Free Notice (Other) - District Court of Colorado - Colorado

Case 1:04-cr-00103-REB

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Criminal Case No. 04-cr-00103-REB UNITED STATES OF AMERICA Plaintiff, v. 1. NORMAN SCHMIDT, 2. GEORGE ALAN WEED, 3. PETER A.W. MOSS, 4. CHARLES LEWIS, 5. JANNICE McLAIN SCHMIDT, 6. MICHAEL SMITH, and 7. GEORGE BEROS, Defendants. _____________________________________________________________________ GOVERNMENT'S PROFFER OF PROPOSED AREAS OF INQUIRY AND IDENTIFICATION OF DOCUMENTS FOR THE DEPOSITION OF GARY HERBERT _____________________________________________________________________ The Government, by Wyatt Angelo and Matthew T. Kirsch, the undersigned Assistant United States Attorneys, pursuant to the Court's Order of January 5, 2006 [Doc. # 616], hereby identifies, to the extent possible, those areas of inquiry and relevant documents for the deposition of Gary Herbert. INTRODUCTION Set forth below are the potential areas of inquiry for the deposition of Gary Herbert which may implicate the attorney-client privilege. The government has sought to include context for each area of inquiry. For that purpose, the government also incorporates herein by reference the Government's James Proffer [Doc. # 235].

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The government may inquire about communications between Mr. Herbert, Mr. Schmidt and other co-conspirators related to any of the subject areas indicated below. The interview with Mr. Herbert referenced herein begins at Bates # 0313954, and is Attachment 1 to this pleading. Based on this interview and the opinion letter identified in Section 7 below, the Court previously found, in accordance with Rule 15 of the Federal Rules of Criminal Procedure, that exceptional circumstances exist and that it is in the interests of justice to allow the deposition of Mr. Herbert based on the materiality of his testimony and the likelihood that he will be unable to testify. [See Order Directing Videotaped Deposition of Gary Herbert, Doc. # 546]. The exhibits listed below are identified with their corresponding attachment numbers. 1. FORMATION AND USE OF CORPORATE ENTITIES INCLUDING SMITTY'S INVESTMENTS, LLC, CAPITAL HOLDINGS, LLC, CAPITAL HOLDINGS, INTERNATIONAL, LLC, FAST TRACK, LLC, MONARCH CAPITAL HOLDINGS, LLC, ROCKY MOUNTAIN SPORTS PROMOTIONS, LLC, ROCKY MOUNTAIN DEVELOPMENT GROUP, LLC, and HIGH TRACK TEAM, LLC. CONTEXT: Defendant Norman Schmidt and the other co-conspirators utilized a variety of business names and entities to promote, market, and lend credibility to the fraudulent high-yield investment program. (See Second Superseding Indictment ¶ 4(b) [Doc. # 526]). Mr. Herbert has indicated that he performed legal work in the formation of some of those entities and performed additional legal work for some these entities. The investigation to date reveals that these entities had no purpose other than to lend credibility to the fraudulent high-yield investment program. AREA OF INQUIRY: The government may inquire as to: legal work performed

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by Mr. Herbert on behalf of these entities; the name(s) of the person(s) requesting his services; the purpose and business of the entities as explained to him; the name(s) of the persons who received income and controlled those entities, and; the roles of those persons and other co-conspirators in the operation of those entities. EXHIBITS: Attachment 2 - Articles of Organization - Capital Holdings, LLC Attachment 3 - Articles of Organization - Capital Holdings, International, LLC Attachment 4 - Articles of Organization - Monarch Capital Holdings, LLC Attachment 5 - Articles of Organization - Fast Track, LLC Attachment 6 - Articles of Organization - Rocky Mountain Sports Promotions, LLC Attachment 7 - Articles of Organization, Rocky Mountain Development Group, LLC Attachment 8 - Articles of Organization - High Track Team, LLC Attachment 9 - Articles of Organization - Finish Line Racing Products, LLC Attachment 10 - Tradename Certificate - Fast Track, LLC - Smitty's d/b/a Jan Schmidt Attachment 11 - Tradename Certificate - Fast Track, LLC - Jan Schmidt d/b/a/ Capital Holdings Inc. Attachment 12 - Tradename Certificate - Fast Track, LLC - Jan Schmidt d/b/a/ Smitty's Investments

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2.

