James M. Davis, the former chief financial officer for Stanford's companies, testified the financier came to an agreement with the official responsible for reviewing his bank on the island nation of Antigua where that person, Leroy King, would not dig too deeply into the institution's operations. Prosecutors allege Stanford masterminded a fraud in which he bilked investors out of more than $7 billion in a massive Ponzi scheme centered on the sales of certificates of deposit, or CDs, from the bank.
"Mr. Stanford said they (he and King) actually cut themselves and had a blood oath," a frail-looking Davis, 63, said.
Davis said Stanford made regular cash payments of "hush money" to King and another regulator "for them to look the other way." He also testified the financier loaned the Antiguan government about $40 million, which was never repaid.
Authorities allege Stanford used depositors' money to fund his businesses and his lavish billionaire lifestyle and pay bribes to regulators and auditors. They also allege he lied to depositors by telling them their funds were being safely invested.
Stanford's attorneys contend the financier was a savvy businessman whose financial empire, headquartered in Houston, was legitimate. They have suggested Davis, who worked 21 years for Stanford, is behind the fraud.
Stanford is on trial for 14 counts, including mail and wire fraud, and faces up to 20 years in prison if convicted. King was also indicted and is awaiting extradition to the U.S. Three other ex-Stanford company executives were also charged and await trial in September.
Davis said Stanford ran his business empire through a mix of flattery and fear, describing his management style as charismatic but also dictatorial.
Davis, the prosecution's star witness, told jurors Stanford laughed about the alleged fraud at the bank. Davis said he would often mimic in front of Stanford being handcuffed and having his legs shackled as a reference to being arrested.
"Occasionally he would laugh and say, `Well that's OK. ... I didn't know what was going on and I'll just blame it all on you,"' said Davis, as Stanford looked on and shook his head.
Davis pleaded guilty in 2009 to three counts: conspiracy to commit mail, wire and securities fraud; mail fraud; and conspiracy to obstruct a Securities and Exchange Commission investigation. The plea is part of a deal Davis made with the Justice Department in exchange for a possible reduced sentence.
Davis, who was Stanford's roommate at Baylor University for a semester in 1973, said he realized the bank was a fraud after he was asked to help lie to a potential investor that the bank had insurance. Davis told jurors CDs were insured by a company that had been set up by Stanford but that wouldn't be able to pay for any losses. He said Stanford referred to the insurance company as a "marketing device."
Davis testified that in August 1991, he was asked by Stanford to fly to the insurance company's London office, which was actually a 10-foot square cubicle, and fax a letter to a potential investor confirming the bank had insurance.
Prosecutor William Stellmach asked Davis why, after realizing there was fraud, he continued working for the financier.
"I wanted to please Mr. Stanford. I was a coward. I was embarrassed and he signed my paycheck," said Davis, who told jurors he made $14 million in salary and bonuses during his employment.
Davis said he and Stanford fabricated figures in annual reports and other documents shown to depositors. The papers made it appear as if the bank were doing well when it actually never had a profitable year, Davis said.
Davis said he was "one of those liars" who faked the bank's numbers but that Stanford was "the chief faker."
Davis, who ended up working in Stanford's Memphis office, described an environment full of deceit in which the company's chief investment officer, Laura Holt, lied to investors about monitoring all of the bank's investments. Davis told jurors he had a two-year affair with Holt and that he had first met her at a Bible study class he and his wife taught. Holt is among the executives set to be tried in September.
Stanford was once considered one of the United States' wealthiest people, with an estimated net worth of more than $2 billion. He's been jailed without bond since being indicted in 2009.
Davis was to continue being questioned by prosecutors on Friday.