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Case 1:04-cr-00103-REB

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Attachment 2 Excerpts from Deposition of Gary N. Herbert February 16,2006

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Q Can you tell us how you know that name? A He -- he was a client before he was deceased, and I had met him some years -- or some months before I started representing him through one of the attorneys, Martin OTallon. Q Can you tell us approximately when you started representing Mr. Harte? A It would have been sometime, as I r e d , either in the late summer or early fall of 2000. Q And was that for business matters or was that for personal matters? A It would have been both. Q And are you familiar with the names of the business in which Mr. Harte was engaged at the time you began representing him? A Well, there -- yes, I am. Q Can you tell us, please, what that name was? A There was Reserve Foundation. There was Tranquility Options, LLC; Serenity Options, LLC; and a third one, which I don't recall at the moment. Q And can you tell us, please, what initially you did with respect to those entities and for Mr. Harte? MR. HAMMOND: And 1'11object to that question on the basis of not so much an evidentiary objection, but other issues involving affirmative obligations.
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1 Foundation? 2 A At the time I first represented him, I knew 3 there was another individual involved, but I didn't -4 was not aware of the extent or the nature of the

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involvement. I mean, his name would appear on the complaints with Harte's, but - and then as we got krther into the cases, the interrogatories and so forth reflected the involvement of other individuals. Q And what was the individual that you were referring to? A Norman Schmidt. Q And what, if anything, did you know from Mr. Harte about Mr. Schmidt's association and affiliation with Reserve Foundation? MR. HAMMOND: I will raise, on behalf of Mr. Schmidt, the same objection I raised earlier. Q (By Mr. Angelo) You may answer the question. A Okay. He appeared on certain organizational documents of the various LLCs, and that he was a participant in the business, but at first he was described - it was a very loose participation. Q And when you talked about the LLCs, which LLCs are you referring to other than Reserve Foundation? A Tranquility, Serenity, and the other one, the name of which escapes me at the moment.
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Q (By Mr. Angelo) You may proceed to answer the question. A Would you repeat the question, please. Q What work did you perform with respect to those entities and for Mr. Harte initially? A The entities had been the recipient of civil complaints filed against them. Q As part of your representation, did you gain some knowledge concerning the nature of the business of those corporations and Mr. Harte? A I did, yes. Q From what sources? A From Mr. Harte primarily and from such paperwork as existed. Q And what were you able to learn about the business of Reserve Foundation from Mr. Harte? A Well, it was -- do you mean the nature of the business or its assets or what? Q Let's start with the nature of the business. A The nature of the business was the investment - securing investments from clients for participation in deep-discount promissory notes on the international market. Q And are you aware of whether Mr. Harte had any partners or associates in the operation of the Reserve
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Q And what did you understand from Mr. Harte or the documents that you've referred to to be Mr. Schmidt's role andlor association with those LLCs? A They would be -MR. HAMMOND: I would object; that calls for a double hearsay response or hearsay within hearsay response. Q (By Mr. Angelo) You may answer the question. A I saw documents that were organizational documents of the respective LLCs that contained the names therein of Mr. Schmidt and also of Mr. Harte's wife, Debra Harte -- or Debbie Harte. Q And with respect to the information that you had outside the source of those documents from Mr. Harte, what was he able or did he tell you about Mr. Schmidt's affiliation with those LLCs? MR. HAMMOND: The same objection is raised. THE WITNESS: That there was an ownership interest, but it varied amongst the various LLCs and the foundation. Q (By Mr. Angelo) Now, you've referred to some civil complaints that resulted in your undertaking some legal representation. A That's correct. Q Can you tell us, please, what you recall about
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those specifically? MR. HAMMOND: Objection on behalf of Mr. Schmidt; 401,402,403, and.404. MR. ANGELO: Mr. Daiker, are you still there? MR. DAIKER: Yes, I am. MR. ANGELO: Thank you. THE WITNESS: Would you repeat the question, please. Q (By Mr. Angelo) I will try to repeat the question. Are you familiar with the contents of the civil complaint as a result of your representation? A Yes, I am. Q And did you actively undertake to perform the legal services related to those civil complaints? A I did. Q And as part of those civil complaints and your representation, did you attempt to obtain information to meet and represent the defendants in those civil complaints? A Idid. MR. HAMMOND: Objection. Q (By Mr. Angelo) From what sources did you obtain information? MR. HAMMOND: Objection.

