Free Transcript - District Court of Colorado - Colorado

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 1 of 259

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 v.

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 XVI _______________________________________________________________ Proceedings before the HONORABLE ROBERT E. BLACKBURN, Judge, United States District Court for the District of Colorado, commencing at 9:20 a.m., on the 25th day of April, 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

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 2 of 259

3166

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

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.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 3 of 259

3167

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 morning. right. seen. THE COURT: MR. LEWIS: THE COURT: morning.

P R O C E E D I N G S (Proceedings resumed at 8:50 a.m.) THE COURT: Very well. Thank you, and please be seated. Mr. Schmidt, good morning. Good morning.

MR. SCHMIDT: THE COURT:

Mr. Weed, I can see you more clearly this

Good morning. MR. WEED: Good morning, your Honor. I am glad to be

Mr. Lewis, good morning. Good morning, your Honor. And Mr. Smith is sliding left and then

Good morning. MR. SMITH: THE COURT: Good morning. And counsel for the government and the

defense, good morning. MR. ANGELO: Good morning, your Honor. Good morning, your Honor.

MR. BORNSTEIN: THE COURT:

Ladies and gentlemen generally, good

We convene outside the presence of the jury

importantly to resolve business commenced yesterday afternoon. And to consider a matter timely brought to the attention of the court through its clerk by Mr. Goodreid. MR. GOODREID: THE COURT: May I commence, your Honor?

Not yet.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 4 of 259

3168

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

MR. GOODREID: THE COURT:

Oh, okay. We proceed in the

It's still my turn.

absence of Mr. Hammond only for the limited purposes of these in limine proceedings. Yesterday afternoon, Mr. O'Donnell offered Smith Exhibit 34 for identification, the same as Herbert deposition Exhibit J13, or at least one page of it. Defendant Schmidt

objected on the grounds of foundation, presumably for lack of authentication. His objection was joined by defendant Lewis.

After reviewing the transcript of the Herbert deposition, I find and conclude that defendant's Exhibit Smith 34 has been sufficiently authenticated, and that the evidence in that regard may be found in the Herbert deposition transcript beginning on page 188 at line 10, and concluding on page 190 at line 2. That accordingly, the requirements of Rules 901 and 902 are satisfied by the extant evidence. Therefore, the objections

are overruled and Smith Exhibit 34 for identification is admitted in evidence, with leave to publish. Madam clerk, if you would approach the bench. In the

recess let's make sufficient copies for the court and counsel so that everyone is armed with Smith Exhibit 34. Mr. Goodreid. MR. GOODREID: THE COURT: Thank you, your Honor.

You are welcome.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 5 of 259

3169

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

MR. GOODREID:

Your Honor, I just want, as a matter of

courtesy and also to get some direction from the court. Defendant Weed's Exhibit 228, this is a document that I had intended to introduce through a witness by the name of Orvalee Farris, who was on the government's will-call list. But I

understand from discussing with the government she probably will not appear because of health issues in this trial. And therefore I have talked to defense counsel and the government counsel, and I believe everyone is in agreement that we can have this document admitted, and I look for guidance from the court as to when to do that. It's kind of a non sequitur in terms of witnesses right now so there is no particular moment that's better than the other. So I ask for guidance from your Honor as to when we

might do that. THE COURT: Let's discuss first Mr. Weed's offer of

Weed Exhibit 228, assuming that all parties and counsel are privy to that defense exhibit. Any objection by the government? MR. KIRSCH: THE COURT: No, your Honor. By defendant Schmidt? Excuse me, your Honor. I wonder if

MR. BORNSTEIN:

Mr. Goodreid talked with Mr. Hammond about this because this is new to me. MR. GOODREID: Actually, Mr. Bornstein, I spoke to you

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 6 of 259

3170

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

as well about it yesterday and Mr. Hammond, but I am happy to tender it to you again. MR. BORNSTEIN: MR. GOODREID: THE COURT: If I could see it, your Honor. May I, your Honor? Thank you.

You may.

MR. BORNSTEIN: brain. Oh, okay.

I think that the trial is addling my Um, we had a -- we had an issue

I remember.

related to that exhibit, and the issue was that Mr. Schmidt never had notice of the events that that exhibit purports to present to -- as a piece of evidence. It describes a lawsuit and a default judgment that entered on that lawsuit, and Mr. Schmidt never had notice of that lawsuit, and we hadn't resolved how to deal with that notice issue. THE COURT: Well, the objection is relevance. The objection is relevance as to

MR. BORNSTEIN: Mr. Schmidt.

I don't care if it -You can only speak for Mr. Schmidt so the

THE COURT:

objection is relevance. Any objection on behalf of Mr. Lewis? MR. GAINOR: THE COURT: No objection, your Honor. Any objection on behalf of Mr. Smith? No, your Honor.

MR. STUCKEY: THE COURT:

Mr. Goodreid, you may either respond to

Mr. Schmidt's objection now, withdraw your proffer without

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 7 of 259

3171

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

prejudice, and continue to discuss that with counsel for Mr. Schmidt, or proceed with plan C, whatever that is. MR. GOODREID: option to begin with. Well, your Honor, let me take the first It's certainly relevant in the case

because it follows -- there has been a lot of testimony about communications that St. Paul's did and did not have with investors about various issues, and this is offered to show the last piece of communication apparently that St. Paul's Mr. Landsman had with one of the investors. Now, I don't know whether Mr. Schmidt did or did not have notice of that particularly matters. THE COURT: Well, the exhibit is new to me. I received

a copy to peruse only this morning. way out for now.

So I take the poltroon's

I take the matter under advisement, and you

will have the benefit of the court's ruling as soon as practicable. That will allow you a continued opportunity, if

you choose, to discuss the matter with Messrs. Bornstein and Hammond. MR. GOODREID: THE COURT: I will do so, your Honor. Thank you.

Very well.

And we will visit, if and when

appropriate, the timing of the publication to the jury in the course of this trial. MR. GOODREID: THE COURT: Thank you, your Honor.

For now we are in recess pending the

availability of the jury.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 8 of 259

3172

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 Judge.

