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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Criminal Action No. 04-cr-103-REB UNITED STATES OF AMERICA, Plaintiff,

NORMAN SCHMIDT, GEORGE ALAN WEED, CHARLES LEWIS, MICHAEL D. SMITH, Defendants. _______________________________________________________________ REPORTER'S TRANSCRIPT TRIAL TO JURY - VOLUME XXIII _______________________________________________________________ Proceedings before the HONORABLE ROBERT E. BLACKBURN, Judge, United States District Court for the District of Colorado, commencing at 8:35 a.m., on the 8th day of May, 2007, in Courtroom A701, Alfred A. Arraj United States Courthouse, 901 19th Street, Denver, Colorado. APPEARANCES WYATT B. ANGELO, MATTHEW KIRSCH, Assistant United States Attorneys, 1225 Seventeenth Street, #700, Denver, Colorado, appearing for the Government. Suzanne M. Claar, Official Reporter 901 19th St. Denver, Colorado, 80294-3589 (303)825-8874 PROCEEDINGS REPORTED BY MECHANICAL STENOGRAPHY TRANSCRIPTION PRODUCED BY COMPUTER

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APPEARANCES (Continued) PETER R. BORNSTEIN, 1600 Broadway, #2350, Denver, Colorado, THOMAS J. HAMMOND, 1544 Race Street, Denver, Colorado, appearing with Defendant Schmidt. THOMAS E. GOODREID, 1801 Broadway, #1100, Denver, Colorado, appearing with Defendant Weed. RONALD GAINOR, 6414 Fairways Drive, Longmont, Colorado, appearing with Defendant Lewis. DECLAN J. O'DONNELL, 777 Fifth Street, Castle Rock, Colorado, RICHARD N. STUCKEY, 2150 West 29th Avenue, #500, Denver, Colorado, appearing with Defendant Smith.

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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 BY MR. KIRSCH: Q

P R O C E E D I N G S (Proceedings resumed at 8:35 a.m.) THE COURT: gentlemen. Very well. Mr. Schmidt, good morning. Good morning. Thank you, and please be seated, ladies and

MR. SCHMIDT: THE COURT: MR. WEED: THE COURT: MR. LEWIS: THE COURT: MR. SMITH: THE COURT:

Mr. Weed, good morning. Good morning, your Honor. Mr. Lewis, good morning. Good morning, your Honor. Mr. Smith, good morning. Good morning. Counsel, good morning, and ladies and

gentlemen generally, good morning, and ladies and gentlemen of the jury, good morning. THE JURY: THE COURT: Good morning. I presume we are prepared to proceed.

And, thus, Mr. Kirsch, you may resume cross-examination of Mr. Smith. (Michael Smith was recalled to the stand.) MR. KIRSCH: THE COURT: Thank you, your Honor. You are welcome. CROSS-EXAMINATION

Mr. Smith, yesterday I had asked you question about the

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Michael Smith - Cross signature authority for the National Marketing Solutions account at US Bank? A Um-hm. MR. KIRSCH: Your Honor, I would ask for leave to

publish a portion of Government's Exhibit 9203 at this time, which are the records for that account. THE COURT: MR. KIRSCH: THE COURT: BY MR. KIRSCH: Q Is this the certificate of authority that you provided to Leave is granted. And if I may use the ELMO, please. You may. Thank you.

the bank in connection with that account, Mr. Smith? A Q It appears to be, yes. And if we look here on page 2, that's your original

signature here on the first line, isn't it? A Q Yes. And that's a signature stamp for Mr. Mitchell there on the

second line? A Q I believe so, yes. Also a signature stamp for him down here under authorized

signers? A Q Yes. Now, if we look at the top of this page, you received this

from the bank via fax on March 5th of 2002, right, and then faxed it back to him about half an hour later at 4:56 in the

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Michael Smith - Cross afternoon after receiving it at 4:27? A Q Yes. And the reason that you would have wanted to fax this in as

opposed to doing it in the bank is that a bank doesn't accept a signature stamp for a signer if you do it there in person, do they? A Q No. Now, the address that you used for the Northwest Group, LLC,

that was on Newport Highway? A Q A Q Yes. That's at Mail Boxes, Etc., right? Yes. That's the same address that you used for any number of the

trusts that you and your employees and your investors used, right? A Q Yes. Now, why is it you didn't use the address where your

business was located at 505 Gem Lane? A We did use that sometimes, but the mail would never come

until four or five o'clock every day living up in Colbert so it was to get our mail in the morning that way. Q Okay. It didn't have anything to do with not wanting an

association between your address and National Marketing Solutions? A Had nothing to do with it.

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Q A Q A

Michael Smith - Cross Do you know who Elise Hart is? Yes. She worked with Mr. Schlabach.

She was an employee of the Northwest Group, I take it? I don't know if she was an employee. How John worked with

her, I don't know. Q A Q She didn't have anything to do with you? No. Let me ask you to take a look at what's marked for We can

identification as Government's Exhibit 1005, please.

just put it up on the screen if we don't show it to the jury. Are you able to see that on your screen, Mr. Smith? A Q A Q A Q Yes. Do you recognize that? Yes. Fax cover sheet? Yes. Can you tell me why it is that it's a fax cover sheet from

Elise Hart saying from National Marketing Solutions, LLC? A Yeah. We shared the office there so they just used the fax

cover sheet to send faxes. Q Doesn't mean she had anything to do with National Marketing

Solutions, right? A Q Does she what? The fact that her name is on a National Marketing Solutions

document doesn't mean she had anything to do with National

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Michael Smith - Cross Marketing Solutions? A Q No. She didn't.

Just like the fact that your name on the document that says,

called by Michael Smith of Northwest Group, LLC, doesn't really mean you have anything to do with Northwest Group? A Q No. You also testified yesterday I think that Val Bough was a

part of the Northwest Group? A Q A No. I didn't say that.

