Stanford's bank loaned him money for real estate investments.

Terri Langfor, San Antonio Express-News

HOUSTON — R. Allen Stanford received several hundred million dollars in loans from his Caribbean bank as he expanded his real estate holdings, and as investors he wooed in the U.S. and elsewhere deposited billions in the bank, a business associate testified Tuesday.

The government charges that although depositors were assured by Stanford and his associates that the CDs were safe and that the bank did not make loans, $7 billion in investors' money went to Stanford's pet business projects and lavish lifestyle.

On Tuesday, federal prosecutors zeroed in how the Mexia native began branching into real estate ventures, searching for projects for “high net” people, while he was loaning himself money from Stanford International.

Federal prosecutors introduced two promissory notes signed by Stanford, indicating the bank loaned him $168 million in 2002 and $330 million in 2003. Neither loan was listed on the bank's annual statements for those years.

Stanford defense attorney Robert Scardino noted several times during the proceedings that no law required disclosure of the loans.

They surfaced during the testimony of Arnold Knoche, an accountant with construction experience, hired in 1987 to head up what would become Stanford Development Co.

When it began, Stanford wanted to buy up distressed property in Houston, renovate it and then sell it. The projects would be funded by clients at Stanford's first bank, Guardian International Bank in Montserrat. Clients invested in the first project, but the bank couldn't to get enough client funding for the other two, Knoche said.

Stanford told Knoche he would make up the shortfall with personal resources.

During the 1990s, Knoche said, the development company shifted its focus to Stanford's commercial projects in Antigua.

Stanford took out the two loans during construction of major projects there — a restaurant, private airplane hanger, a new bank building and a cricket field.

In an undated video played in court Tuesday, Stanford told associates at a meeting that the projects would attract wealthy people. “The richest people in the world that we bring down here will be impressed,” Stanford said.

Knoche also said Stanford's insistence on lavish materials pushed up construction costs. He said Stanford once ordered the hardwood floors at the bank in Antigua replaced because they were “too light a shade.”

Knoche testified that as early as 2003, six years before U.S. regulators forced Stanford's businesses into receivership, he was concerned about Stanford's speculative investments in Caribbean resort real estate.

The prosecution's star witness, former Stanford Chief Financial Officer James Davis, is expected to testify starting today or Thursday. Davis, Stanford's former Baylor University roommate, has pleaded guilty to three felony counts.