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IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 05-1223 T (Judge Allegra) CLEARMEADOW INVESTMENTS, LLC CLEARMEADOW CAPITAL CORP., Tax Matters Partner, Plaintiff, V. THE UNITED STATES, Defendant. DEPOSITION The deposition of SCOTT R. HEWITT, taken on behalf of the Defendant pursuant to the Federal Code of Civil Procedure and Notice before: DONNA M. LYTLE, CSR, RPR, CRR OWENS, BRAKE & ASSOCIATES 234 North 7th Street, Suite E Salina, Kansas 67401 a Certified Shorthand Reporter of Kansas, at the Epic Center, 301 N. Main Street, Suite 1200, Wichita, Kansas, on the 8th day of May, 2007, Stoddart Decl. Exhibit 33

25 starting at the hour of 9:30 a.m.

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APPEARANCES The plaintiff appeared by Mr. Mark Hutton and by its counsel, Mr. Tom Pliske, of the firm Gasaway & Stientjes, LLC, 1120 Olivette Executive Parkway, Suite 220, St. Louis, Missouri 63132. The defendant appeared by its counsel, Mr. Robert Stoddart, of the U.S. Department of Justice, Tax Division, P.O. Box 26, Washington, DC 20044.

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SCOTT R. HEWITT, of lawful age, having been first duly sworn on his oath to state the truth, and nothing but the truth, deposes and says: DIRECT EXAMINATION BY MR. STODDART: Q. Good morning. My name is Bob Stoddart, I represent the United States in this case, with the Justice Department. Could you please give us your full name A. Scott R. Hewitt, home address or business Q. Either. A. 205 West Second, Wichita, Kansas, 67202. Q. May we have your phone number? A. 316-269-4500. Q. And have you ever been deposed before? A. Yes. Q. Oh, good. Then I don't have to stress that the transcript is only from our oral indications and that you can't nod your head or make gestures and expect to be understood. Are you able to give full and complete

11 and your address? 13 address?

25 answers today; is there any reason why you can't?

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A. To my knowledge, no. Q. So you're not on any debilitating drug or anything of that sort? A. No. Q. I may be, I'm on antihistamines. We might as well begin. (WHEREUPON, the reporter marked for identification Deposition Exhibit No. 1.) Q. Do you know what Exhibit 1 is? A. Yes. Q. What is it? A. It was an affidavit that I signed regarding this case. Q. Paragraph 3, you say you've been Mark Hutton's personal accountant from 1993. In that A. I've done all his personal tax returns, his corporate tax returns, consulted on various business items with Mark. Q. What sort of business items? A. Tax matters regarding asset purchases, building purchases, any of the things that Mark does, business or personally wise, that would have

17 capacity, what have you done for him?

25 a tax impact.

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Q. Has your advice and your consultation been exclusively about the tax affect of these purchases? A. I would say, yes, for the most part. Q. Have you become familiar basically with Mr. Hutton's holdings and his assets? A. Through preparation of the tax returns, I'm aware of his holdings and assets. Q. Now, to get to what this case is about, in 2001, Mr. Hewitt (sic) entered a transaction or investment or tax shelter that is supposed to have generated certain tax losses that was claimed on Do you know or are you familiar with that transaction which involved Deutsche Banc, among A. Yes, I am. Q. So to avoid a lot of difficulty prefaces, transaction, or the MLD transaction. A. Okay. Q. When did you first become familiar, first hear about the MLD transaction? A. During Mark's discussions with, I believe it was the Cantley & Sedacca law firm. Mark gave

13 the 2001 and 2003 amended return as a loss.

16 others?

19 I'll just called it the market link deposit

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me a call and we had a meeting and a telephone conference with Mark and Bryan Hanning and myself on the phone with Ed Sedacca, I believe. Q. When was that? A. I don't remember the date. Prior to the time Mark invested in the transaction. Q. So before October of 2001? A. I would guess that'd be right. Q. Did you have any other calls with Cantley & Sedacca, other than your first one? A. We had a second brief call to clarify a few things after the first one, and then when we're preparing the 2001 return, we had a brief phone call with Mr. Sedacca to get a clarification on reporting. Q. What was the clarification you got on reporting? A. It's been a long time. Just assurance of the way I prepared the return, that it was reasonable. There wasn't anything real specific, just general questions. I don't, frankly, remember all the conversation. Q. Had you given a copy of the return to Mr. A. No.

24 Sedacca to look at?

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Q. Back to the first meeting, do you remember what the conversation was about? A. It was mainly Mr. Sedacca explaining the investment opportunity and the risks, the reward scenario of what the transaction could produce. Then question and answers. Mark had questions, I had questions, Bryan Hanning asked questions, and then we left the -- got off the phone call with Mr. Sedacca and basically adjourned the meeting. Q. What were your questions? A. My questions involved the tax aspects, what happens if the MLD has profit, how is that and the tax aspects of that. That's pretty much Q. Do you remember what profit items you were considering? A. The currency transactions? Q. Um-hum. A. I believe they were Euros, but those transactions, if they had profit, my questions were, were they long-term capital gains, were they Q. Do you remember the second meeting you had?

13 going to be taxed, what happens if it has a loss 15 my involvement in that.

23 ordinary income, those kind of things.

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A. It was just a more brief meeting, just to clarify -- I was asked to be there, it mainly didn't involve tax, it was Mark and Bryan Hanning and another gentleman named Marc Kaplan who worked for AGH, Allen, Gibbs & Houlik. It was more just clarifying -- a few clarifying questions that Mark had on the transaction. Q. What were those few final questions? A. I don't remember now. Q. Did you ever do an independent transaction? A. Of the financial side, no. That's Mark and Bryan. Q. So you never gave Mr. Hutton any make a profit independent of the tax benefits that A. I did not. I have no expertise in that area. Q. If you look at Paragraph 9 of Exhibit 1, you say you discussed the investment with Mr. Hutton and noted its possibility of a high return. When you noted the possibility of a high

11 examination of the financial aspect of this

16 assurance that he had a reasonable opportunity to 18 he would get?

