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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 XX _______________________________________________________________ Proceedings before the HONORABLE ROBERT E. BLACKBURN, Judge, United States District Court for the District of Colorado, commencing at 8:30 a.m., on the 2nd 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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P R O C E E D I N G S (Proceedings resumed at 8:35 a.m.) THE COURT: Very well. Mr. Schmidt, good morning.

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

Good morning.

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

Ladies and gentlemen generally, good morning. and gentlemen of the jury especially. THE JUROR: THE COURT: THE JURY: THE COURT:

That wasn't Freudian.

We know what you are talking about. You, all of the jury, good morning. Good morning. We are prepared to proceed. The government

may with leave to broadcast the video. MR. KIRSCH: THE COURT: Thank you, your Honor. You are welcome.

(The videotape exhibits 520A and 520B were played.) THE COURT: Very well. Counsel for the government, for

the record, we have completed the broadcast of this videotape, and under what exhibit number again for the record, please. MR. KIRSCH: Your Honor, that was Government's Exhibit

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Nos. 520A and 520B. THE COURT: Very well, and thank you. Very well. If

prepared to proceed, you may, Mr. Kirsch. MR. KIRSCH: rests its case. THE COURT: Ladies and gentlemen of the jury, the Your Honor, at this point the government

government has rested, signaling the completion and presentation of its case-in-chief. As I advised you now, it's necessary for the counsel and court to consider and conclude required legal business outside your presence and hearing, and I will be placing you, therefore, in a temporary state and status of recess. It will be overnight. As we discussed, I will be

requesting and requiring that you return and report for further duty and service in this case tomorrow morning at 9:30 a.m. Preparatory to this overnight recess as concerns you, ladies and gentlemen, please store and leave behind in your suite your note-taking materials, and of course, especially now be ever mindful of and sensitive to the important rules that continue to govern your conduct, your communication, and deportment as jurors in the trial of this case. As concerns you, ladies and gentlemen, we are in recess until tomorrow morning at 9:30 a.m. And as concerns the rest of And we

us, we are in recess until this afternoon at 1:30 p.m. are now in recess.

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(Recess at 10:50 a.m., until 1:35 p.m.) THE COURT: Good afternoon, and thank you. Please be

Indeed we are. We convene on the record in open court to conduct

mid-trial or half-time proceedings in the trial of this case. We convene, of course, deliberately outside the presence and hearing of the jury who are in recess until tomorrow morning. If prepared to proceed as stated and understood by the court, the court will now entertain the respective mid-trial motions, petitions, and requests of the respective parties commencing with the government. MR. ANGELO: Mr. Angelo.

Your Honor, the court has probably noticed

by now that Orvalee Farris did not attend, and her health prohibited her from attending, so we move to dismiss Count 11 of the Second Superseding Indictment at this time. THE COURT: I presume this is a Motion to Dismiss Count

11 with prejudice; is that correct? MR. ANGELO: THE COURT: That's correct. Any objection on behalf of Mr. Schmidt? No objection, your Honor.

MR. BORNSTEIN: THE COURT:

On behalf of Mr. Weed? No, your Honor.

MR. GOODREID: THE COURT: MR. GAINOR: THE COURT:

On behalf of Mr. Lewis? No objection, your Honor. On behalf of Mr. Smith?

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MR. STUCKEY: THE COURT:

None, your Honor. That

Therefore, it is ordered as follows:

the government's oral Motion to Dismiss with prejudice Count 11 of the Second Superseding Indictment is granted, and that, accordingly, Count 11 of the Second Superseding Indictment is now dismissed with prejudice. Done in open court effective forthwith. Further mid-trial business now by the government. MR. ANGELO: THE COURT: Nothing at this time, your Honor. Very well. Mid-trial motions, petitions,

or requests by the defendants. First, let me inquire, to the extent that you have caucused between and among yourselves, is there an agreed order? MR. STUCKEY: THE COURT: Yes, your Honor.

Mr. Stuckey. Four, three, two, one. If Mr. Smith is prepared to

MR. STUCKEY: THE COURT: proceed, he may. MR. STUCKEY:

Very well.

May I make an initial request, your May

Honor, on behalf of Mr. Smith I will make the argument.

Mr. O'Donnell make the argument relating to the securities counts in the sense that on the issue of whether or not the government has proven them to be a security. THE COURT: argument is granted. The request for that limited bifurcation of

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MR. STUCKEY: THE COURT:

Thank you very much, sir.

You are welcome. May I also inquire, maybe we don't want

MR. STUCKEY:

to do it now, after the dismissal of Count 11, I assume sometime your Honor will be renumbering the counts again as you did before. THE COURT: Don't make that assumption. Now, we can just proceed as they are

MR. STUCKEY: numbered?

May we, your Honor? You may proceed as they were renumbered sua

THE COURT:

sponte by the court so as not to obfuscate the jury, and again I reiterate the court and its best intentions has resulted in a modicum of confusion to the parties. proceed. In reading the superseding -- Second Superseding Indictment to the jury, if and when that becomes necessary, the court will read Counts 1 through 10, inform the jury that there is no Count 11, and then read Counts 12 through the end as renumbered by the court initially. Is that comprehensible to counsel, the government? MR. ANGELO: THE COURT: alert me. It is, your Honor. And to the defendants? If not, please So here's how we shall

Apparently it is. It is, and I apologize, your Honor. I

MR. STUCKEY:

forgot we had to renumber all those charts.

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THE COURT:

Yes.

The cure once again perhaps would be

worse than the disease. MR. STUCKEY: THE COURT: May it please the court.

Thank you. Government counsel, defense counsel,

MR. STUCKEY:

defendants, court staff, on behalf of Michael Smith, your Honor, we do move at this time under Rule 29 of the Federal Criminal Rules of Procedure for a Motion of Acquittal on all the counts with which Mr. Smith is charged. That includes Count 1, the conspiracy charge, Counts 5 through 9 of the mail fraud counts, 16 and 17 of the wire fraud counts, Counts 23 through 29, some seven of them, of the securities fraud counts, and the two violations of 18 United States Code Section 1957, which are now -- I have forgotten to change this -- Counts 35 and 39. If the court will indulge me, I want to make sure I changed the appropriate numeration after your Honor's much earlier ruling, and it looks like I have. THE COURT: Yes.