(Recess at 9:00 a.m., until 9:15 a.m.) THE COURT: Thank you, and please be seated. As

before, I have already bid everyone else in the courtroom a good morning, so ladies and gentlemen of the jury, lastly, but not leastly, which is not a word, good morning. THE JURY: THE COURT: Good morning. If the government is prepared to proceed,

it may call its next witness. MR. KIRSCH: calls Leo Durkacz. THE COURT: Before you do, hold that thought. Thank you, your Honor. The government

Mr. O'Donnell, are you seeking publication of Smith Exhibit 34? MR. O'DONNELL: It will only take a minute if I may,

I would like the jury to actually read that. THE COURT: Ladies and gentlemen of the jury, as a

result of business transacted outside your presence and hearing, I have overruled the objection and admitted Smith Exhibit 34 in evidence, now with leave to publish. And Mr. O'Donnell, you may proceed with publication. MR. O'DONNELL: screen, please. Thank you. If we could bring it on the

Perhaps enlarging the text. Mr. O'Donnell, is publication of Smith

THE COURT: Exhibit 34 complete?

MR. O'DONNELL:

Thank you, your Honor.

With no witness

here I will have no more questions and that concludes our part

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 9 of 259

3173

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

of the deposition testimony. THE COURT: Thank you. Thank you.

MR. O'DONNELL: THE COURT: witness, Mr. Kirsch. MR. KIRSCH: Durkacz. THE COURT:

Now the government may call its next

Thank you, your Honor.

We will call Leo

Thank you.

Good morning, sir.

If you

would come forward to be sworn by the court.

To accomplish About there

that, if you will please stand in this open area. is fine. I will administer the oath. your right hand to be sworn.

Please face me and raise

And thank you.

May I have your attention in the courtroom. (Leo Durkacz was sworn.) THE WITNESS: THE COURT: witness stand. Sir, as you testify, please use the microphone in front of you. And by its peculiar design, a speaking distance of Thank you. I do. Please be seated in that

Thank you.

about six to eight inches is most efficient. Mr. Kirsch. MR. KIRSCH: THE COURT: Thank you, your Honor. You are welcome. DIRECT EXAMINATION

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 10 of 259

3174

Leo Durkacz - Direct 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 A Q A Q A Q Sir, could you please state and also spell your name? My name is Leo Durkacz, D-U-R-K-A-C-Z. Where do you work, Mr. Durkacz? I am a Special Agent with the FBI. Are you based in a particular office? In Chicago. And do you have any particular duties or assignments within

the FBI? A I am a primary investigator with the special team undercover

matters. Q Were you asked to perform an undercover operation in

connection with the case at issue here? A Q Yes, I was. Did you assume a particular identity for the purposes of

that operation? A Q A Q A Q A Q Yes, I did. What name do you use? Lou DeFranco. Approximately when was this? In 19 -- I am sorry -- 2003. And in the early part of that year? February. And as Lou DeFranco, did you purport to have an amount of

money available to invest?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 11 of 259

3175

Leo Durkacz - Direct 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 A Q Yes, I did. Approximately how much? A hundred million. Were there -- did you come -- were you put in contact with

other people who purported to offer an investment program? A Q A Q A Q Yes, I was. Did you receive their names? Yes, I did. What names did you receive? Norm Schmidt and Chuck Lewis. And how is it that you made contact with Mr. Schmidt and

Mr. Lewis? A Q A Through a cooperating witness. And what's a cooperating witness? It's someone who is working along with the FBI in providing

information about possible -- to further our investigation. Q Did you provide that cooperating witness with information

related to your assumed identity as Lou DeFranco? A Q Yes, I did. And was that information then further communicated to

Mr. Schmidt and Mr. Lewis? A Yes, it was. MR. BORNSTEIN: THE COURT: MR. KIRSCH: Objection, 602.

Response. I will ask the witness additional

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 12 of 259

3176

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

Leo Durkacz - Direct questions that I believe will address that objection, your Honor. THE COURT: may proceed. BY MR. KIRSCH: Q I believe you said, Mr. -Special Agent Durkacz, that you For now the objection is sustained, and you

had provided information to the cooperating witness? A Q Yes, sir. And did you, after you provided that information to him, did

you have discussions with Mr. Schmidt and/or Mr. Lewis? A Q A Q Yes, I did. Were those discussions on the telephone or in person? In person. And during the course of those discussions, did they make

reference to the information that you had provided to the cooperating witness? A Q Yes, they did. Let me ask you to take a look, please, at what's marked for That will be

identification as Government's Exhibit 521. provided to you in just a moment, please.

Can I ask you to take that out of this sleeve so you can look at the various pages of the document. recognize those documents? A Q Yes. How do you recognize those? Are you able to

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 13 of 259

3177

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

Leo Durkacz - Direct These are documents -- the information that I provided to

the cooperating witness he put together in this client evaluation history form, which was then transmitted to the -- to Mr. Schmidt and Mr. Lewis, and then these were also -- copies of these were also at our meeting that I had with Mr. Lewis, Mr. Schmidt, and the cooperating witness. Q A Copies of these same documents? Yes. MR. KIRSCH: THE COURT: defendants? MR. BORNSTEIN: THE COURT: Voir dire, please. I move to admit Government's Exhibit 521. Any objection by any one or more of the

Briefly. EXAMINATION

BY MR. BORNSTEIN: Q You said that this exhibit was put together by an unnamed

person that you are calling a cooperating witness? A I know he was a cooperating witness. I don't know if he has

been named yet. MR. BORNSTEIN: I am going to ask for the name. If

this document was put together by a person, I would like the person's name identified in open court. MR. KIRSCH: THE COURT: cross-examination. No objection, your Honor. Well, first of all, that is It doesn't go to authenticity. It was my

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 14 of 259

3178

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

Leo Durkacz - Direct understanding that this packet of materials was compiled by this witness. Is that correct? THE WITNESS: Honor. THE COURT: who did. THE WITNESS: It is my belief that Mike Miller did. He All right. Then you may ask the question I did not type this information, your

is the cooperating witness. BY MR. BORNSTEIN: Q A Q A And my next question is, when was it done? I have no specific information as to when it was compiled. And how did you get possession of it? Copies were provided to us by Mr. Miller. MR. BORNSTEIN: Honor. MR. GAINOR: THE COURT: Briefly, your Honor? Very briefly. EXAMINATION BY MR. GAINOR: Q Mr. Durkacz, on page 1 of that exhibit, you didn't prepare That's all the questions I have, your

it and you don't know if Mr. Miller prepared it, you believe he did but you are not sure? A That's correct. I did not witness him prepare this

document. Q Same thing with page 2?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 15 of 259

3179

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

Leo Durkacz - Direct That is correct. MR. GAINOR: THE COURT: MR. KIRSCH: Specifically object to pages 1 and 2. Response by the government. Your Honor, the witness has testified that

