Free Sentencing Statement - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Criminal Case No. 04-cr-00103-REB UNITED STATES OF AMERICA Plaintiff, v. 1. 2. 4. 6. NORMAN SCHMIDT, GEORGE ALAN WEED, CHARLES LEWIS, and MICHAEL SMITH, Defendants.

GOVERNMENT'S SENTENCING STATEMENT

The United States of America, by and through Assistant United States Attorneys Wyatt Angelo and Matthew T. Kirsch, files the following sentencing statement as required by General Order 2002-3: STATUTORY PENALTIES 1. The maximum statutory penalties for imprisonment, fines and supervised release are set forth below for each count on which one or more defendants were convicted. All counts of conviction except the money laundering counts carry with them a potential order of restitution, and all counts of conviction require a special monetary assessment of $100. It should be noted that the penalties for mail and wire fraud changed effective July 30, 2002.

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Conspiracy, 18 U.S.C. § 371 Count(s) 1 Defendant Norman Schmidt; Charles Lewis Imprisonment 5 years Fine $250,000 or 2x the loss/gain from the offense Supervised Release 3 years

Mail/Wire Fraud, 18 U.S.C. §§ 1341,1343, & 2 Count(s) 2-4, 12-14 5, 9, 15-17 5, 16 Defendant Norman Schmidt Norman Schmidt George Alan Weed Charles Lewis Imprisonment 5 years Fine $250,000 or 2x the loss/gain from the offense $250,000 or 2x the loss/gain from the offense $250,000 or 2x the loss/gain from the offense $250,000 or 2x the loss/gain from the offense $250,000 or 2x the loss/gain from the offense Supervised Release 3 years

20 years

3 years

20 years

3 years

3

5 years

3 years

5, 16

Charles Lewis

20 years

3 years

2

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Securities Fraud, 15 U.S.C. §§ 77q(a) & 77x, 18 U.S.C. § 2 Count(s) 18-29 Defendant Norman Schmidt George Alan Weed Charles Lewis Imprisonment 5 years Fine $250,000 or 2x the loss/gain from the offense $250,000 or 2x the loss/gain from the offense $250,000 or 2x the loss/gain from the offense $250,000 or 2x the loss/gain from the offense Supervised Release 3 years

23

5 years

3 years

21-22, 24-25, 28 23, 26-27

5 years

3 years

Michael Smith

5 years

3 years

Money Laundering, 18 U.S.C. §§ 1956(a)(1)(B)(I) & 2 Count(s) 30, 31 Defendant Norman Schmidt Imprisonment 20 years Fine $500,000 or 2x the value of the property involved Supervised Release 3 years

Money Laundering, 18 U.S.C. §§ 1957 & 2 Count(s) 33, 35-44 Defendant Norman Schmidt Charles Lewis Imprisonment 10 years Fine $250,000 or 2x the value of the property involved $250,000 or 2x the value of the property involved Supervised Release 3 years

40

10 years

3 years

3

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FACTS RELEVANT TO SENTENCING 2. The evidence at trial established that conduct relevant to the offenses began for: Norman Schmidt in April 1999; George Alan Weed in June 2002; Charles Lewis in December 2001, and; Michael Smith in July 20021. The evidence at trial also established the following: The Conspiracy/Scheme to Defraud 3. Count 1 (Norman Schmidt, Charles Lewis) - Norman Schmidt and Charles Lewis, together with Leon Harte, Peter Moss, Jannice McLain Schmidt, and others, participated in a conspiracy to commit mail, wire, and securities fraud by operating a fraudulent high-yield investment program (HYIP) from 1999 through 2004. Although defendants Weed and Smith were acquitted of the specific conspiracy count, the evidence at trial also established that the scheme to defraud in which all four defendants were convicted of participating involved essentially the same features as the conspiracy. The basic features of both the conspiracy and the scheme to defraud are discussed below. 4. The defendants and their agents falsely promised investors that their funds would be used to purchase financial instruments, usually referred to as bank debentures or medium term notes, and would earn returns of 2%-400% per

These dates were selected based on: Norman Schmidt's meeting with Roy Christian in Kansas City in April of 1999, during which he posed as an investor (Test. Christian.); George Alan Weed's participation in June of 2002 in the creation of a letter from attorney Gary Herbert (Weed Tr. 5/9/2007 pp. 81-88.); Charles Lewis's solicitation of investor Warren Peterson in December 2001 (Test. Peterson), and; Michael Smith's discovery of Charles Lewis's criminal conviction and the Nebraska Cease and Desist Order in late June of 2002 (Test. Ben Ortize, Cory Kirkham, Robert Wommack). 4

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month. Investors were variously and falsely told that their funds would be safe because they would be placed in a "non-depleting" account and would be insured against loss from a variety of risks by either the St. Paul insurance companies or Lloyd's of London. 5. The defendants used a welter of corporate shells for the purpose of lending legitimacy to their operations, including the Reserve Foundation Trust (RFT) (Gov't Ex. 12000), the Reserve Foundation, LLC (RF) (Gov't Ex. 12001), Smitty's Investments, LLC (Smitty's) (Gov't Ex. 12005), Capital Holdings, LLC (Gov't Ex. 12006), Capital Holdings International, LLC (Gov't Ex. 12007), Monarch Capital Holdings, LLC (Gov't Ex. 12009), Fast Track, LLC (Gov't Ex. 12011), Summit Ventures, LLC, Northwest Group, LLC, and National Marketing Solutions, LLC. The defendants also rented office space, in downtown Denver for Capital Holdings (see Gov't Ex. 270) and in an office park near Cleveland for Monarch Capital Holdings (see Gov't Ex. 6001), for the same purpose. After search and seizure warrants were executed on March 7, 2003, defendant Schmidt caused the creation of two new entities, Rocky Mountain Sports Promotions, LLC (RMSP) (Gov't Ex. 12013) and High Track Team, LLC (HTT) (Gov't Ex. 12012), which were used to disguise the relationship between these entities and those that had been named in the warrants. 6. The defendants also developed official-looking contract forms and associated documents to further the impression of legitimacy for the HYIP. (See, e.g., Gov't Exs. 21, 23, 220, 233, 253, & 257.) Expert witness Philip Feigin established that

