Free Status Report - District Court of Colorado - Colorado

Case 1:03-cv-00923-REB-CBS

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MARSHALL GANDY Attorney for Plaintiff UNITED STATES SECURITIES AND EXCHANGE COMMISSION Texas Bar No. 07616500 Burnett Plaza, Suite 1900 801 Cherry Street, Unit #18 Fort Worth, Texas 76102-6882 Telephone: (817) 978-6464 Facsimile: (817) 978-4927 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 03-cv-00923 REB-CBS SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CAPITAL HOLDINGS, L.L.C.; et al. Defendants, FAST TRACK L.L.C.; et al. Defendants Solely for Purposes of Equitable Relief. Joint Status Report Pursuant to the Minute Order entered on May 1, 2006, Plaintiff Securities and Exchange Commission ("Commission") joined by Intervenor Plaintiff United States Attorney, defendants George Beros, Charles F. Lewis, Terry Lorenzen, Jeffrey D. Mitchell, Michael D. Smith, Michael Vallone, Gary N. Herbert and George A. Weed submit the following status report.

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I.

Relevant Procedural History 1. On May 21, 2003, the Commission filed its Complaint in the above matter, which

alleged, among other things, that the Defendants Capital Holdings, L.L.C. ("Capital Holdings"), Capital Holdings Int, L.L.C. ("CHI"), Smitty's Investments, L.L.C. ("Smitty's"), Monarch Capital Holdings, L.L.C. ("Monarch"), National Marketing Solutions, L.L.C. ("NMS"), North West Group, L.L.C. ("NWG"), Heritage America ("Heritage America"), Norman E. Schmidt ("N. Schmidt"), George Beros ("Beros"), Charles F. Lewis ("Lewis"), Terry Lorenzen ("Lorenzen"), Jeffrey D. Mitchell ("Mitchell"), John J. Schlabach ("Schlabach"), Michael D. Smith ("Smith"), Michael Vallone ("Vallone"), Roy R. Chavers ("Chavers"), Gary N. Herbert ("Herbert"), and George A. Weed ("Weed") (collectively "Defendants") had violated the enumerated sections of the federal securities laws. Further in its Complaint, the Commission seeks disgorgement of ill-gotten gains from the Defendants, plus prejudgment interest, and civil penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]. The Commission is also seeking disgorgement, plus prejudgment interest, from the Relief Defendants Fast Track L.L.C. ("Fast Track"), Cambridge Ventures, Ltd. ("Cambridge Ventures"), Cambridge Enterprises, L.L.C. ("Cambridge Enterprises"), Regency Ventures, Ltd. ("Regency Ventures"), Jannice McLain ("McLain"), and Scott Schmidt ("S. Schmidt") ("collectively Relief Defendants") regarding all funds derived, directly or indirectly, from the Defendants' alleged fraudulent conduct. 2. On July 16, 2003, defendants Capital Holdings, CHI, Smitty's, Monarch, N.

Schmidt, and Relief Defendants Fast Track L.L.C. ("Fast Track"), Jannice McLain ("McLain"), and Scott Schmidt ("S. Schmidt") (collectively "Capital Holdings Group") filed a motion to stay the proceedings. On July 29, 2003, Magistrate Judge Coan granted the motion to stay as to the

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Capital Holdings Group until April 29, 2004, or pending a resolution of criminal and civil forfeiture proceedings by the United States Attorney for the District of Colorado. 3. On November 21, 2003, defendant Herbert joined by the remaining Defendants

and Relief Defendants, with the exception of Schlabach and Smith, requested that the Court extend the stay to include all Defendants and Relief Defendants. The Commission did not object to that request and on December 5, 2003, Magistrate Judge Shaffer stayed the matter as to all parties until April 29, 2004, subject to the previously entered Agreed Orders of Preliminary Injunction. 4. On March 18, 2004, a federal Grand Jury sitting in the District of Colorado

returned an indictment against defendants N. Schmidt, Beros, Lewis, Smith, Weed, and Relief Defendant McLain-Schmidt on numerous counts of mail fraud, wire fraud, securities fraud and money laundering arising out of the same facts alleged in the Commission's Complaint. [USA v. Schmidt, et al. Case No. 04-cr-00103-REB] 5. On May 13, 2004, defendant Herbert, joined at that time by all the Defendants

and Relief Defendants, with the exception of Schlabach and Mitchell, filed a Motion to Extend the Stay. 6. On July 28, 2004, the Magistrate Judge Shaffer held a hearing on the Motion to

Extend the Stay and at the conclusion of the hearing entered an Order to Show Cause requiring the parties to submit briefs addressing why the Court should not sever those defendants who are the subject of pending criminal prosecution pursuant to FED. R. CIV. P. 42.

