By Patsy R. Brumfield / Daily Journal
HOUSTON, Texas – Part 2 of James Davis’ testimony Friday in the Southern District federal courthouse.
His former boss, R. Allen Stanford is on trial accused of a $7.2 billion Ponzi scheme on CD investors through his Stanford International Bank Ltd. in Antigua.
(Please excuse the typos and glitches likely as I type as fast as I can. If you have questions, email me at email@example.com. Also follow instant reports on Twitter @REALNEWSQUEEN with a hashtag #stanfordtrial.)
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11:55 – JUDGE BACK. Lawyers want to talk. Hittner tells jury just a few minutes, keep it down.
JUDGE – On record, they just wanted to know about clock. I said we are way ahead, we’re doing fine time-wise. Primary thing is to keep jury positive.
David Finn – Davis’ attorney. NOtified by defense, subpoenaed me as witness in trial. My concern I have a lot of fed trials in East District Tx, several significant federal trials … you know judges will ask me if I’m ready to proceed. Must tell them about subpoena. Could jam me up. Asking for your guidance. Needs it signed by someone, fed judge won’t buy that. Been practicing 20 years, never been subpoenaed like this. Wonder if it’s a tactic.
SCARDINO – Everything unusual. This isn’t frivilous. Somebody with knowledge of a deal would be better to explain things … in plea bargain agreement that we consider to be a little unusual and should be explained to the jury. We talked to Mr. Finn about it. Thought it was OK. No intention to inconvenience him in any way. Can call him when convenient to him. COSTA – Davis plea agreement in evidene. Is defense has questions, they can ask.
JUDGE – If we have Finn take stand, he’s giving a legal opinion. Isn’t the judge suppose to make the legal decision. (recalls case years ago, patent case where someone called to explain patent law to me – I’m suppose to know it.) Haven’t hd this before, but some issues about whether can subpoena a counsel to explain agreement. When sked for trial. FINN- Two weeks, another week after. Got quite a few state ases.
JUDGE – If in state court, in trial, I defer to them all the time. Suggestion: Not putting it off. I don’t want to take jury time, if need to argue as a legal matter about whether he’s a proper witness. Let’s set for hearing at your convenience, next week. We have time in morning. Before jury comes in, do it more academically. Bottom line, if get a bind, I will call your judges or ase mgr. FINN – Anything between DAvis and me is covered by privilege. While we have nothing to hide, it’s a Stickey Wicket (GROANS FROM AUDIENCE).
JUDGE – If can’t work it out, let’s do research, come in and talk about it. SCARDINO – Nothing about conversations with his client. JUDGE – Now, if can be done in ordinary course of biz, or what. Finn, if can’t get agreement you feel reasonable, let my case mgr know. COSTA – Tough to talk about agreement in a vaccuum. JUDGE – They are not bound to let you know, change their mind to call or not any witnesses. 5th Amend rights of defendant. If they want to call him, at least need to know that. I’ll talk to other judges, we’re not there yet. SCARDINO – Can we consider him under jurisdiction of court? JUDGE – We’ll do it before Mr. Davis is off the stand. FINN – Instructed my client to steer clear of those type things..
12:05 – Jury comes back. Judge tells them about issues, says to avoid TV, news
(Stellmach – multiple exhibits – RAS loan agreements?) Yes. (Who said to sign them?) Mr. Harry Failing, RAS CPA (Why?) Monies represented by Shareholder Funding Rpt would be cosidered income to him if no notes produced otherwise. Those notes serviced. (Did RAS promissory notes?) Yes, copies of them here. (Exhibit – Promissory Note?) $52M Dec. 31, 1999 borrower Mr. Allen Stanford (Next pg) SIBL lender, RAS maker on loan. Bank was lender on all the notes, far as I know. (Info) $59.5M dated Dec. 31. 2000 lender SIBL. Signed by Allen Stanford. (Who’s signing for bank?) No sig, except RAS. (Was anybody at bank notified about PNotes?) No sir. (Prez of bank?) No sir, not to my knowledge. (Prez know RAS borrowed $2B?) NO sir. (Next – PNote?) $112M dated Dec. 31. 2001. Signed by Allen Stanford. (next ) $168M dated Dec. 31, 2002 signed by RAS. (next) $330M dated Dec. 31, 2003. Signed by RAS (next) $2.3M dated Dec. 31, 1999.
(Why SFG borrowed it?) RAS signed. (SFG funded how?) From CD deposits. (next) $75M dated Dec. 31, 1999. (So, were dates Dec. 31 of each year … maybe a few others? When he signed it?) No sir. (Why dated at end of year?) Pertained to period of time set in place by Harry Failing for transactions to that time. (Saw 2008 Shareholder Funding Rpt – $2B borrowed. Were there PMs totaling $2B?) No sir (Note for every dollar RAS took from bank?) No (Why?) Difficult to get RAS time to sit down and sign the notes.
