March 26 (Bloomberg) -- One month before he was accused of helping R. Allen Stanford run an $8 billion Ponzi scheme, James Davis sent a text-message to a friend: “I’m praying for you.”

Now members of the church Davis founded are praying for him. The Stanford Group Co. chief financial officer shouldn’t be judged until all the facts are revealed, said Paul Stupka, the youth pastor at LifeWay Community Church when it held its first service in Davis’s home outside Baldwyn, Mississippi, in 1999.

“People are surprised and saddened” by the U.S. Securities and Exchange Commission claims, Stupka said. He received the text-message from Davis in mid-January and hasn’t heard from him since, he said.

Davis, 60, met with federal prosecutors and representatives of the SEC and the Federal Bureau of Investigation yesterday at the regulator’s office in Fort Worth, Texas. The CFO abandoned a plan to invoke his Constitutional right against self- incrimination and is “fully and actively cooperating,” his lawyer, David Finn of Dallas, said in a telephone interview.

His client’s conversations with regulators began before the SEC filed its civil lawsuit suit on Feb. 17, Finn said.

“James Davis was actually the whistleblower,” he said. “He was the one who blew the whistle and brought the house of cards down.”

Officials with the SEC and FBI have declined to comment on any aspect of the Stanford Group case.

Davis’s willingness to talk to investigators shows that “he’s just trying to handle this in the wisest and most humble way possible,” Stupka said. “I’m praying for mercy for him and grace for his family.”

No ‘Free Pass’

Davis misappropriated investors’ funds, falsified financial statements and trained employees to lie in a “massive” fraud at Stanford Group, according to the SEC.

The agency sued Davis; Stanford, 59, the Houston-based company’s chief executive officer; and Laura Pendergest-Holt, 35, its chief investment officer. Davis was Stanford’s roommate at Baylor University in Waco, Texas, according to a deposition by Stanford’s father, James Stanford, in the SEC case.

“Cooperating doesn’t guarantee a free pass,” said Josh Hochberg, a lawyer with McKenna Long & Aldridge in Washington and a former fraud section chief at the U.S. Department of Justice. “It’s a complex negotiation based on what he knows and the degree of culpability.”

Pendergest-Holt, charged criminally with obstructing investigators, had been cooperating before her Feb. 26 arrest, said one of her lawyers, Dan Cogdell of Houston. She is free on $300,000 bail.

‘Family, Friends’

Davis’s discussions with investigators are “immaterial” to Pendergest-Holt’s case, said her Dallas-based attorney, Jeff Tillotson. “I doubt his focus is about our client.”

Stanford, who asserted his right against self-incrimination in court papers filed in Dallas on March 11, couldn’t be reached for comment.

With Davis’s assets frozen by a federal court order issued in Dallas on Feb. 17, he has turned to “family, friends and others” to pay his legal bills, Finn said.

“Any investor who is concerned that I’m being paid with dirty money, that’s not happening,” he said.

Finn couldn’t explain why Davis had invoked the Fifth Amendment on Feb. 21 because he didn’t begin representing him until last week, the lawyer said.

The picture of Davis and the alleged Ponzi scheme painted by the SEC is confounding to people who thought they knew him, said Tennessee state Senator Paul Stanley, a Republican. The swindle, named for 1920s financier Charles Ponzi, is a fraud in which early investors are paid with money raised from later participants.

God-Fearing

“He always seemed to care” about Stanford Group employees, Stanley said. He met Davis during the three years he worked as a financial adviser for the company in Memphis, he said.

Stanford Group sponsored a U.S. PGA Tour tournament in Memphis that dropped the financial firm’s name on March 19 to become the St. Jude Classic. Davis is on the board of the city’s National Civil Rights Museum at the Lorraine Motel, where Martin Luther King Jr. was assassinated in 1968.

“I’d like to know who Jim Davis really is,” Stanley said.

In Baldwyn, 123 miles (198 kilometers) south of Memphis, the man some call Mr. Jim is viewed as God-fearing and honest, said Ethan Nanney, an elder at LifeWay Community, which holds services in a one-story brick building without a steeple on County Road 833 in Guntown, 10 miles from Baldwyn.

