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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 XIII _______________________________________________________________ Proceedings before the HONORABLE ROBERT E. BLACKBURN, Judge, United States District Court for the District of Colorado, commencing at 8:20 a.m., on the 19th 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

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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 8:20 a.m.) THE COURT: Very well. gentlemen generally. Thank you, and please be seated. To the parties, their counsel, ladies and Good morning. Good morning, your Honor.

MR. BORNSTEIN: THE WITNESS:

To the marshals, good morning.

Counsel, it is my understanding that Mr. Gainor may wish to be heard on what appears to be the imminent proffer by the government of a proof or proofs of conviction in this case. Mr. Gainor. Hopefully I am not putting words in your

You are not, your Honor.

I just wanted to

make a record before the government seeks admission, and I don't have with me the exhibit numbers of the redacted judgment of convictions, and I will speak somewhat on behalf of Mr. Franklin. I think it's 12035? O31. 031. Your Honor, so I asked for this

MR. ANGELO: MR. GAINOR:

opportunity to make this on the record but without the jury being here. I have made a motion, a 403 motion, seeking to exclude any evidence of this conviction to be noted in front of the jury or read it. They have been informed on multiple occasions that

the defendant had a prior conviction.

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But I just want to renew that 403 objection for the hard copy coming in. And I know that the court basically ruled

it was admissible pursuant to its order on docket No. 676, when it was referred to my Motion to Sever and/or Exclude, pursuant to docket No. 653. I just didn't want to waive that objection. And I also

wanted to make an objection to the hard copy of the conviction coming in as being cumulative. The jury has already heard on at

least three or four occasions that Mr. Lewis has a felony conviction. I would suggest to the court that is enough. It does

not come under cross-examination as a fact that is in dispute. And to put in the hard copy at this particular point would be cumulative and unnecessary and highlighting the issue. So that would be the second objection to its admission. I don't know if Mr. Schmidt and the other parties will be joining in on that, but those are my only two. THE COURT: Well, we will find out about Mr. Schmidt.

Because I presume the government intends at some point to offer a redacted version of the proposed judgment of conviction affecting Mr. Schmidt. MR. HAMMOND: So let me turn to his counsel. Your Honor, on behalf of Mr. Schmidt, we

would like to join Mr. Gainor and say that none of this should come in at all during the trial, even though it already has. We understand the court's ruling earlier regarding

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notice to potential investors and the duty to provide that notice. The only thing that I can tell you in terms of a record is that I think it was earlier last week I got together with Mr. Kirsch, and we did redact portions of the judgment of conviction pertaining to Mr. Schmidt, and I believe that that document has been redacted and is prepared to be admitted. THE COURT: Mr. Gainor. MR. GAINOR: Your Honor, I forgot to add, and if I may Thank you.

be granted leave of court to supplement the record. THE COURT: MR. GAINOR: You may. I have also had the opportunity to meet

with the prosecutors in regard to the redacted judgment of conviction and it is satisfactory. And there is also a limiting instruction that has been drafted by co-counsel that obviously we would like to remind the court, and I am sure the court doesn't need that, that has to be read as well. If the court doesn't see fit to keep out the

convictions to begin with. THE COURT: alternative. With plan A to exclude the exhibit altogether. Response by the government. MR. KIRSCH: Mr. Kirsch. I understand that you are arguing in the

Thank you, your Honor.

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Your Honor, the government does intend to offer at the conclusion of Mr. Hector's testimony this morning both Government's Exhibit 12030, which is now a redacted version of Mr. Schmidt's conviction mentioned in the indictment with respect to the securities fraud counts, and the redacted version of Mr. Lewis's conviction as Government's Exhibit 12031, also mentioned in the indictment with respect to the securities fraud counts. For the purposes of the record, I don't think there is any challenge to these documents, but I do want to note for the record that the government had originally marked certified copies of the complete versions of these documents. As defense counsel had indicated, we have worked with them to remove objectionable portions. Obviously, that means

that the copies that are now being offered are not certified, but we don't understand that there is any objection to that, given the circumstances. With respect to the 403 objection, the government does not agree that these objections are cumulative. There is not

evidence yet before this jury about Mr. Schmidt's conviction. With respect to Mr. Lewis's -- nor is there any evidence about the date or the nature of Mr. Schmidt's previous conviction. With respect to Mr. Lewis's previous conviction, there is testimony by a witness that she learned of Mr. Lewis's

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conviction.

Obviously, that does not have the same probative

value as does the official document indicating that conviction. There is also not information yet before the jury about the date of that conviction, the nature of that conviction, nor the fact that Mr. Lewis was placed on probation for that conviction, and was in fact on probation during much of the time relevant to the conspiracy. Those, again, are all elements that the government alleged as part of the material omissions that were made in connection with the securities fraud scheme. The government does not believe that the presentation of those in this format is cumulative, and the government believes that, particularly in conjunction with the limiting instruction, that this is a proper way to get this information before the jury. THE COURT: Thank you. Well, unquestionably the

proposed government Exhibits 12030 and 31 respectively are relevant as defined by Rule 401. The issue is whether their probativity is substantially outweighed by one of the three considerations, as opposed to the three dangers, made the focus of Rule 403, and that is the needless presentation of cumulative evidence. The first sub issue is whether this is in fact cumulative. It is not with respect to Mr. Schmidt. And it is

not with respect to Mr. Lewis.

Neither is it needless because

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of the reasons stated and arguments advanced by the government, which are now approved, adopted, and incorporated by the court. Thus, the objection under Rule 403 on behalf of Messrs. Schmidt and Lewis are respectfully overruled. Now, in the name of efficiency, focus, please, on the government's redacted Exhibits 12030 and 12031. Any other objection concerning their admission as redacted? As we had discussed initially on April 9 this year in

our 8:15 a.m. conference. MR. HAMMOND: Your Honor, on behalf of Mr. Schmidt,

knowing that the court knows that we have already made the record regarding the objection generally. good as we can hope for. THE COURT: I translate and construe that to mean no The redaction is as

additional objection on behalf of Mr. Schmidt. Any additional objection on behalf of Mr. Lewis? MR. GAINOR: THE COURT: No additional objection, your Honor. Thank you.