Oh, you didn't? No. The salesmen were paid their fees that they earned from

the trades through Northwest Group. Q But you didn't testify earlier that Val Bough was a part of

the Northwest Group? A I said they were the salesmen that were selling the program

through the account of Northwest Group for their fees. Q I was wondering why it was the other day that when we were

talking about Mr. Bough, you said he went around me when he was trying to collect fees? A Yeah. He went sometime I believe in October or November, I

found out after the fact, after everything was shut down March 7th of '03, that he went directly with Norm and cut a deal with him to bypass the Northwest Group, myself, whatever you want to call, so he could deal direct and he brought like 120 clients directly to Capital Holdings, bypassing us, cutting us

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Michael Smith - Cross out of our fees. Q The whatever you want to call it is what I need to ask you Because you have testified that he was a part of the

about.

Northwest Group, and you also testified that he went around me. And I am trying to figure out how it is that he could -- that both of those could be true? A Okay. Well, as I said earlier, the Northwest Group was an

account set up to do the accounting to pay everyone their fees that they had earned. That's what Mr. Schlabach got a quarter It was his company. He

point to provide those services for. owned that company.

My account was Asset Holding where I got

paid overrides through there, so by him bypassing both myself, Asset Holding, and Northwest Group, he cut us out of all the fees we were entitled to as salesmen. Q A Q He went around you and the Northwest Group? Yes. That's what I said.

That's not what you said, actually, I don't believe. You have also talked a lot about due diligence, and I

am curious to know exactly what it is you mean when you are using the term "due diligence"? A Due diligence is where I had checked out Norm Schmidt back

in April of '02, where he came back clean and didn't show any felonies. Continued due diligence was talking to other people.

When I first looked at this Terry Lorenzen, Bly Haugen, some of the other people who were involved in this program. Tom Wright

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Michael Smith - Cross from the races that we went to down in Colorado Springs raceway, and some of the crew people that worked with Norm. Just a lot of the different investors that were in the program before I ever came in. Talked to them about how happy

they were, if they were paid their earnings, and everyone was completely happy, and everyone was being paid what they were supposed to be paid from the people I talked to. Q So due diligence, as you have described it, includes running

the check that you ran on Mr. Schmidt in April of 2002 and talking to previous investors? A Yes. And also talking with Mr. Herbert, getting securities It was ongoing continuous due

opinion letter from Norman Sirak. diligence. Q A Okay.

And when did that begin?

That would begin in probably after May, April/May, ongoing

continuous due diligence. Q No. I am talking about when did the process of due

diligence begin at all? A It started in February when I had talked with Mike Vallone. We didn't find any information. So it would

We did some Internet searches.

Continued to talk to people throughout the program. have started probably the end of February. Q A Q End of February? Yeah. And you invested in mid-March?

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Michael Smith - Cross 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 A Q Yes, sir. So it took you about two weeks to complete your due

diligence to satisfy yourself, at least with respect to your own money, that this was a good deal? A Q Yep. And during that two weeks you had done some Internet

research, right? A Q A Q Yes. You talked to previous investors? Yes. You hadn't yet actually done the background check on

Mr. Schmidt because you didn't do that until April of 2002, right? A Q A Q Correct. You invested before you did that? Yes. Okay. And you testified yesterday about receiving Smith Do you recall that? Yes.

Exhibit 44. A Q A

I have to look at it here.

Have you got that there in front of you now? Yes. MR. KIRSCH: Could I ask for leave to publish this on

the ELMO as well, please, your Honor? THE COURT: BY MR. KIRSCH: You may. Thank you.

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Q

All right.

Michael Smith - Cross Do I have the first page of that on the screen

now, Mr. Smith? A Q Yes. And did I hear you say yesterday that you received this

document from George Beros and Norm Schmidt in February of 2002? A Q A Q Yes. From Norm Schmidt.

You didn't say George Beros yesterday? I believe I did, yes. Was that true? Did you get it from George Beros and Norm

Schmidt, or just from Norm Schmidt? A Q A Q From Norm Schmidt is who actually gave it to me. Did you even meet with George Beros in February of 2002? No, I did not. And if I understood your testimony correctly yesterday, this

is one of the documents that convinced you that the Capital Holdings program or the Smitty's program were legitimate investments. A Q Yes. Looking at page 3 of that exhibit now, monetary science, Did I get that right?

plus political science, plus fractional reserve banking, equals capital markets and bank instrument trading. Can you explain to

us, please, how that equation convinced you this was a legitimate investment program? A Well. The fractional reserve banking explained how they Turned a hundred million into

leveraged their money.

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Michael Smith - Cross 900 million made sense to me in reading these materials here. Q A What does this equation mean here, Mr. Smith? I don't know what the whole entire equation means. Just the

idea of it. Q I am not asking what was explained to you, Mr. Smith. Did you understand fractional I am

asking what you understood. reserve banking? A Q Yes.

From what was explained to me.

I just told you that.

Then there are a couple of pages about the history of money How is it that this information about the history of

in here.

money convinced you that this was a legitimate program? A I would have to go back and re-read it all. It's been a

long time since I read it. history of money evolved. Q

It made sense, though, of how the

Wasn't this part of the materials that you asked Tammie

Goulet to modify so you could use it in your sales presentation? A Q She didn't modify it at all. She did just clean it up.

You did ask Tammie Goulet to clean this up to make a

presentation that you yourself used, right? A Q Yes. Is that what we saw earlier in Government's Exhibit 2015,

one of the master copies that was seized during one of the search warrants? A Q Yes. That was something you asked Tammie Goulet to make based on

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Michael Smith - Cross this document, isn't it? A Q Yes, sir. It was duplicated from this document.

And you used this document when you were trying to get

people to invest in the Capital Holdings program, didn't you? A Q Yes. This was the Capital Holdings information he gave us.

But as you sit here today, on trial for your participation

in soliciting investors in the Capital Holdings program, you don't remember what the history of money is or how it relates to this investment program? A I haven't looked at this thing in four years. But it is

exactly the copy of what was given by Capital Holdings marketing materials. Q It's exactly what you got and turned around and gave to

investors in exactly the same format, right? A Q Yes. What's numbered as page 7 on this exhibit talks about the

various reserves of various functions of the Federal Reserve. Do you have that in front of you now, Mr. Smith? A Q Yes. I believe you told Mr. O'Donnell yesterday that you

understood how the Federal Reserve performed all of these functions? A Q A Yes. From reading this document.