Mr. Schmidt and Mr. Lewis had copies of these materials when he met with them in person. I believe that that establishes their

authenticity for the purposes of this trial. THE COURT: It does. The objections based on

foundation or authenticity are respectfully overruled. Government's Exhibit 521 for identification admitted in evidence, with leave to publish. MR. KIRSCH: Thank you, your Honor. If we could

publish the first page of that document to begin with, please, and expand the text here, please. BY MR. KIRSCH: Q The various information that's reflected on the screen here,

Mr. DeFranco, is this all information that was part of the identity that you were using for the purposes of this operation you have described? A Q Yes, it was. And if we look -- if we could publish the second page of Again expanding the text. Under capital

that document now.

amount and type available, does that accurately reflect the amounts of money that you were talking about potentially investing?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 16 of 259

3180

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

Leo Durkacz - Direct That was what we were purporting to invest, that's correct. All right. There is also a date on the bottom of this of Is that consistent with your recollection

November 7th of 2002.

of when this operation would have begun? A Q Yes. If we could look briefly at the next page of the document.

Can you just explain what this page of the document is? A This is what we referred to as the proof of funds that we

drew up to convince individuals who we would be interested in investing with that we had the appropriate funds that they were looking for. Q All right. And then did you also provide a copy of the

passport in the Lou DeFranco identity? A Q A Q I did. And is that contained at the back of this document? Yes. There is two copies of this attached.

Now, at some point you said that you had a meeting in person

with Mr. Schmidt and Mr. Lewis? A Q A That's correct. How were the arrangements made for that meeting? Through the cooperating witness, Mike Miller, and he spoke

with their secretary or their representative. Q A Q Where did this meeting occur? At FBI covert location outside of Chicago, Illinois. And on what day did it occur?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 17 of 259

3181

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

Leo Durkacz - Direct My recollection was February 19th, 2003. Do you know how it is that Mr. Lewis and Mr. Schmidt

traveled to the meeting? A Q A They flew. How do you know that? We had one of our undercover agents pick them up at Midway They flew in on Southwest Airlines flight.

Airport. Q A

What happened after you picked them up? They were brought to our particular office where we had a

meeting, myself, Mr. Miller, Mr. Schmidt, and Mr. Lewis. Q Does this office have any equipment that allows recordings

to be made? A Q Yes. Both video and audio recording equipment.

Do you know who paid for the airline travel in connection

with this trip? A No, I don't. THE COURT: One moment, counsel. Let's allow

Mr. Hammond to come forward and be seated. MR. HAMMOND: THE COURT: everyone else. Thank you, your Honor. And I bid good morning to

You are welcome.

Mr. Hammond, good morning. Thank you. Good morning, your Honor. You

MR. HAMMOND: THE COURT: may proceed. MR. KIRSCH:

Mr. Kirsch, excuse the interruption.

Thank you, your Honor.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 18 of 259

3182

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

Leo Durkacz - Direct THE COURT: You are welcome. BY MR. KIRSCH: Q Special Agent Durkacz, what happened at the beginning of the

tape? A There were some general introductions and general I offered

conversation, and then we stepped out of the meeting. them some refreshments.

So we went to the kitchen area of our

undercover office where soft drinks and coffee and cookies were offered to them. Q A Q A Q A Q Did you -- where was the recording device located? In the conference room. Where did you initially meet with Mr. Schmidt and Mr. Lewis? In the conference room. And then you went to the break room? Break room or kitchen room. Was there any recording made of the conversation or events

while you were in the break room? A Q No. There were not.

Did you have any discussion about any potential investment

while you were in the break room? A Q A None at all. After you finished in the break room, what happened? We came back to the conference room, closed the door and

began our meeting. Q And during the meeting, generally what was the topic of

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 19 of 259

3183

Leo Durkacz - Direct 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 discussion? A Was the -- they were offering for me to invest in one of

their high-yield investment. Q Were you continuing to represent yourself as a person with

ten million or more dollars to invest in this program? A Q A Yes, I was. At the conclusion of the meeting, how were things left? It was left that I was going out of the country and that

upon my return I would be in contact with them, and I would make up my ultimate mind as an individual investor whether or not to place money in their program. Q Did -- during the course of the meeting, did Mr. Schmidt

make a variety of representations to you about how this program worked? A Q Yes. Did he talk to you about the history of the investment

program? A Q Yes, he did. Did Mr. Lewis make similar statements to you during the

course of the meeting? A Q Yes, he did. Did you speak to anybody else during the course of the

meeting? A We had -- Mike Miller was there, the cooperating witness was But then

there, so we engaged in conversation with him as well.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 20 of 259

3184

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

Leo Durkacz - Direct we also conference call, we spoke with another individual. Q A Q Do you recall that person's name? George Beros. And did Mr. Beros also make a number of representations

about the trading program that you had been discussing with Mr. Schmidt and Mr. Lewis? A Q Yes, he did. After the conclusion of the meeting, did you have an

opportunity to review the videotapes that were made of the meeting? A Q Yes. A videotape. And did that videotape fairly and accurately

A videotape.

record both the visual and the audio events that occurred during the course of the meeting? A Q Yes, they did. Let me ask you to take a look, please, at what's marked for I think it may

identification as Government's Exhibit No. 520.

be 520A and 520B, and madam clerk, that will be in the manila envelope on the bottom shelf there, I believe. ma'am. It's that manila envelope, there. First of all, do you That's the one,

recognize any of the information on the outside of that envelope? A Q Yes, I do. What do you recognize on that?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 21 of 259

3185

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

Leo Durkacz - Direct This is our preprinted envelope for evidentiary purposes of

original material. Q Okay. Can I ask you to open that envelope up, please, and Do the contents of that envelope

examine what's inside of it.

contain two tapes marked as Exhibits 520A and 520B? A Q A They do. And do you recognize those tapes? These would have been the videotapes, the original

videotapes that I removed from the recorder, from the video recorder right after the meeting. Q A Q And how do you recognize them? My initials are on them with the date. Before beginning your testimony today, did you also have the

opportunity to view a version of those tapes loaded onto the government laptop computer? A Q Yes, I did. And did that version loaded onto the computer fairly and

accurately -- was that consistent with the videotapes that you reviewed there, Government's Exhibit 520A and 520B? A Yes, they did. MR. KIRSCH: 520A and 520B. THE COURT: defendants? Hearing none, Government's Exhibit 520A and 520B are Any objection by any one or more of the I would move to admit Government's Exhibit

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 22 of 259

3186

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

Leo Durkacz - Direct admitted in evidence, with leave to publish and broadcast. MR. KIRSCH: please, your Honor? THE COURT: MR. KIRSCH: Thank you. You may. I have no other Could I have just a moment to consult,

Thank you, your Honor.

questions for Special Agent Durkacz. THE COURT: Cross-examination on behalf of Mr. Smith? Nothing, your Honor.