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the contracts used were investment contracts as defined by applicable securities law. 7. The HYIP was initially marketed by word-of-mouth. Later, defendant Smith enlisted a widespread network of solicitors and insurance agents around the United States to market the investment. (Test. Valdemar Bough, Michael Smith.) 8. Investor funds were actually used for undisclosed and unauthorized purposes, including but not limited to: investments in foreign currency trading programs (See Gov't Exs. 140, 141, 143, & 144); acquisition of real estate (See Gov't Exs. 150-52, 12025-27) and NASCAR racing equipment (See Gov't Ex. 1033); investments in restaurants (Test. Larry Forgione); commissions or overrides to promoters and sales people (E.g., Test. Susan Veik), and; payments to conspirators and family members (Test. Wayne Stockley). 9. Although Leon Harte and defendant Schmidt purchased two insurance policies from the St. Paul in the fall of 1999, the supposed benefit of these policies to the investors during this initial time period was illusory. The commercial crime policy did not protect against the risk of loss or theft by Schmidt or Harte (Test. Sandy Woodbury, Jerry Landsman), while the depository bond policy became worthless when investor funds were siphoned off from an account in the bank for which the bond had been issued (Test. Scott Bailey). The St. Paul insurance was cancelled in February 2000, and thereafter no insurance was ever purchased for the protection of investors, despite the defendants' representations to the contrary. Instead, the defendants created or "borrowed" a series of documents

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and correspondence and used them for the purpose of convincing investors that the insurance existed and that their investment was protected. These included letters from defendant Weed (E.g., Gov't Ex. 236), Marsh insurance certificates concerning insurance policies actually held by Wells Fargo Bank for its own benefit (Gov't Exs. 300-302), and several versions of a letter from attorney Gary Herbert which was widely distributed to investors (E.g., Gov't Exs. 223, 237, & 316). 10. When funds were unavailable to meet investor withdrawal requests due to depletion or seizure, the defendants and other conspirators, including defendants Schmidt, Lewis, and Smith, falsely represented that the HYIP was being reorganized or that the funds had been seized due to the Patriot Act, that all funds would be returned, and that the HYIP would continue. (See, e.g., Test. Lambros Gianos, Eric Weare; Smith Ex. 1.) Mail Fraud Counts - 18 U.S.C. §§ 1341 and 2 11. Count 2 (Norman Schmidt) - Gordon Hulbert was an early investor in the HYIP via the RFT. Mr. Hulbert wrote a letter to defendant Schmidt requesting a distribution of some of his accrued commissions, or overrides, in January 2000, following his receipt of letters from St. Paul representative Jerry Landsman which revealed the misleading nature of the representations made by the defendants about the St. Paul insurance coverage. (Gov't Ex. 50.) In response, Mr. Hulbert he received a form letter from the RFT via U.S. mail, postmarked February 1, 2000, which contained an offer to refund his principal investment upon his return

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of the signed letter. (Gov't Ex. 51.) Other witnesses also identified defendant Schmidt as a principal and promoter of the RFT during this same time period. (Test. Boyd Brown, Jerry Landsman, Gary Bell.) 12. Count 3 (Norman Schmidt, Charles Lewis) - Warren Peterson, of Plainview, Nebraska testified that he had begun discussing the HYIP with Charles Lewis, Jannice McLain, Michael Bergman, and Scott Schmidt in 2001. Charles Lewis traveled to Nebraska with Jannice McLain and discussed with Peterson the HYIP, then being marketed through Smitty's. (Test. Peterson.) Lewis made false representations concerning the success of his own investment to Peterson during those contacts. (Id.) After agreeing to invest, Peterson received an investment packet containing the investment contract and related forms from Smitty's, already signed by defendant Schmidt, which had been sent via U.S. mail from Denver and postmarked January 2, 2002. (Gov't Ex. 202.) Peterson invested five thousand dollars after receiving these forms. (Test. Peterson; Gov't Ex. 203.) 13. Count 4 (Norman Schmidt ) - Following the investment by Warren Peterson, Nebraska securities regulators began an investigation concerning the Smitty's HYIP program. The investigation determined that Smitty's was not authorized to offer such investments in Nebraska, and a letter was sent by Nebraska state regulator Thomas Sindelar to Norman Schmidt notifying him of that fact. (Gov't Ex. 210.) Sindelar received a letter from defendant Schmidt in response, via

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Federal Express and dated February 23, 2002, which falsely stated that Smitty's did not solicit nor offer investments in Nebraska. (Gov't Exs. 211, 212.) 14. Count 5 (Norman Schmidt, George Alan Weed, Charles Lewis) - Gregory Hector originally discussed investing in the Smitty's HYIP with Charles Lewis and Norman Schmidt. (Test. Hector.) He was specifically told about the supposed insurance protections by Lewis and Schmidt. (Id.) Mr. Hector invested hundreds of thousands of dollars over a period of time starting in May 2002, and continuing thru February 2003. (Gov't Exs. 254, 255.) When Smitty's became Capital Holdings, LLC, approximately three months after Mr. Hector's initial investment, Mr. Hector received a letter from defendant Weed falsely describing the insurance protection relating to Mr. Hector's investment. The letter was sent via U.S. mail and was postmarked August 24, 2002. (Gov't Ex. 258.) The majority of Mr. Hector's investments were made after he received this letter from defendant Weed. 15. Count 9 (Norman Schmidt) - Darren McGee invested in the HYIP through Smitty's in March 2003. Following the execution of search warrants, Mr. McGee understood that his investment had been transferred to RMSP, although he was not aware of the reason for the transfer. (Test. Darren McGee) Mr. McGee then received a fax from Jannice McLain Schmidt with new investment documents indicating that his investment had been assigned to HTT. (Gov't Ex. 563.) Mr. McGee continued to receive monthly statements concerning his investment from