point, interrogatories,etcetera. And it should be noted that 1don't have the exact dates or recall the exact dates that we undertook to secure additional counsel to represent Mr. Harte at that juncture, and the counsel was located in Miami, Florida. Q Can you tell us, please, if you know, based upon your conversations with Mr. Harte, what services he actually performed for the corporation besides being its spokesman? A 1believe he recruited -- recruited -solicited clients and secured clients, that is investors. Q And you've described the nature of this business as, I believe, trading in some form of security or medium-term note? A That's correct. Q And who on behalf of that corporation, based upon your conversations with Mr. Harte, was actually doing the trading? A At that juncture I don't believe the trading was active. There was reference made to a gentleman by the name of Peter Moss, who was reported to reside in London, and he was quoted to me as the primary trader and the source of most of the information about these trades and the schedule of the trades, et cetera. Q During the course of the representation that

THE WITNESS: From what sources? 1 2 Q (By Mr. Angelo) Yes. A Primarily from Mr. Harte, and, again, from 3 4 such documentation as existed. Q And who provided the documentation to you? A Mr.Harte. Q And can you describe for us the nature of the documentation that was provided? A There were the LLC organizational minutes, the LLC documentation filed with the state to organize the LLCs. There were some -- at some juncture, someplace during the fall, there were investment documents that investor clients had signed. I don't believe we saw the actual documents at that time, but we saw the models thereof. Q What was your -- well, first of all, let's back up just a little bit and let's talk about the Reserve Foundation. Was it one of the parties in these civil claims? A It was. Q And based upon your conversationswith Mr. Harte, what did you understand to be his role in the Reserve Foundation? A Well, he was speaking for it in the context in which we were answering the questions at that -- that
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1 you've described, did you also obtain information from 2 Mr. Harte concerning Mr. Schmidt's role in the Reseive 3 Foundation? 4 A I did at some point, of course, but I can't 5 pinpoint the day. I mean, it would come up in 6 conversation; and then as we got further into the 7 litigation, Schmidt's reported involvement and then 8 actual involvement became more apparent. 9 Q Can you tell us, please, initially what 10 Mr. Harte told you about Mr. Schmidt's relationship to 11 the Reserve Foundation and his role? 12 MR. HAMMOND: Objection. 13 THE WlTNESS: That he was a co-owner or 14 participant - and participant. 15 Q (By Mr. Angelo) And with respect to that 16 participation, did he describe for you initially any 17 duties that Mr. Schmidt had with respect to Reserve 18 Foundation? 19 MR. HAMMOND: Objection. 20 THE WITNESS: No. He -- he described in very 21 general terms, but the inference at first was that he was 22 inactive in those. 23 Q (By Mr. Angelo) And did that change at a 24 later time? 25 A It did as -;

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MR. HAMMOND: Objection.

THE WITNESS: It did as the litigation
progressed and as conversations or discussions progressed. Q (By Mr. Angelo) Okay. And let's talk about those conversations. First of all, who were they with? A Leon Harte. Q And-A And at some point -- and this, of course, is available in records -- with the attorney and then later with the associates of that attorney in Miami, Florida. Larry Heller, I believe, was the name. Q What did Mr. Harte tell you after -- about Mr. Schmidt's role in Reserve Foundation after his initial statements t o you? MR. HAMMOND: Objection and hearsay. THE WITNESS: Well, he referred to him as a co-owner and participant, but inactive at that juncture. Q (By Mr. Angelo) And you've indicated that that changed at some point? A It did. 22 Q And tell u s approximately how long after that 23 it changed, and then we'll go into it a little bit more. MR. HAMMOND: Objection and hearsay. 24 25 THE WITNESS: It -- it would have been a

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difference -- and l'm trying to make this more understandable -- is that the majority of the clients or investors were referred to by Mr. Harte as Mr. Harte investor, his contacts. Q And after Mr. Schmidt began appearing in your office, did you have any conversations with him about his role in the Reserve Foundation? A Well, I -- no, I did not, in -- other than what became apparent in the conversations. I didn't again, I didn't question him every time he came into the office. It was somewhat apparent from the nature of the conversations or discussions and the natures of the documentation, which l've described. Q And can you tell us, please, based upon those conversations, what did become apparent from the statements that Mr. Schmidt made to you? A That Mr. Schmidt did have an ownership and from time to time had participated to one degree or another, although that participation at that juncture was not clear. Q Did it become clear later based upon information provided by Mr. Schmidt or based upon your observations? A It did, yes. Q Can you tell us, please, how it became