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7.

On November 5, 2004, Magistrate Judge Shaffer denied the Motion to Extend the

Stay and severed defendants N. Schmidt and Lewis due to their continued incarceration and inability to participate in discovery.1 8. On November 5, 2004, this Court entered a Trial Preparation Order, which

among other things set a trial date on July 10, 2006. 9. On November 9, 2004 in accord with the provisions of
FED. R. CIV. P.

16(a),

Magistrate Judge Shaffer entered a Scheduling Order, which among other things set a case management plan, deadlines for discovery and presumptive limits on written discovery. 10. On March 7, 2005, the United States Attorneys Office for the District of

Colorado ("USAO") filed a Motion to Intervene and Motion to Stay Proceedings ("Motion to Intervene") in the above-captioned case. 11. On April 19, 2005, after hearing Magistrate Judge Shaffer entered a Minute

Order granting in part and denying in part the Motion to Intervene filed by the USAO. Further, the Minute Order vacated the November 9, 2004 Scheduling Order and the deadlines contained therein. 12. On April 22, 2005, Magistrate Judge Shaffer entered a Memorandum Order

Regarding Motion to Intervene and Motion to Stay Proceedings making recommendations to the Judge Blackburn, which the Court later adopted, limiting discovery and requiring the Commission to respond to any pending written discovery served by a defendant in this action. 13. In accord with the above referenced order, only limited written discovery has

been taken by the parties.

Subsequently, Defendant Lewis has been released to reside in a halfway house, but under the terms of his release he is not allowed passes, is not permitted to travel, shall not be employed and shall have no contact with any person associated with the criminal case with the exception of his attorney. Joint Status Report SEC vs. Capital Holdings, L.L.C., et al. PAGE 4

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14.

Currently, discovery is being conducted in the criminal case and the matter is set

for trial on April 2, 2007. 15. On February 21, 2006, Magistrate Judge Shaffer conducted a status conference in

the case and entered a Minute Order, which among other things required the parties to confer and if possible file a joint status report. Further, Magistrate Judge Shaffer urged the parties to file a motion to reset the trial date with Judge Blackburn as soon as possible. 16. On February 24, 2006, pursuant to above-referenced Minute Order the

undersigned parties conferred and on March 7, 2006 submitted a joint status report. 17. On March 27, 2006, the parties submitted a joint motion to continue the trial date,

which the Court granted on May 1, 2006 vacating the trial date and setting the case for status/scheduling conference on December 15, 2006. 18. On December 15, 2006, the Court conducted a telephonic status conference

attended by the Commission, Intervenor Plaintiff United States Attorney, defendants Beros, Lewis, Lorenzen, Mitchell, Smith, Vallone, Herbert, and Weed. At the conclusion of the

conference the Court indicated that it would set the case for further a status conference after the trial of USA v. Schmidt, et al. currently set on April 2, 2007. II. Status Report A. Securities and Exchange Commission

Counsel for the Commission has to date answered all outstanding written discovery requests, including providing three defendants with electronically imaged copies of all documents in the Commission's possession. The Commission has recently noticed the

depositions of defendants Schmidt, Beros, Lewis, Smith, Vallone, and Weed. Counsel for each of these defendants in the related criminal case has, as expected, represented that each defendant

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will assert privilege at the noticed deposition. Accordingly, each was provided with a written declaration asserting the privilege against self incrimination as to any question asked at the noticed deposition. B. Incarcerated Indicted Defendants N. Schmidt, Lewis and McLain-Schmidt

Defendants N. Schmidt, Lewis and McLain-Schmidt are not represented by counsel in the above-captioned civil case. Each of these defendants has been appointed counsel in the related criminal matter. Defendants N. Schmidt and Lewis remain in custody and have pursued no discovery in this matter and due to their incarceration cannot meaningfully conduct or participate in discovery. Further, due to their incarceration, counsel for the Commission has not been able to communicate with these defendants, although the Commission has forwarded proposed settlements (as further discussed below) to their appointed counsel in the criminal case. On August 25, 2006, defendant McLain-Schmidt was sentenced to 108 months incarceration after entering a guilty plea to two counts of the indictment in the related criminal case. McLain-Schmidt is currently assigned to a federal correctional facility in Arizona. C. Indicted Defendants Beros, Weed and Smith

Defendant Smith is represented by retained counsel in the above-captioned case and the related criminal case. Defendants Weed and Beros are not represented by counsel in the abovecaptioned civil case and have been appointed counsel in the related criminal case. Beros and Weed have pursued no discovery in this matter. Smith has issued written discovery requests to the Commission, which the Commission has answered, including providing his counsel with electronically imaged copies of all documents in the Commission's possession. Each of these defendants has indicated a desire to focus their time and resources on the related criminal case.

