (When became controller?) Timing of a few weeks beyong. (What about bank financial statements to depositors in annual reports, you involved?) Prepared by acct David Chambers, who worked for Stanfords. Subsequent to that, yes. (Role?) I was responsible for seeing they were prepared. (Board terms, statements list assets and liabilities?) Yes
(GIB liabilities?) A few local account payable. Most were what was owed to individual depositors, client accounts payable. Preponderence, about 95% in excess. (Info on liabilities?) Came from lady who handled client accounts payable operations, Dora Donis. (She would tlel you what we owe, grand total?) Yes, she would. (Assets? What generally included?) Assets, listings comprised of furniture, fixtures, possibly miscellaneous like utilities. But greater amount, lion’s share, investments. Inestments made with depositor monies, or should have been mde with depositors money. (Oversees mgrs?) Moneys sent to banks, say in Switzerland, for mgt. (You weren’t receiving all statements?) Correct, went to RAS.
(Did RAS give you statements for assets?) Initially, no. (Initially?) RAS, when statements prepared under my command, I would receive balance sheet – inclusive of assets, except for investment section. Mr. STanford, furnished those numbers to me. JUDGE – Define investment section? DAVIS – Bonds, foreign currency. (Stanford furnished it, how?) In early days, just verbally. (Come to office and tell you?) On occasions for statment with government or board of directors, statement of condition would be prepared. Later on, I was made privy at end of 1991 to statements. (Still foxussing on 88, 89, 90 – who was giving you info about assets?) Mr. Allen Stanford, I didn’t receive statements. Bank was Guardian at time.
(Not getting statements, did RAS, in your presence, ever talk about your role to manage money?) We talked about this process of taking info from him to make the necessary entries into general ledger. He said, Yes, of course, you’re going to get these. In front of finanial institutions, money mgrs, to change signatories. You’ll get them. That will come. (His explanation?) Yes. (My question, did RAS ever lie about your role to oversee mgt of CD money?) Yes, he would say I was the numbers man, in charge of the financial statment, both sides assets and liabilities. (What said to private bankers about role?)Said I oversaw money mgrs. Wasn’t true. (When RAS said that to private bankers, did you ask why?) We talked about it, yes. He said we’re going to go to the mgrs, get you on the paper. Until we get it done, they are there. Have to be put in, entries. Investments are there as I said they were. We’re making money. And I took his word for it. And I did the statments.
(BEfore knew about statements, did you lie about your role?) Yes, I did lie. Yes, we lied. I wanted to please Mr. STanford. I was proud, embarrassed. I was a coward. Years later, I was greedy … VOICE CHOKES … regrettably. (When first started, did RAS own other businesses?) Guardian Development Corp., a real estate aquisition and development company in Houston. Also Stanford Financial Group Co. and Guardian International Bank and some real estate connected between those. (Did RAS say how financing real estate out of Guardian Development?) He said it was his own money. (Asked if with CD momey?) Don’t think I asked that in early days. Believed him. (When private bankers asked?) That was a fairly frequent question. Yes. RAS said, no, not using CD money… my funds. (Believe it?) Yes sir.
(1990 – Guardian offshore, not FDIC insured?) NO sir. (Present with talk RAS and bankers, that Guardian didn’t have FDIC?) Yes. (1990 – talk about insurance for bank with RAS?) Yes sir. (For CD depositors?) Yes. (Ever present when others raised concerns about that?) Yes. (What were private bankers telling RAS?) OBJECT – HEARSAY – SUSTAINED ONLY TO TIME AND PLACE (When you started in 1988, did private bankers talk with RAS?) Yes. (During meetings, talk about Guardian and insurance?) Yes (In 1988, what bankers say to RAS about FDIC?) Said to him that lack of insurance of that type impeded or held them back of closing sales of CD products. Competition was with FDIC insurance, needed for sales. (Expressed in 1989, 1990?) Yes. (What RAS say about that?) Mr. STanford indicated that there was FDIC insurance at competition level and that in interantional markets wasn’t a similar product sold with CDs, but there was an excess insurance coverage that existed and that was available to use and share with clients. (Excess coverage?) RAS said policy in force that would insure Guardian’s deposits held by other financial institutions. If failure in them, for certain stated amount, GIB would be indemnified for certain amount.