Now, focusing on the proposed limiting instruction, which for the record, I have taken the liberty of marking holographically as limiting No. 1. It was presented to me. I

am not going to read it unless counsel have a concern that what I have is not what you want. If you wish a brief opportunity to review and peruse that which you provided to me, I will grant that request.

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Is there such a request? MR. GAINOR: THE COURT: Yes, your Honor. If you will approach the bench, I will make Please don't try to memorize my work

this available to you. product. Just kidding. MR. BORNSTEIN: as well look at it. THE COURT: complete. MR. KIRSCH: THE COURT:

As long as he is looking at it, I might

Very well.

So the circle of review may be

Thank you, your Honor. Mr. Kirsch will join you gentlemen at the

Counsel, I have granted your request to review at my bench proposed limiting No. 1. Is that limiting instruction in

this context acceptable to the government? MR. KIRSCH: THE COURT: Yes, your Honor, it is. And to Mr. Schmidt? Yes, it is, your Honor.

MR. HAMMOND: THE COURT: MR. GAINOR: THE COURT: codefendants?

And to Mr. Lewis. It is, your Honor. Are there any objections by the other

Hearing none, the court at the propitious time --

that reminds me of a near slip of the tongue yesterday -- will read limiting No. 1 to the jury. Now, when should that be in relation to the admission

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of Government's Exhibits 12030 and 12031, both as redacted? And here are your choices. Immediately before or

immediately after, and that is cast in the exclusive disjunctive. That's either or, not both.

Does the government have a preference? MR. KIRSCH: Your Honor, we would suggest -- the

government would suggest before, but if the defendants feel differently, we would defer to their judgment on that issue. THE COURT: On behalf of Mr. Schmidt. A preference?

MR. HAMMOND: co-counsel.

This is what happens when you have

We would request the court read it after. Mr. Gainor? I would concur. It's three against one, Mr. Kirsch. I cast

THE COURT: MR. GAINOR: THE COURT:

the deciding vote, the only one, frankly, that counts. immediately after the anticipated introduction of the

And

aforementioned redacted government exhibits of judgment of conviction, I shall read to the jury what is now approved by the parties and the court as limiting No. 1. Very well. That concludes our business for now. We

are in recess pending the availability of our jury. (Recess at 8:35 a.m., until 8:45 a.m.) THE COURT: Thank you, and please be seated.

Mr. Hector, good morning. THE WITNESS: Good morning.

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THE COURT:

And ladies and gentlemen of the jury, good

THE JURY:

Good morning.

(Gregory Hector was recalled to the stand.) THE COURT: Mr. Hector, of course I remind and admonish And

you that you continue to testify in the trial under oath. do you understand? THE WITNESS: THE COURT: Yes, I do.

Mr. Gainor, I believe you were at the

MR. GAINOR: THE COURT:

Thank you, your Honor. You are welcome. CROSS-EXAMINATION

BY MR. GAINOR: Q A Q Mr. Hector, good morning. Good morning. I believe when we broke yesterday we were talking about your So I

connection to and communication with one Terry Lorenzen. would like to go back to that area. A Q Okay.

There was contact with Terry Lorenzen prior to meeting

Charles Lewis? A Q Yes. There was contact with Terry Lorenzen by the form of e-mails

and phone conversations in March of 2003?

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Gregory Hector - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A Q Yes. He continued to stay in contact with you with regard to your

investment after the news broke with regard to the searches and seizures, and so forth? A Q Yes. After meeting Mr. Lorenzen, and having e-mail contact with

him, I believe you testified that it was in the early part of 2002 that both he, Mr. Lorenzen, Mr. Lewis, and Mr. Schmidt, met with you at a meeting. A Q Correct. And that meeting occurred at Teddy's Country Western

Nightclub? A Q Correct. You discussed with those in attendance that you wanted to

make a transition from construction to another line of work and that you were looking for basically finding out more about this investment. A Is that correct, sir?

Um, I don't recall discussing that with him, but I may have.

I don't recall that. Q Well, you had already met Mr. Lorenzen. So the first time

at this meeting -- this was the first time that you met Mr. Lewis and Mr. Schmidt? A Q Correct. And Mr. Schmidt was described as the individual who decided

who was going to invest and who was not going to invest?

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A Q

Gregory Hector - Cross I believe Mr. Schmidt and Chuck Lewis made those decisions. Do you remember telling the FBI that from what you heard it

was Mr. Schmidt who decided who got into the program and not Mr. Lewis? A Q I don't recall saying that. Okay. But you do recall that at this meeting it was

Mr. Lorenzen and Mr. Lewis that did most of the talking? A Q Yes. And was it at this time that the term "friends and family"

came up that this program was basically being exposed to friends and family? A I don't really recall that as being the group that it was

being included to. Q A Q Okay. Do you remember that being discussed later on?

I really don't. Because I heard that term yesterday during your direct Maybe I misunderstood.

testimony. A

I recall hearing it too, and I thought my response was that

I didn't believe that it was just a friends and family, that it was neighbors, acquaintances, connections at their discretion. Q A Q A Q But it was also open to friends and family? Yes, it was. Perhaps that where we both got it wrong? Okay. You were told at that meeting, were you not, sir, that

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Gregory Hector - Cross Mr. Lorenzen invested in the program? A Q Yes. You were also informed that Mr. Lewis was an investor as

well? A Q Yes. Were you given any information as to whether or not

Mr. Schmidt was an investor? A I don't remember knowing if he was. I guess I assumed that

he was, but I don't remember hearing that. Q You were informed that the trades were accomplished by what Who was the trader or who had the connections

individual there? to the trader? A

I don't know that I ever heard that.