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HTT, the last of which was sent via U.S. mail on or about May 8, 2004. (Gov't Ex. 565.) Wire Fraud Counts - 18 U.S.C. §§ 1343 and 2 16. Count 12 (Norman Schmidt) - Gary Bell made multiple investments via the RF, the first of which was by wire transfer from his bank in Leawood, Kansas to the RF account at Bank One in Colorado on February 17, 2000. (Gov't Exs. 101, 9040.) Mr. Bell originally communicated about the investment with agent Rebecca Taylor. (Test. Gary Bell) After he had problems receiving both disbursements and the return of his principal, he had conversations with defendants Schmidt and Weed during which they made false representations about the status of his investment. (Id.) 17. Count 13 (Norman Schmidt) - Mary Ann Gough heard about the RF investment through Orvalee Farris and Rebecca Taylor. (Test. Mary Anne Gough.) Ms. Farris provided Ms. Gough with a copy of a check on the RF account at New Frontier Bank, signed by defendant Schmidt, which purported to represent the income from Farris' investment in RF. (Gov't Ex. 86.) This check was in fact written on a closed account. (Test. Larry Seastrom; Gov't Ex. 9000A.) In reliance on that check and the representations in the contract documents and letters from George Alan Weed concerning insurance protection, a consortium of investors under the name of Goldcoast Enterprises funneled more than one million dollars, by multiple wire transfers, through an account opened by Gough at the Bank Nevis to the RF account at Bank One in Colorado. (Test. Gough.)

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One of those wire transfers was for $109,770 on April 7, 2000. (Gov't Exs.132, 9040.) 18. Count 14 (Norman Schmidt) - On May 12, 2000, Gary Bell (see paragraph 16 above) added to his original investment by wire transferring an additional $126,000 to the RF Bank One account. (Gov't Exs. 101, 9040.) 19. Count 15 (Norman Schmidt) - Cynthia Lange was the caretaker of the Redstone Castle when it was purchased by defendant Schmidt and Leon Harte in May, 2002. (Lange Test.) She stayed on as caretaker for a period of time thereafter and briefly met Peter Moss. (Id.) Leon Harte suggested to her that she invest money received from the sale of her home in Redstone in the HYIP, then operating as the RF. (Id.) Schmidt also encouraged her to invest those funds in the HYIP, telling her that, if she did, "she would never have to work again." (Id.) Lange signed a Cooperative Private Placement Agreement, as did Harte on behalf of RF, on August 1, 2000. (Gov't Ex. 170.) Lange then caused $50,000 to be wire transferred from her account at U.S. Bank to the RF account at Bank One on the same date. (Gov't Exs. 173, 9040.) 20. Count 16 (Norman Schmidt, Charles Lewis, George Alan Weed) - Following his original investment in the HYIP via Smitty's, Gregory Hector added to his investment on multiple occasions, one of which was a wire transfer of $30,000 from his Wells Fargo account to the Fast Track, LLC account at Key Bank on February 21, 2003. (Gov't Exs. 255, 9040.) This investment took place after Mr.

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Hector received the misleading correspondence from Weed referenced in paragraph 14 above. 21. Count 17 (Norman Schmidt) - Carol Hall, a Nebraska resident and friend of Jannice McLain Schmidt, invested in the HYIP via Smitty's in November 2002. Following the execution of search warrants and seizure of bank accounts in March 2003, Hall was solicited to invest again, this time through RMSP. (Test. Hall.) In response, Hall wire transferred $45,000 from her account at Wells Fargo in Nebraska to the RMSP account at Commercial Federal bank in Colorado on April 30, 2003. (Gov't Ex. 577.) This account had been opened by Michael Huffman after March 7, 2003, at the insistence of Jannice McLain Schmidt and Norman Schmidt, ostensibly for the purpose of depositing funds from NASCAR sponsors. (Test. Huffman.) Hall's funds, along with those belonging to other investors in Smitty's Investments, LLC, were withdrawn by Huffman at the direction of the Schmidts and given to them. (Id.) Securities Fraud Counts -15 U.S.C. §§ 77 and 2 22. In addition to the misrepresentations and omissions concerning the investment in the HYIP described above, defendants Schmidt, Lewis, and Smith all failed to disclose to investors material facts, including the facts that Schmidt and Lewis had previously been convicted of felonies involving fraud or theft (Gov't Exs. 12030-31), and that Smitty's was the subject of the Nebraska Cease and Desist Order (Gov't Ex. 12024). Philip Feigin testified that (1) the failure to make disclosure of these and other facts related to the investment constituted material

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omissions and that falsely representing past success and that invested monies would be kept safe in a "non-depleting" account were material misrepresentations. 23. Count 18 (Norman Schmidt) - On April 4, 2000, a wire transfer of funds from the Goldcoast Enterprises investor consortium was made from the Goldcoast account at the Bank of Nevis to the RF account at Bank One as an addition to funds earlier invested in the HYIP. (See paragraph 17 above; Gov't Exs. 132, 9040.) 24. Count 19 (Norman Schmidt) - Gary Rademacher was originally solicited to invest in the HYIP through Smitty's by defendant Schmidt's son, Scott Schmidt. (Test. Rademacher.) Prior to or at the time of making his investment on November 13, 2000, he had met with Norman Schmidt about the investment and had been told that Peter Moss was the trader in Great Britain who invested the funds. (Id.) In addition to failing to disclose his criminal conviction, defendant Schmidt failed to disclose to Rademacher that previous investors had lost money and that no trading of the type described had ever taken place. (Id.) Rademacher invested $10,000 by a check written on his account at Wells Fargo on or about November 13, 2000, and deposited into the RF account at Bank One. (Gov't Ex. 191.) 25. Count 20 (Norman Schmidt) - Sue Veik testified that Shirley Lehr was an investor in the Smitty's Investments HYIP prior to the time that she began working in the Summit Ventures/Smitty's/Capital Holdings Office in August 2002.

