WRAP UP: Davis tells Stanford his son won't do as his father has in fraud

By Patsy R. Brumfield / Daily Journal

6 P.M.
HOUSTON, Texas – After midafternoon break, former Stanford CFO James Davis continues testimony in the fraud trial against R. Allen Stanford.
(Below is a running account. Court usually ends about 6 p.m. Please excuse the typos and glitches I’m sure will occur while I type as fast as I can.)
• • •
4:11 – SCARDINO complains about something seized by FBI out of an office. Asks that it falls under Motion to Suppress. JUDGE – Was it denied summarily. SCARDINO – Urge it for this exhibit. JUDGE – also was reason specific on this book? (WE REALLY CAN’T HEAR THEM WELL) COSTA – Cites 5th Circuit, about receiver. JUDGE – How about that? DEF LAWYER – Argues fails to address Supreme Court cases. Private office, anything in it normally exclude others from, searchers must have warrant. COSTA – Argues. This has already been ruled on. (Arguments continue…..) JUDGE – Receiver went in and got it and you got it from receiver? Right? (Arguments continue…) Fazel – cites Supreme Court … JUDGE – Says seized in civil action, receiver turned it over. FAZEL – Argues about 4th amendment. JUDGE – How do you redeem this. They had no warrant. OVERRULED
4:19 – JURY RETURNS
(Stellman – Exhibit – How do you recognize this book?) Seen it before in RAS posession. It’s a call book, addresses phone numbers, A-Z. JUDGE – Before Blackberry, address book. (Want to turn to this page .. just this page to protect privacy. Who was Lester Byrd?) Antigua Labor party and Prime Minister. In 1980s and 90s. His father first, then followed by Lester. (RAS made political contributions?) Yes. (Book – RAS had both home and cell numbers?) Yes. (Another, Trevor Bailey?) Worked with FSRC, financial reg commission in Antigua. Was supervisor of banks, worked for Mr. Leroy King. (Bailey left, went to work for SIBL?) Yes, as its internal auditor. (Leroy King?) Director of FRSC at Dept. of Treasury of Antigua-Barbuda… had direct lines. fax, cell, home, secretary, New York home number, U.S. cell, wife’s cell. (Also see Giselle?) She was SFG employee and also related to Mr. King in come way. (King headed FRSC after Crick?) Yes sir.
(RAS ever say anything about King, Bailey?) Spoke of close nature of relationship. They spoke often. Mentioned various calls with King. (RAS about payments to King?) Said he made regular cash payments to Mr. King and Bailey, at one time. (We;ll come back in a bit. Understand why making those payments?) It was hush money, they were bribes to look over way in exams of SIBL and other situations that came up. (Antigua, where was your office?) Houston, Tx 1990-98 or 99. (After Houston, all time?) No, late 1990s moved office to Memphis, TN. 1992-93 moved my family to Mississippi, near Memphis. (Stanford’s office?) In Florida, Houston. (Did he spend a lot of time imMemphis?) No.
(Was he on road a lot?) Yes, I believe he was. (Were you running the operation?) NO, I was CFO in charge of financial side. No one ran the company except Mr. Stanford. (Did RAS say you were No. 2?) No. (Waht said about No. 2?) Said he had no Number 2 and I recall being said in front of a number of people …. (When said that?) I recall an incident told to me by several people at executive meeting… I was not able to attend … several attendees .. OBJECT – HEARSAY – (Did RAS tell you that you weren’t his Number 2?) Yes. (When?) 2007, 2008 (What led to that?) Circumstances were that suggestion was made, I did, that due to his schedule, travel, that No. 2… OBJECT – SUSTAINED (Did you raise the issue?) I did not. (What did you tell RAS whether desirable to ahve a nUmber 2?) I did. (When?) Several times 2007, 08. (Why?) Believe we needed someone beause of size, scope of responsibilities, faster decision making, take load off him, help individuals in regional and company offices for quicker decisions. (What did he say?) Didn’t need a Number 2. Everybody reported to him, regional, HR, etc. Directly to him, Things were working fine. (Who?) Jack Staley, Danny Bogard, Juan Rodrguez, Frano Mochia – responsible for Stanford companies in those regions. (Did any of them report to?) Course not. To Allen Stanford.
