flashing and stucco
Obviously, your best option is to rip off whatever is currently there. It was very poorly designed/specified, and poorly installed as well. You can clearly see water on the inside, and since this is a "rainscreen" system, it's obviously failing.
For starters, I don't see what flashing at the bottom is going to do. Any water that gets behind has no weather barrier to run down and get diverted. Adding a flashing isn't going to fool anyone - and if the next home owner gets a half decent inspector there's no way they'll miss the mess that is that "cladding".
I also wouldn't fill in between the studs again (with plywood or insulation), as that will ruin any ventilation/air exchange you are currently getting. Air exchange is what is needed to prevent mold and rot.
I don't know what to say - besides that flashing is the least of your problems.