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matter of two or three months that that changed and references became more frequent and then Norm Schmidt began sometime in the fall coming into the office with Mr. Harte. Q (By Mr. Angelo) And with respect to the references that you've made, would these be references by Mr. Harte to Mr. Schmidt? A Yes. I'm sorry. Q Okay. And how did they change, then, these references? MR. HAMMOND: And I object to the form of the question. MR. ANGELO: l'll rephrase it, actually. Q (By Mr. Angelo) How did Mr. Harte's description of Mr. Schmidt's role change? MR. HAMMOND: Objection and hearsay, 801,40 1, 402,403. THE WITNESS: Well, he didn't sit down and redefme the role every day or every time I met with him. The references by Mr. Harte to Mr. Schmidt increased in frequency, and I became aware that he was involved, in fact, and then as I referred to earlier, had an ownership interest and participatory interest, but -Q (By Mr. Angelo) And -- I'm sorry. A Well, I'm sorry. I suppose the main

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clearer? A That, in fact, some of the clients had been contacts of Mr. Schmidt, and that he was much more instrumental in the description or structure of the program than Mr. Harte had at first let on or alluded to. Q Did you obtain any information from Mr. Harte for the purposes of defending these lawsuits? MR. HAMMOND: Objection regarding an affirmative obligation. THE WITNESS: Well, the defenses -- or the nature of the defense, both to me and the attorney in Miami, who was primary -- or lead counsel in the defense after that, as was Cindy Tester in Glenwood Springs, who represented Debbie Harte, that was the defense team; and Debbie Harte was a named party in all of the suits, or named defendant. So the -- the story line or the defense was based upon the fact that these investments were real, that they hadn't been made yet, that they were waiting on a transaction in London or elsewhere, and that Mr. Moss in London was the train conductor, if you will. He had the schedule, he knew, and he would call upon the funds to be transferred or to place them and buy the notes. Q (By Mr. Angelo) You have, to your left, a notebook, which is tabbed. And I would like you to turn

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1 to Tab Number 12020. MR. SMITH: l'm sorry, counsel? MR. ANGELO: 12020.
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THE WITNESS: 12020? Q (By Mr. Angelo) That's correct. AOkay. Q Do you have before you Government Exhibit 12020 at this point? A Yes. Q Do you recognize that document? A Yes, I do. Q And how do you recognize that document? A It appears to be one of the ones -- one of the complaints with which we were dealing. Q And that would be the civil actions that you've described earlier, somewhat generically? A It would. Well, it would be one of the civil actions. Q One of the civil actions. And just briefly, based upon your conversations with Mr. Karte, who were, in fact, the plaintiffs in this particular complaint? MR. HAMMOND: Objection; affirmative obligation. THE WITNESS: Who were what? Q (By Mr. Angelo) The plaintiffs.
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Q Do you have that document in front of you? A Ido. Q And are you familiar with it? A It appears to be one and the same that we had copies of and dealt with. Q All right. Would this be one of the civil actions that you described generically earlier? A It would, yes. And this was generally referred to as the Florida action. Q And did you actively enter an appearance in this particular case or was some other attorney retained? A This - I may have entered an appearance, but Larry Heller's law firm was the attorney in charge. I was not admitted in Florida, and Mr. Heller took over the very aggressive defense of this particular case. Q Did you provide Mr. Heller with information for the purposes of that defense? A I acted as liaison from what documents as were supplied to me by Mr. Harte and I would believe what documents of record with respect to the real estate, which became the subject - or was the prime subject of this case. Q Would you also take a look at Exhibit C, attached to Exhibit 12021. There is a handwritten page number of 34, if you see those at the bottom. Does that
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A The plaintiffs. As they appear on the exhibit; that is, Universal Synergy, Inc., Discovery Bay Capital Corporation, Rama Universal Holdings, Ltd., Ross Peat, and Subash Parmar. Q And who were the defendants named? A The defendants were named as Leon Francis Harte, Norman Eugene Schmidt, Debbie A. Harte, Reserve Foundation, LLC, The Reserve Foundation, The Reserve Foundation Trust, Tranquil Options, LLC, Peacehl Options, LLC --that's the one that escaped me - and Serenity Options, LLC, and the Harte Entertainment Group. Q And does this complaint represent one of the actions upon which you performed legal work at the time? A It does. MR. ANGELO: Subject to ruling by the Court, we would be moving at this time for the admission of Government Exhibit Number 12020. MR. SMITH: The Defendant Jan Schmidt would object; 401,402,403, and 80 1. MR. HAMMOND: Norman Schmidt joins in that objection. Q (By Mr. Angelo) With respect to the exhibits that you have in front of you, would you also now turn to Government Exhibit Number 12021. A Yep.