(How handson was he?) Finger on pulse, phones, texts, emails, quarterly meeting with senior staff, had network of individuals reporting to him, as I said. (Marketing materials?) Yes sir. Creative servies Department in charge … reported directly. (Annual report?) Included in that responsibility. (You were CFO, involved with reviewing annual report?) Yes sir, I was. (How did that work, what you did, who had final approval?) CFO in charge of accoutning, bookkeeping, reportingi – would prepare numbers, draft of financial statement, profit and loss statement, funds-flow statement, footnotes to those statements. After they finished, I would review it and that review would be shared with in due course with Creative Services, with RAS, to produce so-called GLOSSY report that goes out annually. (Final approval?) Allen Stanford. (Always issued on time?) No, always seemingly late. (Why?) Process waited on RAS final approval.
(Marketing materials… terms, “tier”?) In our investment section, internally to acct. staff and investment staff research staff, RAS and others – internally in 3 sections. Tier I, Tier II and Tier III. (Tier I?) Cash and cash instruments, could be called commercial paper, called near cash, issued by financial institution. Converted to cash quickly. (Tier II?) Segment of investments, various securites – bonds, equities, investment funds, hedgefunds, alternate funds, similar instruments – some cash mostly securities. (Consistent with claims in marketing materials?) Yes. (As general matter, percentage, how much in Tier 1?) Latter years, 10%. (Tier 2?) 15%, varied. (Tier 3) WAs the MISSING FUNDS, 75% of bank’s assets.
(Why funds were missing?) Yes, CD monies mssing were invested into Stanford companies and spent in other ways, not ways reported in promotional materials. Other assets. (Only 25% in ways consistent with marketing materials and annual report?) Yes. (How widely known was Tier system in SFG?) Not general knowledge, but widely known along lines of financial reporting departments. Known at SIBL, existence of three segments. (How many knew what was in Tier 3? Assets, how spent?) Mr. Stanford and myself, chief acct ofc, Mr. Kuhrt, possibly others on staff, accontants.
(Marketing material – Start with Exhibit – look at screen, document?) That’s brochure cover. (How involved was RAS with this?) Say he was hands-on very involved in process. Creative provided all workups for RAS approval. (What did he do to review?) He read, looked at each page. Seen him go over brochrues page by page. At time would make adjustments to copywriting. Seen him interact with Creative employee about materials. (Pg 3 – Depositors Security, liquidity? Highest degree of liquidity?) Not true. 75% of portfolio was not liquid. (Highly marketable securities?) 75% of portfolio in non-liquid, non marketable investments. (RAS companies traded around world in securities?) No.
(Inestmtne time horizons?) To ensure liquidity … matching time horizons… means cash available to meet groupings of deposits by customers. If $500K by customers are due in October of year, timed out … to be an investment in amount per time available to meet a client deposit amount dollar for dollar. (If $500K CD due in October, what meant for assets?) That would be assets to be redeemed to meet the demands in CD investors. (True?) NO sir.
(You started in 88 to end, if somebody wanted to cash CD, were they able to do that?) They were. (How is this statement wrong that bank could cover redemption?) Most depositors left their deposits in bank, renewing their CDs rather than withdrawing. If necessity to withdraw all the money, it would not have been possible.Not sufficient assets.
(Some were redeeming, where was money coming from?) Pool of money in bank as investment was sufficient to meet those redemptions. But by and large, the biggest reason money was avaiable that continual sales of CDs came in at such a growth rate that it wasn’t a problem to pay withdrawl requests… until 2008 economic debacle, people afraid and began withdrawing in heavy amounts. End of 2008 became issue of magnitude proportions.
(Anohter page – global investment strategy, minizes exposure?) Only partially true. Just applied to Tier 2 investments, not Tier 3 or 75%. (Where was concentration of Tier 3 assets?) Concentration of reported assets in real estate in Caribbean, most dollar amount there. (RAS personal companies receiving CDs … where?) Caribbean was heavy, North American, South America. (Only lending on cash-secure basis?) That is a lie as well beause lending to The Shareholder (Who?) Mr. Allen Stanford. He had a $2B loan.
(Pg 6 – consistent profitability – since inception?) No sir, it was not. (Did bank ever have a profitable year?) Not to my knowledge. (Says instead of dividends …?) Amounts paid to shareholders from earnings. (Here?) Says basically no dividends paid. (But RAS borrowed $2B?) Correct. (Any earnings? Profits?) None, net or otherwise. (Global investment – statement … diversified, not loans are primary source of revenues. On board when?) 1992 (How actively involved was board to review investment strategy?) Not very involved. Same info as prospective CD holders, marketing brochure, fraudulent financial statements. (Board getting any info other than that?) No sir. (Says, low overhead … what was overhead like at Stanford organization?) Large. It was exhorbitantly high. (What kind dealt with?) Would say travel, employee expenses were very high. Office built outs were high. Overheads like aircraft, hangars, 42 aircraft employees exorbitant, higher than should be.