And in your aid, Count 32, of course, was

dismissed, and starting with the original Count 33, it was renumbered retrogressively to Count 32, and each succeeding count renumbered accordingly. MR. STUCKEY: So I am correct in the enumeration of

those 17 counts which are in the Second Superseding Indictment of the indictment against Michael Smith.

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To start with, your Honor, I am mindful of a recent, I guess, Tenth Circuit opinion U.S. v. Goode, G-O-O-D-E, 2007, Westlaw 113957, Tenth Circuit, April 16th, 2007, which I have an e-mail regarding from a one Mrs. Grady, an intellectual stalwart in the Federal Public Defender's office of the District of Colorado. And succinctly she states that the rule of law in

Goode is that when a defendant challenges in the District Court the sufficiency of evidence on specific grounds, all grounds not specified in the motion are waived. So, we have, on behalf of Michael Smith, and all attorneys here are aware of this, we have a general argument that I will make posthaste, succinctly, as your Honor wanted, and shortly to begin, and then I will have to touch on several specific other grounds that we wish to raise. Starting generally, it is the position of the defense for Michael Smith that the government has not made out a case against any of these charges against him in the Second Superseding Indictment because they have shown no proof through testimony or documentation that Michael Smith ever knew that these trades, multiple term note trades, whatever trades occur in England or London, there has been no proof shown that he had any knowledge that they were not being made. To state it the other way, the proof tends to show, based on all his actions as indicated by witnesses and documentation here, that he in fact acted on the notion and

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belief that they were being made, and therefore the Capital Holdings program was viable, legal, and legitimate. Therefore, as to Count 1, there can be and has not been shown any agreement whatsoever between Michael Smith and any of the other defendants who entered into a conspiracy to violate these laws, as enumerated mail fraud, wire fraud, securities fraud, money laundering. Also, as to the mail fraud, wire fraud, and securities fraud counts, there can be no showing, has been no showing, that he entered into or devised or intended to devise or assisted in any way in any scheme to defraud because of his lack of knowledge, and because at this point, more properly stated, because the evidence does not show he had any knowledge that the trades were not being consummated. Now, in that -- that's that general argument, and along with that general argument is this or these compounding problems. Count 1 of the indictment and the evidence adduced at the trial shows, we contend, at least four conspiracies or four groups of conspiracies. The government says back in '99 all the

way to May of 2004, April, I am sorry, October of 2004, that this was one continuing conspiracy. We suggest that the There was the Reserve

evidence does not show that whatsoever. Foundation Trust at the start.

Then Smitty's and Capital Holdings came into play.

The

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second alleged conspiracy, the way they have drawn it and the way they have proved it. Then the Monarch business, and then at

the end the fourth group, Jan McLain Schmidt's Rocky Mountain Sports, FastTrack and High Track Team investment plans, schemes, whatever. We suggest that those are four separate conspiracies that have to be dealt with even on a Motion to Dismiss for sufficiency of the evidence. And I would cite United States v.

Evans, Tenth Circuit, 1992, 970 F.2d 663, where the court there dealt with this problem of multiple conspiracies, and dealt with the issues, as I understand it, of sufficiency of evidence as to each of them and how they have to be broken down and each analyzed, and in our case, we maintain that defendant Smith never joined any conspiracy. He certainly had nothing to do He wasn't even aware of the

with the Reserve Foundation Trust.

aspect in Denver until that was gone by. Monarch and Rocky Mountain Sports and FastTrack and High Track Team he was never invited, never asked to join. was never asked to participate in their dealings. He

So the only

evidence relating to him as he is charged in paragraphs 2 through 5 of Count 1, which are repeated throughout the indictment, but 2 through 5, manner and means of a conspiracy, which go on till -- from pages 2 till 5, we maintain the evidence must be looked at as to him, only as to the Capital Holdings, Smitty's aspect, and that it falls far short again,

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primarily because he had no knowledge that the trades as described therein and the other actions as described therein which were false and fraudulent as alleged therein, he had no knowledge that these things happened. He was duped. He was an

innocent victim, and he never should have been in this indictment is our contention. However, at this point we make that general argument regarding insufficiency of the evidence as to him in terms of agreeing; in other words, of course we know, for a conspiracy indictment, combine, conspire, confederate, and agreed together. He can't have done that unless he knew that Norman Schmidt wasn't making these trades. Beros was not making these trades. trades were not being made. All the evidence shows the return and flow of money, whether it came in terms of pieces of paper showing monthly statements and monies made by people, whether it came in the form of actual money for checks to be written to investor clients in Spokane, whether it came in the form of monies to be paid as overrides on the particular people that bought into the investment plan, or whether it came in any of the other myriad documents, the indications of the myriad documents that showed that this was a legitimate plan. Shy of him not knowing those Unless he knew that George Unless he knew that these

trades were made, this evidence fails. And it segues immediately into the wire fraud, mail

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fraud, securities fraud counts in this manner.