24 Also the risk of a large loss.

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return, did you yourself think that it had a possibility of a high return? A. It's like any investment, I was -- my thinking was there was potential for a return. Q. Why was there potential? A. Just from the discussions that I was -- I mean, I was in the room during the discussions of the investment and I felt like there'd be a potential for -- even though risky, it had a possibility of having a return. Q. Did you yourself independently from your knowledge of finance believe that it had a return or you believed that it had a potential of a return, or were you taking the possibility of return on faith, so to speak, from what Cantley & Sedacca was saying? A. No real knowledge of that. Probably more on faith, I would say. Q. In Paragraph 11, you say that you were

20 unaware at the time of providing any advice to 21 Mark Hutton regarding the MLD investment, that it 22 23 24 25 had been determined to be a listed transaction. Do you remember when it was determined to be a listed transaction? A. I believe that was in 2004. I may be

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wrong on that but that's when I -- I think it happened. Q. Okay. And you say in Paragraph 13 that you reviewed the extensive legal opinion from the law firm of Cantley & Sedacca; is that true? A. That's true. Q. Did you get a copy of the legal opinion from Cantley & Sedacca? A. I had acquired a copy of Mark's, yes, but Mark. Q. When did you give a copy back? A. After I reviewed it. Q. Did you review it before you did the tax return? A. Yes. Q. And did you return it before you produced the tax return? A. Yes. Q. I'll tell you that the return that I got from Mr. Hutton was printed on only the odd numbered pages, like one, three, five. MR. PLISKE: Objection, you said the return. MR. STODDART: I'm sorry, you're

10 I did not keep a copy of it. I gave it back to

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right. Q. The opinion letter from Cantley & Sedacca, do you remember if the opinion letter from Cantley & Sedacca that you got had the even numbered pages? A. I have no idea. I would assume it would have but I don't know. Not anything I really looked at. Q. You didn't look to see if it had all the A. It was bound, I assumed it would have had them. I just made an assumption. Q. You reviewed the opinion, didn't you? A. Um-hum. Q. Did you notice anything missing? A. Not to my knowledge. Q. Okay. A. No, I didn't notice anything missing. Q. You remember if it had the even numbered A. I can't remember that. It didn't appear Q. Okay. You then eventually prepared tax returns for Mr. Hutton. For the year 2001, what tax returns did you prepare?

10 pages?

20 pages? 22 to be -- anything out of order in the document.

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A. There would have been a Clearmeadow Capital Corp, which was an LLC, Clearmeadow Capital Company, I believe, is the name of it, an S corp, and then Mark Hutton's personal return and also Mark Hutton's business return. Q. I'm going to get out another exhibit here. (WHEREUPON, the reporter marked for identification Deposition Exhibit No. 2.) Q. Do you know what Exhibit 2 is? A. Yeah. Q. What is it? A. It was a request to Mr. Sedacca to get an example return during the time we're preparing the return to make sure we knew how to report the -report everything. Q. Did you request a sample return from Mr. Sedacca? A. No, my associate did. Q. Did you ask this associate to? A. Yeah. Q. Who is the associate? A. Amy Clupny. Q. And her name is on the --

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A. Her name is misspelled, C-L-U-P-N-Y. Q. Thank you. Did you ever receive this sample return? A. Yes. (WHEREUPON, the reporter marked for identification Deposition Exhibit No. 3.) Q. Do you know what Exhibit 3 is? A. It appears to be the sample return. Q. Is it? A. Yes, it is. Q. Do you remember -- oh, the sample return for which entity? A. It'd been the Clearmeadow Investments, LLC return. Q. The partnership? A. Um-hum. Q. Did you follow this sample return when you did your own return? A. Actually, we had already prepared the much right on. We didn't agree with one number, I believe. Q. So all of your return is basically the same as Cantley & Sedacca except for the change of

21 return before we requested this and we were pretty

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one number? A. I believe that's correct. Q. And is the one number on Page 3 of this exhibit? A. Yeah, I believe so. Q. And just to be sure, what line is that number on? A. 14b(1). Q. And the handwritten number, is that the number that you put in? A. I believe it is. I'd have to look at the Clearmeadow return. Q. I note on the front of this sample the cash accounting method was chosen; is that A. That's what they suggested. I'm not sure how we reported it on Clearmeadow, I frankly don't remember. Q. Would it refresh your memory if I were to show you a copy of the return -A. Sure. Q. -- you prepared. A. Yeah, we looked at cash basis, also. Q. Why did you elect cash basis?

14 exhibit in Line H(1) that there's an X by cash, so 16 correct?

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A. Normally on an LLC investment, I almost always select cash, unless there's a reason to go accrual. Q. Do you know the Internal Revenue Code prohibits the use of the cash method for tax shelters? A. At this point in time, we didn't think this was a tax shelter. Q. Do you know the definition of tax shelter that applies to the choice of accounting method provision? A. Frankly, no. Q. I believe it's a partnership, one of the many definitions, a partnership, a significant purpose of which is the avoidance of federal income tax. Did you consider whether Clearmeadow was a partnership, a significant purpose of which was the avoidance of federal income tax? A. Absolutely not, it was an investment partnership. Q. And it's significant purpose was not -A. Not in my mind, no. MR. STODDART: Let's go off the

25 record for a moment.

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(WHEREUPON, an off the record discussion was had, after which the following:) Q. I would like these exhibits back, because they're not exhibits to your deposition, but I'll tell you it is an exhibit that's captioned at the top Investor Representations. Have you ever seen this document before? A. I don't recall ever seeing this before. Q. May I have those back, please? A. (Complies with request). (WHEREUPON, the reporter marked for identification Deposition Exhibit No. 4.) Q. Have you ever seen Exhibit 4? A. Yes, I have. Q. And what is Exhibit 4? A. Agreement for legal services from Mr. Hutton. Q. If you'd look at Page 2, and look at the first sentence of the second paragraph of Page 2, the investment in the manner contemplated by Bank is anticipated to provide you with substantial tax

22 states, I quote, as you are aware, investment in

25 benefits; correct?

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A. That's what it says. Q. Wouldn't you think that an investment that provides substantial tax benefits has a significant purpose in the avoidance of federal income tax? A. I didn't view it that way, I viewed it as an investment strategy. Q. An investment -- about how much out of pocket did Mr. Hutton pay? A. 150,000, I believe. Q. It's a bit more than that, but how much in losses did you claim altogether? A. I don't recall off the top of my head. Q. Was it in excess of $2 million? A. Don't know without looking. Q. Let's look. Would it refresh your memory if you were to take a look at your 2001 partnership return? A. Sure. Q. You might try looking at Line 23. Line 23 is distributions of property other than money? What was that property? A. Basis and open securities. Q. And what were the securities? A. Exact securities, I'm not sure.

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Q. Were they Canadian dollars? A. Whatever CAD currency stands for. I assume that's Canadian, yeah. Q. And those dollars were later sold; correct? A. I believe they were, yes. Q. And they were sold for pretty much their face value, weren't they? A. Don't know the answer to that, off the top of my head. Q. You prepared the individual return, didn't you? A. Yes. Q. I can tell you as a fact that they were sold for pretty much their face value. A. Okay. Q. How much would the loss have been? A. Depends on what the face value was. Q. It was about a thousand dollars and the A. Yep. Q. Pretty good investment if you put in 150,000, 300,000, and you get a tax loss of over A. That's your opinion.