MR. O'DONNELL: THE COURT: MR. GAINOR: THE COURT:

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

MR. GOODREID: THE COURT:

Or on behalf of Mr. Schmidt? Yes, your Honor.

MR. BORNSTEIN: THE COURT:

Mr. Bornstein. CROSS-EXAMINATION

BY MR. BORNSTEIN: Q Agent Durkacz, the persona that you adopted was one of a

southern businessman? A Well, no. It was one of a businessman based in Chicago with

business interests in South Carolina. Q And how did you deal with the fact that you don't speak with

a South Carolina-style accent? A I wasn't pretending to be from the south. I was pretending

to be from the Chicago area.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 23 of 259

3187

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 Q

Leo Durkacz - Cross But with business interests that you had sold in the south? Correct. Now, before you got to this meeting in February of 2003, you

had prepared these papers in November of 2002? A Q A Q A Q A Q A Q A Q I did not prepare these papers. Okay. Were they prepared at your direction and control?

I provided the information to the case agent. Was that the case agent Stephanie Hahn? At that time, no. Was the case agent here in Colorado? No. A case agent in Chicago? No. Where? South Carolina. Okay. Greenville, South Carolina.

So you provided information to a case agent in

Greenville, South Carolina, about the persona that you wanted to adopt? A Q That's correct. And that person arranged with Mr. Miller to prepare those

papers? A Q A That's my understanding. Who is Mr. Miller? He is a cooperating agent for the case agent Paul Jacobs in

Greenville, South Carolina.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 24 of 259

3188

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

Leo Durkacz - Cross And so when you used the term a "cooperating individual" or

"cooperating witness" for the case agent, can you define that for us, please? A What does that term mean?

He was somebody who was providing information regarding many

of these different types of investments to Paul Jacobs. Q And was Mr. Miller in contact with a woman in Denver,

Colorado, by the name of Sue Veik? A Q A Q I have no direct knowledge of that. Were you in contact with anyone named Sue Veik? No. Were you in contact with anyone in the Denver office of

Capital Holdings? A Q Other than Mr. Lewis and Mr. Schmidt, no. And how did you make -- did you contact with Mr. Lewis and

Mr. Schmidt yourself before the February meeting? A I did not make contact with them. I met them for the first

time when they came to Chicago. MR. BORNSTEIN: THE COURT: Thank you. No further questions.

You are welcome, and redirect examination

by the government, Mr. Kirsch. MR. KIRSCH: THE COURT: No redirect, your Honor. Thank you.

May Agent Durkacz be excused and released

from subpoena, if any, by the government? MR. KIRSCH: THE COURT: Yes, your Honor. Any objection by any one or more of the

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 25 of 259

3189

Leo Durkacz - 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 defendants? Hearing none -- Mr. O'Donnell. MR. O'DONNELL: If I may inquire, your Honor, of the

government for just a moment. THE COURT: And thank you. You may.

MR. O'DONNELL:

I withdraw the proposed objection on He has

cooperation with the government has a witness problem. to leave. So I will defer anything until later.

THE COURT:

Since the non-objection has been withdrawn,

and hearing no other objections by other codefendants, Agent Durkacz, you are now excused and released from subpoena with our thanks. THE WITNESS: THE COURT: Thank you, your Honor. Appreciate it.

You are welcome.

(The witness was excused.) THE COURT: next witness. MR. ANGELO: Thank you, your Honor. We call Len Very well. The government may call its

Zawestoski at this time. THE COURT: You are welcome, and thank you. If you will come to be sworn by the

Sir, good morning. court, please.

To accomplish that, if you will come and stand About there is fine. If you will face me

in this open area in front of my bench.

I am going to administer the oath.

and raise your right hand to be sworn, and thank you.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 26 of 259

3190

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

Leo Durkacz - Cross May I have your attention in the courtroom. (Leonard Zawistowski was sworn.) THE WITNESS: THE COURT: witness stand. I do. Please be seated in that

Thank you.

And sir, good morning. Good morning.

THE WITNESS: THE COURT:

As you testify, please use that microphone

in front of you which, by its peculiar design, works best with a speaking distance of some six to eight inches, please. THE WITNESS: THE COURT: Yes, sir. Mr. Angelo.

Thank you.

DIRECT EXAMINATION BY MR. ANGELO: Q Would you state your name and spell both your first and last

name. A My name is Leonard Anthony Zawistowski, Jr. That's all

spelled as L-E-O-N-A-R-D, and the last same is spelled Z-A-W-I-S-T-O-W-S-K-I. Q Mr. Zawistowski, can you tell us, please, in what city and

state you reside? A Q I reside in the state of Virginia, in Ashford. Can you tell us, please, what the nature of your business or

employment is. A I am employed by the Federal Reserve Board in

Washington, D.C.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 27 of 259

3191

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

Leonard Zawistowski - Direct How long have you been employed by the Federal Reserve

Board? A Q Since 1990. Can you tell us, please, what your positions have been with

the Federal Reserve Board starting in 1990? A In 1990 I started as a Senior Criminal Investigator in the

office of the Inspector General of the Federal Reserve Board, and in 1993 I transferred into the Division of Banking Supervision as a Senior Special Investigator. Q A And what does a Senior Special Investigator do? What I do, what my section does, is we conduct

investigations regarding primarily bank fraud, fraud against banks because we regulate banks. But it takes on a larger

dimension in that we, in doing so, we assist other government agencies in their investigations of terrorist financing. We also do our own money laundering investigation, but we assist law enforcement in their investigations of money laundering. And one of my other duties is to act as liaison with law enforcement in the intelligence community, and have some more functions. Q I have very many hats in this office.