(Pg 7 – no loan losses? Says bank elminates credit risk with no-loan loss policy?) Credit risk would be risk people entrust money to you … likely to get their money back. (Risk of bad loan?) correct. (Only cash-secured loans?) Loans made to bank customers, CD holders. Example, if depositor had $100K CD, could borrow up to 80% cash secured. (Loans to RAS? Cash secured?) No it was not. (Any collateral put up by RAS?) NO.
(Under greater investable assets? Explain) Says there is equity, more assets than liabilities. No. 2, because no equity there was no supplemental investable assets. (CD disclosure statement – Pg 10 – says funds deposited invested in bonds and securities?) Yes, see that. (True?) No sir, not true. (How much invested there?) No more than 25%, without cash only 15%. (Number below tht on chart … 2003-06 … accurate for products?) NO, sir. all lies.
(Next pg – Explain, if all lies, were you involved with that?) Yes sir, I was one of the liars. (Statement reflect positives?) I was, among others. (Operating profits chart – shows 1997-2006.. info accurate?) No sir. (Any of it?) No sir. (You were incharge of finances of bank?) I was CFO, yes sir. (You put together these fake numbers?) I was involved and lied. (Fake numbers … wer you involved in faking them?) Yes. (Stanford?) He ws the chief faker, before I was involved.
(With RAS, how far back fraud go?) RAS said there were bonafide… I asked ever profitable… he said in the beginning. (In 1988, then by 1992, approx half assets weren’t where should be… were any reports accurate?) NO. (RAS – tell you fake numbers before you joined him?) OBJECT – (Did RAS say fraud had taken place to your learning about it in 1991?) …. long silence ….. Yes sir. (What he said?) Originally he said 85-86 were profits, after that no. Pre-dated me.
(Pg 12 of CD disclosure folder … graph … loans to customers?) Yes it was true. (Were all loans covered by cash?) True with CD customers, but it did not include loans to Mr. Stanford. (Annual report 2004 – pg 16 … chairman’s letter in every one?) Yes. Chairman Mr. Allen Stanford. (Note Investor PHilosophy) reads… to remain diversified. over years consistent returns in stable and volatile market environments… continue to follow as mandated by board … doing hard work nec to uncover ops not found anywhere else.
NOTE – ATTORNEYS UP FRONT ARE HOT, JURY ISN’T. SET UP FAN. LET’S GIVE THAT AT TRY, JUDGE SAYS. 5:09 P.M.
(Exhibit – 2001 annual report, pg 11 … list of assets, liabilities… Tier 1 number accurate?) Yes. (Why?) Actual cash in banks supported by financial statements from thos banks. (Res of assets? Loans to clients – $69M, accurate/) No, did not include loans to Mr. Stanford. (Rest of assets… any other accurate?) Yes, property and equipment an dother assets. (Financial s=assets $6.3B?) No, not accurate. (Under liabilities $6.6B to CD depositors?) Yes. (Look at it, possibly $620M in Tier 1, correct?) Yes, in cash.
(Exhibit – spreadsheet?) A weekly recap summary of Tier 2 investments. (See those numbers… year-end balance $888 million?) Balance in Tier 2 of investable securities as of Jan. 7, 2008 or one week past. (SCARDINO – ASKS Q ABOUT DOC?) (Stellman says internal document prepared in Memphis. Never for public.)
(So, as of end of 2007, bank owed $6.6B to CD depositors) Yes. ($620M cash, $888 invested in Tier 2 liquid assets – total approx $1.5B) Yes. (Leaves $6.6B owed …leaves $5.1B missing?) Yes sir (You and RAS have term for what’s not there… ) Called The HOle.
(As of end of 2007, before economy turned and redemptions increased?) Before that time. (What happened to the HOLE?) It got larger. (Why?) Because couple of reasons – 1. cash burn to run other Stanford companies. 2> Fact that there were no profits, lack of production in small 25% of assets there were. Degradation.
(How covering redemptions in 2008?) Covered by Tiers 1 and 2, until Jan 2009 when liquidity dried up. (NO more money by 09?) Yes sir. (We’ll come back to that.