(Exhibit – borrower SFG $100M from bank Dec. 31. 2000. Signed?) I signed it on behalf of SFG. OBJECTION – … Davis – I signed it as CFO of SFG. Harry Failing suggested it. He couldn’t get meeting with RAS. He wanted docs completed and set it up this way. I signed it. (Did anyone at bank … ever authorize or OK these PNs?) No sir.
(Exhibit – graph 3 ..) default in payment of principal or interest on its due date … (On Promissory Notes.. what could happen if no payment on time on note?) They would immediatley become due with additional expenses. (Did RAS make payments on these notes?) Some checks for small amounts but … No. (When that happened, was penalty enforced?) No sir. (Turn to exhibit …1996 annual report. Pg 13. Advances to directors? Disclosure that bank lent him $13.5M plus others. Did RAS say why disclosure made?) Yes, made beause general counsel became aware of payments to some Stanford companies that had come from the bank… GC Yolanda Suarez, Texas lawyer and Florida. (So, RAS told you?) GC becamse aware tht funds went from bank to companies and she said had to be footnoted. Because of her statement, footnote was created.
(Anything inaccurate in note?) Amount was not that amount. (Was $13.5M lower or higher than real loan?) Lower. (He took out more than that?) Yes. (Dec. 31. 1996. … now 1999 annual report …claim made in report about that loan?) That all credit transactions are in ordinary course of biz, as similar transactions with affiliated persons for $13.5M for 24 months. There was balance $4.8M at end of year. During 1999 paid in full (Was that accurate?) No sir. (Stated at end of 1999 …Promissory note?) $52M Dec. 31, 1999. (Date of report?) Same date as report. (PMs … those post-date 1999? After?) Yes. (After 1999 annual report, any more disclosure about loans to RAS?) No sir.
(Promissory notes…) Signed by Mr. Allen Stanford (Who signed annual reports that didn’t show loans?) RAS, among others. (Previously testified that Stanford Development Corp… what?) Projects … building brick and mortar buildings, house financial operations, banks, brokerage, investment. (Those buildings, who built for?) Mr. STanford’s businesses. Also other projects for restaurants, athletic clubs, Cricket fields. (How learn about these projects?) I saw the transations through accounting. RAS spoke of projects to me. (Involved with them?) No. (approve funds to them?) No sir. (Own any projects of SDC with CD money?) No sir. (SDC projects, any on Antigua?) Yes. (Any particular area/) Yes, the airport complex. (RAS ever say why there?) Said was first and last visual impression visitors would have, excellent visual promotional factor.
(Exhibit – aerial of Stanford complex… Cricket field etc….. use pointer and show us what’s on aerial, where’s airport?) Below it, in lower right quadrant. (Walk us through what’s shown here?) Left side, obervation tower on hill overlooking other buildings and developments. Below tower, building Stanford Trust Co. (what?) STC was Antigua company dealt with clients for trust accounts. (Next?) To right, 5-STar restaurnt The Pavilion. Right, Stanford International Bank Ltd. headquarters. Owned, on balance sheet. (Only real estate disclosed?) Yes. Right, hillside with econ-friendly water filtration project fed into multi-thousands of gallons storage facility. Right Stanford Printing and Pyblishing.. red roof. General landscaping, airport. Theme restaurant Stickey Wicket, Cricket theme. Like Chili’s, Applebees, in that level … like Hard Rock Cafe. Night-lighted Cricket field, stadium and parking. Signage. Athletic Club, Stanford Athletic Club name. Down here, maintenance facilities. Roads, curbs landscaping. This was Bank of Antigua Ltd. (RAS bought ot get commercial access?) Yes. (What all this cost to build?) $120M … from CD depositors. (Reference on Shareholder Funding Rpt?) Yes.
(Otherwise bank property, did SIBL own any of this?) No. Nickname, Wallyworld. (While worked for RAS, ever present at meeting asked how funding?) Yes, board and prospective clients. Financial advisers. (What RAS said?) Said not by depositor money. JUDGE – Only explanation? Davis – They generally accepted it.
(And you mentioned that RAS had plan to build a resort. In this area?) At this end of island but farther north/norheast. JUDGE – ANTIGUA? Davis – about 108 square miles, your honors.
(Leave Antigua … private equity … explain what it is?) Simply, investments in companies that have not yet been sold pubicly and not traded on public stock exchange. (Highly marketable securities?) No. (Bank equities into private equity?) Yes. (How happened?) Believe at some point in time, I suggested that private equity OBJECTION – (Asking bout private equity.) SCARDINO – NARROW IT. (Schellmach – who propsed?) I did, with Mr. Stanford. Proposed it to him. Discussion, hard to say over 21 yars, who wpoke first.