20 loss would have been over two million; correct?

24 two million; correct?

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Q. I understand it's not your opinion, so it's your opinion if you make an investment of 300,000 and get a tax loss of over two million, a significant purpose of that investment is not the avoidance of federal income tax? A. In my opinion, that was not the reason we went into this investment. Q. Your opinion is your opinion. (WHEREUPON, the reporter marked for identification Deposition Exhibit No. 5.) Q. Do you know what Exhibit 5 is? A. It was work papers used in preparation of Q. They're handwritten. Whose handwriting A. Amy Clupny. Q. Did she actually prepare the return? A. Yes. Q. Did she prepare it under your supervision? A. Yes. Q. What does she mean, if you know, the establish deduction in both year?

14 tax returns. 16 is it?

24 bottom of the first page of this Exhibit,

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A. I'm not sure. Q. As I understand this transaction, Mr. Hutton's supposed to have paid a premium for a long position equaled to two and a half million U.S. dollars and on the same day, he's supposed to have received a premium for a short position equaled to slightly less. Do you recall about the same way? A. Frankly, I don't, I don't remember that. Q. To save time, I will just assure you that that is the case and you can just assume it's hypothetical, if you like. A. Okay. Q. But here we have a transaction buying basically operations; correct, buying and selling? A. Correct. Q. So Mr. Hutton purchased an option, let's say for two and a half million, and he wrote an October of 2001, the transaction closed on December 14th of 2001, and what are the tax A. Off the top of my head, I don't know the answer to your question. Q. Well, he paid money, he received money.

19 option for slightly less. He did all of this in

22 effects of doing that?

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Is the money he received taxable income? A. Potentially. Q. And when options close, do you recognize taxable income? A. I would say normally you would. Q. Did he recognize taxable income in this case for the short premium he received in the amount of nearly two and a half million dollars? A. I don't know that he ever received two Q. True, he did not. Did he pay two and a A. Not that I'm aware of. Q. Okay. (WHEREUPON, the reporter marked for identification Deposition Exhibit No. 6.) Q. Do you know what Exhibit 6 is? A. It's a money transfer request. Q. This was produced from your files? A. I remember seeing it, I'm not sure of the significance of it, honestly. Q. Well, let's look at what it says on its face. Mr. Hutton is asking a bank to transfer 25 million U.S. dollars and to pay premiums of two

10 and a half million dollars. 12 half million dollars?

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and a half million dollars. You said before you were more or less familiar with Mr. Hutton's assets. To your knowledge, did he have 27 and a half million dollars to invest in this transaction? A. Not aware that he did. Q. Here's another Exhibit from your files that you produced. (WHEREUPON, the reporter marked for identification Deposition Exhibit No. 7.) Q. Do you know what this Exhibit is? A. It's a Deutsche Banc account statement. Q. Did you look at this exhibit before you prepared the 2001 return? A. I assume I did, yes. Q. Exhibit 6 -- we know that on October 15th, 2001, Mr. Hutton told the bank to transfer

19 out 27 and a half million dollars from his 20 account, and I can tell you that he's also 21 22 24 25 supposed to have received about the same amount at the same time. Do you notice any such transfers A. Not on this statement, no. Q. It is the same bank; correct?

23 on the bank statement?

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A. I may have told Mr. Hutton, yes, but no one else. Q. You may have. Did you? A. I don't remember. Q. What did you tell Mr. Hutton about your efforts to make sure that the Cantley & Sedacca opinion letter was correct? Did you ever assure him that you had independently tested those conclusions? A. Probably not. Q. Yes or no, please. A. No. Q. Did you ever expressly assure Mr. Hutton that if the IRS challenged any of the opinions taken on that return, there was a greater than 50 percent chance that the positions would be upheld? A. Greater than 50 percent chance it'd be upheld? Q. Um-hum, expressly say that. A. No, not to my knowledge. (WHEREUPON, the reporter marked for identification Deposition Exhibit No. 8.) Q. You'll see from the SH number at the

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public accountant? A. Yes. Q. Approximately when did you receive your CPA license? A. 1984. Q. And have you been practicing in public accounting since 1984? A. Yes. Q. Do you practice primarily in the tax area? A. Yes. Q. Do you conduct audits? A. A few, yes. Q. What percent of your work is done in the tax area? A. Approximately 70 percent. Q. And in the tax area, does that consist of tax planning? A. Occasionally, yes. Q. Do you do tax compliance work on a A. Yes, um-hum. Q. Work experience, history, since graduating and getting your CPA license, where have you worked?

21 regular basis, the preparation of tax returns?

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A. I worked for -- from '77 to 1984, I worked for Haney, Riffel and Company, local firm. In '85, I started a firm called Hewitt -- Hanneman & Hewitt. Q. That was 1985? A. Uh-huh. Q. Were you a partner? A. I was a partner with Dale Hanneman, and then in 2004, I split off from him and opened Hewitt and Company. Q. And you're a partner in Hewitt and Company? A. Yes, I'm the only partner, only owner. Q. How many employees do you have? A. Three full time and two part time. Q. And earlier when I asked about the type of work that you do, is that the type of work the firm does, also? A. Yes. Q. Your background with Mr. Hutton, earlier you stated you've been working with Mr. Hutton A. '93 or '94, in that time frame. Q. And do you prepare audits on his

22 since 1993; is that correct?

25 business?

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A. I have prepared an audit on his records. Normally, we do reviews for his bonding requirements. Q. And you prepare the tax returns? A. Correct. Q. Earlier you stated corporate tax returns, individual tax returns, Clearmeadow Capital? A. We prepared that, yes. Q. Do you prepare any other tax returns on A. There's another partnership return. Q. Which is that? A. EquipLease. Q. Do you prepare payroll tax returns? A. No. Q. Do you prepare all these returns or are they prepared under your supervision? A. Prepared under my supervision. Q. Does Mark ever direct you how to prepare a return? A. No. Q. Has he -- would you ever prepare a return A. No. We have arguments about which way to report it, but if push comes to shove, I win.

10 behalf of Mr. Hutton or his business?

23 as directed by any client?

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 16 17 18 20 21 22 24 25

Q. And you're talking with respect to Mr. Hutton? A. Correct. Q. Do you take continuing education classes? A. Yes. Q. Are they mandatory in this state? A. Yes, 80 hours every two years. Q. And do you take continuing education classes in tax matters? A. Yes. Q. And periodically or recently or always? A. Well, I mix it probably 60, 70 percent tax and the rest financial or that kind of thing. Q. You know Mr. Hutton on a business level. A. Very occasionally. Q. Would you be in here testifying on his behalf for any reason other than it being a true A. No. Q. You stated you were involved in the early discussions with respect to the MLD transaction A. That's correct. Q. And you were on a phone conference with

15 Do you know him on a social level?

19 statement?