Wire fraud Mail

realleges paragraph 7 -- I am sorry -- jumping ahead.

fraud realleges paragraphs 2 through 5 in its paragraphs 7 through 11. But each -- we had the list of mail fraud, and then we had the second list of the wire fraud counts with date and the persons charged and the item either wired or mailed. As to each

of those counts, the general language at page 7 of the Second Superseding Indictment controls, and says that the defendants devised, intended to devise, and participated in a scheme to defraud and obtain money and property by means of material, false, and fraudulent pretense, misrepresentations, and promises. First of all, the statute doesn't have the word "participated" in it. That's thrown in there gratuitously. It should

It's not in 18 United States Code Section 1341 or 43.

be intended devise or intended to devise, as the statute reads. But most important -- and there also should be a scheme to defraud and a scheme for obtaining money and property, to repeat the statutory language, but most importantly, it doesn't say "knowingly". And that carries over to each of the mail Without the

fraud counts and each of the wire fraud counts.

word "knowingly" there, the pleading is deficient. So when we argue that Smith didn't have the requisite knowledge, we are really arguing against nothing that's there

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because they haven't alleged it, and I would cite for the court United States v. Hofmann, 353 F.2d 188, Tenth Circuit, 1965, a Colorado case, where it was stated that an essential element -I think it was wire fraud -- an essential element is knowing participation in the scheme to defraud. In paragraph 12 of the mail -- the mail fraud counts, and in paragraph -- it's not in the wire fraud -- in paragraph 12 the word "knowingly" is used to describe and to allege that the participants named in each count knowingly put them, the letter in the mail, put the item to be delivered by the mail a private and commercial interstate carrier, according to the direction thereon. That's one aspect of it. The elements are,

as I said, to the mailing, of course, starting at the other end, and then knowledge of the fraud scheme and knowing participation. Further complicating the matter, and part of our argument here about insufficiency of the evidence, is the, should the government resort to it, language at the top or end of paragraph 7 of the mail fraud count, which again, of course, is incorporated in its entirety paragraphs 7 through 11, in the wire fraud count and then the securities fraud counts. The government has alleged in -- or this indictment alleges, last three lines before the defendants' names are highlighted again in the middle of the page, and they aided and abetted -- and they aided, abetted, counseled, commanded,

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induced, procured, and caused the commission of acts in furtherance of the scheme. That's not what the statute says. 18 United States 2.

Whoever commits an offense against the United States or aids, abets, counsels, commands, induces, or procures its commission. That is the commission of an offense against the United States. Not an act in furtherance of the scheme. Acts in furtherance of the scheme, I suggest, are well below the commission of the offense. An example when the

evidence produced here could be things that the witness Tammie Goulet in Mike Smith's office testified to. Working up the

various materials that had been given him by George Beros, cleaning them up, and making them more attractive and whatnot. That could be interpreted as acts in the furtherance of the scheme. that. Again, there is no "knowingly" charged, and as I stated, the statute -- I am sorry -- the whole count, the mail fraud counts, plead unknowingly, so we have that problem. We She could be charged as an aider and abettor under

join that in with our argument that, therefore, the evidence is totally insufficient. As to wire fraud, the same argument applies. They only

incorporate paragraphs 7 -- I am sorry -- 2 and 5 from the conspiracy count and 7 and 11 from the mail fraud count, but knowingly -- "knowingly" is not in there because they

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reincorporate the paragraphs from mail fraud where "knowingly" is omitted so "knowingly" doesn't get picked up in the wire fraud counts either. They don't even say they knowingly

transmitted or caused to be transmitted by wire communication. So on that basis it's insufficient. As to the securities fraud counts in general, that's a different statute, comes out of Title 15, and has a little different language. And they have pretty much followed the

statute in their pleading. However, we claim that the evidence is insufficient on the counts with which Michael Smith is charged, 23 through 29 because of his remote and unconnected in any reasonable way position to the interstate or interstate commerce or mails, which are alleged to have been used to violate the securities fraud statute. Starting at Count 23, and completely remote from Mr. William Dellapenna in terms of date and whatnot the evidence shows, and we also have an argument as to each of these whether an interstate nexus was shown. securities fraud counts. But the lady from the Federal Reserve who testified about how these things happen if they are wires had me buffaloed. I didn't understand her testimony, but it seems to It's hard to tell on these

me that her testimony did come down to credit and debit entries or transactions may be made between member banks of the Federal

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Reserve, and they may get processed at their Federal Reserve units in New Jersey, Virginia, and Texas. But we would claim

that as to all those interstate charges where a wire is alleged that that evidence regarding where and when, fails when it shows, like, for example, Count 24, Wells Fargo from First Bank of Boulder. I am sorry. Main Street Mortgage of Colorado

account of First Bank of Boulder in the Capital Holdings account of Wells Fargo. Count 25. Wells Fargo -- into Wells Fargo from

Bellco Credit Union in Colorado, Count 16. That's going back to the wire fraud counts, and our same argument about sufficiency, and it can't be 16. It must It

be -- I am sorry, your Honor, I lost my place on that one.

was a Wells Fargo transaction of February 21st, '03, to Key Bank here in Denver to Denver. And then the last one was April 30th, '03, a Wells Fargo -- well, that was a transaction from Lincoln to Commercial Federal. That doesn't fall under our argument as to That

insufficiency of the evidence regarding interstate nexus.

falls under our argument that Michael Smith was too remotely connected with it, and the evidence is insufficient to show that he either aided and abetted or assisted in any manner in that count for the commission of that offense. As to Counts 35 and 39, 18 United States Code Section 1957 counts, we again argue on both those transfers that the evidence is insufficient to show that Mike Smith and Norman

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Schmidt on those dates -- to show that Mike Smith even knew or requested or had knowledge or had written a letter or received a fax or anything to know that money was coming. That was just

part of the standard operating procedure by which monies were sent from Wells Fargo, in both instances, to the US Bank in Spokane, account of the Northwest Group. As Mr. O'Donnell established yesterday from IRS agent Stockley, Mr. Smith didn't even have signatory authority on that account, so his remoteness and distance from that transaction, we argue, is insufficient for those two counts also to go to the jury. In addition, one last grounds, maybe last, for the 1957 counts. Again, we have a deficiency in a pleading. It states

on the second line of paragraph 23 that the defendants named below for each count did knowingly engage, and then aided and abetted language, which is in stark contrast to the aided and abetted language I indicated earlier, which only said aided and abetted acts to further the scheme. Here they say aided and

abetted or otherwise engaged in monetary transactions, which are the crimes to be committed. So that one is good.