What I understood was

that it was through Norm Schmidt's connections as the person with the major backing. Q Okay. Now was it at that meeting, Mr. Hector, that you were

supplied by any written documentation, or did that come after the fact? A As far as contracts and those types of things, it was after It was more I think I received a couple general-type

that day.

pamphlet-type things. Q What a general pamphlet about Capital Holdings or Smitty's

or in terms of MTNs, medium-term notes? A Q Medium-term notes is what I remember getting that day. Do you remember that being general or fairly extensive

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Gregory Hector - 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 material? A Q I remember that being maybe one or two handout-type items. Was it during that particular meeting that you got the

Federal Reserve Bulletin, or would that have been subsequent to that meeting? A Q A Q A Um, I am not sure. A long time ago.

Let's do this, if we can. I know that -I am sorry. I received several different handouts over two or three

different occasions. Q Let's see if we can clarify that a little bit, with the

court's permission and with the help of the IT individual, could we have Exhibit 251 shown to the witness, please. You can actually look at it on the screen or hard copy. I want to get an idea, Mr. Hector, if that was given to you at the meeting in April or subsequent to the meeting? A Q A Q A Q The meeting in April -- the meeting. At Teddy's? At Teddy's? Yeah. My recollection would be that I got it after that. Okay. Now, there was a document that I believe -- well, I My records are a little bit

don't know if it is in evidence. unclear.

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Gregory Hector - Cross If we can show you Exhibit 250. in evidence. A

I believe that may be

Do you remember getting that at the April meeting? Only because I vaguely remember

That one I may have got.

within days of that meeting sitting down and reading through it. MR. GAINOR: Your Honor, with the court's permission,

may I inquire of the clerk whether or not 250 is admitted? THE COURT: MR. GAINOR: BY MR. GAINOR: Q So it's your testimony that you may have received Exhibit You may but need not. It is.

Thank you, your Honor.

250 at the time of the meeting? A Q May have, yes. And then the documentation with regard to the Federal

Reserve, you may have received subsequent to that? A Q That would make sense, yeah. Now, when you received that documentation, I believe you

testified you went through it and you didn't understand it completely but you did read it? A Q I did read through it. Okay. Now, that documentation appeared to come from either

a textbook or from some published pamphlet, correct? A Q A Q Correct. Didn't appear to be written or authored by Mr. Lewis? I certainly wouldn't have thought that, no. And you don't think that now?

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A

No.

Gregory Hector - Cross I assumed that these were their marketing materials

based on historical writings and publications. Q And from meeting with Mr. Lewis at that meeting and

subsequent phone calls with him or contact with him, I believe it's fairly easy to say that you believed that he believed in this program and what he was talking to you about? was an investor at that point? A Q Yeah, I did. All right. And Mr. Lorenzen never gave you any cause during He also appeared You knew he

that time to be concerned about that program. to believe in it as well? A Correct.

He showed up at the luncheons and continued to

invite people that he knew, neighbors, acquaintances. Q And Mr. Lorenzen was fairly active at these -- at the

meeting in April, and subsequent to that at these educational seminars that you talked about? A He was active initially in that first meeting, and then

present at the others. Q And of course, stayed in communication with you during the

pendency of your investment? A Really, once we started to invest, most of my interactions

were with Chuck Lewis. Q But I believe that you testified that you still had contact

with Mr. Lorenzen, before, during, and after? A Occasionally.

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Q

Okay.

Gregory Hector - Cross You also testified that it is your belief that it was

Mr. Lorenzen, you think, that may have delivered the contract to you, and then taken it back and given it to Charles Lewis or some other party? A Yeah. I just don't recall who exactly I faxed it to. I I

know that Terry Lorenzen was a vehicle in me receiving it. may have faxed it back or sent it directly. Q Now, can you recall for us, sir, how many educational

seminars or social luncheons you attended at the Capital office after the April meeting? or five? A Q A Q No. It would have been less than that? Yeah. Two is what I recall. Would it have been in excess of four

And during these meetings, there were actually

presentations, seminars, and educational material? A Q Yes. And there were a number of people in attendance in addition

to you? A Q Yes. And you were told by Mr. Lewis that your investment was Is that a fair statement?

protected and it was safe. A Q Yes.

And in confirmation of that, you were eventually sent

insurance certificates which you believed confirmed the security

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Gregory Hector - Cross of the investment? A Q Yes. You had an opportunity to hear from a John Schlabach at one

of these meetings or educational seminars? A Q A I did. And he was talking about the program as well? No. He was talking more about IRS-type requirements that he That he was doing a training on

didn't believe were legal.

interactions and things that you did not need to respond to based on IRS regulations. Q You talked about, perhaps at the beginning of my

cross-examination, that you had received three or four disbursements from Capital Holdings? A Q A Q Correct. Those came in the form of checks to you? Yes. And were those mailed to you or delivered to you by third

parties? A Q Mailed. Did you also have an opportunity to review any documentation

from a lawyer by the name of Gary Herbert that discussed the capital investment? A Q I don't remember that name. Do you remember it ever coming up during any of the seminars

that you attended or any conversations with anyone?

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A Q

No.

Gregory Hector - Cross I really don't.

You spoke to Mr. Lewis about coming over to your house and

meeting some of the Indian missionaries that you were supporting? A Q A Q A Q A Q Correct. And he accepted that offer and came over? Correct. And a presentation was given by him? Yes. How long was that presentation? Probably two hours, hour and a half, two hours. And I believe you testified that at the conclusion of that

presentation, Mr. Lewis said he couldn't invest personally but he would try to help you with the percentage of what you were gaining on your investment? A Q Correct. And seek authorization for a higher level of investment

return? A Correct. I don't remember him saying he would seek I think he granted an extra two percent per

authorization. month. Q A Q A

Right then and there? The first time I talked to him, yes. That would have been after the -After that. Might have been within the next day or so.

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Gregory Hector - Cross MR. GAINOR: If I may have a moment, your Honor. THE COURT: MR. GAINOR: THE WITNESS: THE COURT: by Mr. Hammond. MR. HAMMOND: THE COURT: Thank you, your Honor. Thank you, counsel. You may.

Thank you, Mr. Hector. Thank you.