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help you find it? A Page 4 in handwriting? Q 34. A 34? Q That's correct. A Yes. Q Would you take a second to look through that $ document. A Yes. $ Q Do you recognize that document? A It appears to be one and the same of one with which we were dealing; that was one of the other cases, one of the early ones. Q And did you obtain information from Mr. Harte for the purposes of representing him in this particular $ lawsuit? A Idid. Q And did you enter an appearance in that particular lawsuit? A Tm sure I did. Q Now, with respect to the f ~ slawsuit that's t referred to as the Florida case, that was -A Okay. Q --12021. 2 A Uh-huh.

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Q Who was Mr. David Levine? A He was receiver -- he had been appointed receiver for a company in Florida called Sunstate FX, according to the complaint, Sunstate FX, I-N-C. Q And with respect to Exhibit C that we've talked about, at page 34, can you tell us, please, who Cynthia Lange was? A Cynthia Lange, as I understand it, was -had -- and had been for some time, manager of the so-called Redstone Castle and had managed that through the tenure of several previous owners and, as I understand it, continued to manage it after the acquisition by Leon Harte. Q And what was her association, if any, with the Reserve Foundation? A She became an investor. Q And she is the plaintiff in that particular action? A In the -- not in the Levine one; but, yes, in the so-called class action complaint, that's right. Q Let's talk a little bit about the nature of the claims with respect to these three lawsuits. Can you tell us, please, if you can, generally, or if you need to do it by specific complaint, what the plaintiffs were seeking and why?
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Q Yes. A -- LLCs, or the -- the Tranquility and Serenity and Peaceful? Q Yes, and the reason for their inclusion as defendants. A I don't believe it was -- it was apparent ftom the complaints, but it became apparent later when the same question was raised in a different context. The previous owner had divided some of the real estate into different parcels, and they had been assigned by the Pitkin County Planning Commission different zoning categories. And so, in fact, it was the suggestion of the attorney for the seller -- again, this is as I understand it or as it was explained to me, that -MR. HAMMOND: Objection, that would be hearsay. MR. SMITH: Join in the objection. MR. ANGELO: I concur. Q (By Mr. Angelo) Mr. Herbert, lets talk generically about the Redstone Castle properties if we can. A Okay. Q What was your understand'ig of the names of the owners of those parcels when you began
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MR. HAMMOND: Objection; 401,402,403, and
801.

MR. SMITH: Defendant Jan Schmidtjoins in that objection. MR. DAMER: So does George Beros. THE WITNESS: Well, the allegations in -- I'm trying to position these as broadly as possible, covering all of them. The allegations were that funds had been used -- funds intended for the overseas investments had been used to purchase the Redstone Castle instead without consulting any of the investors; and that Leon Harte and Debbie Harte had, in fact, according to the allegations, appropriated it for their own use. Q (By Mr. Angelo) And can you tell us, please, what the nature of the -- or the reason of the inclusion of the, I'll call them the options corporations, were in those complaints? MR. SMITH: Objection; foundation. This witness -MR. ANGELO: I'll rephrase the question. Thank you. Q (By Mr. Angelo) Do you know from your reading of the complaints that we've referred to as to the nature of the claims against the options corporations? A Do I know the nature of the --

representation? A That the record owners were Reserve Foundation and the three option LLCs and possibly the Reserve Foundation Trust. I don't recall specifically. Q And you obtained that understanding from where? A Well, I'm sure I saw real estate documents relating to the castle and also security agreements relating to the castle that had been recorded. Q When you talk about the castle, is that A That would be the Redstone - it was known as the Redstone Castle. Q Now, with respect to these complaints and the nature of the allegations in those complaints, did you have discussions with Mr. Harte about the source of the funds used to purchase the Redstone properties that -A Idid. MR. SMITH: I would object to the question, and specifically the Courfs prior ruling on the government's so-called James proffer of May 25th, 2005, and the proffer numbered 55 was ruled out. MR. HAMMOND: I'll join that objection, and also object on 40 1,402,403, and 80 1. Q (By Mr. Angelo) You may answer the question. A Would you repeat it, please.