23 for 2001; is that correct?

OWENS, BRAKE & ASSOCIATES P.O. Box 1362, Salina, Kansas 67402-1362 785-825-6665 - 251 -

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49

1 2 3 4 5 6 7 8 9 10 11 12 13 15 16 18 19 20 21 22 23 24 25

Cantley & Sedacca? A. Yes. Q. Who was on that phone conference with you? A. I believe Ed Sedacca at the other end, and Mark and Bryan Hanning and myself. Q. Why were you on the conference? A. Mark just asked me to come and listen and give him an opinion on my thoughts about this transaction. Q. Did you just listen? A. Mostly. Q. Did you ask questions? A. I think we all asked questions as I recall would have asked but I'm fairly sure I did. Q. You were not prohibited from asking A. No, no, no, huh-uh. Q. After that phone conference, do you recall -- I don't know what you did, but did you follow-up in any way after that phone conference? A. Once Mr. Hutton received the opinion letter, I read through it and evidently didn't do a good job of analyzing it, and then we had another meeting later.

14 but mine were -- I don't recall what questions I

17 questions?

OWENS, BRAKE & ASSOCIATES P.O. Box 1362, Salina, Kansas 67402-1362 785-825-6665 - 252 -

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CANTLEY & SEDACCA, LLP
JEREMY I NERENBERG ASSOCIATE
ATTORNEYS AT LAW 5220 SPRJG v ALLEY ROAD, SUITE 6\ 0
DALLAS, TEXAS 75254
MIAMI, FL

DALLAS, TX

TEL (972)233-6175 FAX (972) 361.D644

SAN FRANCISCO, CA

March i, 2002

VIA FEDEX
Amy Klupny 229 E. Williams, #310 Wichita, KS 67202
Re: Sample Tax Return

Amy:

Enclosed please find a sample tax return as it relates to the market linked deposit investment you have any questions regarding this matter, please feel free to call Ed Sedacca or me. strategy. If
Thank you.

",

/ Jf
./

Very Truly Yours,

CANTLEY & SEDACCA, LLP /', ""..-- ì

/k"~emÝ1. Nerenberg

-J-Ikit/
Enclosures

SH 00106

CASE # 05-1223

253

J

!~

~ DEFENDANT'S

í EXHIBIT

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Form 1 065
,2001, and endin
Use the

2001
IRS uSd only - 00 not write or sbple in this spõlce.

,20

OMS No. i 545.0
o Employer IderrQ'on Number

B Pnnq:ial Prodct or Service

C 8usÎnes Code Number

G Check applicable boxes: (1) X Initial return (Z X Final return (3) Name change (4) Address change (5 Amended return

523900 $
INVESTMENTS
Otherwise.

INVESTMENT

IRS labeL.

LLC NAME

D f:.ÁJ i"', c,
~ lr .~

pnnt

or type.

/

E C~te Busines Start

9/01/2001
F Totol As.ts (see instr)

H Ct-,ecx accounting metlcc: (1) X Cash (Z Accrual (3) Other (specify). ~ - - - - - - - - - - - - - -I Numcer of Schedules K-I. Attach one for each person who was a parter at any time during tie tax ear... ~

2

Caution: Include only trade ;r bUSiness income ;!r:d e:q;erises on lines Ta through 22 below See tne instmclions for more rfcrmalion,
1 il Gross receipts ~r sales, b Less returns e;-d allowances
i

1a
1b

N

o
E

c

M

2 Cost of goods sold (Schedule ,6., lir.e 3) 3 Gross profit. SL:btract line 2 from lir,e 1 c- . . .

Z

3

4 Ordinar income (loss) from otier parterships, estates, and trts
(attch schedule) . . . . . . . .
5 Net farm profit (loss) (attach Schedule F (Form 104)). 6 Net gain (loss) from Form 4797, Part 11, line 18.
7 Other income 00ss)

4
5 6

7i
8
9 10
11

(attacfi schedule) . .

8 Total income (1oss). Combine lines 3 through 7 .
5 E
E
i N

9 10
11

0
E

5
T

Salaries and w:ges (otter than to parters) (less employment credits) . Guaranteed payments to parters . . Repairs and maintenance
Bad debts. . .

',

0 c U
u
i

R

12 13
15

Rent. ,

C T

T

0
N

14 Taxes and licenses. . . . . .

0
N

I

Interest,

12 13 14 15
J£î§t1t

3 - f!W¡ft

....... ..

5

16 a Depreciation (if required, attch Form 452)

S

0
R
L I I

F

b Less depreciation reported on Schedule A and elsewhere on reh.rn. . 17 Depletion (Do not deduct oil and gas depletion.) . .
18 19 20

16a 16b

16c
17 18 19

,.
T A T

Retirement plan, ete . . , . . .

Employee benefit programs. . . ,
Otter deductions

20

a
5

I

(attach schedule) . . .
Z1

N

Total deducton. Add tte amounts shown in tte ta ri

ht column for lines 9 ttrou h 20..

21

22 Ordinary income (loss) from trade or business activities. Subtract line 21 from line a . . , . .. , . 22
Under penalties of perury, I declare tht I hae wmined this return, including accompanying schedules and statements, and to the best of my knowledge and

Sign Here

which preparer ha any knowledge. I ~
Prl!pares
Sign.lure

belief, it is tre. correct and complete. Declaration of preparer (other thn general parer or limited liability company member) is based on all information of

