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Houston Chronicle, Mayra Beltran, Associated Press
Attorney David Finn and James Davis, former Chief Financial Officer in Stanford International Bank Ltd. walk out of Bob Casey U.S. Courthouse upon the conclusion of Davis' first day of testimony on Thursday, Feb. 2, 2012, in Houston. Prosecutors allege Texas financier R. Allen 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 a Caribbean bank.

HOUSTON — People who bought certificates of deposits, or CDs, from Texas financier R. Allen Stanford's Caribbean bank were wowed by financial statements and other reports that showed their investments were doing spectacularly well and the bank itself was on solid footing.

But James M. Davis, the former chief financial officer for Stanford's companies, said the statements were full of fake numbers and lies and that he and the jailed financer concocted to hide a massive fraud in which CD depositors' funds were not safely invested but recklessly spent by Stanford for his own personal use. 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 CDs from the bank on the island nation of Antigua.

Davis told jurors in Stanford's fraud trial he was "one of those liars" who faked the bank's numbers but that his ex-boss was "the chief faker."

Davis was to continue being questioned by prosecutors Friday after beginning his testimony a day earlier.

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.

On Thursday, Davis, 63, told jurors Stanford undertook various extreme measures to hide his bank's fraud, included entering into a blood oath with a top Antiguan regulator to secure his loyalty. Davis said Stanford also paid the regulator, Leroy King, bribes. King was also indicted in the case and is awaiting extradition to the U.S. Three other ex-Stanford company executives were also charged and await trial in September.

Davis, who was Stanford's roommate at Baylor University for a semester in 1973, said that as part of the deception to hide the fraud, Stanford in August 1991 had him fly to London so he could fax a letter to a potential investor confirming the bank had insurance. In London there was an insurance company set up by Stanford which had an office that only consisted of a 10-square-foot cubicle and which couldn't pay for any investor losses, he said.

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.

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 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.

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.