FORMATION AND USE OF CORPORATE ENTITIES TO ACQUIRE ASSETS WITH INVESTOR FUNDS (SMITTY'S MOTORSPORTS) CONTEXT: Mr. Herbert indicated in his interview that he had performed legal

work in the formation of Smitty's Motorsports, LLC. Financial records obtained by the government indicate that the assets acquired in the name of this corporation were from funds invested through the above entities and placed in supposed "non-depleting accounts." (See Second Superseding Indictment, ¶ ¶ 3(a) and 5(c) [Doc. # 526].) AREA OF INQUIRY: The government may inquire as to: legal work performed by Mr. Herbert on behalf of this entity; the name(s) of the person(s) requesting his services; the purpose and business of Smitty's Motorsports, LLC as explained to him; the name(s) of the person(s) controlling this entity; the sources of funding for the acquisition of assets by this entity, and; the role of any of the co-conspirators in the operation of the entity. EXHIBITS: Attachment 13 - Articles of Organization - Smitty's Motorsports, LLC 3. REPRESENTATION OF LEON HARTE AND RESERVE FOUNDATION CONTEXT: In his interview, Mr. Herbert indicated that he was asked by Leon Harte to represent Harte and the Reserve Foundation, LLC in litigation related to the Redstone Castle properties by investors in the Reserve Foundation, LLC (RF) or Reserve Foundation Trust (RFT). Mr. Herbert also indicated that he represented Harte and RF in litigation filed by a receiver seeking return of monies invested by Harte in Sunstate FX (a foreign currency trading company), which were later withdrawn and used to purchase the Redstone properties. 4

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AREA OF INQUIRY: The government may inquire as to: the nature of this litigation (including identifying the opposing parties, the nature of the claims, the resolution of the case); any unfiled litigation claims; the relationship of the opposing parties to RFT and RF; statements made by Harte, Schmidt, or their agents related thereto, and; the substance of any discussions had with Harte or any of the coconspirators relating to those claims. EXHIBITS: Attachment 14 - Notice of Lis Pendens filed by Universal Synergy, District Court, Garfield County, CO Attachment 15 - Amended Complaint filed by Receiver, U.S. District Court, Southern District, FL Attachment 16 - Letter from Mark Bienstock (Federal Recovery Group) to Alan Weed Attachment 17 - Letter from Hiram Martin to Weed Agency w/ fax cover Attachment 18 - Letter from Hiram Martin to Norman Schmidt, Trustee 4. DEPOSITION OF LEON HARTE CONTEXT: Mr. Herbert represented Leon Harte at a deposition in his dissolution of marriage case in 2002, in the District Court of Garfield County, Colorado. During that deposition, Harte revealed that he had never used the funds invested through RFT and RF for the purposes represented and his belief that he was criminally liable for his conduct related to RFT and RF. AREA OF INQUIRY: The government may inquire as to whether and to whom Mr. Herbert disclosed the substance of Harte's admissions and any discussions 5

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related thereto. EXHIBITS: Attachment 19 - Leon Harte Deposition, 1/29/2002 5. CONVERSATION WITH DEFENDANT NORMAN SCHMIDT - SPRING 2000 CONTEXT: In his interview, Mr. Herbert disclosed a meeting with Norman Schmidt in 2000 during which he was told by Schmidt of a different investment program. Schmidt said that he intended to repay the investors in RFT and RF, entities which were no longer being used to solicit investments, from this program. Not coincidentally, Smitty's Investments, LLC was incorporated at or about this time. AREA OF INQUIRY: The government may inquire as to the specifics of statements made by Schmidt; the context in which they were made; and identification of others involved. EXHIBITS: none 6. CEASE AND DESIST ORDERS CONTEXT: In March 2002, the State of Nebraska issued a Cease and Desist Order to Smitty's Investments based on marketing of the fraudulent high-yield investment program as an unregistered security to Nebraska resident Warren Peterson. Prior to the entry of the Order, Norman Schmidt wrote Nebraska state regulators informing them that Smitty's Investments did not do business in Nebraska. Mr. Herbert mentions this Order in his interview. AREA OF INQUIRY: The government may inquire as to: when and from whom Mr. Herbert learned of the Nebraska Cease and Desist Order; any representations made to him concerning activities in Nebraska and the sources thereof; 6

