Bloomberg News

Stanford Operations Run by CFO Davis, Not Boss, Manager Says

February 21, 2012

Feb. 17 (Bloomberg) -- R. Allen Stanford left daily operating decisions to his finance chief, who volunteered to “lay himself off” for a $650,000 lump-sum payout as regulators were closing in on the company in February 2009, a former manager testified.

“We were in the midst of a crisis, and I told him it would look strange if we lay off our global CFO,” Joan Stack, former global human resources manager at Stanford Financial Group, said she told finance chief James M. Davis. “He was the person I felt made the day-to-day decisions.”

Davis replied that he would “stay behind the scenes” and continue running the firm, Stack told jurors yesterday in federal court in Houston at Stanford’s criminal fraud trial. In exchange for appearing to step aside, Davis asked for an upfront payment of 65 percent of his 2009 salary, she said.

Davis made this proposal “at a very fast-moving time” when “cash flow problems” were causing Stanford’s firm to cancel 2008 year-end bonuses and lay off half its employees, Stack testified. “We were trying to get to a point where costs would be reduced to the point the organization would survive,” Stack said.

Jurors previously heard Davis testify that Stanford was the mastermind and prime beneficiary of an alleged $7 billion investment fraud centered on what the government claims were bogus certificates of deposit at Antigua-based Stanford International Bank Ltd.

Extravagant Lifestyle

Prosecutors accuse Stanford of skimming more than $2 billion of investor deposits to finance an extravagant lifestyle and risky ventures ranging from Caribbean airlines and real estate development to cricket tournaments. Investors were told their funds were kept in safe, liquid assets rather than speculative ventures.

Davis pleaded guilty to his role in the alleged scheme and testified as a government witness in the trial, now in its fourth week. “Follow the money,” Davis told jurors, pointing across the courtroom at Stanford.

Stanford, 61, denies wrongdoing in connection with the alleged investment fraud. If convicted of the most serious charges against him, he faces as long as 20 years in prison. He has been jailed as a flight risk since being indicted in June 2009.

Stanford Memo

Stack told jurors that a Stanford memo to employees, sent several days before the U.S. Securities and Exchange Commission seized the company on suspicion of fraud, was done partly at her request. Prosecutors told jurors that the message, which tried to reassure staff the offshore bank remained strong, is the basis of one of Stanford’s fraud counts.

“I told him, ‘People need to hear from you,’” Stack said. “A lot of people were telling him that. He wasn’t visible. He wasn’t responding. We told him people are scared, and they need to hear from a leader.”

At the time the memo was sent, Stack said, Stanford was often absent and difficult to reach.

“Mr. Stanford would be absent for a month, five or six weeks,” she said. “Then suddenly he’d come in and get hyper- focused on some project. Then he’d just disappear for a few more weeks.”

Promoting Cricket

Stack said he appeared more focused on promoting cricket and building a high-end island resort than on running his financial services empire.

“He was very excited, almost like a kid at Christmas,” when discussing the island resort project, she said.

Stack testified that Davis and Laura Pendergest Holt, Stanford’s investment chief, routinely hired unqualified relatives and fellow church members to staff most positions in the Memphis, Tennessee, research division that oversaw the bank’s multibillion-dollar investment portfolio.

“They were family members who had no experience in doing what we’d hired them to do,” she said.

Earlier witnesses told jurors that Davis hired one of his farm hands to analyze commodities and his preacher to advise the company on Middle Eastern affairs. Holt also invested about $2 million of the bank’s portfolio in a hedge fund run by her husband, a former personal trainer.

Broken Laptops

Prosecutors have said Stanford wasn’t an absentee boss and kept in close touch electronically with executives while he traveled.

Sohil Merchant, Stanford’s former information technology manager, told jurors under prosecutors’ questioning that he replaced the financier’s personal laptop computer 20 to 30 times from 2005 to 2008. Merchant said the financier broke his personal laptops so regularly that the technology department maintained a standing replacement order.

Assistant U.S. Attorney Gregg Costa asked Merchant if Stanford destroyed his laptop “through physical abuse, such as dropping it in the water, throwing it against a wall.” Merchant said that was his understanding. He said he sometimes delivered the replacements on one of Stanford’s private jets.

Jurors watched much of a 30-minute promotional video Stanford created to promote his planned ultra-luxury resort, which he called Islands Club. Giselle James, the Stanford employee who marketed the project, testified the resort was intended for vacationers who could pay a $50 million initiation fee and $15 million in annual dues for access to 30 villas planned for a private island off Antigua’s coast.

Islands Club

Jurors, watching the video without any sound, saw footage of Antigua’s lush foliage and pristine beaches intermingled with interviews of New York-based architects who had worked on the project and Antiguan celebrities, including several cricket stars. Prosecutors requested that the sound be turned off to avoid improper influence on the jury.

James testified Stanford had constructed yacht-docking facilities, desalinization plants, a private airstrip and hangar, refueling facilities and other infrastructure to support his luxury resort. James said a marine research facility was also part of the planned development.

“The prosecution said it was just a dream, but this was real bricks and mortar, wasn’t it?” Robert Scardino, Stanford’s lawyer, asked James.

“I walked there,” James testified. “I saw it.”

The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas).

--Editors: Peter Blumberg, David Glovin

To contact the reporter on this story: Laurel Brubaker Calkins in Houston at

To contact the editor responsible for this story: Michael Hytha at

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