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(Test. Veik.) Veik identified the Lehr investor file (Gov't Ex. 1003) which, along with bank records (Gov't Ex. 9330), reflect an investment of $20,000 by check from Shirley Lehr on August 7, 2001. 26. Count 21 (Norman Schmidt, Charles Lewis) - Linden Markham testified that she had originally discussed an investment through Smitty's with defendant Charles Lewis and Jannice McLain Schmidt. (Test. Markham.) She was subsequently taken to meet defendant Norman Schmidt at his offices at America West Packaging, which she incorrectly understood him to own from her conversations with Lewis and Schmidt. (Id.; cf. Test. Marian Pettee.) No disclosures of their respective criminal convictions, nor of the past performance of the RFT investment program, were made to Markham prior to her investment of $25,000 on February 25, 2002. (Gov't Ex. 220.) 27. Count 22 (Norman Schmidt, Charles Lewis) - As noted in paragraphs 14 and 20 above, Gregory Hector's initial investment on May 9, 2002, represented by this count (Gov't Ex. 254), came after various conversations with defendants Norman Schmidt and Charles Lewis concerning the HYIP. Mr. Hector particularly relied on false statements concerning the success of the investment program and its safety features. (Test. Hector.) 28. Count 23 (Norman Schmidt, George Alan Weed, Michael Smith) - In the middle of 2002, defendant Smith contacted Valdemar Bough about marketing the HYIP. (Test. Bough, William Dellapenna.) Mr. Bough ran an insurance agency in California with approximately eighty sales people, who marketed

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insurance as well as investments, primarily to senior citizens. (Id.) William DellaPenna was one of those sales people. (Id.) Over a period of some months, Smith, Schmidt, and Jeff Mitchell met with Mr. Bough's sales force concerning the HYIP. (Id.) In his conversations with defendants Schmidt and Smith, DellaPenna asked if the investment was a security and if a securities license was needed to market the investment. (Test. Dellapenna.) He was told "no" as to both questions by both defendants. (Id.) During those conversations, and prior to DellaPenna's investment of $28,000 on September 13, 2002 (Gov't Ex. 384), Schmidt failed to disclose his felony conviction and that of Lewis. Smith also knew of at least Lewis's conviction as of July 2002, based on John Schlabach's conversations and email correspondence with Cory Kirkham and Ben Ortize. (Test. Kirkham, Ortize; Gov't Exs. 350-52.) DellaPenna testified that in making his investment, he relied heavily on a letter prepared by Gary Herbert and widely circulated to Bough's agents by Michael Smith. (Gov't Ex. 385) This letter falsely represented the safety features of the investment. George Alan Weed and Michael Smith both admitted under cross-examination to participating in creating this letter. (Weed Tr. 5/9/2007 pp. 83-87; Gov't Ex. 5005; Smith Tr. 5/8/2007 pp. 68-69; Gov't Ex. 3001.) 29. Count 24 (Norman Schmidt, Charles Lewis) - Michael Jones met Charles Lewis and Mark Perreault through his son-in-law, Eric Veve. (Test. Jones.) Defendant Lewis began talking to Jones about investing in the HYIP. (Id.) In addition to various failures to disclose the actual uses of the money and lack of

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trading success, Lewis failed to disclose his own conviction prior to Jones' investment of $350,000, which represented the proceeds of a mortgage on the group home for troubled teenage girls operated by him and his wife. (Gov't Ex. 401.) Jones received a letter from defendant Schmidt confirming his investment and a subsequent letter with Marsh insurance certificates from Schmidt. (Gov't Exs. 402, 408.) Jones also received a copy of the Gary Herbert letter, with a cover letter written by defendant Lewis. (Gov't Ex. 415.) 30. Count 25 (Norman Schmidt, Charles Lewis) - Lambros Gianos invested $5,000 in the HYIP on October 19, 2002, after discussing the investment with Charles Lewis. (Test. Gianos; Gov't Ex. 423.) Lewis did not disclose his conviction during any of these conversations. (Test. Gianos.) After his initial investment, Gianos also met with Schmidt and Lewis at the Smitty's Motorsports garage where he also discussed the investment with Schmidt. (Id.) Schmidt did not at that time disclose his own criminal conviction. (Id.) Prior to this initial investment, Gianos received copies of misleading correspondence (1) from defendant Weed and addressed to defendant Schmidt and (2) from Gary Herbert addressed to Michael Vallone, both of which concerned the nature of the bank account into which investors' money was deposited and the insurance applicable to investors' money. (Gov't Exs. 420, 421.) 31. Counts 26 and 27 (Norman Schmidt, Michael Smith) - Carol and Clarence Hendrickson were solicited to invest in the HYIP by Smith in October 2002. (Test. Carol Hendrickson.) As described above, defendant Smith knew by this