Cross-examination on behalf of Mr. Schmidt

You are welcome. CROSS-EXAMINATION

BY MR. HAMMOND: Q A Q Good morning, sir. Good morning. When you started your direct examination you said that you

were the director of development for a developer? A Q A Yes. What does that mean? I right now handle a lot of the project management oversight

for different projects that this development group is doing. Different places in the country. Q When you say "the development group", is that a real estate

development group? A Well, it's -- yes. There is an entity as a part of another

company that is a real estate development group. Q And is that what you were part of is the real estate

development group or do you have broader responsibilities?

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A

No.

Gregory Hector - Cross I am part of that real estate development group on the

construction side of it. Q A And what are the other sides besides this construction? They have a commercial industrial property management

portion, and then apartment building management portion, and then a mortgage banking kind of a side of their company as well that I am not involved in. Q A Q You are just involved in the real estate part? Just the construction side. Okay. I want to talk to you about when in October of about

2001 your wife met Mr. Lorenzen and you ultimately got involved in the investment program. When you got involved, did you have

other investments at the time? A Q No. I don't believe I did. Nothing significant.

This was the first -- was this the first time that you got

involved in an investment? A In anything like this, yes. I have, you know, 401(k) and

some small stock. Q When you talk about the 401(k) and the small stocks, did you

oversee your 401(k) investments? A Q A Yes. Personally? I have, yeah. We had in my company, we have third-party

administrators that, you know, get your report and review it and look it over.

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Q

Gregory Hector - Cross And what I mean by that, is when you have a 401(k), there One is you do the monthly

are two ways to do it at least.

contribution and they stick it in a fund or something like that and you don't have to worry about it. Or you become more

actively in daily decisions about what to invest in. A More the former where we had a third-party administrator. Built a menu list of

We set up a company program.

recommendations and each employee could pick and choose what they wanted to participate in. Q A Were you part of building that list? I was part of authorizing that as to what the third-party

administrator was recommending. Q And you say you had some of our own investments in small

stocks? A Yeah. I think I had a stock in Krispy Kreme or something at

the time. Q Before you got involved with the stocks with Krispy Kreme,

did you go out and research it? A Q do? A Obviously not enough. Um, I thought about it a lot for A little. Okay. When you got to this program, what research did you

about six months. '01.

We talked to Terry Lorenzen, probably October Thought about it a lot.

Didn't invest until May of '02.

And met with Chuck and Terry and Norm.

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Gregory Hector - Cross After that meeting thought about it a little bit more. Read some of the material. And checked with some personal

friends and people -- my dad was in banking, checked with him. That's about what I did. Q So there were some independent checks that you did in

addition to just listening to Mr. Lorenzen and then going to the meeting? A Q A Q A Q A Yes. You talked to your dad who was in banking? Um-hm. Asked him about medium-term notes? Correct. And you said there were some other people? Yeah. I don't recall. Some friends that were in financial I

industries.

I remember checking in with several people.

don't remember who. Q Okay. When you were told either at the -- well, let me ask You were told at some point that you could get up

it this way.

to like a ten percent per month return, right? A Q Right. Was that the first -- I will call it a meeting -- when

Mr. Lorenzen met you when he drove your wife home? A I think he spoke in probably broader numbers at that first

meeting, and was a little noncommittal but he gave a range around there.

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Q A Q A Q A Q

Gregory Hector - Cross Did that impress you? Yeah. Surprise you? A little bit. Okay. I did. When you spoke to your dad in banking and your other friends Did you think that was a little high?

in finance, did you come away with that feeling that maybe this works, it's good? A I came away with the feeling that there was possibly

something that I had not been exposed to before that was actually taking place, and that maybe this was an opportunity to have a connection with it. Q And if I understand correctly, this is also after you talked

to the folks independently that you talked to? A Yeah. I don't remember the time frame exactly when I called

them, but I know I touched base with them during that six-month period, and to some degree after. Q You said that you over a course of time developed a

friendship with Mr. Lewis? A Q Correct. Did you also over a course of time have a similar

relationship with Mr. Lorenzen? A Q No. So I know that you met him when your wife got a ride from

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Gregory Hector - Cross him from the -- I think it was the shop, the car shop? A Q Right. And then he went to at least one other meeting. How many

other meetings did you have when Mr. Lorenzen was present? A Probably just the two luncheons that I went to, and that was

June, July, '02, and probably did not -- may not have ever seen him again after that point. But did have contact from him in

March '03, phone calls, e-mails. Q You had a number of -- there were a number of e-mails

exchanged or at least from Mr. Lorenzen in March of 2002, right? A Q A Q March of 2002. Yeah. I think there were some e-mails.

And that's what led up to the April meeting, right? Correct. And at the April meeting at Teddy's, and that's a

country-and-western club, right? A Yeah. They just picked a place, and that's where we met.

It's kind of the lobby of a hotel there. Q And at that meeting in April, one of the things that you

noticed, if I understand correctly, is that Mr. Schmidt and Mr. Lorenzen did more listening at that meeting? A Um, I would say Mr. Schmidt did more listening and Chuck

Lewis and Terry Lorenzen did most of the talking. Q You also said that Mr. Smith came in at some point for

training, and that training was about the nuts and bolts of how the investment works, if I recall correctly?

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Gregory Hector - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A Q A Q Correct. That was after you had already made the investment, right? Correct. If it was already after you had made the investment, why did

you go? A More education, better understanding, meet some of the other I was invited to take an opportunity to see their

investors. offices. Q

I had never seen their offices before.

When you were socializing, do you recall with whom you

socialized at that meeting, at that training? A I remember meeting a neighbor of Terry Lorenzen's who was in That's the one that jumps out immediately. I met

real estate.

probably only four or five people out of the 25 that were there. Q You were also referred just a few minutes ago, and then

yesterday, to Exhibit 250, which is -- I believe is the Federal Reserve Bulletin. A Q 250 is the Turin Group. Let me do it this way, sir. 250 is the introduction to the

bank debenture programs.

I believe on your direct examination

you said that you had read through it? A Q Right. And I think you also said something like you didn't

understand it front to back? A Q Correct. What did that mean?