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Q In order to meet the allegations of the civil actions, did you have discussions with Mr. Harte about -A I did. Q -- the sources of funds used to purchase the castle? A I did. And the source of the funds -- well, there were -- they would be in two stages and there were two different blocks of funds. Part of the funds came from, I believe it was FirstBank in Greeley, Colorado; part of the funds came from -- I'm sorry -- Sunstate FX in Florida. Q And based on your discussions with Mr. Harte, did you have any understanding of the original sources of those funds? MR. SMITH: Objection; the Court's prior order May 25th, 2005, ruling out this testimony. MR. HAMMOND: I join that objection on behalf of Mr. Schmidt. Q (By Mr. Angelo) You may answer the question. A It was my understanding that they had, in fact, been investor funds. And the rationale behind it was that this was - well, there were two rationales: One was that this was the management's profits, if you will, of various transactions; and number two -- and this became the dominant theory -- was that these funds were
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1 Q You've indicated, I think, that there was a 2 word used "parking"? 3 A Yes. Q Can you tell us please what Mr. Harte told you 4 5 about that? 6 A Yes, I can. It was -- the idea, as I understand it, was that rather than these funds sitting in a bank account, at various places, amongst them Greeley and Florida, and I believe at one point Saint Vincent's in the Grenadine Islands, rather than the funds just sitting there accumulating minimal interest, it was Mr. Harte's belief or assertion that it would --the castle was a very advantageous investment and perhaps the investors' money might be in it, it appears somewhere in the documents or a deposition, that he would be able to double the investors' money. MR. SMITH: I'm going to object to this response as nonresponsive, and also in violation of the Court's order of May 25th, 2005, the offer number 55 by the Government. MR. ANGELO: Thank you. MR. HAMMOND: I'll join that objection. Q (By Mr. Angelo) Please proceed to conclude your answer. A Okay. Parking the funds in the context in
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part -- part in quotation marks - in the real estate investment as a potential investment or as an investment for the investors or for the benefit of the investors while awaiting one of the transactions in London. Q And 1 want to clarify, when you say that originally your understanding was that these were from investor funds, are you referring to investors in this medium-term note program? MR. HAMMOND: Objection; leading. THE WITNESS: Well -MR. SMITH: I'm going to object to the form of the question. This witness hasn't testified to medium-tern notes. He testified to discounted -- deeply discounted promissory notes. MR. ANGELO: Thank you, Counsel. I'll rephrase it. Q (By Mr. Angelo) With respect to the investors, Mr. Herbert, that you have referred to, what was your understanding of what they were - had invested in based upon your conversations with Mr. Hartel A Well, the so-called instruments or notes went by various names, they were referred to by various names. Medium-tern would have been one of those terms, but that was not until much later. They generally, as I recall, were referred to as deep-discount notes.

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which it was used referred to investing the funds in an active profit-generating enterprise as opposed to the funds residing in a bank account. Q And that enterprise, as you understood it from Mr. Harte, was what? A The Redstone Castle. Q Did Mr. Harte tell you during the course of your representation what his hopes were with respect to the Redstone Castle, and that's from the standpoint of generating a profit? MR. SMITH: Objection; the Court's order of May 25th, 2005, ruling out this testimony. THE WITNESS: May I ask what the Court's order of May 25th is that keeps coming up? MR. ANGELO: Actually, you may just go ahead and answer the question. THE WITNESS: Okay. Would you repeat the question. Q (By Mr. Angelo) When you talked about parking the funds -A Okay. Q -- did you have a discussion with Mr. Harte during the course of this representation about what he hoped to achieve by purchasing the Redstone Castle with the investors' money?

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MR. HAMMOND: I join Mr. Smith's objection on behalf of Mr. Schmidt. Q (By Mr. Angelo) And the question is: Did you have a conversation about that? A We did have a conversation about that. Q And what did Mr. Harte tell you? A Mr. Harte indicated that there would ultimately be a capital appreciation by selling it because it was his belief that the mountain real estate market, or more specifically the mountain resort real estate market, was heating up and that he had gotten the castle at a very advantageous price. In the interim before the sale it was his thought that they would run -- "they" being he and his wife -- a form of B and B, and also with an entertainment aspect to it for which they had retained -- or obtained a liquor license for a pub in the basement of the Redstone Castle. Q Did Mr. Harte tell you why the funds were not vested in the deepdiscounted trading program that you had earlier referred to? A Hedid. Q Can you tell us, please, what he told you? MR. HAMMOND: Objection; 801. THE WITNESS: He told me that the transaction