What does that mean? This is just general terms of each aspect of the Federal

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Michael Smith - Cross Reserve, again in very general terms. Q What do those general terms have to do with the investment

program that you were soliciting to investors? A It goes back to the fractional reserve bank and how the

money moves around through the Federal Reserve and overseas and around the world. Q Tell me which part of this page relates to fractional

banking? A Q A Nothing on this page. Then how does it relate to the investment program? It's an overall understanding of the program, different The regulator, banker, lender, just explains

aspects of it.

different functions that happens inside the Federal Reserve in a very basic manner. Q Which portion of this page has anything to do with the

investment program that you were selling? A Q A Q A Q It doesn't have anything to do with it. Nothing to do with it? Not this page, no. Why is it in the materials? This is just an overall explanation of the Federal Reserve. All right. Page 9, this is the fractional reserve banking

page. A Q

Now, fractional reserve banking you understand, right?

The basics of it, yes. Explain that to us again, please. How does fractional

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Michael Smith - Cross reserve banking relate to the Capital Holdings investment program? A The way it explained to me is how they can take a hundred The bank

million dollars and leverage it out to $900 million.

has to keep ten cents on reserve, and they can leverage the rest of the money out through loans to earn fees and make money on it. Q Is it the Federal Reserve that does the fractional banking,

or is it other banks that do the fractional banking? A Q A Q A It's just the banks that actually do it. It's not the Federal Reserve? No. So how is the Federal Reserve involved? Federal Reserve oversees it and they have rules where the You get some money from the

banks allow them to do that. Federal Reserve. Q

If we go to page 13 here where it begins to say, the basics.

Now, is this where the -- is this where we are starting to get into the actual meat of how this trading supposedly works? A Q Yes. The basics of it, yes.

Now, there is no mention in this discussion of medium-term

notes, is there? A Talks about bank debentures and zero coupon bonds. Letter

of credits. Q Do you know what those are?

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A Q

Michael Smith - Cross The different notes that they trade between banks. What's the difference between a stand-by letter of credit

and a bank debenture? A My understanding, the way George explains a stand-by letter

of credit is an account where they can screen and issue a letter of credit against the money that they have in the bank account. Q What's the difference between that and the bank account,

Mr. Smith? A Very similar where they traded paper between the two banks

after they had screened it. Q You don't have any understanding of this document other than

Mr. Beros told you? A Just general basics. Like I said, it's been over four years

since I have read it. Q At the bottom of this page, it says that Deutsch Bank off

balance sheet business was 2.4 times its on balance sheet business. Do you believe that to be true, Mr. Smith, given your

knowledge of banking regulation from your work as a mortgage lender? A Yeah. This comes back, I believe, to part of how they

leverage their dollars. Q So you believe it's true that, in an industry as highly

regulated as banking, that banks are allowed to have 2.4 times their business off their balance sheets? That they can have 2.4

times more business off their balance sheets than on them?

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A Q A Q

Yes.

Michael Smith - Cross That's how you leverage it ten to one. That just means funds are leveraged?

That's all that means. Yes.

Leveraged funds aren't recorded on banks' balance sheets,

you think? A Q A I am sure they are. Then how are they off balance sheet? They also have off balance sheet items they do with

medium-term notes and other stuff, too. Q A Q The medium-term notes are off balance sheet? That's how Mr. Beros explained. Then how is it that you got comfort from looking at that

other US Bank report that indicated on its balance sheet the interim notes? What does that have to do with the trading

program if they are off balance sheet? A Q A Q You can do it both ways, on balance and off balance. How do they decide? I don't know. Which ones were at issue in this trading program, the ones

on balance sheet or the ones off? A Q I have no idea. Page 16 of this document talks about how trading programs Again, I think you said that this was

generate profits.

consistent with your understanding of how this program worked? A Yes. The general idea of it.

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Q

Michael Smith - Cross No. 3 there talks about funds being exchanged.

But I

thought that your understanding was that funds never left the account? A Q A They didn't. So how did they get exchanged? They screen the account, like I said earlier, that was told

to me by Mr. Schmidt and Mr. Beros. Q A Q Screening is the same thing as an exchange then? No. Well, is this document accurate or not? It says, funds from

trade account are exchanged? A There are many different ways that are done. It's just one

aspect of it, I am sure. Q This is not the way it was done in the program that you were

selling to people? A No. They actually will exchange the paper overseas when They screen the account in

they are doing a trade with a bank. the U.S. bank. Q

Is this the way the trades operated in the programs you were

selling it, Mr. Smith? A Q A Q A Yes. Part of it was.

The funds were being exchanged? Overseas when they traded paper between the banks. And your proof that that happened was George Beros told you? George and Mr. Schmidt, yes.

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Q A Q

Michael Smith - Cross Norm Schmidt told you also? Yes. That was your due diligence to determine that the trading

was occurring, asking Norman Schmidt and George Beros? A They told me the trades were being made and they made money I had no knowledge they were not making trades.

on it. Q

And that was the sum total of the work you did to confirm

that the trades were occurring, wasn't it? A I also talked to Mr. Herbert. He verified they were making

trades and making profits, and relied on him as an attorney with his opinion. Q He did also.

Mr. Schmidt's attorney also told you the trading was

happening? A Q A That is correct, yes. Is that the sum total then? Um, then a continuation of just every time there was a

question or issue came up, we would address it, and I consider that ongoing due diligence. Q Can we look at Smith Exhibit 31, briefly, please. Publish that electronically as well, your Honor? THE COURT: BY MR. KIRSCH: Q First page of that document, please. Do you see that on the And you may. Thank you.

screen in front of you, Mr. Smith? A Yes.

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Q

Michael Smith - Cross This is the document that you testified I believe you

printed you received directly from US Bank? A Q Correct. When you received this document from US Bank, the logo on

the first page was crooked like that? A Q Yes. One of the biggest banks in the country puts out an annual

report with a logo at a 30-degree angle on the cover page? A Yes. If you want the original, it's right here. That's the

way it's designed. Q Let's talk about the work you did on the Internet. You

testified you went to the Federal Reserve web site, correct? A Q Yes. One of the things that you did when you were at the Federal

Reserve web site was you printed out Smith Exhibit 13, right? Let me pull that out briefly, please. it. That's it. No. That's not

This is a document that you said you printed

out from the Federal Reserve web site, right, Mr. Smith? A Q Yes. And can we go down to the bottom of that, please. Now, this

says it was printed out in April of 2003.