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time of defendant Lewis' conviction and of the issuance of the Nebraska Cease and Desist Order in March 2005. Smith disclosed none of this information to the Hendricksons prior to either of their two investments. (Id.; Gov't Ex. 372.) 32. Count 28 (Norman Schmidt, Charles Lewis) - On February 19, 2003, defendants Schmidt and Lewis flew to Chicago, Illinois from Denver, Colorado on a commercial airline to meet with a potential investor who they believed had $10,000,000 or more to invest in the HYIP via Monarch Capital Holdings. (Test. Leo Durkacz; Gov't Exs. 521,1038.) Schmidt and Lewis both recited a litany of misrepresentations and untruths, including Lewis' statement that Schmidt was licensed "by the feds" and Schmidt's detailed, false representation about his relationship with the Federal Reserve. (Gov't Exs. 520A, 520B.) 33. Count 29 (Norman Schmidt) - Prior to the execution of search warrants on March 7, 2003, Norman Schmidt and Jannice McLain Schmidt had discussed the HYIP through Smitty's with Cliff Seigneur of Paonia, Colorado. (Test. Seigneur.) Norman Schmidt did not at any time disclose his criminal conviction during his contacts with Seigneur. (Id.) Seigneur initially signed an investment contract and issued a check for $25,000 payable to Smitty's Investments. (Gov't Exs. 590, 591.) This check was never negotiated due to the seizure of the Smitty's accounts. On May 20, 2003, both Norman Schmidt and Jannice McLain Schmidt traveled to Paonia and convinced Seigneur to replace the first check with a cashiers check payable to RMSP. (Test. Seigneur; Gov't Ex. 592.) This check was deposited into the Commercial Federal account opened by Michael Huffman

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and controlled by the Schmidts. (Gov't Ex. 9310.) The check cleared on May 20, 2003, and thereafter the funds were removed by Huffman at the Schmidts' request. (Id.; Test. Huffman.) Money Laundering Counts - 18 U.S.C. §§ 1956(a)(1)(B)(I) and 2 34. Counts 30, 31(Norman Schmidt) - On May 15, Leon Harte wire transferred investor monies in the amount of $2,164,737.03 from the RF "non-depleting" account at Bank One to the Aspen Title Company escrow account at Wells Fargo Bank. (Gov't Exs. 152; 9040.) The following day, Harte caused a wire transfer of $3,500,000 of investor funds to be made from the Sunstate FX account at First Union Bank to the Aspen Title Company escrow account at Wells Fargo. (Id.) Both of these wire transfers were for the purchase of the Redstone Castle parcels, represented by the deeds marked as Government Exhibits 12025-12027. (See also Test. Michael Brudwick, John Hyland.) Although the source of both of these wire transfers were investor funds previously deposited into non-depleting accounts for investments in medium term notes, the title to the parcels was taken in the name of three newly formed corporations controlled by Schmidt and Leon and Debbie Harte, Peaceful Options, LLC (Gov't Ex. 12002), Serenity Options, LLC (Gov't Ex. 12003), and Tranquil Options, LLC (Gov't Ex. 12004). The purpose of creating these corporations and using them to hold title was to disguise the nature and source of the funds.

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Money Laundering-18 U.S.C. §§ 1957 & 2 35. Counts 33, 35-44 as re-numbered (Norman Schmidt - all counts; Charles Lewis - Count 40 only) - These counts reflect a series of checking or wire transfer transactions involving investor monies from "non-depleting" accounts, all initiated by defendant Schmidt. Government Exhibits 9502B and 9504B-9513B contain all of the bank records relevant to each of these transactions. (See also Test. Wayne Stockley.) Each transaction represented a use of funds not authorized by investors and contradictory to the representations made to the investors orally or in contractual documents. SENTENCING COMPUTATIONS2 36. The conspiracy and fraud counts of conviction should be grouped for each of the defendants, as reflected below, because they involve two or more acts connected by a common criminal objective or constituting part of a common plan, U.S.S.G. §3D1.2(b), and because the offense level is determined largely on the basis of the total amount of loss, id. §3D1.2(d). a. b. c. d. 37. Norman Schmidt - Counts 1-5, 9, and 12-29; George Alan Weed - Counts 5, 16, and 23; Charles Lewis - Counts 1, 3, 5, 16, 21-22, 24-25, and 28; and Michael Smith - Counts 23 and 26-27.

Defendant Schmidt was also convicted of money laundering in Counts 30-31, 33, and re-numbered Counts 35-44. Defendant Lewis was convicted of money

The calculations below are based on the 2002 edition of the Guidelines Manual in order to avoid ex post facto issues. 19

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laundering in re-numbered Count 40. Defendant Schmidt's money laundering convictions should be grouped because the offense level is determined largely on the basis of total harm or loss. U.S.S.G. §3D1.2(d). The money laundering counts for these two defendants should also be grouped with the conspiracy/fraud counts. Id. §3D1.2(c), §2S1.1, comment. (n.6). The following paragraphs contain the conspiracy/fraud calculations for all of the defendants and the related money laundering calculations for defendants Schmidt and Lewis. Conspiracy/Fraud Calculations 38. The applicable guideline for the conspiracy/fraud group is Section 2B1.1, with a base offense level of 6. For the purpose of calculating loss pursuant to this Guideline, relevant conduct is determined by the following: [I]n the case of a jointly undertaken criminal activity (a criminal plan, scheme, endeavor, or enterprise undertaken by the defendant in concert with others, whether or not charged as a conspiracy), all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity, that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense. U.S.S.G. §1B1.3(a)(1)(B). This determination must be made with reference to the scope of the criminal activity jointly undertaken by each defendant. Id. §1B1.3, comment. (n.2); United States v. Dazey, 403 F.3d 1147, 1176 (10th Cir. 2005). The defendants' convictions on the conspiracy and or scheme counts, combined with the evidence presented at trial, demonstrate that each of the defendants, at least by the date of the first count of conviction for each