(Tier 2 – 15% assets invested … tell us what depositors told who was overseeing bank invetments?) Yes, direct oversight was by financial institution money mgrs. Internal oversight was by Investments Department in Memphis, some 20-odd employees who reviewed weekly the investments. (How much actual invesments and assets did Memphis have access to?) No more than 25%. (So research analysts … explain to chart wht depositors were told about how investments were overseen? First Diagram) (Tell us, according to the hart, what depositors were told about how money being invested.) Says overseen by global money mgrs, reviewed by research analysts in Memphis. (Stanford Group Co. in US?) Yes. SFC, brokerage, would sell CDs to clients and monies in CDs went to SIBL, then CD money … diagram says sent to money managers. Told all the money handled that way. Their function was to monitor the money managed by managers. Investments fulfilled Stanford Model perameters, told to depositors. Also told to money managers.
(How analysts and brokers led to believe?) Yes. (What % really run this way?) No more than 25%, Tier 1 and Tier 2. (Who ran Memphis research?) Laura Holt, CIO (How many worked for her?) 17 or so (One Mark Collinsworth? Zach Davis?) Yes, Zach research analyst and my son. (You hired your son as research analyst?) Yes, (Background?) He was grad of Union University, biz administration, series licenses by Securities Industry.
(When did he start working?) 2002… had been parttime student summer employee. (This was 10-11 years after you realized you were in a fraud?) Yes. (Why hire your own son at company involved in a fraud?) Well, he was not part of the fraud. He was away from fraud. (Son worked?) Stanford Financial Group Co. Didn’t sell CDs. (Did he know about loans to RAS?) NO sir. (That statements full of lies?) Not at all, no sir. (Did you hire him?) All employees went through normal process. (Did you expect him to stay for years?) Actually no, maybe to get experience, further licenses. (Intended to bring him in?) Never. (Did you tell RAS you wanted to retire, resign?) Yes, I did. (When?) 2006 or 2007.
(When talked with him, did he talk about successor?) One point in time, last years, he asked if my son Zach would do what I had done. I said ABSOLUTELY NOT!
(Holt was supervisor of analysts?) She was chief investment officer. (Relationship with her?) Personal and professional. (Personal?) She and I had an affair 2001-2003. (When she became CIO?) Subsequent, maybe 2004-5. (Who’s decision?) Mr. Stanford. (Before promotion, did you tell RAS you had an affair with her?) Yes, he knew .. at the time. (What he say about that, with her promotion?) That’s good, he said, she will be loyal. (In what way?) Continue to speak, act, manage in loyal way to sell CDs and method of sharing internal/external that Tiers being managed and monitored in this diagram. (She would repeat the lie?) YES
(The Lie?) She would speak to truth of investment model, hold herself up to be monitoring all three tiers when in fact she was not doing so? (Did she to that?) Yes sir. (Who did she lie to?) Done at so-called quarterly Top Performance groups, with certain investor groups. (How did you meet her?) In Baldwyn MS at college and career Bible study class. I was the teacher with wife Lori. (You recruited her to Stanford ) Yes 1996, she joined after got master’s in 1997. (Affair 01-03?) Yes.
(In addition to personal, have professional relationship?) In Baldwyn, restaurant/coffee shop. Funded with CD money, yes. Through our salaries. (Did you take money to start up shop?) Not directly. (Used your salary and bonuses?) Yes, all came from CDs. Not skimming money. (When Holt went to TPC meetings …) attended by top sales people who sold CDs to clients. (like Jason Green?) (What did she do at meetings to assist the fraud?) Stand up and explain Stanford Investment Model, as adjusted, philosophy for investing funds. Identified promotional materials. Talk about economic environment around world, then would point to charts that showed distribution in investable assets. Where invested, currencies. (What did she say to further the lie?) That in effect that she was involved in all 3 tiers, not the case.
(Did she know what was in Tier 3?) No, I don’t believe she did. (Loans to RAS?) No, she did not. (Did she ever ask?) Yes, a question. (When she asked, what did you tell her?) (Did Ms. Holt every raise any concerns that she didn’ tknow what was in Tier 3, with RAS?) OBJECT – SOMETHING SHE DIDN’T KNOW ABOUT (My question, did she raise it as concern with Mr. Stanford?) JUDGE – Try a little more. (Mr. Davis, when Ms. Holt was made CIO of SFG, was she given any information about actual content of assets of loans to Stanford in Tier 3?) No sir. (What assets was she told about?) Tiers 1 and 2. (When she was 25% of assets, she wasn’t told content of rest?) OVERRULED OBJECTION (…read back question…) Yes sir. (But she went to meeting and talked about she knew?) Yes, she did. (Did Holt ever raise any concerns in meetings with RAS, that she didn’t know Tier 3 contents?) Yes sir. 2007 meeting, FourSeasons Hotel, Georgetown WashingtonD.C. – Holt, RAS and me. (She said?) One thing she said was that in looking at RAS, I’m trusting in you that these assets are as we’ve been reporting, and I’m trusting Jim. He said she could trust us, trust me. (What did she get out of being part of fraud?) A paycheck, bonuses. Paid competitively. well paid (What about loans?) Not to my knowledge. (Funnel any money to her?)No (Her husband, knew him?) Yes. (Was he one of money managers?) Yes. (Who OK’d hire of her husband as one of mgrs.) She recommended, I approved it with trial period with $2M assets. He met Mr. Holt in Georgetown one evening. RAS said about him – he liked him. (OK to give him $$ to manage?) Said he could be trusted to do so.