(Exhibit – British Insurance Fund Limited, London England – recall seeing this?) Yes. First saw it in summer of 1988, most probably in 1989. RAS showed it or private banking officers or Sidney Adler, legal counsel for RAS. (Recall who first showed it?) NO, sir I don’t. (At some point after saw it, talk about it with RAS?) Yes. (What did he say?) Said real policy, real company. Charter, formed in US. (When talked about it, that he personally owned it?) I don’t believe initially he said that, no. (First saw policy, understand what it was?) First saw it, believed it to be a real company as he said it was. (Subpart A- loss of momey…. Did RAS say what “as approved by company meant?) As approved by the company. (When he showed it to you, tell you he formed it?) I don’t remember on initial, but afterwards yet. (Summer of 1990?) No sir. Certainly 1991 rings a bell.
(Summer 1991 – discuss policy with RAS?) Yes sir. He called me into his office, told me said policy was a … although legal… was real charterd company, that it was not a real company in terms of an insurane company. No ability to pay a loss. It was a marketing device, that he said, I need you to go to the office of British Insurance Fund, send a document. Fly to London to office, send a fax to a certain prospective client to indicate there is activity in a real company, then fly back to Houston. (Explain why?) Said potential client, large amount to invest in CDs. I went on the trip, flew and made a fax, sent to an address given and came back.
(Late summer? You fly to London? Then what?) Took taxi to a hotel right off Piccadilly, center of London. Le Meridien Hotel name of it. From hotel went to office. (What was it?) It was a second or third floor office, across from hotel. Had a receptionist and many cubicles that house a lot of office. An Administraitve SErvices complex, number biz had cubicles inside. (Office?) was 10’ square cubicle. (Files, documents per insurance biz?) No, didn’t find any files of insurance office. (Literal cubicle?) Office bordered by cubicle panels about 7 feet high. Partitions. Faxed sheet given in Houston. Went back to hotel. JUDGE – Equipment? Davis – Desk, chair, fax machine, that’s all. (Faxed it?) Type of confirmation of insurance coverage. Don’t remember details. Next flight back to Houston, early next morning.
(When RAS asked you to do this? Said why you?) He trusted me to keep the confidence. Someone else, the fraud would have been exposed. (Trusted you?) Trusted me. It was necessary, he said. (RAS asked to fly, fax, did you still believe that the bank was legitimate?) No sir. Previous suspicions were years of suspicions. At time didn’t have access to all of accounts. Maybe a little hope for indeed a complete, whole investment portfolio, was insurance. After that, I knew it was a fraud.
(Told you?) Said real insurance premiums were a waste of money. (Exhibit – document – says $50M insured by British Insurance. Premiums?) Never saw any premiums paid. (Did RAS try to transfer assets to it?) No sir. (Was policy used throughout fraud?) This policy was in place when I joined the company. (Continued? as marketing tool?) Came point when stopped, shortly after THE TRIP in 1991. It was stopped, certainly by middle of the next year. (RAS why wasn’t using any more?) Well, company Guardian growing to such a size, this would not hold up to scrutiny. Needed to be a real policy.
(RAS said, grown too big?) Would be inquries and discovering the fraud. (So, once he asked you to fly to London, send fake confirm, why not pull out at that point? This is 1991, you were three years end, why not quit?) I wanted to please Mr. STanford, I was a coward. He signed my paycheck. (Finally, get oversight to assets?) Yes, approx Dec 1991, a couple of months after the trip. Where I sat down and met some mgrs and added to signatory on those accounts.
