A former employee of Peter Hoffman, a Hollywood producer on trial in New Orleans for fraud, told jurors Wednesday that he had grave concerns about a series of “circular” wire transfers between Hoffman’s California-based production company, Seven Arts Entertainment, and a contractor hired to refurbish a rundown mansion on Esplanade Avenue.

Erik William Smith, who was vice president of production for Seven Arts until resigning in 2008, shortly after he drew up the transfers, said he confronted Hoffman about the suspicious payments and was rebuffed.

The transfers included about $1 million that was supposedly sent from Seven Arts to a general contractor in New Orleans hired to renovate the three-story mansion at 807 Esplanade Ave. into a post-production facility, though it wasn’t clear from Wednesday’s testimony whether the contractor even had been aware of the transfers.

Prosecutors introduced records that showed the payments were immediately returned to Seven Arts.

While he never alerted law enforcement officials, Smith, who now works as a production accountant for ABC Studios, said he refused to sign any of the paperwork and made clear in dealings with bank officials that he was acting on Hoffman’s behalf.

“Isn’t that fraud?” Smith recalled asking Hoffman, referring to the circular transactions.

“Don’t be ridiculous,” was Hoffman’s response, according to Smith.

Smith testified as a government witness on the third day of a film tax-credit fraud trial in federal court. Hoffman, his wife, Susan, and Michael Arata, a local businessman and lawyer, are charged with conspiracy, wire fraud and mail fraud for allegedly inflating their expenditures on the Esplanade Avenue mansion to obtain more than $1 million in tax credits under the Louisiana Motion Picture Incentive Act. Arata also faces several counts of making false statements to the FBI.

The alleged scheme among the business partners involved submitting false bank records and other financial documents that made it appear they had spent far more on the renovation — which qualified for a 40 percent subsidy from Louisiana taxpayers — than they actually had. In some cases, the group is accused of shuffling money among different corporate entities they controlled. Prosecutors charged in opening statements this week the trio had “exploited every human being that they could” in order to hoodwink the state.

Hoffman’s attorneys challenged Smith’s testimony by noting he did not leave Seven Arts until weeks after the troubling transactions. Asked why he hadn’t quit on the spot, Smith said, “Life’s not that simple, mister.”

Defense attorney Billy Gibbens, meanwhile, sought to distance Arata from the payments, even as prosecutors presented emails that showed Arata discussing similar transactions — he used the phrase “circle the money” in one email — related to another matter. Smith acknowledged he had not discussed the circular wire transfers with Arata and that he had been on good terms with Arata even after he left Seven Arts, trying to hire him as an attorney in another film project.

Jurors also heard Wednesday from Lou Sandoz, a licensed general contractor — not the one supposedly involved in the circular transactions — who said he was brought on by Advantage Capital Partners, a venture capital firm that invested in the Esplanade Avenue renovation, to get a handle on where the project stood and why, by summer 2009, it had come to a “virtual stop.”

Photographs that Sandoz took at the time showed little work had been done — conflicting with invoices that purported to show real progress.

Sandoz recalled discovering some irregularities when he became involved, including a lack of change orders and other construction documents that generally would provide an overview of the project. “It was almost bizarre,” he testified.

Sandoz also said he could not explain invoices prepared by Hoffman’s company showing Sandoz had been paid some $250,000 in consulting fees by Seven Arts for his work on the old mansion.

He said he earned between $20,000 and $30,000 for his work on the project over 11/2 years — money that wasn’t even paid by Seven Arts.

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