MR. SMITH: Thafs Exhibit C thereto, Counsel? MR. ANGELO: Thereto, yes. MR. SMITH: Objection; 40 1,402,403, and 80 1. MR. HAMMOND: I think we've already made an
objection, but if we haven't, I join. MR. DAIKER: Also note Mr. Beros's objection to that. Q @y Mr. Angelo) Mr. Herbert, during the course of that representation, did you become familiar with allegations in the two complaints that we've discussed that there had been promises of insurance to insure those investments? A Yes, I was. Q And did you seek to determine at some point whether the insurance was available to repay those persons who were, in fact, plaintiffs in these lawsuits? A Yes, I did. Q And did you talk with anybody about that? A I asked Mr. Harte early on what was the status of the insurance. Q And what did he tell you? A He told me that the insurance had lapsed. Q And did he give you a reason for the fact that it had lapsed? A Generally that - I believe it was a trustee

was not, quote, ready; that is, he had been advised by Mr. Moss in London that there had been delays in these investment programs or perhaps specifically in the one he had in mind, that was never defined, but that, quote, the program had been delayed, and they were waiting for the next one. Q (By Mr. Angelo) And during the course of your representation, did you have similar conversations with Mr. Schmidt at all about the Redstone Castle and the use of the investor funds? MR. HAMMOND: Objection. THE WITNESS: I don't believe so at that juncture. Q (By Mr. Angelo) Did you at a later juncture? A It's very likely, yes. I don't recall specifically. Q Did you also have any discussions with Mr. Schmidt during the course of your representation at that juncture or at a later juncture about the parking of the funds that you've described? MR. HAMMOND: Objection. THE WITNESS: No. MR. ANGELO: At this time we're going to move to admit, subject to Court ruling, Exhibit 12021 and Exhibit C.

at the bank in Saint Vincent had been charged with the responsibility of purchasing the insurance or keeping the insurance in force; and that because of internal problems within the bank, that the premiums had not been paid or it had been lapsed or something. It was a technicality at that juncture, as I understand it. Q And did you continue to represent MI. Harte after the resolution of those lawsuits? A The only one that was resolved during his lifetime, as I recall, would have been the Cynthia Lange lawsuit. Q Did you continue as counsel in the lawsuit that we've talked about with respect to Universal Synergy? A Yes. Q And did you continue to act as liaison with respect to the - what you've referred to as the Florida lawsuit, which is represented by Exhibit 12021? A Yes. Q After commencing your representation of Mr. Harte with respect to his business matters involving the Reserve Foundation and what I will call the options corporations, did you start to actively represent Norman Schmidt? A Idid.
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Case 1:04-cr-00103-REB

Document 705-3

Filed 04/10/2006

Page 9 of 11
14 (Pages 4 1 to 44)

1 Q Can you tell us, please, whether that was for 2 business or personal matter? MR. HAMMOND: Objection. THE WITNESS: It was for business matters as
6 Trust, as I recall. 7 Q (By Mr. Angelo) And in what particular kind 8 of matters were you engaged to represent Mr. Schmidt? MR. HAMMOND: Objection. THE WITNESS: As I recall, he was sort of 11 reorganizing and revivifying the activity of those 12 entities or taking over from Harte. 13 Q (By Mr. Angelo) Is that based upon

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name would be adopted for this reconstruction? MR. HAMMOND: Objection. THE WITNESS: I don't know at -- or I don't recall at what point in time. I don't believe he ever business under another name called Capital - Capital what? And then later under another name called Monarch Investments. Maybe it was Capital Investments. I'm not

10 Q (By Mr. Angelo) If you would, please, would 1 1 you turn to the tab marked 300 1. 12 A 3001? 13 Q Right. I'm sorry. Did I misstate that? 15 misnumbered there is no 3001. MR. SMITH. Yes, there is. THE WITNESS: Oh, yes, there is. I'm sorry. 18 Q (By Mr. Angelo) Take a minute to look at that 19 if you would, please. 20 A (The witness reviewed the exhibit.) 21 Q First, do you recognize that document? 22 A Ido. 23 Q How do you recognize it? 24 A By my letterhead and by my signature on the 25 last page, which would be page 3, and then by the content

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MR. HAMMOND: Objection. THE WITNESS: I'm sure there would have been conversations to that effect, but it also became apparent from the nature of the transactions and what we did. It also -- I represented him in matters containing -- I mean, pertaining to the racing activities. Q (By Mr. Angelo) And besides the racing activities, what kinds of services were you performing for Mr. Schmidt related to his reconstruction of the Reserve Foundation? MR. HAMMOND: Objection.