But your testimony, I

think, was that you in fact had been to this site in April of 2002; is that right? A Q Yes. So you just didn't happen to print out a copy the first time

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you went.

Michael Smith - Cross You went back and printed out another copy after the

search warrants and seizures of the accounts had happened, right? A it. No. What happened is I had this in the computer and saved

When you reprint it out, it puts a new date at the bottom

when you printed it out and I gave it to my attorneys as part of our evidence. Q A Q But you know you went there in April of 2002? Yes. Or it might have even been earlier than that.

And you also, when you were there, printed out the Federal The Federal

Reserve bulletin that we have seen several times?

Reserve bulletin about the anatomy of the medium-term notes markets, Government's Exhibit 231, for example? A Q A Q Yes. Okay. I actually got that from Mr. Schmidt. Did you get that from Mr. Beros and Mr. Schmidt or just I wasn't sure about that either.

Mr. Schmidt? A Q

Just Mr. Schmidt. If you said you got it from Mr. Beros yesterday, that wasn't

right? A Q No. It wasn't. Now,

Now, can we look at Government's Exhibit 440, please.

this is the press release from May 20th of 2002 on the Federal Reserve web site containing warnings about high-yield investment

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frauds. A Q

Michael Smith - Cross Do you remember that? It's too small.

I can't see this thing. All right.

Can we blow up the top half of that, please.

Are you able to read that now, Mr. Smith? A Q A Q Yes. Do you remember seeing this document before? I believe through the trial. Okay. You didn't see this when you were doing your due

diligence because you it did it before May 20th of 2002, right? A Q Yes. Now, can we look at Government's Exhibit 2020, please. And

can we zoom beginning right under the subject line, please. Right there. Now, this is the 1996 warning from the Federal Reserve web site about these kind of investment programs. But you

didn't happen to bump into that while you were on the Federal Reserve web site in April of 2002? A Q No. I didn't see it. When you were doing your

When you were doing -- thank you.

Internet due diligence, you never went to the NASD site, did you? A Q A Q No. You never went to the Washington state securities site? No. Never went to the Colorado State securities site?

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Michael Smith - Cross 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 A Q No. And clearly you never went to the Nebraska state securities

site either, right? A Q No. So if we can look at Government's Exhibit No. 213, please.

So you never saw this press release from the Nebraska securities commission about the cease-and-desist order against Smitty's? A Q No. In fact, I think you said yesterday there was no way you

could have seen this because your due diligence was completed prior to that date. A Q Yes. So your Internet searching was done prior to April 4th of Didn't you say that?

2002? A Q A Q Yes. And no investors ever mentioned that exhibit to you either? No. And you never talked with John Schlabach about anything

about that cease-and-desist order? A Q No. Can we look at Government's Exhibit 351, please. This is

the e-mail that Mr. Schlabach -- that Mr. Kirkham said he received back from Mr. Schlabach. A Q Yes. And in the e-mail Mr. Schlabach said that he had a call in Do you recall that testimony?

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Michael Smith - Cross to the principals and that Mike was setting up a call with Wells Fargo to confirm the accounts. was you, Mike? A Q A Q Yes. But I never set this up. That was you, wasn't it? That

You never set that up? No. I did not.

John Schlabach never talked to you about the fact that

investors at his church were telling him they had had some serious concerns about the program? A Q No, he did not. Okay. Government's Exhibit 352, can we look at that Can we go to the second page of that document,

briefly, please? please.

Do you remember Mr. Kirkham's testimony that they found

that Nebraska press release, and that he printed it out and sent it to John Schlabach? A I don't remember exactly what he said but I remember seeing

it in his testimony. Q A Q But Mr. Schlabach never passed that on to you? No. He did not.

Even though this was the Mr. Schlabach who you had been

friends with for more than ten years? A Q A Q That's correct. Your business partner? Yes. The person that did all the accounting for all of the

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Michael Smith - Cross investors that you were bringing into the program? A Q That's correct, yes. The person that later on you asked to do due diligence on

your behalf? A Q That's correct. But he never talked to you about this cease-and-desist order

against the very entity with which you had invested your own money? A Q That's correct. Can we look at page 9 of Government's Exhibit 1021, please.

When Mr. Ortize got out of the program, Mr. Smith, you wrote this note at the bottom of this statement, didn't you? A Q Yes, I did. And you knew when you wrote that note that Mr. Ortize was

concerned because he had found in part that Nebraska cease-and-desist order, didn't you? A Q A Q No. Don't put words in my mouth. That's not true at all.

That's not true? No. What is it that made Mr. Ortize -- what is it that made you

unsure of Mr. Ortize's safety as an investor? A Mr. Schlabach said he wasn't sure that he was comfortable He wanted his monies refund. So that

staying in the program.

happens many, many times to our clients, both in insurance and in Capital Holdings when someone wants their money back, whether

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Michael Smith - Cross it was insurance or annuities, we would simply give the money back. Q A Q It was Mr. Ortize that was unsure about the safely, not you? That's true. That was what require you to put an exclamation point at the

end of that note? A No. That's just -- I put it there. Mr. Schlabach told me

he wasn't sure -- didn't know if he was willing to stay in. Felt more comfortable having the money in the bank where it was before. Q I said, fine, we will just give him his money back.

If it's so routine, why did you put an exclamation point at

the end of your note? A Q A Q A I just put an exclamation. Just what you do? Yes. Just ordinarily use exclamation points? If you see my notes, I have all kinds of exclamations in It's just what I do.

there, too. Q After you -- can we look at Government's Exhibit 3004, This is the version of the press release that Michael

please.

Huffman was able to find, the car salesman. A Q A Yes. But -The date is April 4th. Mine was the same exhibit you showed

on that other one.