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whether he had personal knowledge of or whether any of the conspirators discussed or otherwise revealed to him the Cease and Desist Order or Orders of Prohibition previously entered in other jurisdictions, and; any discussions concerning the impact of the Order on the operations of the fraudulent high-yield investment program. EXHIBITS: Attachment 20 - Nebraska Cease and Desist Order Attachment 21- Letter from Norman Schmidt to Thomas Sindelar Attachment 22 - Letter from Thomas Sindelar to Norman Schmidt Attachment 23 - Iowa Cease and Desist Order Attachment 24 - Illinois Orders of Prohibition 7. PREPARATION OF ATTORNEY OPINION LETTER CONCERNING SECURITY OF INVESTMENT CONTEXT: In June, 2002, Mr. Herbert prepared an opinion letter addressed to four of the co-conspirators and relating to the security of investor funds received. This letter was widely disseminated to prospective investors in the fraudulent high yield investment scheme. (See Second Superseding Indictment ¶ 3(b) [Doc. # 526]). Mr. Herbert testified previously in the related SEC case pending before this Court that the information contained in the letter was provided to him by Norman Schmidt and George Alan Weed. A review of items seized during the execution of the search warrants in March, 2003, revealed a number of drafts of that letter, some of which contained handwritten interlineations. AREA OF INQUIRY: The government may inquire as to: who requested the preparation of the letter; the purpose and intended use of the letter as explained to him 7

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by any of the co-conspirators; discussions he may have had with any of those coconspirators concerning the letter; who provided the information contained in the various drafts of the letter; the source of the interlineations, and; the misleading nature of the representations. EXHIBITS: Attachment 25 - June 17, 2002 Letter to Jannice McLain - Initial Bates # 0201621 Attachment 26 - June 17, 2002 Letter to Jannice McLain - Initial Bates # 0271059 Attachment 27 - June 17, 2002 Letter to Jannice McLain - Initial Bates # 0271075 Attachment 28 - June 17, 2002 Letter to Jannice McLain - Initial Bates # 0271080 Attachment 29 - June 17, 2002 Letter to Jannice McLain - Initial Bates # 0209507 Attachment 30 - June 17, 2002 Letter to Jannice McLain - Initial Bates # 0209510 Attachment 31 - June 17, 2002 Letter to Jannice McLain - Initial Bates # 0270163 Attachment 32 - Fax cover sheet from Gary Herbert to Alan Weed w/ letter Initial Bates # 0270169 Attachment 33 - Fax cover sheet from Gary Herbert to Alan Weed w/ letter Initial Bates # 0270172 8

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Attachment 34 - June 21, 2002 Letter from Michael Smith to Gary Herbert w/ fax and letter Attachment 35 - June 21, 2002 Letter to Michael D. Smith Attachment 36 - June 21, 2002 Letter from Michael Vallone w/ letter Attachment 37 - June 21, 2002 Letter to Michael Vallone w/ note Attachment 38 - June 21, 2002 Letter to Michael Vallone w/ envelope Attachment 39 - June 21, 2002 Letter to Michael Vallone w/ warning Attachment 40 - June 21, 2002 Letter to Michael Vallone w/ "do not call" notation Attachment 41 - June 17, 2002 Letter to Jannice McLain - computer draft Attachment 42 - December 17, 2002 Letter to Quickgold Attachment 43 - June 21, 2002 Letter to D. William Thomas 8. SECURITIES OPINIONS SOUGHT CONTEXT: Mr. Herbert indicates in his interview that he discussed securities issues with Norman Schmidt which led to a meeting with a securities attorney in 2002. During the meeting, Norman Schmidt explained the fraudulent high-yield investment program to the securities attorney, who then asked Schmidt if the program was a Ponzi scheme. The attorney requested further information which was never provided. Investigators also found during the execution of search warrants a letter from a different attorney, addressed to Mr. Herbert, purporting to provide an opinion as to whether the investment program was a security. AREA OF INQUIRY: The government may inquire as to: the conversations with Mr. Schmidt which led to consulting the securities attorney; the reason(s) for seeking an opinion from a second attorney; the sources and content of the information provided to 9