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defendant, had joined the conspiracy and/or scheme charged in the indictment and that all of the acts and omissions of the other participants in the conspiracy and/or scheme from those dates forward were reasonably foreseeable to each of the defendants. The loss amounts and corresponding increases for each defendant below are based on the total amount of loss, as measured by deposits from known investors3 into purported "non-depleting accounts" minus monies returned to those same investors, computed from the date of each defendant's first respective conviction forward. Due to investor privacy concerns, the government will separately provide the probation office and counsel for the defendants with spreadsheets supporting these computations: a. Norman Schmidt - loss of $43,017,319.57 computed from April 1, 1999 (Count 1), - 22-level enhancement, U.S.S.G. §2B1.1(b)(1)(L); b. George Alan Weed - loss of $20,037,835.32 computed from August 28, 2002 (Count 5) - 22-level enhancement, U.S.S.G. §2B1.1(b)(1)(K); c. Charles Lewis - loss of $24,709,954.02 computed from January 2, 2002 (Count 3) - 22-level enhancement, U.S.S.G. §2B1.1(b)(1)(L); and d. Michael Smith - loss of $18,105,778.67 computed from September 18, 2002 (Count 23) - 20-level enhancement, U.S.S.G. §2B1.1(b)(1)(K).

"Known investors" are investors confirmed as such through a combination of evidence introduced at trial, the remission verification process conducted by the trustee in related civil case numbers 03cv00385-REB-CBS, 03cv00403-REB-CBS, 03cv00749REB-CBS, and 03cv00799-REB-CBS, or investor files seized during the various search warrants. 21

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39.

Each defendant should receive a 4-level increase because the offense involved more than 50 victims. U.S.S.G. §2B1.1(b)(2)(B).

40.

Each defendant should receive a 2-level increase because the offense involved violations of a prior, specific administrative order­namely, the Cease and Desist Order first issued by the Nebraska Department of Banking and Finance on March 12, 2002, Government Exhibit 12024. U.S.S.G. §3B1.1(b)(7)(C). Carol Hall's testimony at trial established that she and other members of her family, as well as their friend and fellow Nebraska resident, Abhirjun Dutta, invested through Smitty's in November 2002, well after this order was issued. (See also Gov't Exs. 581, 572, 575.) Thomas Sindelar testified that he corresponded directly with Norman Schmidt about this order (see also Gov't. Exs. 210, 211), and a copy of the press release concerning this order was found during the search defendant Schmidt's office in the America West Plastics building (Gov't Ex. 3004). The violations of this order were reasonably foreseeable to the other defendants for the reasons described below: a. George Alan Weed - he was participating in the scheme by this time and had been a party to a similar, previous Order of Prohibition entered by the Illinois State Securities Department directed at the RFT. (Gov't Ex. 12023; see also Gov't Exs. 180, 181.) b. Charles Lewis - he was a member of the conspiracy and the scheme by November of 2002 and had previously himself solicited the investment from Warren Peterson in Nebraska.

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c.

Michael Smith - he was a member of the scheme by November of 2002 and had learned of the order during the summer of 2002. (Test. Cory Kirkham, Robert Wommack, Michael Smith; Gov't Ex. 352.) Robert Wommack's testimony that defendant Smith requested a copy of the order from him further demonstrates his concern that the investment was being sold in violation of the order.

41.

Each defendant should receive a 2-level increase because the offense involved sophisticated means. U.S.S.G. §2B1.1(b)(8)(C). "[S]ophisticated means" means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. . . . Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts . . . ordinarily indicates sophisticated means. Id., comment. (n.6(B)). The evidence at trial, discussed in part in paragraphs 5 and 6 above, established that the defendants used numerous corporate shells, rented corporate office space, and engaged an attorney, Gary Herbert, all for the purpose of lending legitimacy to their operations. The defendants also engaged in a pattern of creating and using new corporate entities to offer the HYIP after any previous entities had been compromised by regulatory or law enforcement attention. Each defendant also hid transactions conducted using investor money and payments to themselves of investor money through various entities or corporate shells, as set out below: a. Norman Schmidt - disguised the purchase of the Redstone Castle properties through Peaceful Options, LLC (Gov't Ex. 12002), Serenity Options, LLC (Gov't Ex. 12003), and Tranquil Options (Gov't Ex. 12004). 23

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(See also Test. Michael Brudwick; Gov't Exs. 12025-12027.) He also disguised his use of investor money to fund Smitty's Motorsports, LLC (Gov't Ex. 12008). b. George Alan Weed - disguised his receipt of investor money through Compliance Holdings Company, Inc. (Gov't Ex. 12010). c. Charles Lewis - disguised his receipt of investor money through Summit Ventures, LLC, and Miloka Holdings, and further disguised his control of those entities by making other people the signatories on the bank accounts opened in those names. (See Gov't Exs. 1010, 9192, 9198, 9336.) d. Michael Smith - disguised his receipt and control of investor money through the use of the Northwest Group entity to market the HYIP and through various trusts which he controlled but made other people the signatories on bank accounts opened in their names, including Asset Holding, Land Management, MJR Holdings, and J & C Resources. (See Test. of Tammie Goulet, Paula Galley, Michael Smith; Gov't Exs. 1009, 1011, 1012, 1014, 1050, 9194, 9238, 9243.) 42. Defendant Schmidt should receive a 4-level increase because he, along with Leon Harte, was the primary organizer or leader of a criminal activity that involved five or more participants and was otherwise extensive. U.S.S.G. §3B1.1(a). The evidence at trial established that defendant Schmidt controlled most of the non-depleting accounts, signed the investment contracts, recruited