Does your position entail cooperating with law enforcement

agencies involved in investigating high-yield investment programs? A Yes, it does.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 28 of 259

3192

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

Leonard Zawistowski - Direct How long have you been doing that? That came to my plate probably around eleven years ago,

1996. Q Can you tell us, please, what kind of experience you have

had in investigating those matters. A Yes. In the mid-1990s these high-yield investment

programs -- in fact, they were initially called prime bank type frauds -- were multiplying in a large number. They were just

off the charts in numbers coming to the attention of the -MR. HAMMOND: Your Honor, I will object to the opinion

testimony at this time. MR. ANGELO: Your Honor, this is not opinion. He is

testifying from his knowledge and experience. THE COURT: Which appears to be the case, although

admittedly there is a fine line between fact and opinion, I find this to be essentially factual in nature, and therefore Rule 702 is not implicated, which is the gravamen of this particular objection, although unstated. The objection is overruled. Sir, you may continue and complete your response, if you recall where you were. THE WITNESS: Yes. Thank you. With a multitude of

these type of programs and fraud schemes facing the U.S. government, we were -- multiple agencies, including our own were called into helping to combat them.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 29 of 259

3193

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

Leonard Zawistowski - Direct And so while there was one person assigned to that function in my office, I was also brought into that fray, and started assisting law enforcement in their investigations, as well as acting as a spokesperson for the Federal Reserve in regards to people who would call in and say, there is a program out there that I am interested in and it involves the Federal Reserve, could you tell me about the Federal Reserve's involvement. So back in 1996, I started becoming more involved in this type of program. BY MR. ANGELO: Q As part of your assistance in these investigations, have you

had the opportunity to interview persons who in fact had marketed these types of high-yield investments or have in fact professed to trade in medium-term notes? A Yes, I have. MR. HAMMOND: THE COURT: of the examination. Objection. Relevance.

I discern the relevance and the direction The objection, although implicating Rule

401 and 402, is respectfully overruled. Sir, you may answer counsel's last question if you recall it and can answer it. THE WITNESS: THE COURT: Thus, do you recall the question?

I do recall it.

Can you answer it? And my answer is yes, and, your Honor, I

THE WITNESS:

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 30 of 259

3194

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

Leonard Zawistowski - Direct will pause before answering in case there are objections from now on. I apologize for that. THE COURT: Very well. So my answer to the last question asked

THE WITNESS:

was yes, I have interviewed people who were involved in claiming to be traders in these programs. BY MR. ANGELO: Q Can you give us some idea of how many people you interviewed

within that context? A Q Three to five. Have you also testified in court cases related to those

cases? A Yes, I have. I have testified I believe fifteen times in

these sort of cases. Q Switch gears here a little bit. Can you tell us, please, if

the Federal Reserve has a role in selling government debt instruments? A Yes, it does. We act as a fiscal agent of the U.S. The U.S. Department of the Treasury

Department of the Treasury.

issues debt instruments on behalf of the United States government. The Federal Reserve has the mechanisms and

operations in place in which to be the fiscal agent to both distribute the instruments and receive payment for them. Q Can you tell us, please, how and to whom these instruments

are distributed or sold?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 31 of 259

3195

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

Leonard Zawistowski - Direct Well, the U.S. government runs at a deficit at this present And we offer what we call treasury notes, treasury bills,

time.

treasury bonds to finance our deficit or our debt. So these notes, bonds, or bills are offered by our government. They are offered at an auction-type of thing where

people bid on the issue, which happens every couple of days, certainly every week. And primary dealers and other people who are interested in purchasing the debt of the United States government put in bids for those instruments, as a transparent, regulated, open-to-the-world type of auction of this debt. Q Can you tell us, please, can you name for us the primary

dealers who participate in those auctions? A I believe that your major New York brokerage houses like

Morgan Stanley, Lehman Brothers, Merrill Lynch, to name a few. I don't have the list in front of me. And I believe there are

about 30 of them who are primary dealers. Q Does the Federal Reserve require any of those primary

dealers to donate a portion of their profits from selling these instruments to charity? A Q No, they do not. Now, have you heard as part of your job of a medium-term

note? A Q Yes, I have. And do they exist?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 32 of 259

3196

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

Leonard Zawistowski - Direct Yes, they do. With respect to privately issued medium-term notes from

banks or other institutions, does the Federal Reserve play a role in their sale or marketing? A Q None whatsoever. And based upon your experience and training, do you know if

these privately-issued medium-term notes are traded or sold on regulated exchanges? A Q A Yes, they are. And are those exchanges transparent? Yes, they are. Whether they are in the United States or

North America or Europe or Asia, they are regulated transparent exchanges for the sale and purchase of these financial instruments. Q Now, does the Federal Reserve issue anything akin to a

trading number or registration for people to trade in any type of security or medium-term note? A Q No, sir, we do not. Does the Federal Reserve regulate a market related to the

trading of privately-issued medium-term notes? A Q No, sir, it does not. During the course of your investigations, have you found any

evidence that these high-yield trading programs and the trading that's described in them exists? MR. HAMMOND: Your Honor, I am going to have to object.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 33 of 259

3197

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

Leonard Zawistowski - Direct That calls for an opinion. THE COURT: MR. ANGELO: Honor. MR. HAMMOND: rulings. THE COURT: Well, it has, but those rulings are not This has been the subject of prior Response. It's based upon his experience, your

dispositive of the issue presented because it begs the question of whether this evidence is factual in nature or opinion in nature, and that issue has not been resolved by prior rulings. The issue has been framed by prior rulings but not resolved. MR. HAMMOND: And I believe, your Honor, that the

government just said it is an opinion based on his experience. That's a 702 opinion not endorsed. THE COURT: MR. ANGELO: Mr. Angelo. Your Honor, I asked the witness if he

found any evidence to support the existence of these programs, not opinion. THE COURT: is not implicated. overruled. Sir, you may answer counsel's last question again on my two continuing preconditions, the first of which again is, do you recall his question. THE WITNESS: I would like to hear it restated, your This requires fact, not opinion. Rule 702

The objection is duly noted but respectfully

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 34 of 259

3198

Leonard Zawistowski - Direct 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 Honor. THE COURT: BY MR. ANGELO: Q As part of your investigations into these matters, have you You may. Counsel.

found any evidence that these type of high-yield trading programs actually exist? A No. I have explored this issue on behalf -- I have been

involved in my own experience, and I have not found any evidence that they exist. Q Now, what is the Federal Reserve's interest in, for

instance, making people like you available in cases like this? A Well, what has happened in this arena is that the Federal

Reserve is wrapped into these programs or schemes, if I may, and the use of the Federal Reserve name is implicated as being part of the scheme. And our reputation thus is damaged. Your Honor, I am going to have to object So the

MR. HAMMOND:

because it is a global as opposed to a specific answer. relevance is questionable. hearsay response. THE COURT:

It also calls necessarily for a

Both bases of objections are noted but

respectfully overruled. Sir, you may continue and complete your response if you recall where you were. THE WITNESS: Thank you, your Honor. As I was saying,

the Federal Reserve has been implicated in many of these

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 35 of 259

3199

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

Leonard Zawistowski - Direct programs, so-called trading programs, so-called investment programs, by name, saying that we either regulate them, we license them, we supervise them, we issue bank guarantees for them, any multitude of things. By name the Federal Reserve, and oftentimes by name officials of the Federal Reserve. So the interests of the

Federal Reserve in having me here today is to rebut those claims that the Federal Reserve is involved with them. In fact, try to

keep our reputation intact and defend our reputation. BY MR. ANGELO: Q Does the Federal Reserve also issue warnings with respect to

these matters? A Q Yes, we do. And can you tell us, please, how long Federal Reserve has

issued such warnings? A We have issued three separate warnings. The first was in

1993, and that was a joint warning with multiple other agencies of the U.S. government. We issued a follow-up warning on the same subject, which I have titled in these warnings as prime bank fraud or high-yield investment program fraud. warning was in 1996. And then we had a follow-up warning issued in 2002 to members of the public about what these programs are, how they utilize the Federal Reserve name, what some of the pitfalls The second alert or

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 36 of 259

3200

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

Leonard Zawistowski - Direct might be, and to arm members of the public so that they are aware of them if they are approached about these programs. Q And how are these warnings disseminated or made available to

the public? A The 1996 and 2002 warning were issued on the Internet, as The 1993 warning was a

well as sent to banks which we regulate.

little pre-Internet, and was posted -- was mainly mailed to banks that we regulate. Q With respect to the warnings that were posted on the

Internet, is this a password access only or is the general public -- or can the general public avail themselves of that Internet access? A They are available. They are meant to be there for the use And let me correct that. When Internet

of the general public.

access became more available, we had our web sites, the 1993 warning was added to the Internet site. Q Thank you. If you would look now at Government's Exhibit

440, which will be presented to you in a notebook. A Q A Q A Yes, I have it. Do you recognize that exhibit? Yes, I do. Can you tell us, please, what that is? That is our 2002 warning letter to the public about

high-yield investment programs. Q And is this available on the web site as you have discussed?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 37 of 259

3201

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

Leonard Zawistowski - Direct Yes, it is. MR. ANGELO: Your Honor, at this time we move for the

admission of Government's Exhibit No. 440. THE COURT: defendants? MR. HAMMOND: THE COURT: May I have just a moment, your Honor? Thank you. Any objection by any one or more of the

You may.

MR. HAMMOND: grounds. THE COURT:

Your Honor, Mr. Schmidt objects on 403

The objection is under Rule 403, which

requires me to determine whether the probativity of this concededly relevant exhibit is substantially, an important adverb, outweighed by the danger of unfair prejudice, no, confusion of the issues, no, or misleading of the jury, no, or by the considerations of undue delay, no, waste of time, no, and the needless presentation of cumulative evidence, no. The objection is overruled. Government's Exhibit 440

for identification is admitted in evidence, with leave to publish. MR. ANGELO: first the first page. THE COURT: BY MR. ANGELO: Q Mr. Zawistowski, with respect to the press release or And you may. Thank you. Thank you, your Honor. If we can publish

warning we have referred to, does the warning address certain

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 38 of 259

3202

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

Leonard Zawistowski - Direct commonalities with respect to these types of programs? A I am sorry. Are you asking on the first page only or the

entire document? Q A The entire document. Yes, it does. That was its explicit purpose is to gather

these commonalities and publish them. Q Can you look at page 4 of the document, please. Looking at

the terms that were included within the context of the warning. If we can highlight, please, the funds of good, clean, clear and non-criminal origin. We now move down to the section concerning investors' funds are absolutely safe. next paragraph, please. Thank you. The second footnote. sentences. And now if we can turn to page 5, please. And if we can highlight the last two And to the next paragraph. To the

Thank you.

Mr. Zawistowski, in addition to posting these warnings on the Internet, does the Federal Reserve answer inquiries from people about these types of programs? A Q Yes, we do. And how are people directed to the Federal Reserve for that

purpose? A Basically two ways. And this is age of communication we

sometimes receive e-mails, but most often we receive direct phone calls, usually placed to our operator, who then forwards

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 39 of 259

3203

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

Leonard Zawistowski - Direct them to me in most cases. Q A Q And do you answer those phone calls? Yes, I do. And are you willing to talk with people about the kinds of

programs that we are considering investing in? A Yes, I am. And I do often talk to people about them. If I

could note in the exhibit, there is actually two phone numbers given. Q And with respect to those phone calls, how often do you get

them? A I get them on a weekly basis. In fact, this week I received

two so far. Q A And is that unusual to have that number of calls? No. That's probably pretty average. Over a long term of

years. Q And when people call you with respect to these matters, do

you refer them to the web site? A Yes, I do. But we also discuss with them their specific In fact, in

issues.

But the web site is what we close with.

this week's example, if I may, we pointed to this -- to the exhibit you have here. We pointed a consumer, person involved

who had a question, and we answered the questions to the best of our knowledge and pointed him to this web site. MR. ANGELO: else at this time. Thank you, your Honor. We have nothing

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 40 of 259

3204

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

Leonard Zawistowski - Direct THE COURT: Very well. Cross-examination on behalf of Mr. Smith by Mr. Stuckey. MR. STUCKEY: THE COURT: Thank you, your Honor.

You are welcome. CROSS-EXAMINATION

BY MR. STUCKEY: Q A Q Good morning, sir. Good morning. I would like to ask that the witness be shown Smith exhibit And I would like to ask you, sir, when you see this book It's under the colored

book.

to look at Defendant Smith's Exhibit 29. tabs, 29. A

Exhibit No. 29, the Federal Reserve Bulletin of August of

1993. Q 2? A Q Yes, sir, it is. In Government's Exhibit 440, the press release and the Is that the same bulletin that's referred to in the footnote

Federal Reserve prime bank notice which was admitted through your testimony. The one document that was put on the -- was published. And the footnote 2 at the very end refers to, does it not, this Exhibit 29? A Q Yes, sir, it does. Kind of a convoluted question. The Federal Reserve Bulletin

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 41 of 259

3205

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

Leonard Zawistowski - Cross Defense Exhibit 29 was put out in August of 1993; is that correct? A Q A Q 30. Yes, sir. And it's titled Anatomy of the Medium-Term Note Market? Yes, sir. I would like to ask you now to look at the next one, Exhibit Smith Exhibit 30. Now, it may be the first page of that.