(Disclosure to depoisitors or advisers?) No (Why invest i privfate equity when he’s borrowing $2B?) Private equity offers opportunity, if sufficient holdings in deal, opp to make unsual gains compared to normal market offerings. (Could hit the jackpot?) Yes sir.
(Illustrate how private equity investments made at bank… drawing?) Davis at flipchart … big circule at top.. arrow down to another big circle… arrow from top cirule to another circle … three-four arrows from that circle… two arrows from first middle circle.
CD money to a shell company like SVCHoldings, then would fund purcahses of private equity in various companies. (Why not hve bank transfer diretly to private equity?) Because PE weren’t according to investment parameters told to potential investors. The answer to question… two ways .. private equity investments would be made after Capital Markets Group of SFG recommendations. Those would come to me at end of line, approved or disapproved. Shared with RAS or a couple of times to RAS by referral. He also discussed that with me, sit down together. Common-knoweldge pieces we disussed frequently.
12:43 – (Exhibit – want to be very precise … companies on exhibit with $2B loans from RAS … not assets of bank?) No. (Any listed here assets of bank?) No sir. (But private equity … were some bank assets? Tier 3?) Yes. (So these companies, are they part of Tier 3 or only RAS loans $2B part of Tier 3?) Latter, the note.
(In general terms, what were Tier 3 assets?) That would be resulting 75% missing.. (Was RAS note in Tier 3?) Yes it was. $2B note. (Bank also had private eqity … in Tier 3?) Yes. (Anthing else in Tier 3?) Yes, real estate. Antigua/Barduba. (So when say 75% of assets in Tier 3, you mean actually value equal to 75% reported to bank assets?) There were , Tier 3, 75% of the bookkeeping number did not represent cash. Not secuties that were marketable. (If you used cash in Tier 1 about 10% reported assets. And used Tier 2 stocks etc. 15%. If you sold bank’s assets in Tier 3.. could that be enough to repay depositors?) OBJECTION … Judge – break it down.
(At end of 2007, that bank owed depositors $6.6 B. Docs showed Tier 1-2 was $1.5B. If Tier 3 was sold, worth $5.1B?) OBJECT – NO FOUNDATION THAT HE HAS EXPERTISE ON MARKETABLE VALUE OF THESE. Schellmach say oversaw this. SUSTAINED AS TO FORM OF Q.
(At any time you worked there, at any time did bank have ability to repay depositors all it owed them?) NO sir.
(True from very beginning?) Yes sir. (Bank assets?) Yes sir.
(Exhibit – 2005 Annual Report – pg 26 …who signed letter from chairman?) Mr. Stanford. (Prior pg … 3rd graph … says what?) During pst 20 years, array of diff economic /political events. 1987 stock market decline. 1990 major recession. Next few years Mexican peso … other financial crises…NASDAQ, Dow started to break high marks. (Pst 20 years, had SIBL, Guardian reported profits?) Yes. (Ever have profitable year?) No. (RAS said about profit?) Can’t sell to clients without profits. Had to have profit. (How fake profit nubmer determined?) Simply, reported had to be a reasonable gain on investment portfolio section. If world markets returned 6% for example, would be farfetched to say institution gained 14%. Profit number had to be reasonable. Then that being decided upon, determined the “push” or inflated or fraudulent lie number entered into the investment section.
(When you saw down with RAS to pick profit number?) In very beginning, yes 1991-2. My instrictions were clear from beginning to report profit. After, it took place whether he discussed each period or not. He signed them. (Knew it was fake?) Yes,he did. (Didn’t sit down with him?) He knew about the $550M plowed back into defunct airline… money into deepwater port. OBJECT. (Did you disuss with RAS a number picked not based on actual returns?) Yes, we discussed amount profit to be shown. Two reports. One statement of condition and then glossy annual report at year end.
(Communicating with him about report?) OBJECT – rephrase (Did you sit down each time to pick a fake number?) No sir. (When you were trying to determine what profit to report, discus with him?) Yes. (Tell us, in those discussions was RAS uncomfortable with too high a number?) No. (How worked?) He’d be told how much profit was reported on interim report. OBJECT – HE? (Stanford?) Yes, your honor.
I would discuss this number with RAS each and every time. (Did he approve proposed nubmer in interim report?) Every single time. Yes. (Did bank ever report unprofitable quarter?) Recall two, yes. First 9-11 quarter. (Why?) Markets collapsed worldwide. Would ahve ben unreasonable to produce a profit when global markets collapsed. (Even then, still said?) He told me from very beginning that profit had to be reported.
12:59 – LUNCH BREAK
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