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A

Gregory Hector - Cross A lot of new language that I wasn't used to, and trying to And it wasn't a comprehensive understanding of Thus, I went to the luncheons and tried

understand it.

it reading through it.

to gain some more understanding. Q Did you also talk to your dad from his banking experience

about some of that stuff? A Q I did. Did he give you some -- without saying what he said, did he

give you some answers to that? A He gave me the indication that with his bank he believed

that they -Q Well, I probably shouldn't ask you what he believed because Whatever he told you didn't

that would be what's in his mind. make you want to withdraw, right? A Q Correct.

I would like to talk to you about some of the other exhibits I would like to talk to you about And do you have that

that have been introduced.

Exhibit 253, and if we could publish that. in front of you? A Q I do.

You might be able to look at the screen as well, whichever

is easier for you. A Q Okay. One of the things that I want to talk to you about, if I

remember what you said yesterday, the top part, and I want to

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Gregory Hector - Cross talk about the handwritten parts as much or more than what's already printed there. A Q Okay. The top part you filled out, right, with your name and

address? A Q Correct. The bottom part you initialed, and then there are some other

parts that were initialed by someone else? A Q A Q Correct. Were they initialed in your presence? No. Do you know what on the bottom, where it says LLC initials,

and that's the next day, May 9th, '02, do you see where it says by CL? A Q A Yes. Do you know what that means? I would assume it means by Chuck Lewis, looking at it right

now. Q On the next page you have -- at the bottom of the page you

have the same kind of an initial, right? A Q A Q A Yes. And again over on the LLC initials, it says by CL? Yes. Page 3, same thing, right, at the bottom? Correct.

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Q

Page 4.

Gregory Hector - Cross And then on page 5, if I understand correctly, you

signed on May 8th, right? A Q A Q A Q A Q A Q A Q A Q Correct. And then there is a signature there for Mr. Schmidt? Okay. This is page 5. Yeah. Can you blow that up for me? Thank you.

Does that help? Yeah. Okay. No. Next to party B? After the LLC initials -- oh, up there, okay, yeah, it does. Up there just at the end of the T? Right. And then again below that, the next line from Norman And does it again say by CL?

Schmidt's signature by CL? A Q Yeah. I see that. You filled

And then if we can go to page 7 of that exhibit.

out an application, right? summary? A Q Correct.

Or an investor qualification

And that is page 6 and page 7.

At the bottom of page 7,

there was a question asking if your investment, if the money you were going to put in here is free of encumbrances and liens?

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Gregory Hector - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A Q Okay. You said no, but you said that you did have a fair amount of

money available? A Q Okay. Make sure I am tracking with that here.

The first handwritten line at the end of No. 9, and it is

highlighted on the screen. A Q Okay. Okay. Part of what you said was you have got some

encumbrances but you have also got it looked like a number of properties that were invested in that would have no encumbrances later on after they sold? A Q A Q Correct. I would like to move on to Exhibit 255 now. Okay. And in connection with that, the exhibit that we just looked

at, 253, that one, the agreement called for a $50,000 investment, right? A Q I am sorry. The agreement called for 50,000? But if we could

I don't want you to take it out of there.

go back to 253 at page 2. investment? A Yeah.

That agreement called for a $50,000

It didn't call for 50,000.

I wrote that in.

Because

that was what my intention on my initial investment was. Q And then when we go over to page 2 of 255, one of the things

you did was a wire transfer for 30,000?

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A Q A

Gregory Hector - Cross That was later on. That 30. That was well after? Yeah. That was probably almost near the tail end of the

investment. Q A Q Okay. My initial was 50. Page 3 of 255. I just want to go over some signatures with

you.

At the bottom of page 3 on 255 where you see the signature

for Norm Schmidt? A Q A Q Okay. When you signed that that signature wasn't there, right? Correct. Now, as you go through that, and what I want you to do is Does

take a look at page 5, and take a look at that signature. that look exactly the same as page 3? A Q A Q A That appears to. And page 7? Correct. And page 9, for example? Very similar. It appears to look the same.

A little different at the bottom of the I,

but -Q It is a little darker and you can see the hole there, is

that what you are saying? A Q Right. Okay. You didn't see those signatures either written or

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Gregory Hector - Cross stamped at the time that they were placed on the document, right? A Q No. On page 16 of that Exhibit 255, toward the top in the Do you know

handwritten section, it says, please return signed. what that -- what comes after signed? A Q A Q A Q Addendum. Signed addendum. Yes. Was it returned? On that 30,000 -And I am not asking you to find it. Was that your handwriting?

I am just asking you

from your recollection if it was returned. A I would assume it was returned signed because I would check

to make sure, but I am not seeing it here. Q I want you to take a quick look at page 17 of that exhibit. That is the addendum? It

Well, that's the addendum, isn't it? says addendum at the top? A Q A Q A Q A Yeah. Okay.

I don't think it is just because the dates are wrong. You signed that on May 24th?

The addendum? Yes, sir. Yes. And Mr. Schmidt signed that on May 24th? Yes.

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Q A Q

Gregory Hector - Cross Did he sign that in your presence? No. That's a different signature than the other signatures that

you have looked at in this exhibit, right? A Q Those look different. And in fact, where it looks printed, that looks much

different as well, doesn't it? A Q It does look a little different. The last page, page 18 of that exhibit, are two Wells Fargo That looks like $20,000 each.

receipts for 20,000. A Q A Q

I think they are the same. Do you believe it's just one for 20,000? I think so. Okay. So do I understand correctly then that the tax refund

that you got back was 2940? A Q Correct. I think that's what it was. That you were speaking

I would like to move to Exhibit 256.

about on your direct examination and you said there was a fair amount of handwriting that you had on that letter. recall that? A Q Okay. Okay. I am sorry. Okay. Do you

256.

That's the letter you were talking about during

direct examination about there were things you didn't understand? A Things that I thought were a little odd, yes.