Through Davis Holdings LLC, incorporated in 2005, Davis purchased and rehabilitated at least three 1920s-era buildings on Main Street in Baldwyn, according Mayor Danny Horton and real estate records. His wife, Lori, is part-owner of Gotta Have a Quilt, a fabric store, and president of Status Thimble, which sells needlepoint kits costing as much as $135, in a renovated downtown building.

‘In His Blood’

“He was a mover and a shaker,” said Terry Cutrer, pastor of Baldwyn’s First Baptist Church, where Davis taught a Sunday school class Pendergest-Holt attended in the 1990s.

Davis, who is white, made his most important mark when he decided the Baldwyn area, about one-quarter black, needed a place where different races could worship together so Sunday would no longer be “the most segregated day,” Nanney said.

“It was in his blood,” Nanney said. “His great-great grandfather was an abolitionist.”

On a Sunday last month, of the 26 people who attended the 10:30 a.m. service, six were black and the rest white. The pastor, Jimmy Haley, who is black, declined to be interviewed and didn’t mention Davis in his sermon or when he asked parishioners to lay their worries at the altar.

LifeWay Community got its start in a carriage house behind the four-story home Davis built outside Baldwyn. Named Loribel, the residence is gated and boasts a pond, Ionic columns and a widow’s walk.

Laying On Hands

Born in Baldwyn in 1949, Davis was in high school when he moved away with his family, Cutrer said. His older brother Eugene Davis, a pilot, died in 1972 in the crash of a Cessna in Texas. He was shot in the head by a passenger who left a suicide note saying she wanted to kill herself, her husband and two children, according to court documents. They all died in the accident.

Until Davis stopped attending services at LifeWay Community earlier this year, he would often stand before the altar on Sunday mornings to lay hands on congregants who had problems or wanted to be saved, Nanney said.

“God laid it on his heart to start the church,” Nanney said. “We are praying for him.”

In Memphis, Davis gave the keynote address in 2006 for the National Civil Rights Museum’s annual Freedom Award ceremony, where he was photographed with television personality Oprah Winfrey. The picture ran in an in-house Stanford Group publication.

‘Impossible’ Returns

The speech had a Biblical theme and referred only to Old Testament passages so as not to offend Jewish attendees, said Andy Hamm, a speechwriter who helped Davis prepare.

“It is very rare in corporate America to take a stand in public and profess religion” as Davis did that day, Hamm said.

Religious faith was part of the culture at Stanford Group, according to interviews with current and former employees. Davis, who had offices in Memphis and Tupelo, Mississippi, would open meetings in with a prayer, said a former staff member who asked not to be identified.

Stanford Group employees sometimes drew on church ties to find customers for certificates of deposit issued by Stanford International Bank, the current and former employees said. The CDs offered “improbable if not impossible” returns, according to the SEC.

The bank had sold $8 billion of the CDs by the end of 2008, and Davis and Stanford had hidden their “fraudulent conduct” by fabricating financial statements and issuing misleading performance data, the agency says.

Lied To Advisers

As CFO of both Stanford Group and Stanford International, Davis traveled frequently to Antigua and also worked from Stanford Group’s office in Miami, according to court documents.

The fraud began to unravel days before the SEC suit, according to the agency. Stanford, Davis and Pendergest-Holt “lied to financial advisers” about the company’s assets at a Jan. 10 meeting in Miami, and Davis failed to tell his own team of advisers that two days earlier, the bank’s treasurer said its cash position had fallen from $779 million to less than $28 million, according to the suit.

A meeting with Davis in February persuaded Stanford Group’s general counsel, Mauricio Alvarado, to quit, he said in a Feb. 12 letter filed with the lawsuit.

Davis “made verbal statements and presented other information which are completely opposite and in direct conflict to what I had been represented and led to believe during my entire tenure with the company,” Alvarado wrote. “I am incredibly surprised and disappointed.”

The case is SEC v. Stanford International Bank, 09-00298, U.S. District Court, Northern District of Texas (Dallas).

To contact the reporters on this story: Laurence Viele Davidson in Atlanta at lviele@bloomberg.net; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com.

Last Updated: March 26, 2009 00:01 EDT