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the securities attorneys, and; any conversations about this issue between Mr. Herbert and any of the other co-conspirators. EXHIBITS: Attachment 44 - Letter from Norman Sirak to Gary Herbert Attachment 45 - Letter from Norman Sirak to Gary Herbert with notes 9. USE OF ATTORNEY TRUST/ESCROW ACCOUNT FOR INVESTOR FUNDS CONTEXT: Mr. Herbert states in his interview that he opened an attorney escrow or trust account specifically to receive investor funds designated for the fraudulent highyield investment program. He states that all funds wired into the account were returned by him. AREA OF INQUIRY: The government may inquire as to: who requested that he perform this service; the reasons given Mr. Herbert for doing so, and; his reason for returning the funds. EXHIBITS: Attachment 46 - Wire Transfer Instructions for Account of Gary Herbert Attachment 47 - Fax cover sheet and letter from Gary Herbert to Alan Weed 10. PAYMENTS FOR LEGAL SERVICES CONTEXT: Approximately $300,000 was paid to Mr. Herbert from investor monies initially deposited in the supposed non-depleting accounts controlled by Norman Schmidt. AREA OF INQUIRY: The government may inquire as to: the specific client, nature, and extent of the services provided to earn these payments; any discussions with either Harte, Norman Schmidt, or other co-conspirators concerning these 10

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payments or the services for which Herbert was being paid; the signatory of any checks received; any payments received by means other than checks; total amounts received, and; the source accounts for any payments received. EXHIBITS: Attachment 48 - Copies of checks written to Gary Herbert/Joyce Herbert 11. MISCELLANEOUS CONTEXT: Following the execution of the search and seizure warrants on March 7, 2003, Michael Smith sent to the investors brought into the fraudulent highyield investment program through the Northwest Group a letter concerning the status of their investment and containing representations attributed to Mr. Herbert concerning the security of their funds. AREA OF INQUIRY: The government may inquire if Mr. Herbert actually made such representations and, if so, the source of his information in support of the representations. EXHIBITS: Attachment 49 - Letter of April 18, 2003 to Capital Holdings, LLC "Contract Holders"

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Respectfully submitted this 12th day of January, 2006, WILLIAM J. LEONE United States Attorney

s/ Matthew T. Kirsch MATTHEW T. KIRSCH WYATT ANGELO Assistant U.S. Attorneys 1225 17th Street, 7th Floor Denver, CO 80202 Phone: (303) 454-0100 Fax: (303) 454-0402 E-Mail: [email protected]

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CERTIFICATE OF SERVICE (CM/ECF) I hereby certify on this 12th day of January, 2006, I electronically filed the foregoing GOVERNMENT'S PROFFER OF PROPOSED AREAS OF INQUIRY AND IDENTIFICATION OF DOCUMENTS FOR THE DEPOSITION OF GARY HERBERT with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses: Peter Bornstein, Esq. [email protected] Thomas Hammond, Esq. [email protected] Declan J. O'Donnell, Esq. [email protected] Ronald Gainor, Esq. [email protected] Daniel T. Smith, Esq. [email protected] Thomas Goodreid, Esq. [email protected] Robert Patrick Sticht, Esq. [email protected] Paul B. Daiker, Esq. [email protected]

s/ Matthew T. Kirsch MATTHEW T. KIRSCH Assistant United States Attorney 1225 17th Street, 7th Floor Denver, CO 80202 Phone: (303) 454-0100 Fax: (303) 454-0402 E-Mail: [email protected]

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