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Q

Gregory Hector - Cross Like the Smitty's Investments, LLC, is experienced in You didn't

numerous businesses like Smitty's Motor Sports. understand Smitty's Motor Sports, right? A

I didn't understand why they were referencing the growth of

Smitty's Motor Sports as it relates to a letter to an investor about his investment inside that bigger umbrella. Q And I think you said something during direct examination

that it kind of explained the transition? A Q I am not following your question. I am talking about your direct examination yesterday, and

you didn't understand where you might be supporting Smitty's Motor Sports. A Q A But this letter did explain the transition.

Between Smitty's and Capital Holdings? I think between Smitty's and Capital Holdings, yes. Yeah. I don't know if that was this one or not. This

letter is -- just because I don't remember everything it said. Q Okay. Well, let me ask you this. When you didn't

understand the part about Smitty's Motor Sports, who did you call to say, I don't understand, why is this in the letter? A Q Um, my recollection would be that I would have called Chuck. Okay. Do you have a direct recollection or are you not

sure? A Q No, I am not sure. I am not sure.

Are you also equally unsure that the next part of it that

said with a major U.S. bank, you are not sure you called anybody

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Gregory Hector - Cross to say who is the major U.S. bank? A Right. I am not sure. It would be unlikely to not call or But -And in I

e-mail. Q

And get some resolve to that.

I would like to draw your attention to Exhibit 260.

that context, 259 was a letter that was dated September 24th. am sorry. Let's go to 259 real quick. And I don't think you

have to pull it out because it's one page. 259 is the letter regarding progress with the insurance coverage. And what I want to draw your attention to is the That does

signature line that has Norm Schmidt's signature.

look exactly like some of those earlier monthly statements that you had seen before, right? A Q Correct. Now, when you go to 260, I believe that you said on 260

there was nothing about individualized protection in that letter dated October 31st. A Q A Correct. Did you ask anyone about the contents of that letter? I am sorry. Say that question -- did I ask anyone about the

contents of that? Q A Right. 260. I would think I would have, but

Um, I really don't recall.

I don't recall if I did or not or e-mailed or phone called. Q Well, do you recall whether anybody called you or e-mailed

you or sent you another letter to address whatever concerns you

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Gregory Hector - Cross might have about an individualized protection? A I don't recall. I do remember having several phone

conversations with Chuck Lewis during those months, and just checking in on progress, and may have just felt like I had handled within the context of a phone call. Q But you don't have a specific recollection of having a

conversation about that October 31st letter? A Q No. Okay. I would like to have you take a look at Exhibit 263.

Do you recognize that? A Q A Yes. What is that? That's one of the checks I received back on distribution

request. Q That's actually a two-page document. Let's just talk about

page 1 first. A Q A Q A Q A Q A Okay. Can you see the amount that the check was written for? Yes. How much was it written for? 35,000. Was that a distribution to you? Yes. From Capital Holdings? Yes.

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Q A Q

Gregory Hector - Cross Do you know -- do you recognize the signature on there? No. There is -- I would like to draw your attention to page 2 of I don't believe this has been admitted yet. It has not, counsel.

that exhibit.

THE COURT: BY MR. HAMMOND: Q A Q A Q A Q A Q A Q

Do you recognize the top portion? Yes. Okay. That appears to be different distribution. And how much is that for?

40,000. Do you recognize the signature on that? Yes. Is that Mr. Schmidt's signature? Yes. Can you tell whether that's an actual signature or a stamp? I can't. Now, down at the bottom portion of that, there looks to It looks to be your

be -- well, there is handwriting. handwriting? A Q A Yes. And do you know, who is Paul?

My only recollection is that I remember Paul as being the

name of a person given to me by Chuck Lewis that was handling some of the monthly distributions and accounting and paperwork. Q Okay. That is -- that's all your handwriting?

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A

Gregory Hector - Cross That's my handwriting. MR. HAMMOND: Your Honor, I move for the admission of Government's Exhibit 263.

Exhibit 263 at this point. THE COURT: MR. ANGELO: THE COURT: other defendants?

Any objection by the government? None, your Honor. Any objection by any one or more of the

Hearing none, Government's Exhibit 263 for identification admitted in evidence, with leave to publish. BY MR. HAMMOND: Q And if we could just take a quick look at page 1, ma'am. If

we try to highlight the top portion, it's kind of difficult, but I believe that you said that that amount was 35,000? A Q Correct. At some point, and let me make that a little bit more of a At some point around the end of 2002 to the

direct reference.

beginning of 2003, you actually received an IRS form 1099 from Capital Holdings, right? A Q Um, I don't know. Okay. MR. HAMMOND: THE COURT: Your Honor, may I use my friend ELMO? Thank you. I don't recall that.

You certainly may.

MR. HAMMOND: with procedures.

And your Honor, I want to stay in context Would

I have not marked this at this time.

the court prefer that I did?

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Gregory Hector - Cross THE COURT: Please, so that the record may be clear. BY MR. HAMMOND: Q I am going to show the first page of what's been marked for Do you see

identification purposes as Mr. Schmidt's Exhibit 1. that on the screen? A Q A Yes.

Does that appear to you to be the cover of an invoice? Not really. It appears to me to be more like an

eight-and-a-half by eleven sheet. Q Sure but the only type on there is the first third of the

sheet, right? A Q Right. Second page of that, just going to ask you if you recognize

what that is? A Q Just a 1099 miscellaneous. And third page appears to be the kind of the same document,

1099s? A Q A Q Correct. Do you recall receiving a copy of that? I really don't. You gave a statement sometime around March 26th of 2003 in

which you apparently said something about holding yourself out as an accredited investor? A Q Can you say that again? You said something about holding yourself out as an

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Gregory Hector - Cross accredited investor as that's defined by Rule 501(a)? A Q A Q I said that or I -Yes, sir. March of '03? And I apologize. That was in the agreement. Do you recall

that? A I remember some of that language in an agreement from the

beginning, yeah. Q A Q A That's where I wanted to go. Oh. What did "accredited investor" mean to you? I remember asking that question after reviewing the initial

contract, if that's truly where that word was, and asking about it. And I remember either Terry Lorenzen or Chuck Lewis telling

me not to worry about that, that that's not a concern, is all I recall about that. Q You said on your -- one of your cross-examinations that you

received somewhere in the vicinity of a hundred thousand dollars in disbursements? A Q I believe that's right. And then at some point you received another 51.9 percent.