~ _ M.y !l. :RS disss !lis relim
Sign.lire cf G"nerl Pamer or LimlIe Liability Company Member (se inslr), X y~ Pr
SH00131
me No

with tte p~a!1r shown below

No

Paid Preparer's Use Only

Finn's Name

DEFENDANT'S EXHIBIT

Addre, :id
ZLP Coa

~~~~~ed. ..

'3375

BAA For Pape Iteil..~20&tice. se sepal'te insctons.

\)~(\ vi
254

\ \) \oS

íì

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Page 2
Form 1065

(2001) LLC NAME

l~ût~Ä:~t¡l Cost of Goods Sold (see instructions)
1

1 Inventory at beginning of year,

2 Purchases less cost of items withdrawn for personal use. 3 Cost of labor. ,
4 Additional Section 263A costs

2
3

(attach schedule)
5 Other costs

4

6(attach schedule) , . . through . 5. 5 TotaL. Add lines 1 . . . . , . . . 6 7 Inventory at end of year. . . 7
8 Cost of goods sold. Subtract line 7 from line 6. Enter here and on page i, line 2 . 8 9 a Check all methods used for valuing closing inventory:
(i) § Cost as described in Regulations Section 1.471-3
(i.i) Lower of cost or market as described in Regulations Section 1.471-4
(iii) Other (specify method used and attach explanation). . , . . . . . . . . . , .. _ - - - - - - - - - - - - - - - - - - - - - - - -

b Check this box if there was a writedown of 'subnormal' goods as described in Regulations Section 1.47l-2(c) ~ U
c Check this box if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970) ~
d Do the rules of Section 263A (for propert produced or acquired for resale) apply to the partership? .' . 0 Yes No

e Was there any change in determining quantities, cost, or valuations between opening and closing inventory? 0 Yes No
If 'Yes', attch explanation. .

~_ Other Information
1 What tye of entity is filing this return? Check the applicable box:

e Foreign partership f Other. .. ~ _ _ _ _ _ _ - - - - - - - - - - - - - - - - - - - - - - - ,.c""" 2 Are any parters in this partership also parterships? .. X
3 During the partership's tax year, did the partership own any Interest in another partership or in any foreign entity that
was disregarded as an entity separate from its owner under Regulations Sections 301.7701-2 and 301.7701 -.3? If yes, see instrctions for required attachment. , . . . . . . . . . , , . . . . . . , . . . . . . . , , . . . , , . , . , . . , . . . . , . . . . , . . . . . . . . . . , , . . . . . . . . . . . . .. .
X
4 Is this parership subject to the consolidated audit procedures of Sections 6221 through 6233? If 'Yes,' see Designation

a ~ Domestic general partership b § Domestic limited partership c X Domestic limited liability company d Domestic limited liability partership

of Tax Matters Partner below. . . . . . . . . . . , . . . . . . . . , . . . . . . . . . . . . . . . . , . . .

5 Does this partership meet all three otthe following requirements? , ,
a The partership's total receipts for the ta year were less than $250,000;

b The partership's total assets at the end of the tax year were less than $600,000; and

c Schedules K-1 are filed with the return and furnished to the parters on or before the due date (including extensions) for the partership return.

If 'Yes,' the partership IS not required to complete Schedules L, M-l, and M-2; item F on page 1 of Form 1065; or item J on Schedule K-l. . . . . . . .
6 Does this parership have any foreign parters? If 'Yes: the partership may have to file Forms 8804, 8805 and 8811 See instrctions. . .
7 Is this partership a publicly traded partership as defined in Section 469(k)(2)? . .

x
X X X

8 Has this partership filed, or is it required to file, Fonn 8264, Application for Registration of a Tax Shelter?,
9 At any time during calendar

year 2001, did the partership have an inter.est in or a signature or other autority over a financial account in a foreign countr (such as a bank account, securities account, or other financial account)?

See the instrctions for exceptions and filing requirements for Form TO F 90-22,1, If 'Yes,' enter the name of

the foreign countr, .. .

---- ------------ --- --- --- - ----- --- --- --- -- - --- -X

X

10 During the ta year, did the partership receive a distribution from, or was it the grantor of, or transferor to, a foreign trst?
If 'Yes,' the partership may have to file Form 3520. See instrctions. . . . . . . . . . . . . .. . . .. ....... .. ................ .

x

11 Was there a distribution of propert or a transfer (e.g., by sale or death) of a partership Interest during the tax year?
If 'Yes,' you may elect to adjust the basis of the partership's assets under Section 754 by attaching the statement
described in the Instrctions under Elections Made by the Partership. . .. ...................,......... ...,. ...,

12 Enter the number of Forms 8865 attached to this return" 0

Designation of Tax Matters Partner (see instrctions)
Enter below the general parter designated as the tax matters parter (fMP) for the tax year of this return:
Name of
Identifying

SH 00132

Designated TMP ~ S CORP
Address of

Number ofTMP ~ AP P LI ED FOR

Designated TMP ~

CASE # 05-1223

PTPA01121 12103101

Form 1065 (2001)

255

/:

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Form 1065 2001 L L C NAME

Pa e 3
(a) Distributive share items
(b) Total amount

Sa-aûJétKE% Partners' Shares of Income, Credits Deductions, etc
1 Ordinary income (loss) from trade or business activities (page 1, line 22). , , 2 Net income (loss) from rental real estate activities (attach Form 8825) ,

3a Grass income from other rental activities. 3a
b Exenses from other rental activities (attach sch) . 3b c Net income (loss) from otter rental activities. Subtract line 3b from line 3a. .
4 Portolio income (loss): a

Interest income..

Income (Loss)

b Ordinary dividends. .
c Royalty income. d Net short-term capital gain (loss) (attach Schedule 0 (Form 1065)). e (1) Net long-term capital gain (loss) (attach Schedule 0 (Form 7065)).

3c 4a 4b 4c 4d 4e
41
5
6

40,120. 404.

(Z 28% rate gain (loss).. ~ _ _ _ _ _ _ _ _ _ _ _ (3) Qualified 5-year gain ~ _ _ _ _ _ _ _ _ _ _

f Other portolio income (loss) (attach schedule),

., SEE. STATEMENT,1

450.
7,200 _

5 Guaranteed payments to parters. .
6 Net Section 1231 gain (loss) (otter ttan due to casualty or ttefl) (attach Form 4797) 7 Other income (loss) . . , . . . . . . . . . . . .
8 Charitable contributions (attach schedule) . . .

7 8
9

tions

Deduc-

9 Section 179 expense deduction (attach Form 4562), .
10 Deductions related to portolio income (itemize) . . . . . . 11 Other deductions. , . . . , . . . . . . . . 12a Low-income housing credit:
(1) From parterships to Which Section 420)(5) applies.

. SEE STATEMENT 2

10
11

7,250.

;;æ'iJ
12a 12a 12b 12c 12d
13

Credits

(2 Otter than on line 12a(1). .. .. . , .. ,. ,. ., . " .
b Qualified rehabililation exenditures related to rental real estate activities (attach Form 34). cOedits (other than credits shown on lines 12a and 12b) related to rental real estate activities.

13 Other credits. . . , . . . , . . . .
Investment Interest
SelfEmploy14a Interest expense on investment debts. . .

d Credits related to other rental activities. .

ment

b (1) Investment income included on lines 4a, 4b, 4c, and 4f above. , Investment ex enses included on line 10 above. . 15a Net earnings (loss) from self-employment, . b Gross farming or fishing income. . . - . . . . , .
c Grass nonfarm income. , . , , . ' . , . . . . . . . , . . . . . ,

..... ."

Adjust-

16 a Depreciation adjustment on propert placed in service after 1986. .

ments
Items

b Adjusted gain or loss. . . . . . . . . . . .
c Depletion (otler than oil and gas). . . . . . . . . .. , , . . , d (1) Gross income from oil, gas, and geottermal properties. (Z Deductions allocable to oil, gas, and geothermal propertes.
e Other adjmnts & tax pref items. , . , , . . . . . . . . . . , . 17 a Name of foreign countr or V.S, possessioii . . ..

and Tax

ence

Prefer-