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Michael Smith - Cross 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 Q A Right. That was after my due diligence. I checked on the Internet

in February, so obviously it wouldn't be found then. Q A Q And you never looked back again? No. Despite the fact that you were doing continuing due

diligence throughout the life of the program? A Q A Q That's correct, yes. That doesn't include going back to the Internet again? No. Now, didn't Robert Wommack give you a copy of that Nebraska

cease-and-desist order? A In July or August, somewhere in that time frame, I believe

it was. Q A Q A In July or August of 2002? Yes. Mr. Wommack gave you a copy of that cease-and-desist order? It might have been later. I think he said he looked at this

for nine months, and I think four or five months into this he found the C and D. Q That wasn't any kind of an important fact for you that would

stick out in your mind in terms of when you would have gotten that? A I just don't recall. I mean it's been four years ago, five I don't know the exact date.

years, whatever it's been.

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Q

Michael Smith - Cross But your testimony is that sometime in the summer of 2002,

you got a copy of the cease-and-desist order against Smitty's from Mr. Wommack, right? A It could have been the summer or fall. I don't recall

exactly when. Q After you got the cease-and-desist order, I presume you

notified all your investors, right? A Q No, I didn't. You didn't notify any of your investors that there had been

a cease-and-desist order issued against the very investment program in which they had invested? A Q A Correct. Do you think that was important to them? When I called Mr. Schmidt up and he explained the situation, It was an administrative rather than

what happened in Nebraska. a court order. respond to.

It was an administrative thing they didn't

They had a client there, and they refunded their So

$5,000, and the guy testified here that got his money back. there is many, many companies have cease-and-desist orders against them. Q So again your due diligence ended once you talked to

Mr. Schmidt and he gave you an explanation? A Yes. And I explained to Mr. Wommack and he still invested

after the fact, so he felt comfortable with it. Q Well, speaking of Mr. Wommack, you got a call from

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Michael Smith - Cross Mr. Wommack once he got his subpoena from the SEC, right? A Q Yes, I did. And you then had telephone conversation with Mr. Lewis about

the fact that Mr. Wommack had been subpoenaed by the SEC, didn't you? A Q he? A Q A Q A Q A Yes. He was upset. Yes. During that telephone call Mr. Lewis was very angry, wasn't

He said that this could ruin everything? I don't know if he said those exact words. Said something like it? I don't recall for sure. He was just upset.

You don't remember that conversation either? No. I said he was upset. I don't know the exact words that

were said. Q You don't even remember an approximation of what he said, do

you? A No, I don't. I reported it to Norm and Mr. Lewis, Norm

Schmidt, and they said, we have to hire an attorney and take care of it. Q A Q A And then you told Mr. Wommack to take the fifth, right? No, I did not. He got that wrong? No. He never said that. He said Mr. Schlabach told him

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that.

Michael Smith - Cross I never told him that. That was his direct testimony.

Maybe you should go back and read it. Q Mr. Schlabach wasn't speaking on your behalf then. He

wasn't acting as your partner when he said that? A No. You have it all wrong. He testified to the fact that I

never told him that.

I told him he should hire an attorney, and

Mr. Schlabach, whatever he said to him, I wasn't privy to the conversation. I know that I never told him that, and he

testified to that so -Q A Q And Mr. Schlabach -- I am sorry. -- so don't try twisting my words. Mr. Schlabach certainly wouldn't be speaking for you when he

said that? A Q I don't know what Mr. Schlabach said. I didn't ask you that. I asked whether he would be speaking

on your behalf? A No. He wouldn't be speaking on my behalf. Whatever he

said -Q A Q Maybe on behalf of the Northwest Group? I have no idea. You would have to talk to him about it.

Did you notify your investors after you found out that the

SEC was investigating this program? A Q A Some of the investors were told about it, yes. Some of them? Yep.

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Q

Michael Smith - Cross How did you decide? Is that the friends and family that you

told? A Q A Yes. Didn't tell the other people, though? They may have been told. I don't know who was told, and I

don't remember. Q A Q A Q A That's not something you kept track of it? No. Was that Mr. Schlabach's job? No. Whose job was it? I don't know. We just told certain people, and the

attorneys were handling it, so -Q That wasn't a factor again you considered important for your

investors to know? A It was an administrative action. It wasn't a court action

or anything else. Q Let's talk about your -- what you termed the due diligence These were

meetings at the bank and then again at your office.

the meetings including telephone calls that I believe you testified you tape-recorded? A Q Correct. And you notified everybody who was there on the telephone

that they were being tape-recorded before you did that, right? A Yes, I did.

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Q

Michael Smith - Cross Because you know that it would have been illegal for you to

have tape-recorded them in Washington without getting the consent of everybody involved? A Q A Q No. I didn't know that at the time.

You didn't know that. No. And when Mr. Beros said he didn't realize any of those

things were being taped, he must have just forgotten about the notification that you gave him? A No. The tape-recorder set right in the middle of the table

with everyone, and I turned it on and off when we took breaks. Everyone was fully aware it was being recorded. Q A Q A Q It sat right there in the middle of the table? Yes. He just forgot about that? I don't know what Mr. Beros forgot about. Let me look at Smith Exhibit 9, please. This is the first

page of the transcript that you testified yesterday you created, right? A Q A Yes. And you said this document is accurate? Correct. Actually let me rephrase that statement. This

document was created by Paula Richardson, who transcribed the tape-recording. Q So when you said yesterday that you created this document,

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Michael Smith - Cross that wasn't true either? A Q I instructed her to do a transcript of the tape-recording. That's not my question, Mr. Smith. My question was, when

you testified yesterday that you created this document, was that incorrect? A Q No. It wasn't incorrect.

You testified also that you didn't know the last names of

the traders that were at this meeting, right? A Q That's correct. Let me look at what's marked on the bottom as page 4 of that It may be page 5 of the exhibit. One more. Next page. Keep

document.

going, please. please. A Q A Q A

Can we look at the top of that,

That says Mark Segovia?