Was that of your original investment? A Um, the numbers I recall in trying to think back through

this, and I didn't go back through the math, but I believe the spreadsheet that I put together back then showed a total

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Gregory Hector - Cross investment of just over 300 or around 300,000, disbursement checks back of roughly a hundred. So there was roughly 200,000

left that we put into the account, not including any of the interest we earned or the dividends, or whatever you want to call them. And so the 51 percent reflects the amount that, after going through this process and getting my paperwork as part of the restitution, I think they only -- she -- who is the name -Marika Toltz was the trustee of the account for federal government, unless I am forgetting the name, but after sending all my documentation to her and their department, they only counted 165 of it as being valid because of a missing deposit slip or something. I really don't actually understand why they But I got back 51 percent of that just

only credited 165,000.

this January of this year. Q You also said a few minutes ago that in relationship to the

meeting with Mr. Lewis and the missionaries from India, that at that point Mr. Lewis decided that you could get an additional percentage. A Yeah. Is that -One and a half or

I recall two percent at that time.

two percent. Q And I believe you said that he didn't need an authorization,

he did it kind of there on the spot? A I remember him -- I recall him not requesting an I recall him telling me that's what he would do.

authorization.

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Gregory Hector - Cross MR. HAMMOND: May I have just a moment, your Honor? THE COURT: Thank you, counsel. You may.

MR. HAMMOND: THE COURT:

I have no further questions. Redirect examination by the

Very well.

government, Mr. Angelo. MR. ANGELO: THE COURT: Thank you, your Honor. You are welcome. REDIRECT EXAMINATION BY MR. ANGELO: Q Mr. Hector, let's clarify things just a little bit. If you

would take a look at Government's Exhibit No. 254, which has already been admitted, your Honor, and I would ask to be published at this time? THE COURT: Thank you. Okay. And you may.

THE WITNESS: BY MR. ANGELO: Q A Q A Q A Q

Do you have the document in front of you now, Mr. Hector? Okay. And tell us what that is again. That is my initial investment receipt. The investment that's reflected in your investment contract? Yes. Now, if you can, let's take a look at Government's Exhibit Do you have that in front of you?

No. 255, second page. A Yes.

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Q A

Gregory Hector - Redirect And what is that? That is a wire transfer that I made 2/21/03, right at the

tail end of the investment, before it stopped. Q A Q And was this for an additional investment? That was for an additional investment. And from -- who gave you the directions concerning where to

wire transfer this money? A Q Chuck Lewis. Let's focus in, if we can, please, on the account number Further

which is on the receiving account for Capital Holdings.

down where it says, beneficiary and recipient information. There you go. A Q A Yes. Did you understand this to be a non-depleting account? Um, what I remember about that account was that it -- their Do you see that account number, Mr. Hector?

banking institutions had just changed, and I was directed to not deposit into some of the accounts that I had been for the initial investments. That they had moved funds to different

bank institutions, and that this was a new -- this is where they had transferred some funds to. Q Did you know what the non-depleting account was at that

point? A Q A Did I know what it was? Or you heard the term used? At that point I did, yes.

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Q A

Gregory Hector - Redirect And what did you understand it to be? I understood it to be an account that my initial investments

and my balance were not at risk. Q And did you have any understanding about whether your money

could leave that account at any time? A My understanding was that it wasn't at risk as far as I guess I -- I understood that they had

leaving the account.

transferred that account to another banking institution instead of working with Wells Fargo. was Key Bank or somebody. Q Did you have any understanding about whether these new I may be wrong, but I think this

accounts would be non-depleting as well? A Q Say that again. Did you have any understanding as to whether these new

accounts would be non-depleting as well? A Oh, yeah, I understood they were all part of the same

account. Q Okay. Let's take a look if we can, please, at Government's

Exhibit No. 263, which is in evidence, your Honor, and again I would ask that it be published. THE COURT: BY MR. ANGELO: Q A Q 263. Yes. What is it? Do you recognize that Mr. Hector? Thank you.

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A Q

Gregory Hector - Redirect It's a distribution check January of '03. And look at the account number, if you would, at the bottom.

Could you highlight that, please? A Q Okay. And now if you would just look back in your notebook at the Second page.

wire transfer on 255. A Q Okay.

Would you compare that wire transfer account number and bank

to the account number and bank on Exhibit 263? A Q Yes. They are the same.

Now, Mr. Hector, would you take a look, please, at page 8 of

Government's Exhibit No. 255. A Q A Q Okay. And is there a deposit slip attached to that? Yes. If we could bring that up on the screen for the jury, And focus in on the lower right-hand corner. Did you

please.

make your deposit to the Wells Fargo Bank? A Q A Q Yes. And is that related to your investment? Yes. Did you have any understanding as to whether that was to a

non-depleting account? A Q On 10/31, I would say that, yes, it was. Okay. What's the account number, please, that you deposited

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Gregory Hector - Redirect 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 it to? A Q A Q A 1011330204. And what bank, please? Wells Fargo. And where did you get those coordinates for the deposit? Unless they differ from the other ones, I would have got

them from Chuck Lewis. Q Okay. Now, if you would, please, take a look yourself at You

the second page of Government's Exhibit No. 263, please. may want to take a look at the screen if that helps you. A Q A Q A Q Okay.

And if you could highlight the account number, please? Okay. Do you have 263 in front of you on the screen? Yes. What bank is that on? Well, first of all, what is it that

we are looking at there? A Q A Q A Q That's another distribution. That you received? Yes. And from what bank is it? Wells Fargo. And would you take a look, please, on the bottom for the

account number on that distribution check? A Okay.

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Q

Gregory Hector - Redirect Can you compare it then with the deposit slip that you made

out that's on page 8 of Government's Exhibit 255? A Q A On which page was it? Page 8. Same. MR. ANGELO: THE COURT: I have no other questions, your Honor. Very well.