14a 14b 14b 15a 15b 15c 16a 16b 16c 16d

~
38,920_

7,250.

7,200_

16d (Z
16e

b Grass income from all sources. .

c Gross income sourced at parter level. .
d Foreign gross income sourced at partership level:
(1) Passive .. (2 Listed categories (attach sch) ~

17b 17c

lt~?rtf;~
(3Generallimitation ~ 17 d (3

Foreign Taxes

e Deductions allocated and apportoned at parter level:

t~~am~¿
~ 17e (Z

(1) Interest expense" (ZOtter. ,
f Deductions allocated and apportioned at partership level to foreign source income:

'~gtllãg~
(3)Generallimitatioil ~
17 f (3

(1) Passive ~ (2 Listed categories (attach sch) ~

g Total foreign taxes (check one):" 0 Paid 0 Accrued
h Reduction in taes available for credit (attach schedule). , .
18 Section 59(e)(2) expenditures: a Type,

b Amount.

17g 17h ~ 18b
19

19 Tax-exempt interest income. , . , 20 Other tax-exempt income. . . . . .

20
21

Other

21 Nondeductible expenses.

22 Distributions of money (c;sh and marketable securities),

23 Distributons of propert otter than money, ,

22 23

24 Other items and amounts required to be reported separately to parters

attach SChedule ..,.....,......,....,....,. . . . , . . . , , , .

BAA

Form 1065 (201)

CASE # 05-1223

PTPA0l34L 01/01102

SH 00133

í~

256

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1 2 3 4

1 UNITED STATES TAX COURT -----------------------------------------X NHB X, LLC, NORMAN H. BEVAN, TAX M ATTERS PARTNER, Petitioners,

5 Docket No. 17453-05 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 REPORTED BY: Helen Mendlowich Stoddart Decl. Exhibit 34 Deposition of Daniel Brooks November 30, 2006 New York, New York -againstCOM MISSIONER OF INTERNAL REVENUE, Respondent. -----------------------------------------X

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

2 November 30, 2006 10:14 a.m.

Deposition of Daniel Brooks, taken by Respondent, pursuant to Notice and Subpoena, at the offices of the Internal Revenue Service, 33 M aiden Lane, 12th Floor, New York, New York, before Helen Mendlowich, a Shorthand Reporter and Notary Public within and for the State of New York.

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3 1 2 3 4 5 BY: 6 7 8 9 BY: 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ALSTON & BIRD, LLP Attorneys for Non-Party W itness 90 Park Avenue New York, NY 10016 BY: FRANCIS PAUL GREENE, ESQ. JOHN ALETTA, ESQ. DAVID SORENSEN, ESQ. INTERNAL REVENUE SERVICE Attorneys for Respondent 333 East River Drive, Suite 200 East Hartford, CT 06108 MARC E. GROSSBERG, ESQ. THOMPSON & KNIGHT, LLP Attorneys for Petitioners 333 Clay Street, Suite 3300 Houston, TX 77002 A P P E A R A N C E S:

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 IT IS HEREBY STIPULATED AND AGREED by and between counsel for the respective parties hereto, that the filing, sealing, and certification of the within deposition shall be and the same are hereby waived; IT IS FURTHER STIPULATED AND AGREED that all objections, except as to the form of the question, shall be reserved to the time of trial; IT IS FURTHER STIPULATED AND AGREED that the within deposition may be signed before any Notary Public with the same force and effect as if signed and sworn to before this court.

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5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS D A N I E L B R O O K S, stating his business address as 10 Bay Street, W estport, Connecticut 06880, after having first been duly sworn by a Notary Public for the State of New York, was examined and testified as follows: EXAMINATION BY MR. ALETTA AND MR. SORENSEN: MR. ALETTA: This is a deposition of Daniel Brooks pursuant to tax court rule 74 in connection with the tax court case entitled NHB X, LLC, et al. versus Commissioner of Internal Revenue, docket number 17453-05. Present at this deposition are myself, John Aletta, Respondent's counsel and David Sorensen, also Respondent's counsel, counsel for Petitioner, Marc Grossberg, the witness, Daniel Brooks and counsel for Daniel Brooks, Attorney Paul Greene. Mr. Brooks, before we get started -- I just want to clarify a few matters before we actually get into the substantive discussion. Did you receive the notice of deposition that the government issued in this case? THE W ITNESS: I did. MR. ALETTA: Did you receive a letter

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11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS MR. ALETTA: W hat was the nature of those discussions? THE W ITNESS: It was a telephone call initiated by Marc. He asked me basic questions about the trading from Mr. Bevan's account. MR. ALETTA: W hat was the general nature of your responses? THE W ITNESS: Just understanding the risk of the transactions. MR. ALETTA: Okay. What was that? THE W ITNESS: Basically, that there was, in fact, a -- that the derivatives that were imbedded in market link deposits had a 28 percent chance of getting a 60-percent return if held to maturity, and the trades, in fact, did work. MR. ALETTA: By "market link deposits" are you referring to those market link deposits that were entered into by Norman H. Bevan during 2001? THE W ITNESS: I am talking about the one market link deposit that Mr. Bevan hired me to put the risk into. MR. ALETTA: On what did you base your

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12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS analysis of the 28 percent profitability? THE W ITNESS: That's pretty clear cut. Derivatives are traded on a model called the Black Scholes model where, in our case, we were trading currencies but basically, you can input the type of risk that you want, the return you are looking for, the current spot price of whatever currency it is that you want to bet on in the market that you are taking the risk on and it will give you the price where you could put that trade on with those exact risk parameters and the exact expected return. MR. ALETTA: How did you know that the amount was 28 percent when you talked to Mr. Grossberg? THE W ITNESS: Because that was -- when I'm hired by somebody to trade for them, that came down from Cantley & Sedacca who were advising Mr. Bevan, from Deutsche Bank and that was the parameters that they gave me to put on these transactions, that was the risk they were looking for. MR. ALETTA: W ho at Cantley & Sedacca provided that to you?

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13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS THE W ITNESS: I'm not sure exactly who -- I talked directly to Craig Brubaker. He is with Alex Brown Deutsche Bank in Dallas. He was the one -- Mr. Bevan was a customer of Alex Brown Deutsche Bank. So basically, I got the information for whatever risk Mr. Bevan wanted to put on from there. My job was to pick a currency with that risk profile that I felt -- and, of course, the direction of that currency that I felt would best allow the customer to be able to be comfortable in that transaction. MR. ALETTA: W hat was the risk amount again? THE W ITNESS: 28 percent probability of winning. MR. ALETTA: W inning what? THE W ITNESS: W inning a 60-percent return on the money being invested. MR. ALETTA: Again, somebody told you that they wanted the MLD transaction Mr. Bevan entered into to have a 28 percent chance of obtaining a 60 percent profit? THE W ITNESS: Right, exactly.

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14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS MR. ALETTA: Okay. THE W ITNESS: That's how I work, I have to have the parameter the customer is looking for. MR. ALETTA: W ho told you that the desired result was a 28 percent probability? THE W ITNESS: Now, the desired profit was coming from Cantley & Sedacca through Deutsche Bank. MR. ALETTA: Again, Mr. Brooks, I'm looking for a name. THE W ITNESS: Craig Brubaker. MR. ALETTA: Craig Brubaker told you that? THE W ITNESS: Yes. MR. ALETTA: W here did he learn that from? THE W ITNESS: I don't know that directly. I assume that it was coming from -- I don't want to assume. I think that probably that came from Cantley & Sedacca. MR. ALETTA: W ho at Cantley & Sedacca? THE W ITNESS: Probably Ed Sedacca. MR. ALETTA: Probably Ed Sedacca? THE W ITNESS: Yes. MR. ALETTA: W e'll probably come back to