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THE WITNESS: I don? recall specific items, but we did discuss at some juncture the possibility of SEC issues, we discussed the possibility of insurance to date, if you will.

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that at least I had the opportunity to skim over. Q Okay. With respect to that particular letter, do you recall whether it was prepared at or about the A That looks to be close in time, yes. A Ms. Jannice McLain. MR. ANGELO: And I think the government at this time would move to admit Exhibit 3001 subject to order of the Court. Q (By Mr. Angelo) Mr. Herbert, can you tell us, please, who first requested that you prepare this letter? MR. HAMMOND: Objection. THE WITNESS: As I recall, Mr. Schmidt and/or Ms. McLain. Perhaps they were in the office together

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8 A Whether or not the program should be 9 registered or brought into - if it needed to be into 10 compliance with SEC regulations. 11 Q And based upon your conversations related to 12 this representation with Mr. Schmidt, what did you 14 Foundation program? MR. HAh4MOND: Objection. 9 10 11 12

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reach an accommodation with a group of investors represented by a -- an individual or an entity called Federal Recovery Group and an individual called - I forget his name -- Beanstalk.

19 Ms. McLain, and specify who, please? MR. HAMMOND: I object to that, that assumes 21 facts that are now not in evidence. As the witness just 22 stated, he doesn't remember who asked him specifically to

Javernick & Stenstrom, LLC 3 13 1 South Vaughn Way, Suite 224, Aurora, Colorado 80014 (720) 449-0329 FAX (720) 449-0334

Case 1:04-cr-00103-REB

Document 705-3

Filed 04/10/2006

Page 10 of 11
17 (Pages 53 to 56)

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A Yes. Q And, again, did that information come from somebody other than yourself -A Yes. Q -- as a reviewer of the policies? A Yes. Q Who? MR. HAMMOND: Objection. THE WITNESS: Mr. Schmidt and Mr. Weed. Q (By Mr. Angelo) If you'd look at the second page of the exhibit. A Yes. Q There's a numbered paragraph 4, the last sentence there. Do you see the one l'm refening to, starting with Capital Holdings and ending with $200 million? A Yes. Q That sentence indicates that there's an additional policy provided by Capital Holdings for protection of investor funds in the amount of $200 million. Can you tell us, did that information come from your review of the insurance documents that you've referred to? A No, it did not. Q Can you tell us, please, from what source you
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of the process by which an insured or investor could seek repayment of any loss by an insurance company? A I did. Q And who did you seek information from related to that specific situation? MR. HAMMOND: Objection. THE WITNESS: Mr. Weed and Mr. Harte -- I mean, Mr. Weed and Mr. Schmidt. Q (By Mr. Angelo) Now, once that letter, Exhibit 3001, was prepared, what was your understanding of the use that would be made of it based upon your conversations with Mr. Schmidt? MR. HAMMOND: Objection, and I object on the grounds that its leading. Q (By Mr. Angelo) You can try to answer the question, if you can. A That he felt it was a clear explanation and it satisfied the need, as far as Jannice McLain goes, and that as such he would discuss with his -- the other members of his organization the contents of it, because he felt it was a good explanation of a very -- about a very complicated or complex matter. Q And did he tell you who those other members of his organization were? MR. HAMMOND: Objection.

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obtained that information? MR. HAMMOND: Objection. THE WITNESS: From the conference telephone call with Mr. Weed and Mr. Schmidt. Q (By Mr. Angelo) With respect to paragraph 5, if you'd take a second look at that, please. A Yes. Q It refers to the fact that investors, once their funds would clear the bank, would receive personal certificates of insurance with respect to each of the policies described. A Uh-huh, yes. Q Did that information come from your review of the insurance documents? A Not that I recall. Q Do you recall where it would have come from? MR. HAMMOND: Objection. Q (By Mr. Angelo) If you don't know, please say you don't. A IdonY know. Q Okay. And please take a look at the last paragraph of the second page. A Yes. Q For the purposes of preparing this letter, did you attempt to obtain information concerning the nature

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THE WITNESS: Yes, he did. Q (By Mr. Angelo) And do you recall the names that he gave you? A I recall some of them. Q All right. What do you recall at this point? A Which ones? Q Yes. A There was a Mr. Vallone. There was a Mr. Smith. And I don't recall anybody else at this juncture -Q Okay. A -- at this point. I'd have to refresh my memory. MR. GOODREID: Counsel, when we get to a convenient place, if we could take a short break. THE REPORTER: I msorry. I didn't hear you. ' MR. GOODREID: I just said l'd like to take a short break when it's convenient with counsel. MR. ANGELO: If this is a good time with everyone, this is f i e with us, probably for the court reporter. VIDEOGRAPHER: The time is 1054. We're going off the record. (A recess was taken from 1054 a.m. until 1 l:07 a.m.)