But it only says knowingly engaged, caused another to engage, et cetera. Where does it say monetary -- oh, in the

monetary transactions described below by through and to a financial institution affecting interstate and foreign commerce, and the next page continues, involving criminally deprived

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property of a value greater than $10,000 as described below for each count, such property having been derived from specified unlawful activity, mail fraud, wire fraud, securities fraud. What is missing is "knowingly". Now, they have got But they don't

knowingly engaged in financial transactions.

have the allegation that the defendants knowingly or had knowledge that the property was derived from a specific specified unlawful activity. I cite the court to United States v. Johnson, which I think I cited earlier, 450 F.3d 366, Eighth Circuit, 2006. Which says, the elements of 1957, one we know more than $10,000, the other knowingly engaged in a monetary transaction, and secondly, that the defendant knew the money was derived from a specified unlawful activity. They did not allege this.

In a District Court case from New Jersey 1996, U.S. v. Caruso, C-A-R-U-S-O, 948 F. Supp. 382, the court there also said it has to be alleged that the defendant knew that the property was derived from specified unlawful activity. allegation of knowledge at that point. So in general, I would conclude, your Honor, by stating that, as I said at the outset, my basic argument is that it shows that Michael Smith knew that this was a Ponzi scheme. did not know that these trades were not being made. The evidence shows in no manner, way whatsoever that he had or could have had any such knowledge. Perhaps with a He Knew. No such

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hundred advisers or something, someone could have found out that the trades were not being made. But in his situation, and based

on the facts and evidence derived so far today, that knowledge is not shown. In short, that knowledge we suggest that the defendant should be found -- I mean that the motion should be granted as to all counts, and that the case against Michael Smith should not go to the jury. I thank the court.

I will ask Mr. O'Donnell to argue that securities aspect. THE COURT: Thank you. Hello, Mr. O'Donnell.

MR. O'DONNELL: THE COURT:

If it please the court.

Thank you. I will undertake a security analysis

MR. O'DONNELL:

that will apply to some of the defendants, and maybe all of them, depending on facts, but the standards and the immediate situation of the law in this area is the Edwards case, and it has five levels of decision, six actually, but one of the intermediate remands count as one. It started in the District Court in the Eleventh Circuit, and then the Eleventh Circuit, then United States Supreme Court, which reversed and remanded to the Eleventh Circuit, and then back to the District Court for further proceedings. And then that court, the District Court, found that,

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pursuant to the Supreme Court's ruling, that it would re-look at the entire case, and it decided that to withdraw it rather than no securities violations and declared a securities violation. And then the last step in that was a salesman in Louisiana was in a civil suit found to be responsible. So that

went immediately to the Fifth Circuit, which dismissed that salesman out. And what we know about the case is that it's

January 31st of '07 is that the SEC then agreed not to pursue a salesman and he was in that category. clear judicial decision. I am going to take a minute, Judge, to run through this scenario because the two issues that were left open by the Supreme Court were whether or not the -- you can have a Ponzi scheme if there is, quote, any substantial underlying legitimate business. And the theory that came to the court in the Edwards case was that the telephone business was real. telephones, et cetera, et cetera. They had real That last fact was not a

And the case went off on the

decision of whether or not a fixed rate of return would insulate against securities infractions because you would not have a security because of the Howey test, the commonality, and the participating in profits -- would not be participating in profits. The company was simply paid what the amount was by

fixed agreement, and it could use additional capital or could go borrow money, and it would be irrelevant to the investor. That

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is what the Supreme Court struck down. So the underlying business, and whether or not there is, quote, any substantial underlying business would be an open issue in this case. The one that I am going to concentrate and end on is whether or not the salesman should be roped in. And to give

background on that and show how it fit in what the Supreme Court was really looking at, I need to give you the facts of how that proceeded. I almost say I hate to do that, but I believe it will be instructive as to what I have just summarized. In the SEC v.

ETS Pay Phones and Mr. Edwards, which was Eleventh Circuit, 2002, the SEC alleged that the use of several control companies collectively in a single larger enterprise involving the sale of securities called investment contracts. And they so asserted. And the facts revealed -- and

this is the facts of that case which are more egregious than any case I have seen in this category. is sold a pay telephone. And it was one the investor

The investor then leases that

telephone back to ETS for management in exchange for a fixed monthly fee. Three, if the investor is not satisfied, he could, A, require ETS to repurchase at a prearranged price, or B, cancel the lease and repossess the phone and go about his business. Everyone agreed that there was no SEC registration of this unit

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of contracts. The last event is the filing of Chapter 11 reorganization by ETS, and that stopped all lease payments and buybacks. The SEC filed a similar injunction for fraudulent Ponzi scheme that was a five-year run with $300 million cash collected from over 10,000 investors without any legitimate business as claimed by the SEC. line. The holding there was that the District Court lacked jurisdiction, subject matter jurisdiction, and the District Court judgment of injunction was reversed. The similarity between the civil and the criminal case is in the definition of a security, and that's why we filed this. That case then went to the Supreme Court. And the That had to be tested at the end of the

Eleventh Circuit had relied on Howey, 328 U.S. 293, which was cited by Mr. Feigin, and we heard quite a bit about that. And

in that also was the Foreman case, U.S. Housing Foundation v. Foreman, at 421 U.S. at 837, a 1975 case, which was -- which also quoted Howey. The nature of the dispute was whether or not you could have a security, and of course, the Eleventh Circuit found it was not a security because it was a fixed rate of return, and it was the entity's job to provide that no matter how it got the

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money.