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15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS this subject but for now let's go back to some more general subjects. The first thing I want to talk about is your education. Can you just give us briefly your educational background? THE W ITNESS: College, I went to Duke University, after which I worked for one year and then went to Fuqua School of Business. It's an MBA program at Duke. MR. ALETTA: Do have have any tax courses in your background? THE W ITNESS: None. MR. ALETTA: Do have you any specialized knowledge in the tax field? THE W ITNESS: No, none. MR. ALETTA: How about accounting courses? THE W ITNESS: None. MR. ALETTA: W hat was your MBA in? THE W ITNESS: Investment and finance. MR. ALETTA: Let's discuss your work experience and before we get there I'm going to hand you a group of exhibits which you already have. Most of these exhibits have been provided to you through my letter.

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16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS The exhibits are marked Exhibit A through A-N and those exhibits are marked so that we have clarity in the record here about what we are talking about. If you refer to Exhibit A -A. Okay. Q. -- you will see that that looks like a Powerpoint which, sort of, discusses Clarion Capital and also a bio of yourself and it looks like a resume attached. Do you see that? THE W ITNESS: I do. MR. ALETTA: Can you give us a general description, Mr. Brooks, of your work experience in the foreign currency market area, the trading area? THE W ITNESS: Sure. Out of business school I went to work for Chemical Bank which no longer exists -- It's now JP Morgan, I guess -- in their management training program. I ended up on the foreign currency desk there as a spot trader. Spot trading is currency that's trading for value right now. So it's a very hectic, very large, block trading-type of desk.

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17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS I was there for several years. I moved to Bank of America. After that to become the senior market trader there which at that point, on a currency desk, the larger the currencies are, generally, the better money, more responsibility, better position. I did that for several years. I went to Lehman Brothers. MR. ALETTA: Excuse me for a second. Could you give us time periods? THE W ITNESS: To Chemical Bank I went in '82. In 1982 I came to Chemical Bank and I traded there through '84. I went to Bank of America from '84 to early '89. I went to Lehman Brothers for several years. I went to Bank National Deperie where I stopped being a spot trader to come more of a proprietary-type trader. Spot trading is very hectic. It's like being in a boxing ring every day. Proprietary trading is more -- as you get more senior you can sit back and take positions and not have to have the day-to-day responsibility of quoting prices. After that I went to Banker's Trust for

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18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS several years. Once again at a proprietary trading desk. Banker's Trust was bought by Deutsche Bank. MR. ALETTA: Up to that point in time, did have you any experience determining the probabilities of currency options in finishing in the money? THE W ITNESS: I represented and advised customers who traded options and had options trade in the money. Yes. I would say on a big currency desk probably half the business you do, maybe more today, is derivative trading. MR. ALETTA: W hat do you mean by "derivative trading"? THE W ITNESS: Options. MR. ALETTA: Currency options? THE W ITNESS: Currency options. MR. ALETTA: Again, my question is: Up until the point where you joined Deutsche Bank, did you have experience in determining the probabilities of currency options finishing in the money? THE W ITNESS: Yes, I did. I had customers who would come in who wanted to trade with the

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19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS bank, that had accounts with the bank and they would want to have specific probabilities on their trades. Nobody is going to do a currency option trade unless they know exactly what the probability of what they are putting on is. I had customers who would come in and say, I want a 10 percent chance to get a big slam or a 50 percent chance of something smaller. MR. ALETTA: W ould you then actually provide the analysis of what those probabilities are or would you have somebody else do that? THE W ITNESS: I would have a derivatives trader put that in -- model that in the Black Scholes model. MR. ALETTA: Then, after that person provided the analysis to you, would you then provide that to the customer? THE W ITNESS: Yes, I would. MR. ALETTA: How about while you were at Deutsche Bank, did you actually provide analyses of currency options finishing in the money? "Analyses" being the probability that

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20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS the currency option would expire in the money. THE W ITNESS: Anybody who does an option -- when somebody comes to you to price an option, you have to put the probability into the machine to get a price for the option. It's impossible to price an option and not know the exact parameters of what you are putting on. MR. ALETTA: W ould you determine that probability? THE W ITNESS: At Deutsche Bank? No. The trader on the desk would determine that probability. At Deutsche Bank I was in the sales function. Of course I had access to the trading model that the trader had. Deutsche Bank has an option pricer. So I would know exactly what the price should be but the responsibility for the price would be the trader's. MR. ALETTA: W hen did you join Deutsche Bank? THE W ITNESS: In 1999 Deutsche Bank bought Banker's Trust and we were merged into that desk, summer of 1999.

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21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS MR. ALETTA: W hen did you leave Deutsche Bank? THE W ITNESS: In April of 2001. MR. ALETTA: During that time you engaged in -- let me ask that question. MR. GROSSBERG: I'm sorry, April -THE W ITNESS: -- 2001. MR. ALETTA: During the time you were at Deutsche, who was the trader at Deutsche who determined the probabilities for the trades that you were involved with? THE W ITNESS: Perry Parker. MR. ALETTA: W ould you spell that for me? THE W ITNESS: P-E-R-R-Y, P-A-R-K-E-R. He was the head of the derivatives desk -- foreign currency derivatives desk at Deutsche Bank. MR. ALETTA: Is Mr. Parker still there? THE W ITNESS: I don't believe so. MR. ALETTA: Do you know where he is? THE W ITNESS: I don't know for sure and I don't know where he went, but I don't think he is at that desk anymore. MR. ALETTA: Could you describe your duties at Deutsche during the time period that