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Javernick & Stenstrom, LLC 3 13 1 South Vaughn Way, Suite 224, Aurora, Colorado 80014 (720) 449-0329 FAX (720) 449-0334

Case 1:04-cr-00103-REB

Document 705-3

Filed 04/10/2006

Page 11 of 11
21 (Pages 69 to 72)

A Yes. Q On or about June 26,2002? A I can't say specifically, but it would be around that period, yes. Q And did you know or have any reason to know who Michael Smith was at the time of the receipt of that letter? A No. Other than he -- he was referred to by Mr. Schmidt as a part of his organization. Q And in your conversations with Mr. Schmidt about that, did he indicate to you what Mr. Smith's role was in that, quote, organization, unquote? MR. HAMMOND: Objection. THE WITNESS: No. Q (By Mr. Angelo) Did you do anythmg in response to this particular letter, Govenunent Exhibit 901? A I believe -- I believe -- yes. Q And what did you do? A I believe I sent him a copy of the letter that went to Ms. McCain (sic) with Mr. Smith's name as the addressee. Q And do you recall how you did that, whether by U.S. mail or fax? A I don't recall.

1 personal discussions with Mr. Smith about this letter? 2 A With Mr. Smith? 3 Q Yes. 4 A Not that I recall. Q Would you take a look at Exhibit Number 7001, 5 6 please. 7 MR. HAMMOND: What did you say? MR. ANGELO: 700 1. 8 THE WITNESS: Yes. 9 10 Q (By Mr. Angelo) Do you recognize that? 11 A Yes. 12 Q And how do you recognize it? 13 A Well, it would have been a part of the same 14 transaction or the same incident or circumstances. Lets 15 call it a transaction. 16 Q And if you can clarify what you mean by 17 "transaction" that would be helpful. A Well, it grew out of the letter to Ms. McLain 18 19 and the situation we earlier described as the request to 20 send this - that letter to several members of 21 Mr. Smith's (sic) organization, of which - and the only 22 two names, you recall, that I recalled were a Mr. Vallone 23 and a Mr. Smith. Q And in your conversations with Mr. Schmidt 24 25 about this organization, did he describe for you what
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Q Would you take a look at Government Exhibit Number 902, please. A Okay. Yes. Q Have you had an opportunity to review that exhibit and its associated pages? A Yes. Q And do you recognize it? A Yes,I do. Q As what? A As a fax transmittal sheet addressed to - my fax transmittal sheet as addressed to Michael Smith. The typeface is done in italics, which would be unusual for me, but the letter I believe is the same one, and I would have authorized it to go to Mr. Smith. Q And you recall preparing that letter for Mr. Smith? A I -- yes. Q And is your signature contained on that letter? A Yes. MR. ANGELO: At this time we would move for the admission of Exhibits Number 90 1 and 902, subject to order of Court. MR. O'DONNELL: No objection from Mr. Smith. Q (By Mr. Angelo) Mr. Herbert, did you have any
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Mr. Vallone's role was in his organization? MR. HAMMOND: Objection. THE WITNESS: No. It would be the same thing, that he was part of this larger organization of -- for lack of a better term, sales organization. Q (By Mr. Angelo) Okay. And in response to that -- in response to this letter, marked as Exhibit 700 1, did you do anything? A Did I do anything? Q Uh-huh. A Yes, I transmitted a copy to him. Q And did you address a copy specifically to Mr. Vallone or just a copy of the letter addressed to -A No. I would have or did change the addressee to that of Mr. Vallone. MR. ANGELO: At this time the government would move to admit Government Exhibit 7001, subject to court order. MR. O'DONNELL: No objection from Mr. Smith. Q (By Mr. Angelo) Would you take a look at Exhibit 7002, please. A Yes. Q Do you generally recognize what that is? A Well, generally it is another iteration of the same letter with the exception of the blank-outs and the
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Javernick & Stenstrom, LLC 3 13 1 South Vaughn Way, Suite 224, Aurora, Colorado 80014 (720) 449-0329 FAX (720) 449-0334