That was their duty. That was what was reversed by the Supreme Court. And

it said it didn't make any difference because the way frauds are committed, they can be used in any configuration, et cetera, et cetera, and you have to roll with the times. did. The concurring opinions in the Eleventh Circuit were instructive on the theory that an underlying -- any underlying legitimate business would save it from being a Ponzi scheme because companies in their need to provide capital can either borrow it or sometimes take it to investors, et cetera, et cetera, and if it is a, quote, looks like a Ponzi scheme but is in support of a legitimate business, it is not a fraudulent security. That is the security is not a fraudulent security. And that's what it

That issue was not passed on by the Supreme Court, nor on remand by the Eleventh Circuit when it sent it back to the District Court. When it got back to the District Court, the court was impressed with the fact that 10,000 investors in pay telephones, which were all hundred percent leased back to the promoter, all for fixed amounts, and that there were thousands of salesmen, much like in this particular arrangement, where people who were in sold to other family and friends, although the decision does not recite that technique, I happen to know from my own travels through that case over a period of time the last few years that

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it was one investor bringing in another in very large part as well as using regular salesmen. That part of the case, then, went back to the District Court, and it found that there was no substantial underlying legitimate business, and in that case declared the entire scheme for $300 million was a fraud. It did recite that the telephone business was providing cash to the company, which was used to make payments to the people. It did not specify the percentage. There was some

underlying business. was not adequate.

But it obviously compared to $300 million

I might, as a side observation here, I was impressed to hear that George Beros had a genuinely, according to his recitations in court under oath and what I saw on the film, what was seriously promoting business that just hadn't quite matured. I was impressed that even Mr. Moss, with a little bit of a window we opened up into his life, and although his chair is still empty, he obviously was promoting some business, even though he lost money in the transaction that we were exposed to, and I don't know what to make of the real estate transaction that we were exposed to. anything either. But I do think that the buying of Euro dollars was a brilliant move, but just had bad timing. underlying business there. There was some That didn't seem to comport with

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The analysis then was that the Edwards case became a security in a fraudulent Ponzi scheme. The follow-on case was

in Louisiana where a salesman was sued, and kind of a test case for a thousand or more salesmen. Then the court ruled there that the salesmen should be dismissed. And it was a civil suit, so the standard of proof

was less than in a criminal suit. And the reasoning, and I will give -- I better give the citation on that just in case. The name of the case is

Ponthier, P-O-N-T-H-I-E-R, v. Masalla, M-A-S-A-L-L-A, decided January 30th of '07. We pick it up at Lexis 114, Louisiana I don't have the District

appellate, Fifth Circuit decision.

Court decision, but I do have the Fifth Circuit, and I think that's all we need. The court premised that the salespeople could only do what due diligence, if you will, investigation, as would be available to them, which is the basic message of Securities Act Rule 167, which I bantered around with Mr. Feigin a little bit, but that's the theory of it. In other words, there is not a one-objective standard for due diligence. And in that case, it showed that the

salesman had done some due diligence, and was satisfied that the program was as represented as far as he could see. And the court did not pass judgment on whether or not his individual due diligence was up to any particular standard.

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Instead, it rested on the case that the plaintiff failed to prove or to show that he had actual knowledge or should have known, and he -- that he did some investigation, and that it was not adequate, that he believed his own representations that he was making, and ruled that that one salesman should be dismissed at halftime. The -- excuse me. appellate court ruled. I misread my notes. That's what the

The District Court had ruled that he The

would stay in the action and did not need to be dismissed. Fifth Circuit ruled that he had to be dismissed. And the

reasoning was that the plaintiff, with a lower standard of proof than we have in this case under any criminal case, failed to show the existence of actual knowledge, or got the ball rolling down the hill so it might eventually hit somebody that he should have known. And at that test is, of course, a lesser test than had actual knowledge. But on the other hand, it's my opinion in

this case, after listening, after all these days of trial, I then, kind of waiting to see when it is that the prosecution was going to get both shoulders -- all four shoulders behind that rock and get it really rolling downhill so it might hit my client, and I am just telling you, Judge, I don't know. was a dearth of evidence in that area. We had evidence about everything. had evidence about everything else. And I should say we And There

There is a void there.

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I think at least the salesmen, if not others, in this case, where there is no danger of that rock coming down the hill and hitting them, because nobody ever got it moving in their direction, is grounds for dismissal of all the securities charges at least, Judge. Mike Smith. Thank you. Counsel, thank you. Thank you very much. As to at least

THE COURT:

Mid-trial motions, petitions, and requests on behalf of Mr. Lewis now by Mr. Gainor. MR. GAINOR: court. THE COURT: MR. GAINOR: Thank you. In the interests of efficiency, I would Thank you, your Honor. May it please the

beg the court's indulgence to be able to specifically adopt certain arguments of Mr. Stuckey only. is move on from there. And then what I will do

But I don't want to have to regurgitate So I will

certain things and keep the court waiting any longer.

point out those adoptions to the court, asking specifically for permission. Your Honor, on behalf of Charles Lewis, we would be making a motion on several grounds for a Rule 29 directed verdict. Mr. Smith, through Mr. Stuckey, made a global argument that there was a lack of knowledge established about trades not occurring, and that Mr. Schmidt and Mr. Beros were primarily

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involved in that, and that I would argue that Mr. Lewis was similarly situated, and with the court's permission, we would seek to adopt that first argument made by Mr. Stuckey without further elaboration. THE COURT: MR. GAINOR: Permission granted. Your Honor, we would also seek to adopt

the motion with regard to insufficiency based on the establishment of multiple conspiracies, and Mr. Stuckey used the Evans case cited at 972 F.2d 663. I would like to supplement the record with the McDermott case, which is 245 F.3d 133, Second Circuit, 2001, and the Berger case, 224 F.3d 107, Second Circuit, 2000. We would agree with Mr. Stuckey that there -- if there was -- we believe that there was insufficient evidence to establish a conspiracy in the first place. But if there was any

type of proof for conspiracies, it was for multiple independent conspiracies, a Reserve Foundation Trust conspiracy, which began in April of 1999. Mr. Lewis was not alleged to be an owner,

promoter, or salesman in that particular conspiracy. And then I would direct the court's attention to those activities of other codefendants allegedly which occurred after March 16th, 2004. Now, March 16th, 2004, is the date the defendant, Mr. Lewis, was arrested, and at that time incarcerated at the Federal Detention Center.