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22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS you were there? THE W ITNESS: Half of my duties were my accounts. As a salesperson you have accounts, basically people who would call in to you to do currency business. Half of my business was the handling of Alex Brown brokers who would come in to do currency business of all different types. The other half was my handling large institutional investors who had long-term relationships with. MR. ALETTA: W hat would you be doing for your clients at Deutsche? THE W ITNESS: Advising. Most times people who are trading from outside of a bank environment, I would say, sort of, 60 percent of your job is to let them know what's going on in the market, a feel for the market, where you think it's going. You get good clients by being right in the market. People call up and say, what do you think dollar/yen is doing today and you say I think it's going up. W hen it goes up, they call you back the next day and say, where do

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23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in. MR. ALETTA: And your title at Deutsche was -THE W ITNESS: -- vice president. MR. ALETTA: W as there anything after vice president? W as there any other designation to your title? THE W ITNESS: No. MR. ALETTA: Again, at Deutsche Bank you were not determining the probabilities of BROOKS you think it's going now. Basically, those are my two functions. W ith Alex Brown it could be any number of things, anything from spot trading in currencies, forward trading, all kinds of derivatives, anything the clients need to do on the currency desk. It's a very active desk. MR. ALETTA: So you actually worked on a desk called the currency desk? THE W ITNESS: I was in foreign exchange sales. MR. ALETTA: That's the department you worked in? THE W ITNESS: That's the department I was

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24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 options? THE W ITNESS: No, I was not determining probabilities. My job was to work for the customer and make sure that the probabilities were correct, that the price they were getting was correct. MR. ALETTA: Okay. How did you go about doing that? THE W ITNESS: There is a pricing model. I had the same pricing model the trader had. MR. ALETTA: Did that pricing model have a name? THE W ITNESS: It's the Black Scholes pricing model. Deutsche Bank has an option pricing model that's available not only to the trading desk but, I think all up until the end of 2005, some big customers also had access to this model. It's not rocket science to price derivatives. There really are just four or five basic variables to put in to get a price. On the vast majority of things that I worked on you were not going to be able to quote a customer price that was off market because they BROOKS

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25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS knew where it was. They are using the same model you are using, the same model the trader is using to price the derivatives. MR. ALETTA: Are you saying that by using this Black Scholes model you would determine the price of the options -- the currency options that were being sold by Deutsche? THE W ITNESS: Exactly. MR. SORENSEN: One quick question: You said there are four or five variables. W hat are they? THE W ITNESS: Interest rates, how long are the options going to be. How much a variable known as volatility, which is how much the market has been moving. If the market hasn't been moving a lot. MR. SORENSEN: Let's stop there. For volatility, do you use a historical analysis for volatility in the model which is used as Deutsche Bank? THE W ITNESS: The model is using -- once again, that's out of my realm, but I know they are using up-to-date volatilities. MR. SORENSEN: Okay.

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29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS And then I handled any Alex Brown branch that would come in and need currency business. So I don't know how many branches they had but their San Francisco, Chicago, Dallas, Atlanta branches were fairly busy in currency so that kept my day moving. MR. ALETTA: W ere you handling currency options for Deutsche in 2000? THE W ITNESS: Sure. MR. ALETTA: Did you handle any market link deposit transactions for Deutsche during 2000? THE W ITNESS: No, I did not. MR. ALETTA: Did you handle -MR. GREENE: Sorry. Dan, just let you know again, for the record, please wait until John is done with his question. It is very difficult for the reporter to pick up both the question and the answer when are you going over each other. MR. ALETTA: Thank you, Paul. Did you handle any market link deposit transactions for Deutsche during 2001? THE W ITNESS: W hile at Deutsche Bank? No,

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30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I did not. MR. ALETTA: W ith regard to the currency options transactions that you handled for Deutsche, did those currency options transactions have any tax benefits associated with them that you know of? THE W ITNESS: Yes, I believe that Deutsche Bank was involved with several customers who were doing tax-related transactions. MR. ALETTA: Could you explain for us what those tax benefits were? THE W ITNESS: I could not. MR. ALETTA: Could you explain who at Deutsche Bank was involved with those transactions other than yourself? MR. GREENE: John, just to clarify, I'm not sure what you mean by "who was involved in those transactions." You wanted the complete cast of characters? MR. ALETTA: Yes. MR. GREENE: Okay. MR. ALETTA: Yes. THE W ITNESS: On the currency side, obviously -- well, I shouldn't say "obviously." BROOKS

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34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS MR. ALETTA: W ho else was involved at Deutsche Bank with these types of transactions that were discussed? THE W ITNESS: W ell, the people bringing the transactions were all customers of Deutsche Bank Alex Brown. Craig Brubaker at Alex Brown in Dallas was a guy who brought a lot of customers. David Parse at Alex Brown in Chicago brought a lot of customers. There were some other -- Alex Flagg in San Francisco, I think, had some customers. I think there were other costumers coming out of Atlanta as well. MR. ALETTA: Did these transactions that we're talking about, these currency option transactions, did they involve a combination of two currency options one being a long position and one being a short position? THE W ITNESS: Yes, they did. MR. ALETTA: W hat is the technical term for that type of option? THE W ITNESS: Digital option. MR. ALETTA: Digital option. W hat was your understanding of how the digital option transaction worked, the ones

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35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS that were involved in Deutsche Bank at the time you were at Deutsche? THE W ITNESS: They were very typical digital options. The digital option is used by somebody that wants to put on a -- these were all European digital options. European means that when you put on a bet that it's going to be read at a certain time on a certain date. So you are making a bet that the currency is going to be above or below a certain price, at a certain time, on a certain date. So basically what -- if you want to think about it, if you are betting on a currency going up, what a digital option does is that you bought upside, today the currency is trading here, whatever the parameters are for the bet that you are putting, that's where the idea of somebody saying, hey, I want this to have a 28 percent chance of a 60 percent return is, that gives you the strike price to say, all right, if this strike price -- if this dollar/yen is 1.20 today and with all the volatilities and time and interest rates and things and you put in that you want this percent chance of winning

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36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BROOKS this bet, the model is going to spit back a price, a strike price saying that this strike price has those probabilities of occurring for that type of return. Basically, you own that, the cust