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accomplices, including Charles Lewis and George Beros, and exercised significant decision-making authority over other participants including George Alan Weed, Charles Lewis, Jannice Mclain Schmidt, Michael Smith, and George Beros. See id., comment. (n.4). Defendant Smith should receive a 2-level increase because he was an organizer, leader, and manager of the portion of the criminal activity conducted out of Spokane, Washington. Id. §3B1.1(c). The evidence at trial established that defendant Smith supervised the activities of coconspirators John Schlabach and Jeffrey Mitchell with respect to the sales of the fraudulent high-yield investment program from the offices of National Marketing Solutions/Northwest Group. (Test. Tammie Goulet, Paula Galley, Jeffrey Mitchell, & Michael Smith.) The jury's special verdict form, which indicated that the government had proven beyond a reasonable doubt that Mr. Schlabach's executed a lease on behalf of the Northwest Group on July 25, 2002 (see Gov't Ex. 270) in furtherance of the conspiracy, established that Mr. Schlabach was a conspirator and therefore a participant in the criminal activity. U.S.S.G. §3B1.1, comment. (n.1). 43. Defendant Schmidt should receive a 2-level increase for abuse of a position of private trust in a manner that significantly facilitated the commission and concealment of his offenses. U.S.S.G. §3B1.3. Defendant Schmidt had signatory authority on approximately ten supposedly "non-depleting" accounts into which investor money was deposited, which gave him almost complete discretion over the use of investor money once deposited into those accounts.

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See id., comment. (n.1). Defendant Schmidt and others also provided victims with indicia that he legitimately held a position of trust when in fact he did not, as illustrated by the various representations made to victims that he held some sort of trading number or license issued by the Federal Reserve or contract with the Federal Reserve (see, e.g., Test. of David Trotter; Gov't Exs. 520A & 520B). U.S.S.G. §3B1.3, comment. (n.2). 44. Defendants Weed and Smith should receive a 2-level enhancement for obstruction of justice based on their materially false testimony during the trial, U.S.S.G. §3C1.1, comment. (n.4(b) & (f)); United States v. Chavez, 229 F.3d 946, 955 (10th Cir. 2000). A defendant is eligible for this enhancement if he "(1) when testifying under oath, gives false testimony; (2) concerning a material matter; (3) with intent to provide false testimony, rather than as a result of confusion, mistake, or faulty memory." Chavez, 229 F.3d at 955 (citations omitted). Testimony is material when, if believed, "it would tend to influence or affect the issue under determination." Id. (quoting U.S.S.G. §3C1.1, comment. (n.6)). In addition to the false claims by each of these defendants that they were acting in good faith and had no intent to defraud, specific false statements made by each defendant are below. All of the testimony described below was material because each statement or group of statements would tend to influence the jury's decisions about whether defendants Weed and Smith had culpable mental states during the relevant time period. Also, this testimony, viewed in the context

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of the rest of the defendants' testimony, was clearly intentionally false and not the result of mistake or faulty memory: a. George Alan Weed i. Defendant Weed testified that he told any RFT investors who called him that they would file insurance claims against the St. Paul policy through the RFT. (Weed Tr. 5/8/2007, p. 22.) Not a single one of the RFT investors who testified believed that they had to go through RFT to recover on these policies. ii. Defendant Weed testified, contrary to Jerry Landsman, that he did not tell Mr. Landsman, "I guess I'm really in trouble" after Mr. Landsman told him that the RFT was a Ponzi scheme. (Id. pp. 3031.) iii. Defendant Weed denied that Special Agent Ron Bratcher told him during their first meeting in the spring of 2000 that the RFT was probably a scam. (Id. p. 34.) Special Agent Bratcher testified otherwise. iv. Defendant Weed repeatedly and emphatically denied telling any investors, including Gary Bell, Linden Markham, or Greg Hector, as well as Mark Bienstock of the Federal Recovery Group, that Lloyd's of London insured their investments. (Id. pp. 41, 94; Weed Tr. 5/9/2007 p. 61.) Defendant Weed's testimony on this point was contradicted by testimony from each of those witnesses.

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Defendant Weed's testimony on this point is also contradicted by Smith Exhibit 10, a transcript of a conversation with potential investors on May 29, 2002, in which he clearly claims that Lloyd's of London was underwriting the insurance. (Smith Ex. 10, p. 5.) Defendant Weed further denied even being able to understand the significance of the representation that Lloyd's of London provided insurance. (Weed Tr. 5/9/2007 p. 92.) Andy Wragg, a representative of Lloyd's of London, testified that defendant Weed had never represented Lloyd's and that Lloyd's had never issued an insurance policy to any of the individuals or entities at issue. v. Defendant Weed initially denied that a draft of the Gary Herbert letter purporting to describe the insurance applicable to the investment program, Government Exhibit 5005, contained his handwriting. (Id. pp. 82-83.) Even after he was forced to admit that Government Exhibit 5005 and other drafts of this letter (see Gov't Ex. 5001) contained corrections in his handwriting, he still attempted to falsely explain away his failure to correct the letter's false statements about his status as a representative of Lloyd's of London by testifying that he attempted to make that correction verbally, during telephone calls with Mr. Herbert. (Id. pp. 78-82, 88; see also Weed Tr. 5/8/2007 p. 76.)

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vi.

Defendant Weed testified that, despite his over twenty years of experience in the insurance business, he believed that individual investors in Capital Holdings would have been able to file a claim, using the insurance certificates issued to Capital Holdings as proof the insurance policies held by Wells Fargo Bank, just as they would have on their own auto or homeowners insurance policies. (Id. pp. 93-94.) He attempted to justify this position by claiming reliance on a letter which he had drafted for Richard Gray of Wells Fargo Bank. (Weed Tr. 5/8/2007 p. 92-93; Weed Tr. 5/9/2007 pp. 107-110.) This testimony was contradicted by the testimony of Marsh insurance representative Timothy Wicker.

b.