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This conspiracy, as alleged by the government, went on another seven or eight months after his incarceration at the Federal Detention Center involving the entities of FastTrack, Rocky Mountain Sports and High Track. We would argue that that is further proof of multiple independent conspiracies which the defendant could not have participated in because of his position. And so in addition to

the argument I am making, we are moving to adopt Mr. Stuckey's original argument on the multiple conspiracies. We would also seek permission to adopt Mr. Stuckey's argument with regard to the Hofmann case cited at 353 F.2d 188, a 1965 case, which pertains equally to mail, wire, and securities fraud, and we would specifically adopt those arguments with the court's permission. THE COURT: MR. GAINOR: And leave is granted as requested. We would also ask the court to hone in

specifically on Counts 7, 8, and 9 of the Second Superseding Indictment, which discusses involvement in April of 2004, and May of 2004, involving the victims Cliff Seigneur, Carol Hall and Darren McGee. Allegations of illegal conduct which occurred

at or during the time that the defendant, Mr. Lewis, was incarcerated at the Federal Detention Center. So he could not

have been part of those specific mail fraud counts. We would seek to supplement the record with the Hollis case, H-O-L-L-I-S, at 971 F.2d 1441, a Tenth Circuit case, that

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would go to the argument that the defendant never intended to provide false information to any of these parties akin to the Hofmann case, that he relied on the advice of others, and there was no direct proof or indirect proof that this defendant ever intended to provide false information. We would also want the record to reflect, consistent with our argument on Count 1, that if there were in fact multiple conspiracies, then there were in fact multiple schemes to defraud in the mail fraud, wire fraud, and securities fraud counts, which would be different than what the government pled in its indictment, which is essentially a single act to defraud or a single scheme to defraud. Going over specifically to the wire fraud counts, we would seek the court's permission to adopt the argument of Mr. Smith through Mr. Stuckey that would argue that there was a lack of interstate nexus established with regard to the wire fraud counts with the court's permission. THE COURT: MR. GAINOR: Permission granted. I would also direct the court's attention

to Count 17 of the wire fraud counts which alleges on April 30th, 2003, a $45,000 wire transfer from Carol Hall's account at Wells Fargo to Rocky Mountain Sports, LLC, account at Commercial Federal Bank. We would point out, although it did not occur at a time when the defendant was arrested, it occurred post-search in this

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case at a time when the defendant was not in any way directly or indirectly as an aider or abettor connected to that particular Count, Count 17, and we would also move for that dismissal on that independent ground. Transitioning, briefly, to the securities fraud count of 18 -- Counts 18 through 29, pursuant to 15 U.S.C. Section 77(g), we would ask the court to pay particular attention to Count 29, which articulates a violation of that act on May 20th, 2003, involving a cashier's check drawn from Cliff Seigneur's account sent to Rocky Mountain Sports. The same arguments would apply in Count 1. That the

defendant was in no way connected to this transaction, either primarily or as an aider or abettor. It occurred outside the

defendant's alleged participation, and for those specific reasons Count 29 should be dismissed. Lastly, and referring to the money laundering counts, we would direct the court's attention to Count 36, which is that count which deals with those monies sent to the Miloka account, I believe it was a $20,000 check, check No. 1412, from the Smitty's account to the Miloka account. The evidence adduced at trial was that the signature on this account was Mark Perreault, and indeed the endorsement on this check was from Mark Perreault. reasons that Count 36 be dismissed. We would ask the court to consider all of my arguments We would ask for those

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in total with Mr. Stuckey's, and grant appropriate Rule 29 dismissals on all the counts cited in the record. Thank you, your Honor. THE COURT: Thank you, counsel.

Mid-trial motions, petitions, requests on behalf of Mr. Weed by Mr. Goodreid. MR. GOODREID: THE COURT: Yes. Thank you, your Honor.

You are welcome. May it please the court.

MR. GOODREID: THE COURT:

Thank you. Your Honor, on behalf of Mr. Weed, I

MR. GOODREID:

would like to make a Motion for Judgment of Acquittal under the Federal Rules of Criminal Procedure on a number of counts, and I would commence with the so-called money laundering counts, the new counts, if you will, Count 42 and Count 45 as we have renumbered them here. Now, following the format that your Honor suggested at the bench yesterday, your Honor, as you well know, under 1957 there are five elements of the offense. Whoever, in

circumstances set forth in subsection D, which essentially means the offense took place in the United States, knowingly engages or attempts to engage in monetary transaction in criminally-derived property. Now, given the standard under Rule 29 that all inferences go in favor of the prosecution at this point,

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Mr. Weed does not quibble with three of those five elements. Two of the elements, however, are germane for discussion here, and the government's case is insufficient. is whoever. Mr. Weed is charged himself in Count 42 and Count 45. The evidence with respect to Count 42 and 45 -- or I should say the allegation here is that two checks went to Compliance Holding Company. That leads to the inquiry, what was the relationship between the Compliance Holding Company and Mr. Weed. The The first of which

government produced two -- there was no testimony from live witnesses on Compliance Holding Company. There are two exhibits

in evidence with respect to Compliance Holding Company, the first of which is Government's Exhibit 12010. That document

from the state of Illinois shows that Mr. Weed was the original registered agent and the original incorporator of that company. The document does not say that he was a director, an officer, a manager, or even an employee of Compliance Holding Company. And

in fact, the -- as that exhibit goes on, it actually shows at a later point in time he was no longer even the registered agent for Compliance Holding Company, although admittedly, your Honor, that didn't take place until November of 2003 after the time of these two alleged money laundering offenses. The other government Exhibit is Government's Exhibit 4006. That is a request on behalf of Compliance Holding Company

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by Mr. Weed to Mr. Schmidt -- excuse me -- yeah, the letter is by Mr. Weed on behalf of Compliance Holding Company requesting payment of some $57,000. The court may recall, I asked Agent Stockley about that yesterday on cross-examination. He conceded that in fact there In fact, he

was no evidence that that $57,000 was ever paid.

said specifically it was not part of the total of 397 some odd thousand dollars that was paid to Compliance Holding Company. So to begin with, your Honor, on that element, Mr. Weed suggests to the court that the connection between Weed and Compliance Holding Company is not firmly or sufficiently established for purposes of this case. The other element, however, which the government's case is more defective on is the issue of engaging, or attempting to engage, in any monetary transaction. The statute says that the term "monetary transaction" means the deposit, withdrawal, transfer, or exchange, and then it goes on and talks about interstate foreign commerce, financial institution. Again, we don't take issue with that.