(Did you notice any difference between bank assets reported and amt of assets the account statment showed?) Yes, noticed maybe 40-50% in those statements with respect to total investments reported? (About half?) My recollection. (When noticed, did you discuss with RAS?) We discussed it at that time, Dec 1991, Jan-Feb 92, until end in Feb. 2009. A frequent topic of conversation. (Initial conversation, end 1991, asked RAS about asset difference? Was anyone else present?) No sir. (Where was it?) In Switzerland when made visit to add my name to signatory accounts, in Houston Texas in office, other places. (INitial?) 38th floor Milan Blds. (What did he say?) That money had been moved into investments of real estate, brick and mortar companies. That value there and that bank was going to grow and dwarf this small amount that is so-called “missing.”
(Small amt? Half money gone? RAs said it was small amount. Express concern?) I wanted to please him. Don’t know the level of my questining. I was certainly concerned. Expressed my concern. (Did RAS explain how make up difference?) Said would grow CD sales so quickly in such an amt that when those CD sales and extreme growth curve invested, money mgrs would make enough to return what was not there, the so-called “hole” plus pay interest on current CD holders, and make a profit. Grow out of the hole by a steep curve of growth in bank… selling CDs.
(But more CDs sell, more interest have to pay?) Don’t remember, testified I believed in Mr. STanford, God forgive me so. I stayed there and continued to lie with him and for him. (After conversation, this gap came up again as topic?) Ongoing topic, that is to say…. OBJECT -SUSTAINED.
(Express concerns with RAS?) Yes, I did. (RAS?) He expressed less concern than I had. He was confident, very charismatic as I said before, he was confident he could do it. (You’re a grown man, aren’t you? You made a conscious decision to continue with this fraud. When expressed concern, did you demonstrate how severe it was?) Yes. (Physical?) DAVIS STANDS UP. I would say nothing… but hold hands together as if handcuffed, in shackles… meaning that what we were doing was going to have consequences. He would laugh and say hahaha , that’s OK, I’ll just tell them you’re on the books, I was out growing, and I’ll just blame it all on you. Laugh it off! (You physically demosntrated? Did he say, it doesn’t matter under international standards don’t have to tell what we’re spending it on?) No, He said we’ll do it, grow bank, close that hole.
3:16 – (after 1992, when RAs explained how to fill the hole, did you believe it was possible?) I believe I did. (For years?) Continued to believe and support RAS for a number of years, yes. (Did he talk about secrecy on this issue – gap betwen assets and what reporting to depositors?) Yes sir about secrecy. All these disussions were between he and I, alone. (He asked if wife knew?) He asked of Lori knew. I said no. I did not even tell my own wife.
(Did your title change?) 1991, chief financial officer of Guardian International Bank Ltd. Meant at time, James Stanford stepped down and I assumed it. About all (Responsibility?) Accounting bookkeeping systems, general ledger from which reports were disseminated. (Added to board?) Yes 1992. Salary increased from $60K initially to base of $900K by end of bank. Received bonuses. Total $14M during tenure.
(Once talked about Montserrat, there when you first joined?) Yes. (Info to regulators there?) They required each offshore bank quarterly, report required financial statements of bank. (Other than financial statements, giving any supporting docs?) No sir. (Just gave them same info as in annual report of bank?) Yes, true. Without any backup to statements submitted. (Like acct statements from overseas money mgrs?) Yes sir.
(Decision to leave Montserrat. When?) 1990 (Doc – Nov. 1990 – Ministry of Finance letter to RAS. Have you seen it?) Yes. (Who first showed it?) RAS. (When?) Close to date of letter, maybe 30-60 days after. (Reference in line 4 to director with bankruptcy, that license would be revoked. What meant?) Referred to Allen Stanford. My understanding. (When he showed you the letter, did he say if bank would stay or move?) At that time, he indicated both. (When talked about moving, say where?) Yes. Nearby, Antigua-Barbuda. (Before letter, were you aware any decision to relocate?)_ Aware investigations that were by RAS in other possible jurisdicitons, he was looking. Bank in Montserrate for sale, looked at in 1990. Yes sir. (When he showed you letter, did he say could be shared?) Not to be shared with anyone.
