R. Allen Stanford told his top brokers in late 2008 that his Antiguan bank “was sitting on $5.1 billion” more cash than it needed as his treasury manager was privately e-mailing him that there was just $173.6 million on hand, Stanford’s former finance chief testified.
“At the present burn rate of withdrawals we had 35 days to 45 days of cash left,” James M. Davis, the former Stanford Financial Group Co. chief financial officer, told jurors today at Stanford’s criminal trial in federal court in Houston.
Davis, testifying under a plea deal, said customers spooked by the global financial meltdown accelerated redemptions of certificates of deposit from Antigua-based Stanford International Bank Ltd. in the second half of 2008. By December of that year, the bank’s cash balance had dropped to $88.2 million, according to an e-mail shown to jurors.
Stanford, who was monitoring the bank’s falling cash balance on “pretty much a daily basis at that point,” decided to shore up investor confidence and slow the run on the bank by making a $541 million capital infusion from his personal assets, Davis said.
“He told me just to make a paper entry into the accounting records that it had been made,” Davis said in testimony before U.S. District Judge David Hittner.
“How would that pay off people at the bank if it was just a paper entry?” Hittner asked. “It was just to stop the withdrawals and get more CD purchases coming in?”
Davis replied that was the plan.
Plugging the Hole
As U.S. securities regulators began pressing for documentation of the bank’s investment portfolio, Stanford concocted a way to inflate the values of real estate and private-equity holdings to “plug the hole” between the bank’s reported and actual assets, the ex-CFO said.
Davis showed jurors how Stanford boosted the purported value of some island real estate by more than 5,000 percent to $3.2 billion in late 2008, when property values “were plummeting.”
When the U.S. Securities and Exchange Commission issued subpoenas for Stanford executives in January 2009, Stanford suggested he provide regulators with “the same report you give the regulators in Antigua that lists all the fictitious assets in the fictitious accounts,” Davis testified.
“He said, ‘They won’t know the difference. They’re not that smart,’” Davis said. “I told him they are that smart and they will know.”
Davis said he told Stanford he planned to tell regulators the truth.
“I was not going to lie to the SEC even though I’d been lying for 16 to 17 years,” Davis told jurors. “If you lie under oath, the future’s not very bright. It’s never a bad time to tell the truth, never too late.”
After Davis refused to meet with the SEC, he and Stanford asked Laura Pendergest Holt, Stanford Financial Group’s chief investment officer, to meet the regulators, Davis said.
Davis previously told jurors he had a three-year love affair with Holt that ended in 2003, and that Stanford approved of the romance between his two top deputies. Holt, who denies wrongdoing, was indicted and will be tried in September.
Stanford continued to fly prospective CD customers on junkets to his Antiguan bank in one of his private jets until the month before regulators seized the operation in February 2009 on suspicion it was a $7 billion Ponzi scheme, Davis said.
“It was a very effective program” for luring new investors, Davis said, citing Stanford. “He said no trip had been made that had failed to produce new CD sales.”
The investors’ travel expenses, as well as the cost of the private jets, were funded with money taken from other CD depositors, Davis testified.
“The bank’s money was used to pay for everything,” he told jurors.
Stanford, 61, denies all wrongdoing in connection with 14 criminal charges of mail fraud, wire fraud and obstructing an SEC investigation.
He faces as long as 20 years in prison if convicted of the most serious charges. He has been in custody as a flight risk since his indictment in June 2009.
Davis said Stanford rewarded Stanford Group financial advisers who pushed the most Antiguan CDs, with an incentive program introduced in late 2000. The bank then had barely enough liquidity to cover CD redemptions while Stanford was borrowing millions of dollars to secretly fund his other businesses and personal expenses, Davis said.
Meetings With Sizzle
Top salesmen were treated to quarterly meetings that featured “extravaganza, Hollywood, lots of sizzle, excitement, with skits, videos and special speakers,” Davis testified. The new incentives and an inter-office sales competition “caused a mushrooming of sales of the CDs. They went from thousands sold to hundreds of thousands sold per quarter,” he said.
Under questioning by Stanford’s lawyer Robert Scardino, Davis told jurors he destroyed evidence in February 2009, by throwing two computers and a flash drive into the 7-acre lake in front of his home near Baldwin, Mississippi.
Davis testified he took almost $1 million in cash loans from the bank in the two months before regulators seized it. When he said his former boss approved these loans, Stanford began to slowly shake his head, his eyes locked on Davis.
“We have to take your word for it, don’t we?” Scardino said more than once to Davis’s explanation of how the alleged fraud was conducted.
“Just follow the money if you don’t believe me,” Davis replied.
“I committed adultery, I was a hypocrite and I lied,” Davis said. “I stole and I lied, and I lied and I stole, for more than 10 years.”
In addition to admitting a romance with Holt, Davis testified that he also had an affair with his personal assistant, Holt’s cousin.
The criminal case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-298, U.S. District Court, Northern District of Texas (Dallas).