Count 42 says that it is the clearing of check No. 1621 in the amount of $130,000 on Smitty's account at Wells Fargo Bank payable to Compliance Holding Company. Now, Mr. Bornstein cross-examined Agent Stockley on this point yesterday. Agent Stockley said that he did not know

if Compliance Holding Company had actually -- what they had done

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with the check or if it had ever been cashed, I think is what he said specifically. Now, the bank records that the government has in evidence, and I would point the court to Government's Exhibit 9344, shows that in fact that check cleared. somewhere. The check shows it was cleared. So the check went However, there is

no proof that that was deposited by Compliance Holding Company or by Mr. Weed. And your Honor, if I may, I would submit for the court's consideration, and I didn't copy this, Judge, because I find with the poor quality of these checks what happens is every time they are copied the quality gets worse, so I would submit to the court a copy that I have, which I think is the best copy that I have, rather, and if it would please the court, if I could hand it to the deputy and have it submitted to your Honor? THE COURT: clerk, thank you. MR. GOODREID: And, your Honor, I have a second copy It would. And you may. Thank you. Madam

here at the podium, and in some respects it is clear and less clear. So perhaps if your Honor would agree, we could perhaps

exchange copies. But a look at the back of that check, your Honor, shows it was not endorsed by Compliance Holding Company, it's not endorsed by Mr. Weed, and if in fact from what we can tell from the back of the check, it's not endorsed by anybody.

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The legible marks on the back talk about going through -- something about routing going through a bank in Portland, Oregon. There is something up in the corner here

which I can't read on my copy, but there is no endorsement on the check. So again showing that there is no proof whatsoever that either Compliance Holding Company on the one hand, and either by further extension, that Mr. Weed ever deposited or even attempted to deposit, withdraw, transfer, or exchange this monetary instrument. I suggest for those reasons, your Honor, that an entry for judgment of acquittal should enter on this particular count. THE COURT: 42. Yes, 42. Similar analysis, your Honor, Now, it's a little bit

MR. GOODREID:

applies with respect to Count 45.

different, as the court will see when I submit this check as well. But I will not reiterate again the tenuous relationship

between Weed and Compliance Holding Company. But with respect to Count 45, Agent Stockley did not testify about this, so there is no evidence at all. testified to the negative about 42. On 45 he did not testify at all that there was any evidence that Compliance Holding Company had ever received this check or had deposited it. Now, again the bank records show this check cleared, He

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and that again is noted in Government's Exhibit 9344. show the check cleared.

It does

But as the court will see when it

reviews a copy of this check, again the check is made out to Compliance Holding Company. signature does not appear. Holding Company. On the back, however, Mr. Weed's There is no stamp for Compliance

What there is on the back of this check is an And it says 01, and it goes on for

account number handwritten. several digits.

There is no evidence in the record that shows

that this account number written on here was linked in any way to Mr. Weed or was linked in any way to Compliance Holding Company. Now, we do know from the bank records the government has the check itself is dated -- excuse me -- one other point about that account number on the back. There is also no

evidence in the record that shows that that handwriting belongs to Mr. Weed. Now, the check itself is dated February 24th of '03. The bank records that the government has in evidence show that the check cleared on the same day that it's written. And I

suggest that the court can take judicial notice of the fact that that could only occur if someone or somebody deposited the check at that institution on the same day that it was written, otherwise there would be a delay of several days. And there is

no evidence in the record to show that Mr. Weed was at a Key Bank in Denver, Colorado, on that day, nor is there any evidence

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to show there was a Key Bank in Benton, Illinois, where Mr. Weed resides. So again, your Honor, if I may have -- I am going to tear this page off, have your clerk hand you a copy of the check related to Count 45, the court can more clearly see the lines on the back of the check. THE COURT: And you may. Thank you.

MR. GOODREID: THE COURT:

Thank you, your Honor. Thank you, madam clerk.

You are welcome.

MR. GOODREID:

And so, your Honor, as I similarly

argued with respect to Count 42, suggest under Rule 29 that the evidence is insufficient for this charge to go forward based upon the lack of any connection Mr. Weed or Compliance Holding Company with this check. There is no proof of monetary

transaction or an attempted transaction, no deposit, no withdrawal, no transfer, no exchange. And I see, your Honor, that the government eviscerated my argument with respect to Count 11, that being dismissed. Other than that, I would like with the court's permission to follow the same tact Mr. Gainor did, and that is in order to save time, to adopt the arguments of previous counsel in some respects, which I will enumerate, as well as the argument I am anticipating Mr. Schmidt's counsel will make with respect to multiple conspiracies. So on that particular point, I would like the court's

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permission to adopt the arguments made by previous counsel with respect to Count 1 that is related to the point of multiple conspiracies as opposed to one conspiracy. I would add only this point on behalf of Mr. Weed, and that is of the four articulated separate conspiracies, three of those four there is evidence Mr. Weed was involved with those entities. There is no evidence that Mr. Weed was involved with

the fourth component or the fourth conspiracy, if you will, that is related to FastTrack, Rocky Mountain High Track, any of those entities, and with the court's permission again, I will adopt their arguments as well as what I anticipate Mr. Bornstein is going to argue. THE COURT: Leave is granted to adopt both

retrospectively and prospectively as requested. MR. GOODREID: THE COURT: be. MR. GOODREID: And finally, Mr. Weed would move to have Thank you, your Honor.

We will see how prescient you turn out to

dismissed or entry of judgment of acquittal on a series of two other counts. One is Counts 7 through 9.