That's correct. That was one of the traders, right? Yes. How did that name get in there if you didn't know it? Because we found out later on through discovery what their

last names were, and previous dealings with these trading programs many, many years ago. Q How do you know that's right if you didn't know his name

then? A Q it. Because it was from the government's discovery. Can we go back two pages, please. I am sorry. One more. Oh, no, that's

Now, this is where there is an indication that

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Michael Smith - Cross this recording actually started with the meeting in progress. Is that right? A Q Yes. And you didn't feel any need, apparently, to tape-record

whatever it was that was said prior to you -- prior to the middle of Mr. Beros's sentence that says, these investments? A This is where I had turned it on. He had already started

his conversation. Q Wasn't necessary to record the beginning of this

conversation, apparently? A I forgot to turn it on when we first started. We were

talking and visiting with people in the room. Q You forgot to turn on the tape-recording for one of your

important due diligence meetings with the bankers? A Q That's correct, yes. And this is one of the meetings at which you understood how

it was that the trading would occur, right? A Q Yes. Based in large part, I believe you testified, on the

explanation provided by Mr. Beros? A Mr. Beros, Mr. Schmidt, R.J. Abercrombie was there to talk,

the two asset managers, and Mr. Weed. Q Let's look a little bit, if we can just pan down on this

screen a little bit so we can get all of Mr. Beros's statement here.

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Michael Smith - Cross Now, is this -- this is the major explanation of the trading given by George Beros during this transcript, isn't it? A In the front part is just explaining who was there and the

rules. Q Then in the middle of the paragraph he says, it's looking to

simply utilize a custodial trust account within the bank to execute the purchase and sales of some securities collateralizing that account basically to accomplish those means? A Q A Yes. That's the description of the trading, isn't it? That's part of it. There is multiple different

descriptions. Q A Q A Where is that in this paragraph? That's just a portion of it there. This is not the whole explanation? No. Then they asked again, and he explained. There is some

more down below. Q Okay. Let's go to page 4. This is where the asset managers

begin talking, right? A

Mark Segovia, one of the traders? I

They are on the previous page that you just went by.

believe -Q Oh, let's go back to the previous page, there. Yeah, David

is the banker, right? A Correct.

David is the person from US Bank?

He was continuing to explain below that paragraph.

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Q A Q

Michael Smith - Cross You are talking about the paragraph on the bottom? Talking about Mr. Beros. Are you saying this person is explaining the trading The person from US Bank? Mr. Beros.

program? A Q A Q No.

On this page Mr. Beros is explaining the program? I am looking at page 2 of 14. Okay. Let's go back to page 2, please. This is the one we

were just looking at? A Q Yes. Let's blow that up. Where is the rest of the explanation of

the trading program in that paragraph? A Talking about there won't be a great deal of activity.

Where they buy the double-A rated or better securities, it's held in the account. Q Okay. One more sentence saying, the purchase and sale of

double-A rated or better securities? A Yes. That's what part of what they told us. They buy

double-A rated or better securities. the account.

They hold that paper in

That's what they screen and utilize when they

trade paper overseas. Q Okay. Let's go to page 4 now. Now, this is the asset Mark?

manager or the trader talking, right? A Q Yes.

This is the person whose last name you didn't know at the

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Michael Smith - Cross 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 time? A Q That's correct. How did you do any extra due diligence on him when you

didn't even know his last name? A Q I didn't do any due diligence on Mark or Lideo. You didn't think it was important to find out anything about

the people who were actually going to be handling the money? A They said that they were traders out in New York and did the They didn't have any signature They weren't in control of the

trading in the account.

authority over the account. money. Q A Q

They were just making the money, right? Yeah. But you didn't think it was important to check out the

people who were generating the profits? A Q A Q I didn't have any concern for it at the time. You had a first name, right? Yeah. So this is the trader explaining the program, right? Where What more do you need?

he says, simply put, we have $10, you want to send us $10 worth of government securities, that's what we are buying. Transaction complete. program, right? A Q Yes. Okay. That was the basic one. Is there any other explanation of the trading program That's it.

That's the trader's explanation of the

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Michael Smith - Cross in this transcript? A Q I would have to go back through and read it all. Why don't you do that. Take a look at it. Tell the jury

where it is. A Most of the explanation was done by Mr. Beros, and that even

afterwards he did the presentation. Q Does that mean that there is no further explanation of the

trading during that transcript there? A No. It's talking about bank references and other

information. Q A That's on page 13, right? Let's display page 13, please. Same person

Bank Americans for Kathy Mills, Colorado.

already called Wells Fargo to verify Norm's accounts there. Q That's the banking reference. That's where Mr. Schmidt is

getting the banking reference? A Q That's correct. That's Kathy Mills, the person who testified she opened the

checking accounts? A Q Correct. And your testimony earlier was that you, having no

connection with the account, called up Kathy Mills, and she confirmed for you, not only that the account existed, but that it was in good standing and controlled by Norman Schmidt? A Q Correct. Your understanding is that banks will typically give

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Michael Smith - Cross information out to people who call on the telephone about other people's accounts? A No. Because privacy they won't get out any information. I

was calling to verify as part of due diligence there was an actual account there, and it was in good standing. Q A Q How is it that the privacy didn't stop her from doing that? What's that? How is it that the privacy requirements you are talking

about didn't stop Ms. Mills from doing that verification? A You can call and verify an account at the bank or verify a That's about all the

check and whether the funds are cleared. information they are going to give you. Q

Did you ask Ms. Mills when you called her whether that was a

custodial non-depleting trust account? A Q A Q I believe I did. You did, and she told you it was? I don't recall what she told me or not. Do you recall what -- she testified here, didn't she, there

was no such thing? A Q Right. But you think maybe she told you a few years ago it was in

fact that kind of an account? A I don't know what -- I might have asked custodial. I don't

know if I asked her non-depleting or not. Q You don't think it would have been an important question for

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Michael Smith - Cross you to ask whether or not the account was non-depleting? A I called to verify the bank account. There was very little

information to give.

All she did was verify there was an

account and it was in good standing. Q Did you ask whether it was a non-depleting custodial trust

account, Mr. Smith? A Q I don't know if I did or not. Your testimony today is that you don't remember if what you

touted as one of the most important security features of this investment, you didn't ask that when you called the bank? A No. I just called them to verify there was an account there

in good standing. Q May we look at Smith Exhibit 10 now, please. This is where

the real meat of the explanation came about the program, right? Because it wasn't in Smith Exhibit 9. all, right? A Correct. No. I said it was at the meeting the night after You looked through that

the bank meeting Mr. Beros and Mr. Schmidt had explained how it worked at the Shenanigans restaurant where we had different people there and investors and people from the office where they were showing how it works with three different circles Mr. Beros did. Q Well, now, which was it, was it the meeting at your house or

was it the meeting at the restaurant where you really understood how the thing worked?