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D.

Defendant John J. Schlabach

Schlabach has issued written discovery requests to the Commission, which the Commission has answered, including providing him with electronically imaged copies of all documents in the Commission's possession. Schlabach noticed and completed the deposition of Joann Harris, the investigative staff attorney for the Commission. Despite repeated attempts recent efforts to contact Schlabach in regard to this case have been unsuccessful. Although his contact information was included for the last telephonic status hearing, he did not respond to the conference call and did not appear at the hearing. E. Defendant Jeffrey D. Mitchell

Mitchell has issued written discovery requests to the Commission, which the Commission has answered, including providing him with electronically imaged copies of all documents in the Commission's possession. F. Defendant Gary A. Herbert

On November 30, 2006, counsel for defendant Herbert gave notice to the Court that Herbert had died in May 2006. Plaintiff's counsel will so advise the Commission and seek authorization to move for a dismissal as to Herbert. G. Defendant Terry Lorenzen

Lorenzen is represented by retained counsel in the above-captioned case. Lorenzen has pursued no discovery in this matter. H. Defendant Roy Chavers

Despite repeated attempts, the Commission has been unable to contact Chavers in regard to this case. Although he has received notice of each setting and his contact information has

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been included for each of the telephonic hearings, docket entries indicate that he has not appeared at any hearing ordered by the Court for more than a year. III. Prospects of settlement The Commission has forwarded to each of the defendants, a proposed settlement agreement consenting to the entry of the requested injunctive relief on neither an admit or deny basis and providing for a later hearing, if necessary, as to the Commission's monetary claims. In the case of the indicted pro se defendants, the proposed settlements were forwarded to their appointed counsel in the criminal case. settlements. Dated: December 28, 2006. Defendants are currently reviewing the proposed

Respectfully submitted,

/s/ Marshall Gandy MARSHALL GANDY Texas Bar No. 07616500 Attorney for Plaintiff SECURITIES AND EXCHANGE COMMISSION Fort Worth District Office Burnett Plaza, Suite 1900 801 Cherry Street, Unit #18 Fort Worth, TX 76102-6882 Telephone: (817) 978-6464 Facsimile: (817) 978-4927 [email protected]

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Approved as to form and content:

/s/ Matthew T. Kirsch MATTHEW T. KIRSCH U.S. Attorney's Office-Denver 1225 Seventeenth Street #700 Denver, CO 80202 303-454-0100 303-454-0402 (fax) [email protected]

/s/ David Zisser DAVID ZISSER Attorney for Gary N. Herbert Isaacson, Rosenbaum, Woods Levy, P.C 633 17th Street Suite 2200 Denver, Colorado 80202-3622 Telephone: (303) 256-3952 (303) 292-3152 (fax) Email: [email protected]

Did not respond prior to filing ROBERT T. MCALLISTER Attorney for Terry Lorenzen 455 Sherman Street Suite 310 Denver, Colorado 80203 Telephone: (720) 570-8892 (720) 570-8906 (fax) Email: [email protected]

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Did not respond prior to filing DECLAN JOSEPH O'DONNELL Attorney for Defendant Michael D. Smith 499 South Larkspur Drive Castle Rock, Colorado 80104 Telephone: (303) 688-1193 (303) 663-8595 (fax) E-mail: [email protected]

Did not respond prior to filing JEFFREY D. MITCHELL Defendant pro se 9986 N. Newport Hwy #378 Spokane, Washington 99218 Telephone: 509-238-4659 Email: [email protected]

Did not respond prior to filing JOHN J. SCHLABACH Defendant pro se 12402 N. Division Street #350 Spokane, Washington 99218 Telephone: 509-238-4659 Email: [email protected]

Did not respond prior to filing GEORGE A. WEED Defendant pro se 504 Public Square Benton, Illinois 62812-0727 Telephone: (618) 439-6674 (618) 439-7031 (direct) (618) 967-7980 (other) (618) 435-5676 (fax) Email: [email protected]
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Did not respond prior to filing GEORGE BEROS Defendant pro se 19006 Winslow Road Shaker Heights, Ohio 44122 Telephone: (618) 967-3240 Email: [email protected]

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