(Exhibit – chart …attachments) SIBL… attachment showing Tier 2 success. (Eshibit – Sent to RAS?) Yes (Others similar, attahment?) Investment portfolios for banks, Tier 2, to RAS. (Next – 10/31/2007 email sending Bank of Antigua, SIBL Tier 2 portfolio, another company Panama bank portfolio) JUDGE – how many people knew about Tier 3? DAVIS – Maybe 300 (How many of Tier 3 makeup?) Totally, 2 – plus others who knew parts of T3, loans to RAS. (Holt?) No.
(Exhibits – Tier 2 report 2007 Nov., Jan. 11 08, telling RAS?) That returns at that point were less than should ahve been but expected with economic environment, during normal audit cycle, improvements would be made. (Financial crisis heating up?) Early stage, yes. (Exhibit – Feb. 1, 2008 … read?) Not what wanted yet but setting up for a good year. Timing of drawdown …. Expectations that returns would pick up steam and increase over the year. (Exhibit – a few weeks later) Bnk of Antigua, Panama, SIBL portfolios – says fighting back on Second Tier…. improvements. (Next one?) Dec. 6. 2008 – investment portfolio SIBL Tier 2. Sent them to RAS, discussed them. (When forwarded, did he say I don’t understand why we only see only 15% of assets?) NO sir.
(Davis said he actually forwarded them.)
JUDGE – OK,, they’re in.
(Tier 3, ingeneral times, what was in Tier 3?) Private equity, investments in companies not traded on stock exchange. Loans to RAS. REal estate. (Any of them assets, including $2B loan, ever disclosed in annual report, materials?) No sir. (Ever?) No sir.
(Explain for us … process how that CD money from bank flows to companies?) I can draw it, will that work? DAVIS AT FLIPCHART…. drawing circles with arrows from top to bottom… attaches microphone to his silvery tie.(Starting at the top, explain flow that amounted to $2B?) CD money from SIBL, then to SFG Co., sent to STanford Development, Bank of Antigua, Panama others (20 some-odd)….. (Why didn’t money go diretly from bank to companies?) A way to disguise origin of monies, recipients thinking it came from SDC not bank. Couldn’t be reported to CD holders. (All these companies owned by him personally?) Yes. (Who misled?) Runnning companies, would have been quite alarmed I’m sure to know CD companies… OBJECT – (Were they told source of money from SFG were CD funds?) No sir.
(Were any of these other companies … also audited?) Yes they were. (So, would auditors know that money to them came from CD moneys?) No sir. (Ever discussed with RAS, to cover up source of funds?) No sir. (Why not?) Mr. Stanford intimately aware of this transfer process. Money went to his companies. He monitored how much in Shareholer Funding report he viewed with me personally. He knew public auditors in these companies. DAVIS GOES BACK TO STAND ….
(Exhibit – email 10, 17 2009 from Patricia Maldonado. Who was she?) She ws treasury mgr for SFG Co. (Her job?) She monitored Tier 1 cash and transferred monies between those accounts. (How know to transfer?) She would be given instructions on routine basis from acct. department or covering bank accts and expenditrues. Instructions from me, RAS from time to time. (Email – she tells him $4M to Stanford Development, and $8.8M to Stanford Finanial Group Co.) To Shareholders acct. – tracking account for accounting to treasury for amounts of money Mr. Stanford borrowed from SIBL. (Fall in bucket of $2B CD money?) Yes. (Next email? From PM to RAS?) Waiting for his responses. I will wait … to send instructions to Chase Bank to process these transferss. (You weren’t authorized in transfer to RAS personal companies were you?) NO sir. (RAS response?) Patricia, I did not get your attachment on $8.8M. Traveling to Caracas and will phone you from plane to go over details of these disbursements? (Did he write why are we disbursing CD accounts?) (What was RAS saying?… based on 20 years associationg?) OVERRULE OBJECTION
First, let’s not talk about this in emails. I’ll take care of it on phone with you.
6:02 – JUDGE 10 A.M. FRIDAY