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A Q A Q A Q A

Michael Smith - Cross It was the meeting at the restaurant. The one you didn't tape? Yes. Did you forget? No, I didn't forget. Why didn't you tape that one? It was a sales presentation. I didn't tape it. We had

another meeting the next morning where we went into a little more detail. Q A That's the one that's here in the Exhibit No. 10.

The No. 10 has more details? It has some more. It has a phone conversation we had with

some investors. Q If this one has more detail, if we look at this one, we will

capture everything, all the important information that was presented the night before, wouldn't it? A Q A Q No. Oh, we wouldn't? No. Well, let's go ahead and look at this one, since we don't Can we go

have the tape of the important meeting, apparently. to what's listed as page 2 of 33. exhibit. Okay.

Maybe probably page 3 of the

Now, this is the first -- this is where the transcript begins, correct? A Page 2 is where it begins.

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Q A Q

Michael Smith - Cross That's what we are looking at on the screen now, isn't it? Yes. And your testimony the other day, I believe, was that this

was the very beginning of the conversation when Mr. Gibson apparently began a sentence by saying, Mark, I briefly explained -- I explained briefly our meeting this morning and one with McMillan bringing you into the picture? A Q Yes. That's when I turned the tape-recording on.

Didn't you say the other day that was the very beginning of

the conversation? A Q Yes. That's when I turned the tape-recording on. I am asking you

That's not what I am asking you, Mr. Smith.

if that was the beginning of the conversation, not when you turned the tape-recorder on. A Q Yes. Okay. That was the beginning of the conversation. And the information in parentheses there, retired

Congressman, finance committee, Jim Gibson didn't say that, did he? A Q No. But that was the knowledge that we had from Mr. Gibson.

You just added that information in when the transcript was

being prepared? A Q A Q Identified who he was. That's not actually what was said? No. It's to identify who it was.

But you said also this is an accurate rendition of exactly

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Michael Smith - Cross what was said during that conversation. MR. O'DONNELL: 611(a). If it please the court, we object under

He is getting a little argumentative and harassing

unnecessarily. THE COURT: Overruled. This is cross-examination. It

may be tough, it may be insidious, but it's in bounds. You may continue. MR. KIRSCH: BY MR. KIRSCH: Q You did testify that this transcript was an accurate Thank you, your Honor.

recitation of exactly what was said, didn't you? A Q A Yes. Except for what's in the parentheses there? Again, as I said before, it was to identify who the person

they were referencing. Q Down at the bottom of this page, that's you saying that Alan

Weed represents Lloyd's of London, right? A Q Correct. And that's at the beginning of the conversation, before

Mr. Weed has even spoken, right? A Q I would have to read it to see, but I believe so. Well, didn't you just say that that was the first page of

the transcript that we were looking at? A Q Yes. And you turned on the tape-recorder at the beginning of the

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Michael Smith - Cross conversation, right? A Q Yes. Well, let's look at the entire page again. Does Mr. Weed

speak before that? A Q No. The purpose of this call was really to try to get Jim Gibson

to bring a bunch of money into the program, wasn't it? A The conversation was to Jim Gibson and people that he knew

wanted to have a conversation with Mr. Schmidt since he was in town, Mr. Weed, and Mr. Beros. Q You're participating in this sales call to try to get an

investment from Mr. Gibson on the day after you have had your supposed due diligence meeting at US Bank, aren't you? A Yes. It was an initial conversation that we had with The

Mr. Gibson and someone he knew through Mr. Tom McMillan. candidate was interested in maybe bringing some money in. Q All right.

And this is the document where we really get Isn't

into the meat of the description of the trading, right? that what you said earlier? A

This is covering some of the information the questions they

had. Q 3? A Q Yes. Okay. Can we expand that for the jury, please. Now, where Okay. Does that start on page 3, Mr. Beros talking on page

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Michael Smith - Cross is it in this paragraph that Mr. Beros explains how it is that this trading works and money is generated? A Q A This is just one aspect of it. Which aspect? Just a portion of it explaining how the minimum amount they

would like to see come in for the guy they were talking to on Canada in the phone. $10 million. Q And what does that have to do with how they are generating He was talking about the sum of

profit? A Q This is just a part of it. Okay. Maybe we can look at page 11. Probably page 12 of

the exhibit.

Um, is this the further description of the trading

beginning with Mark's question? A Q Yes. By the way, this is also where Mr. Schmidt said he had a fed What did that mean?

ID number for that account? A Q A Q A Q

Federal ID number is what it was. Yeah. What's a federal ID number?

A tax ID number. Oh, that's what that meant? Yes. Now we go down to Mr. Schmidt talking there. Mr. Schmidt

seems to be saying that they can get the trading begun even in less than ten days.

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Michael Smith - Cross 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 A Q Yes. I thought your understanding was that the trading couldn't

happen until at least 30 days? A No. I never said that. I said the profits were generated. You are twisting

You could not get paid from them in 30 days. my words again. Q

The profits began being generated quickly, they just weren't

available for 30 days. A Q Minimum of 30 days, yes. All right. Now, can we go to page 24 -- 25 of the exhibit,

please.

Now, if we go to the bottom again, this was another

time when you decided to turn the tape-recording off? A Q A Q Yeah. We had taken a break.

Nothing important happening then? No. Now, is this Mr. Beros giving you additional explanation

about the trading? A Q Yes. All right. And he says, a bank in Europe wants to know that They verify

they have a customer that has X amount of dollars. the account. A Q Yes. Okay. Nothing else happens.

That's what Mr. Beros said. Now, Mr. Gibson is not on the phone anymore at this

point, is he? A I don't think so, no.

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Q

Michael Smith - Cross Well, look back at page 15 of 33.

We don't need to display

that. A Q A Q A Q A Q

It says, Jim Gibson disconnects, doesn't it?

What page are you talking about? Page 15 of 33. That's correct. It's on the screen in front of you now. Yes. So Mr. Gibson is not on the phone anymore by page 24? By page 15, you mean. No. Mr. Gibson disconnects at page 15 of 33 in the

transcript; is that right? A Q Yes. We were looking at page 24 of 33 in the transcript.