May Mr. Hector now be excused and released from subpoena, if any, by the government? MR. ANGELO: THE COURT: defendants? Hearing none, Mr. Hector, you are now excused and released from subpoena with our thanks. THE WITNESS: THE COURT: Thank you, your Honor. Yes, your Honor. Thank you.

Any objection by any one or more of the

You are welcome.

(The witness was excused.) THE COURT: next witness. MR. KIRSCH: Your Honor, at this time the government Very well. The government may call its

would ask for leave to admit Government's Exhibits 12030 and 12031. THE COURT: With extant objections of record preserved,

any other objections by any one or more of the defendants? Hearing none, Government's Exhibit 12030 and

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Gregory Hector - Redirect Government's Exhibit No. 12031 are admitted in evidence, with leave to publish, following this limiting instruction by the court to the ladies and gentlemen of the jury. Ladies and gentlemen, please be instructed that evidence that Norman Schmidt and Charles Lewis were convicted of a felony in the past is being admitted into evidence for a limited purpose only. This evidence may be considered by you only on the securities fraud counts of the indictment, Counts 18 through 29, and only as to the element in those counts concerning the omission to disclose the information to potential investors. This evidence may not be considered by you as bearing on their guilt or innocence as to any of the other counts of the indictment. It may not be considered by you as evidence that either Norman Schmidt or Charles Lewis has a bad character, or has propensity for engaging in criminal acts generally or the specific acts charged in this case. It may not be used by you for an inference that either defendant is more likely to be guilty of a criminal charge or charges in this case simply because he had a prior unrelated case in his past. And you are so instructed as these exhibits are published. MR. KIRSCH: Your Honor, could I ask that the ELMO be

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Gregory Hector - Redirect activated for purposes of publishing those exhibits, your Honor? THE COURT: Thank you. MR. KIRSCH: Your Honor, for the record I am first And your Honor, now You may. Madam clerk, your assistance.

publishing Government's Exhibit No. 12030.

for purposes of the record, I am publishing Government's Exhibit No. 12031. Thank you, your Honor. THE COURT: You are welcome. And again I reiterate my

request that the government call its next witness. MR. ANGELO: Your Honor, we have a logistical matter of And would this be a

moving some notebooks to the podium.

propitious time to take our morning break and then we would not waste time later? THE COURT: I believe that it would. Ladies and

gentlemen, let's take our midmorning recess of fifteen minutes. Again, please store your note-taking materials across the hall in your suite, and of course, be sensitive to the important rules that especially now govern you as jurors in the trial of this case. We are in recess for fifteen minutes. (Recess at 9:55 a.m., until 10:15 a.m.) THE COURT: its next witness. MR. ANGELO: Thank you for your indulgence, your Honor. If prepared, the government may now call

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Gregory Hector - Redirect The government now calls Susan Veik. THE COURT: You are welcome, counsel. If you would come forward to be

Ma'am, good morning.

sworn by the court, please, and to accomplish that if you will come forward and stand in this open area in front of my bench. And about there is just fine. Thank you. If you will face me

I am going to administer the oath. and raise your right hand to be sworn.

And thank you.

If I may have your attention in the courtroom. (Susan Veik was sworn.) THE WITNESS: THE COURT: witness stand. I do. And please be seated in that

Thank you.

And again, good morning. Good morning.

THE WITNESS: THE COURT:

As you testify, please use that microphone

right in front of you, and by its peculiar design, it works best with a speaking distance of about six to eight inches. THE WITNESS: THE COURT: MR. ANGELO: THE COURT: Okay. Mr. Angelo.

Thank you.

Thank you, your Honor. You are welcome. DIRECT EXAMINATION

BY MR. ANGELO: Q A Would you please state your name. Susan Veik.

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Q A Q

Susan Veik - Direct Can you spell your last name? V, as in Victor, E-I-K. Ms. Veik, why don't you pour yourself a glass of water now

if you could, please. Ms. Veik, could you tell us, please, in what city and state you currently reside? A Q A Q A Q A Q Henderson, Colorado. Where is that in relation to Denver? Northeast about 25 miles. Can you tell us what your current employment is? I am a sales manager in a car dealership. And which dealership would that be? Mercedes Benz of Westminster. And how long have you employed with Mercedes Benz of

Westminster? A Q Four years. Can you tell us, please, what your employment was, please,

prior to that? A Q I worked for a private investing company, Capital Holdings. And can you tell us, please, the period of time that you

worked for Capital Holdings? A Q A Q From July of '02 till March of '03. And what did you do there, if you can tell us, briefly? I was the office manager. And who else worked there with you?

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A

Susan Veik - Direct It was mostly just me. Mark Perreault and I worked together He started training me on some of the computer

a little bit.

things that I needed to do. Q A Q A Q A Q And do you know Charles Lewis? Yes, I do. Did he work in that office as well? Yes, he did. Can you tell us, please, where the office was located? Downtown in -- it's called HQ Global. And when you first went to work there, can you tell us,

please, how much space you occupied? A I had my own little office that was sort of catercorner and

across the hall from where Chuck Lewis and Mark Perreault had their office. Q And at the time that you were hired, was there an interview

process that you went through? A Q A Yes. Can you tell us, please, who did the interviewing? Chuck Lewis and one of the girls that worked for HQ Global.

Her name was Jaimie. Q A Q And was that at HQ Global? Yes. And during the course of that interview, did Mr. Lewis

describe for you the nature of his business. A He was kind of vague. Said it was a private investing

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company.

Susan Veik - Direct Said it was very sensitive. It was investments.

We needed to keep a very

low profile.

There was a lot of

confidentiality required so that there was no information shared between the different clients. Q Okay. And did he describe for you what duties he wanted you

to perform? A Yes. There would be some computer work creating

spreadsheets, statements for the clients, executing contracts. Q A Q A Q A Q Did you also maintain clients' files? Yes. Did you also handle duties with respect to reception? Yes. How about telephone answering? Yes. I answered the phones.

Did they describe for you the kinds of skills -- or

Mr. Lewis describe to you the kind of skills he would like you to have prior to hiring you? A Yes. Some computer skills were necessary. I would be

working, talking to some of