Now, the government's legal theory with respect to Mr. Weed on a number of the mail fraud counts and the wire fraud counts is as the law states, that although it's clear that he wasn't involved in a number of these counts individually, the law does say that if a person is involved in a conspiracy, and

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one object or one element of the conspiracy is a mail fraud scheme, for example, that individual can be held liable for individual counts of the mail fraud scheme, even if he didn't participate in a particular count or facts underlying it. However, another element, as the court is well aware, under both Pinkerton, and by way of example, Tenth Circuit case United States v. Massey, 48 F.3d 1560, 1995, from the Tenth Circuit. One common element of liability under the conspiracy theory has to be foreseeability. to this, your Honor. And two arguments with respect

One is the evidence in this case shows

that the arrest -- excuse me -- the search warrants were executed on March 7th, 2003. There does not appear to be any

evidence in the record that shows Mr. Weed himself was involved in any offense personally after that date. So it suggests to the court that Count 7, 8, and 9 -- I am sorry -- rather -- let me restate that, Counts 17 and Count 29, Count 17 is a wire fraud count, Count 29 is a securities fraud account, both of which are alleged to have occurred after the searches in this case, suggests to the court it was not reasonably foreseeable for Mr. Weed to think that after the FBI invaded numerous -- raided and executed search warrants on numerous offices and residences across the country, to think that some conspiracy was going to continue from that point forward.

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So we would move for a dismissal of 17 and 29 based upon the lack of foreseeability as a legal matter on the conspiracy theory as to 17 and 29. That argument is amplified even more with respect to Counts 7, 8, and 9. Mr. Gainor touched upon these. These are

all mail fraud offenses which occurred not only post-search but occurred post-arrest. Mr. Weed was arrested in this case, I believe it was the 1st of April, 2004, and I know there has been some litigation in this case on this various point, it came up on Jannice Schmidt's detention hearing. But the issue, as the court knows very well, in a conspiracy case, the individual may not be liable for lack of foreseeability or the conspirator has to withdraw. Now, Mr. Weed would have been in a very anomalous, position indeed if after April 1st or 2nd he would have to go to the other defendants in the case and say, oh, by the way, I was in the conspiracy but I hereby renounce my participation. not going forward. forward. The government has argued the defendants had lots of choices, they can do what they want, or I suppose put counsel in a rather peculiar position of saying post-arrest once appointed to say to the other defendants, but I hereby put you on notice that my client specifically denies having ever been involved in I am

I am not going to be liable from this point

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a conspiracy in this case, but to the extent he was, or henceforth has been judged to be involved in a conspiracy, he is hereby withdrawing. That seems a peculiar situation to be in.

So I suggest, your Honor, that that result ought not obtain, and that Counts 7, 8, and 9 should be dismissed with respect to Mr. Weed because it was neither reasonable for him to withdraw post-arrest at the same time, nor was it foreseeable to him that this conspiracy of which he was allegedly a part will continue on after a number of these defendants literally were in chains in court. So given that, your Honor, I would ask for entry of judgment on acquittal on the counts I have mentioned, and I look forward to hearing how prescient that was with respect to Mr. Bornstein's argument. Thank you, your Honor. THE COURT: hold that thought. You are welcome. Mr. Bornstein, please

In deference to my staff, we are going to

recess for approximately ten minutes, after which we will receive Mr. Schmidt's anticipated mid-trial motions, petitions, and requests. We are in recess.

(Recess at 2:50 p.m., until 3:00 p.m.) THE COURT: Very well. Thank you, and again please be seated. Mid-trial motions, petitions, and requests

on behalf of Mr. Schmidt by Mr. Bornstein. MR. BORNSTEIN: Your Honor, may it please the court.

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THE COURT:

Thank you. Opposing counsel, fellow counsel for

MR. BORNSTEIN: the defendants.

Your Honor, on behalf of Mr. Norman Schmidt, I

make a Motion for Judgment of Acquittal pursuant to Rule 29 of the Federal Rules of Criminal Procedure. We make this motion based on four matters. One is the

sufficiency of the indictment, and we are going to raise specific issues relating to the sufficiency of the indictment, and we understand that the sufficiency of the indictment may be raised at any time because it relates to the jurisdiction to try that particular piece of the indictment within the court, and it can be raised in a Rule 29 context. We raise it in the context -- or we make the motion in the context of the insufficiency of the evidence as to certain counts. We point out that Orvalee Farris's count, having been

dismissed, Count 11, the overt act in the conspiracy that corresponds to that count, which is 6B, found on page 5 of the Second Superseding Indictment, should also be dismissed or stricken or vacated. would be. And then finally, fourth, this motion is directed towards the Sixth Amendment right to a jury trial with respect to the theory that we suspect will be presented to the court by the prosecution that one or more of the acts for which Mr. Schmidt stands charged can be proven by virtue of the I don't know what the proper terminology

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Pinkerton theory of liability. I want to address all four of those. Let me begin the The

substance of my argument with the securities fraud counts. securities fraud counts are Counts 18 to 29.

And according to

the indictment, they are brought pursuant to 15 United States Code Sections 77(q) sub A, and 77(x). Now, what I would like to point out, if you look at 77(q), it says it should be unlawful for any person in the offer or sale of any security or any security-based swap agreement by the use of any, skipping, by the use of any means or instrumentalities of transportation or communication in interstate commerce or by use of the mails directly or indirectly to employ any device, scheme, or artifice to defraud, or to obtain money or property by means of any untrue statement of a material fact or an omission, so to misstate a material fact, or three, to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. If we look at the elements as have been described, for example, in United States v. Dowlin, D-O-W-L-I-N, 408 F.3d 647, give me -- or -- I will try another one here, United States v. Dazey, D-A-Z-E-Y, at 403 F.3d 1147, what you have is the gravamen of the offense is the sale or offer to sell a security. Now, I want to make a relationship between the securities fraud cases, say, securities fraud, mail fraud, and