(Did he say what people should be told about leaving?) Reason, to be Hurricane Hugo in sept-oct 1989. Actually destroyed operations there. Impetus for the move. (Bank leveled?) Basically, correct. (Real reason?) No sir. (What RAS said, why?) There was action being taken by Ministry of Finane supported by actions from their mother country, colony of UK, action in UK and Montserrate to pare down number of offshore banks there. Maybe 300-400 licensed there. Govts to strike them out. Part of that action. To move out, needed to be another jurisdiction without same controls.
(Did RAS say bank should get license before it lost Montserrat license?) Yes, Imperative. No license, no bank. No bank and fraud would be uncovered. Failure, no way to pay depositors. (When showed?) About 30-60 days after received it. (Ask about exhibit – 1990 annual report for GIB – pg 13 , read?) Capital Reserve – at Sept. 17, 1990 board meeting decision to move to Antigua. (Two months before letter from authorities? Accurate?) No. (RAS discuss that note inreport?) Said board meeting, decision had to be before letter was issued. Evidene of board meeting prior to that. (Clarify, you understand there was a board meeting then with decision to move?) My opinion note was back-dated. Don’t recall Sept. 1990 meeting. (RAS first tells bank will leave?) After that date for sure, maybe December.
(Who decided Antigua?) RAS (Ever say how he picked it?) No. (What said why?) Said met with prime minister and cabinet, became acquainted, receptive to issuing a license. (RAS say preferred Caribbean?) Yes, he did. Said thought good place to operate under the circumstances. (Circumstances?) Said less red tape, less scrutiny by regs, easy entry, low capitalization. (Good relationship with prime minister?) Said had established a good relationship with prime minister, cabinet. Liked PM. (Say he did anything to win the friendship?) Explained his case, said PM was receptive, other ministers on cabinet. Discussion later shared about bank on island, cabinet mentioned. … that was ailing, bankrupt. Bank of Antigua Ltd. Talk, agreed to buy the bank to get a license. To redeem it.
(What kind of bank was it?) Commercial bank serving clients and customers there. Similar to bank down the street. (RAS say anything about its financial condition?) Said it was insolvent, under water, … It’s sitting on the bottom of the ocean. Cost several million dollars. ($40-50M?) Could have been $20M. (Money?) From CD depositors, where all the money came from. (Political donations in Antigua?) Labor and opposition party. Labor party in power. (Tell you where $$ from?) RAS wrote the checks. All monies came from the depositors for all Stanford companies in operation.
(RAS ever make loans to govt of Antigua) Yes, he did. (How much?) Approx $40M. Did not repay the loan. (Point where Stanford got any special honors from govt?) He reeived a diplomatic passport, knighthood. Diplomatic passport – special to insiders. (Ever used the title?) Yes, good promotion, good marketing. (Discuss position with regulators on island?) Yes. (Althea Crick, what told you?) He said she was appointed in interim role as head of predeessor to Financial SErvices Commisison, that she needed to be terminated, ousted. (Tried to oust her?) Yes, said he took stps to have her replaced. (Disdcsed her successor?) Yes, Leroy King. (What said about King?) Said King, knew him well, close relationship. Agreement to work together, in terms of King not digging into the examination process that took place through FRSC. About investments, for example. Agreement codified by a blood oath, as RAS told me, with King and Trevor Bailey. (What did he tell you abou blood oath?) Said he met them in airport area one night, they agreed that King/Bailey would work with him in terms of shielding scrutiny on the Stanford International Bank Ltd. statements and others things. They actually cut themselves and had a blood oath.
(Who is Trevor Bailey?) Worked in FSRC as King’s assistant. (RAS say about Bailey?) Close, they were blood brothers. (Exhibit –