I think you went on to the second page. A Q A I think I have it highlighted and some red marks on it. It should have a sticker on it Defendant's Exhibit Smith 30? I have that as the front page. Trading in Capital Market

Activities Manual. Q A Is that a Federal Reserve publication? Sir, I am unfamiliar with it. Can you tell? I would

I really can't tell.

have to speculate completely. this before.

I would say that I have not seen

And I don't believe -- I think if it was a Federal

Reserve manual or publication, that I would have seen it, and I don't believe I have ever seen this. Q I would like to ask you to look at the fourth page of that

exhibit and see at the top right-hand corner there is a four-digit decimal, one more digit number, and at the bottom there is some publication indications. Does that help refresh your memory about whether this is a -- obviously this is just a portion of a larger document, but whether this was put out by the Federal Reserve or not?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 42 of 259

3206

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

Leonard Zawistowski - Cross All right, sir. The numbers you are referring to are 4040.1

I believe. Q A Q Yes. And then you referenced footnotes. Not the footnotes, but -- oh, well, yeah, footnote 5. Don't

read it, but does that -A Well, I see that this document references a Federal Reserve But to me, I still can't make the tie that

product summary.

this is a Federal Reserve document. Q Okay. Now, in that same book, would you look at Exhibit 13,

Smith 13. A Q Yes, sir, I have it. There is three pages in that exhibit. Press releases? Are those Federal

Reserve releases? A Let's see.

To be correct, they are not press releases, they

are statistical releases from our economists about corporate medium-term notes, but it is released from the Federal Reserve, that is correct. Q A Q Statistical releases from your economist? Yes. Now, if we can go back to Government's Exhibit 440. Yes, sir. I think

you put it under the book. A Q Okay. I have it.

That's dated out there right underneath the big black words

press release, May 20th, 2002, correct?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 43 of 259

3207

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

Leonard Zawistowski - Cross Yes, sir. I think you testified that's when it came out. So if a

person is on the Internet inquiring about what the Federal Reserve has out in terms of press releases or warnings or whatnot regarding programs, prime bank note programs or medium-term note programs, or whatever, and they inquire before May 20th of 2002, they obviously can't find this, correct? A No, sir. That's incorrect. They would have encountered our

1996 warning which was on the web site open to the public in 1996. Q Well, then, let's go to page -- actually, go to the next --

second page, which is just a continuation of the first press release, and the third page, and this is actually the release, right? Which says in '93 and '96 the Federal Reserve issued

advisories concerning illegal schemes purporting to involve prime bank financial instruments, right? A Q That's what it says, sir, yes. And when I asked you before if a person went on before I guess That's what it says?

May 5th, I said prime bank notes or medium-term notes. that was too broad.

And your answer was no, that they would

find the '93 and '96 releases regarding prime bank note frauds, which is what that first sentence says, right? A That first sentence definitely says prime bank fraud, yes,

sir. Q And then if you go to the next page, you have to read that

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 44 of 259

3208

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

Leonard Zawistowski - Cross and you can read the first full paragraph starting, legitimate financials, and when you get to the end of that you find footnote 2, correct? A Q Yes, sir, you do. And then you have to go to the next page to find footnote 2,

which is at the end of the release, right, or the warning? A Q Yes, sir. I am trying to full circle this back to your answer about That

Smith's Exhibit 13, which is put out by your economist.

footnote 2, if you find it, does read, does it not, "In August of 1993, an article entitled Anatomy of Medium-Term Note Market was published in the Federal Reserve Bulletin." thing we had as Smith's Exhibit 29, right? A Q Yes, sir. And it says, does it not, it states, "The article was That's the same

written by Federal Reserve economist and describes the use of this type of legitimate debt instrument by corporations and banking organizations and how they are underwritten and priced by the market." A Q Yes, sir. So if someone just finds what was Smith's Exhibit 29, the That's the remainder of that sentence, right?

August 1993 Federal Reserve Bulletin, they are looking at something that the Federal Reserve describes as written by Federal Reserve economists regarding a legitimate debt instrument?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 45 of 259

3209

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

Leonard Zawistowski - Cross Is there a question there, sir? I said if someone just finds what we have identified as

Smith Exhibit 29, they are looking at what the Federal Reserve itself describes as your economist's written description of a legitimate debt instrument. THE COURT: Comma, correct. So that we can put the

declarative into an interrogatory at the request of the witness, which is fair. MR. STUCKEY: BY MR. STUCKEY: Q A Is that not correct? To understand the first one, the viewing of this would have Thank you, your Honor.

been in 1993, is that what you are saying? Q Well, at any time if they just found this Exhibit Smith 29,

the Anatomy of a Medium-Term Note Market. A Q A Q Um -Let me just ask it a different way, sir. Okay. Footnote 2 of Government's Exhibit 440 describes Smith's

Exhibit 29, does it not? A Q Yes, it does. As a economist's description of a legitimate debt

instrument? A Yes, it does. MR. STUCKEY: Thank you, sir.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 46 of 259

3210

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

Leonard Zawistowski - Cross THE COURT: Cross-examination on behalf of Mr. Lewis by Mr. Gainor? MR. GAINOR: THE COURT: Thank you, your Honor. You are welcome. CROSS-EXAMINATION BY MR. GAINOR: Q A Q A Q It's Zawistowski? Yes. That's correct.

Close enough. Yes, sir, it is. So if I understand your testimony, the term medium-term Yes?

note, medium-term notes exist. A Q

Can you make it more of a question. Do medium-term notes, notes that are traded under the

purview of the title MTN, medium-term notes, do they exist on a public and a private level? A Well, we can talk and describe and define what medium-term

notes, and then I would like to have you expound on public and private trading of same. Q A Q A Well, are there long-term notes that are traded? Can I start with what a medium-term note is? Please. Medium-term note is a debt instrument that is issued for a There are short-term

medium length of time, hence the name.

instruments, in the governmental sense to use your example which

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 47 of 259

3211

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

Leonard Zawistowski - Cross are called bills, which are issued between one month and, say, three years. A medium term is issued between three years and ten years, and they are called notes. And then a debt instrument

that's issued for longer than then years is called a bond. So medium-term notes as a financial debt instrument, they do exist, yes, sir. Now, what was the first part of your question? Q A Q Thank you for the clarification. Um-hm. All right. And you have found, based on your experience A lot of

that a lot of people invest in these programs. questions have come your way. it? A Q Yes, it was.