Mr. Gibson is no longer on the phone at page 24 of the transcript, is he? A Q No. All right. Can we go back to page 24, please. So the bank

in Europe just screens the account, right? A Q That's what was explained. So what trading was it that you were going to go to London

to watch? A Mr. Schmidt was going to take us over to meet Peter Moss and

see how a trade happened overseas. Q Well, there wasn't any money moving so how were you going to

see a trade?

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A

Michael Smith - Cross See it on the screen. How it happens on the screen.

It's

done almost instantaneously. Q So you have to go to London to see the screen? You can only

see the screen in London? A That's what he was explaining to us. We talked about doing

it, but we never went over there. Q They don't have Internet connection between London and the

United States so you could look at that screen over here? A I am just repeating what he told us we were going to do,

so -Q A Q Mr. Schmidt said it, that was good enough for you? Yes. If we look at the next page of that exhibit, please. There

is some more explanation here from Mr. Beros and Mr. Schmidt about how the thing worked? A Q A Yes. Talking about in Germany and Switzerland.

Mr. Beros says, all the trades have already been done? Correct. There was prearranged sale of the paper between

the two banks. Q Okay. This is part of what's giving you comfort and making

you believe that you understand how this program is generating money, right? A Yes. That's what was explained. Beros stipulated to that,

and that's what Mr. Beros and Mr. Schmidt told us. Q And can we go to the bottom of page 27 -- I mean 28 on the

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Michael Smith - Cross exhibit, please. If we can expand the bottom of that, please. Now, this was -- you remember this conversation about Mr. Schmidt saying that, you've got proof from the Federal Reserve that said that they were participating in this kind of trading? A This is referencing the medium-term notes and the market

exists. Q A Q You remember Mr. Schmidt saying that, right? Yes. And that was your belief, that the fed bulletin proved that

the Federal Reserve was involved in this? A If it proved that there would be a fair market. I believe it shows that. Top of the next Their web site There was

no more after the, yes. Q

Go to the top of the next page, please.

page.

You said, I know it's on their web site.

says, these things don't exist.

That's the Federal Reserve web

site you were talking about, wasn't it? A No. It was different web sites. It says it did exist, and

there is ones saying it doesn't exist. Q I am asking about your statement, Mr. Smith, on this day.

When you say, I know it's on their web site that these things don't exist, you are talking about the Federal Reserve web site, aren't you? A No. I was talking about other web sites that say they don't

exist, and the Federal Reserve site shows the medium-term

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Michael Smith - Cross 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 market. Q Can we go back to the previous page, please? The statement

that immediately preceded yours was Mr. Schmidt saying he's got proof that the Federal Reserve, he has got a bulletin that says they are in it? A Q Yes. That's the Federal Reserve. And if we go back to the next page, your

All right.

testimony today is that when you said, I know it's on their web site that these things don't exist, you were talking about a web site other than the Federal Reserve? A Q A Yes. Which one? I don't recall which one it was now. There are other web

sites saying these things don't exist, and web sites saying they do exist, and down below, the next sentence down below says, even Bank of America is buying and selling these medium-term notes, as I showed in one of my exhibits there, so -Q So you chose to believe what Mr. Schmidt and Beros told you

over the information that you got from the Federal Reserve web site? A No. The Federal Reserve web site showed that there are And how to make money, and

medium-term notes in the market.

they relied on, you have Bank of America here. Q And the Federal Reserve web site also showed that these And you went there and looked

things don't exist, didn't they?

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Michael Smith - Cross 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 A Q Yes. This is you talking, while Mr. Gibson is on the line, and at it? A Q No. There was some description of the insurance given during

this meeting as well, wasn't there? A Q Yes, there was. If we can go to page 10 of the exhibit, please. It's going

to be page 9 on the bottom of the transcript.

Do you have

that -- can we expand the bottom of that, please. Now, this is you talking, right, Mr. Smith?

you are trying to help Mr. Gibson -- you are trying to help convince Mr. Gibson that he ought to bring his investors with millions of dollars into the program, right? A This is what I was reading in the contract for an

explanation of the insurance. Q So that you could convince Mr. Gibson to bring in his

investors with millions of dollars into the program, correct? A They were doing their own due diligence, and if they wanted

to come in they would have came in. Q A Did you want them to come in? Sure. I was a salesman selling the program, just like Val

Bough and many other people selling it. Q And you wanted that override off those millions of dollars,

didn't you?

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A Q A Q A

Michael Smith - Cross You don't work for nothing. Mr. Weed was there, right? Yes, he was. But you were describing the insurance protection here? I was reading it out of the contract. Describing what it

said in the contract. Q All right. Go to the next page, please. Your second

statement here, that's not reading out of the contract, is it? A No. That was part of the coverage that was explained by

Mr. Weed. Q A That was you summarizing the coverage? Yeah. It was very simple due to the fact the asset managers

do not run off with the money, did not steal the investment, that was recovered under theft and embezzlement. Q A Q A Q A Q You had seen the insurance certificates by this time? The certificates, yes. From Marsh? Yes. You knew they listed Wells Fargo as the insured? Correct. But you were telling Mr. Gibson that that coverage pertained

to the asset managers stealing money? A That was correct. And Mr. Weed told us the asset managers

were covered from theft and embezzlement so they wouldn't run off with the money.

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Q

Michael Smith - Cross Even though the certificate didn't say that, you chose to

believe Mr. Weed rather than relying on the actual insurance certificates? A Yes. The information that we received from Mr. Weed's This was what

explanation and what he said on the recordings. was told to us. Q

And you didn't have any reason, based on your years of

experience in selling insurance, to question whether or not someone other than the insured might be covered by a policy? A First of all, I have never done P and C, so I relied on

Mr. Weed as the insurance agent and his expertise in this market that he works. And I called Mr. Timothy Wicker at Marsh agency

to verify the coverages, so -Q What do you mean at the end of this statement when you said, You knew this kind of

as has been the problem in the past? investment hadn't worked before? A

That was from some of the web sites that people said these

things had been lost, and what gave me the safety element was the money never left the bank account. of it. Q That made this different than all of the other warnings you That was the safety part

had seen about scams? A Yes. Because most of them, the money goes overseas off

shore where you could never get it back. Q Can we go to page 18 of the exhibit, please. I am sorry. I

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Michael Smith - Cross m