I think it was two this week, was

You get calls from people who actually invested in the

program or different programs involving these notes? A Q Or are contemplating investing. You get people who not only invest but also pass it on to

other people who have questions about relaying their investment to other people on occasion? A That would be like somebody -- so there is an investor and

there is somebody representing the investor, and I would get a call from that person. Q Yes. Is that the question?

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 48 of 259

3212

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

Leonard Zawistowski - Cross I can't recall any of those. Most of calls I can recall are

from investors themselves. Q And you get calls from investors that have questions about

passing on information to friends or family with regard to their investment and whether they can do that or talk about it? A Well, during the conversations what comes up is that under

the terms of the agreement that they are contemplating entering into, they are restricted from discussing these programs or this particular investment with either outside professionals or anyone. Q They have strict confidentiality rules.

Well, aside from that, have you taken calls from investors

who have actually passed on this investment to other people and told you about it after they have invested? A No, sir. I am aware of that, but not from the calls, not I am aware of that

the due diligence calls that come into me. through my other experiences. Q

Even though you haven't received the calls, you are aware

that happens? A Yes, sir. MR. GAINOR: THE COURT: Mr. Goodreid. MR. GOODREID: Thank you, your Honor, but I have no Thank you. Cross-examination on behalf of Mr. Weed by

questions of this witness. THE COURT: You are welcome. Cross-examination on

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 49 of 259

3213

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

Leonard Zawistowski - Cross behalf of Mr. Schmidt by Mr. Hammond. MR. HAMMOND: THE COURT: I am coming, your Honor.

I understand. CROSS-EXAMINATION

BY MR. HAMMOND: Q A Q Good morning, sir. Good morning. I heard you during your direct examination discuss

medium-term notes as being -- I want to try to be as specific as possible -- traded at auction? A Well, the U.S. government issues their medium-term notes

initially into the market through an auction process. Q And there are, if I understand you correctly, there are

governmental medium-term notes and private medium-term notes? A There are governmental, and I would call them everything I am not sure "private" is the right word.

else is other. Business. Q

GM issues medium-term notes, that sort of thing.

And after the auction -- the Federal Reserve actually does

supervision of the auction; is that right? A Q A Q Yes, sir, I believe we do. After the auction, those notes can go to a secondary market? Yes, sir, they can. And when they go to the secondary market, at that point the

Federal Reserve does not further regulate? A That's correct.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 50 of 259

3214

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

Leonard Zawistowski - Cross And there is a point at which European banks do trade in

these medium-term notes? A And Asian banks and South American banks and banks around

the world trade medium-term notes, yes, sir. Q And that obviously is not regulated by the Federal Reserve

because those are independent countries? A Well, sir, first let me add that the trading of these notes

in the United States is regulated primarily by the Securities and Exchange Commission after things start trading. The other markets around the world are regulated by their home country regulators, whether they be the Central Bank or their securities exchange type of agency, but they are done on regulated markets. Q There is also medium-term notes that are traded, I believe,

by Deutsch Bank? A Q A Deutsch Bank is a bank, and I said that banks trade notes. And who regulates them? The German bank regulatory agency, as well as in fact the

Federal Reserve on their operations in the United States. Q A Q A When it comes into the United States? That's correct. But not when it's in Germany? There is a German bank regulatory agency. It's not the

Central Bank of Germany. that in Germany.

It's a regulatory agency that does

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 51 of 259

3215

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

Leonard Zawistowski - Cross MR. HAMMOND: Thank you. No other questions. THE COURT: Counsel, you are welcome. Redirect

examination by the government, Mr. Angelo. MR. ANGELO: THE COURT: Thank you, your Honor. You are welcome. REDIRECT EXAMINATION BY MR. ANGELO: Q A Q A Would you take a look again at Mr. Smith's Exhibit No. 13. Yes, sir, I have it. How does one get ahold of one of those things? These are issued -- I could go into a funny story -- but it If you wanted to see what the release

is mostly Internet now.

was this week it would be on the Internet. Q A Available to download? Absolutely. MR. ANGELO: THE COURT: Thank you. Nothing else.

May this witness be excused and released

from subpoena, if any, by the government? MR. ANGELO: THE COURT: defendants? Hearing none, the witness is excused and released from subpoena with our thanks. THE WITNESS: THE COURT: Thank you, your Honor. Please, your Honor. Any objection by any one or more of the

You are welcome.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 52 of 259

3216

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

Leonard Zawistowski - Redirect (The witness was excused.) THE COURT: Sir, that's fine, we will do the

housekeeping, speaking on behalf of Mrs. Kramer. (The witness was excused.) THE COURT: MR. KIRSCH: calls Stephen Dirito. THE COURT: Thank you. Sir, thank you. If you will To accomplish The government may call its next witness. Thank you, your Honor. The government

make your way forward to be sworn by the court.

that, if you will come and stand in this open area in front of my bench, please. About there is fine.

So if you will face me and raise your right hand to be sworn. And thank you. May I have your attention in the courtroom. (Stephen DiRito was sworn.) THE WITNESS: THE COURT: witness stand. And again, good morning, sir. THE WITNESS: THE COURT: in front of you. Good morning, sir. I swear.

Thank you, and please be seated in that

As you testify, please use the microphone

By its peculiar design, a speaking distance of Thank you.

about this, six to eight inches, is most efficient. Mr. Kirsch. MR. KIRSCH: Thank you, your Honor.

Case 1:04-cr-00103-REB

Document 1591

Filed 06/17/2008

Page 53 of 259

3217

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

Leonard Zawistowski - Redirect THE COURT: You are welcome. DIRECT EXAMINATION BY MR. KIRSCH: Q A Sir, could you please state and also spell your name? Sure. My name is Stephen W. DiRito, spelled D-I, capital

R-I-T-O. Q A Q A Is your first name spelled with V or PH? PH. And how are you employed? I am a supervisory Special Agent with the Federal Bureau of

Investigation, the FBI. Q A Q A Q Where are you based? I am in Washington, D.C. Were you previously based somewhere else? Yes, sir. I was based here in Denver.

Were you a Special Agent with the FBI in Denver on March 7th

of 2003? A Q Yes, sir, I was. And on that day did you participate in the execution of a

search warrant? A Q A Q A I did. Do you recall the location? It was 5850 East 58th Street, I believe. Is that in Commerce City? Yes