Michael Smith i. Defendant Smith testified that he relied on the letter purporting to describe the insurance coverage applicable to the investment program from Gary Herbert, Government Exhibit 3001, which he received on the same day he requested it, despite admitting that he helped participate in the drafting of that letter (Smith Tr. 5/3/2007 pp. 27-32; Smith Tr. 5/8/2007 pp. 68-69) and provided Mr. Herbert no facts on which he could base the letter (Smith Tr. 5/8/2007 pp. 62-63). Mr. Herbert testified that defendant Smith was not his client and could not reasonably have believed that he was represented by Mr. Herbert.

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ii.

Defendant Smith testified that he relied on a letter from Norman Sirak, Government Exhibit 3003, which concluded only that the bank accounts into which investors' money was being deposited did not constitute securities, as the basis for his belief that the investment contracts he was selling did not constitute securities. (Smith Tr. 5/8/2007 pp. 71-74.) This contradicted his admission that he was previously a licensed investment advisor and had to learn the definition of a security to obtain that license. (Smith Tr. 5/7/2007 p. 114.) He also denied discussing potential problems associated with the investment contracts' status as securities at a meeting at the Redstone Castle in May 2002, even though Government Exhibits 1036 and 7004 both indicated that this was a specific agenda item for the meeting. (Smith Tr. 5/8/2007 pp. 5760.)

iii.

Defendant Smith repeatedly testified that he had essentially no association with the Northwest Group, LLC, despite contrary testimony from Tammie Goulet, Paula Galley, Valdemar Bough, Robert Wommack, and Susan Veik, and despite the fact that he offered exhibits, including Smith Exhibits 9 and 10, which indicated that he was performing due diligence on behalf of the Northwest Group.

iv.

Defendant Smith testified that his business partner, co-conspirator John Schlabach, never passed on to him the information provided 30

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by Pastor Cory Kirkham concerning defendant Lewis' felony conviction, the existence of the Nebraska Cease and Desist Order, or the opinion of the attorney hired by Calvary Chapel that the investment program was a scam. (Id. pp. 23-26.) He further testified that Mr. Schlabach also concealed from him the results of a private investigator's report which identified felony convictions for both defendants Schmidt and Lewis. (Smith Tr. 5/7/2007 pp. 97104; Smith Tr. 5/8/2007 pp. 75-77.) v. Defendant Smith repeatedly testified that he had to wait as much as 60-75 days before he could receive a commission on others' investments (Smith Tr. 5/3/2007 pp. 41-45; Smith Tr. 5/7/2007 pp. 64-67) even when he was confronted with documents in his own investor file, Asset Holding, which proved that he received commissions in the same month in which investors' money was received (Smith Tr. 5/8/2007 pp. 84-87). vi. Defendant Smith initially testified that he received no commission for his uncle's investment through M & E Resources (Smith Tr. 5/7/2007 p. 25) until he was confronted with Government Exhibit 13000, the M & E Resources file which indicated that he received a 3% commission (Smith Tr. 5/8/2007 pp. 91-92). vii. Defendant Smith initially identified five checks issued by Asset Holding as representing investments of his money into the Capital Holdings investment program. (Smith Tr. 5/7/2007 p. 17.) On 31

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cross-examination, he was forced to admit that two of these checks, worth $4,850 together, represented money from investor David Trotter, and claimed that he had previously "forgotten" that fact. (Smith Tr. 5/8/2007 pp. 99-100.) He also had no credible explanation for the fact that another $40,000 check which he claimed represented his money had never been credited to his account. (Id. pp. 100-01.) viii. Defendant Smith denied that he had ever seen any of the Federal Reserve's press releases warning about fraudulent high-yield investment scams, despite offering an exhibit in which he himself says that "I know, it's on their web site. Their web site, that these things don't exist." (Smith Ex. 10, p. 29; Smith Tr. 5/8/2007 p. 48.) He then denied that he was talking about the Federal Reserve web site when he made that comment. (Id. pp. 48-51.) ix. Defendant Smith denied that he told Tammie Goulet to delete information from his office's computers on the day of the execution of search warrants at other offices. (Id. pp. 108-09.) x. Defendant Smith denied that he falsely told investor Donald Hoener that he had been to London and seen the trading related to the HYIP. (Smith Tr. 5/7/2007 p. 106.) 45. The adjustment for acceptance of responsibility does not apply to any of the defendants. U.S.S.G. §3E1.1, comment. (n.2).

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46.

Based on the calculations described above, the adjusted offense level for each defendant for the fraud/conspiracy group is as follows: a. b. c. d. Norman Schmidt - 42. George Alan Weed - 38. Charles Lewis - 36. Michael Smith - 38. Money Laundering Counts

47.

The applicable Guideline for the money laundering counts is U.S.S.G. §2S1.1. The base offense level for Norman Schmidt is 42, his offense level for the underlying fraud counts. Id. §2S1.1(a)(1). The base offense level for Charles Lewis is 36, his offense level for the underlying fraud counts. Id.

48.

Norman Schmidt should receive a 2-level enhancement because he was convicted under 18 U.S.C. § 1956. Id. §2S1.1(b)(2)(B). Charles Lewis should receive a 1-level enhancement because he was convicted under 18 U.S.C. § 1957. Id. §2S1.1(b)(2)(A).

49.

The adjustment for acceptance of responsibility does not apply. Id. §3E1.1, comment. (n.2).

50.

The adjusted offense level for the money laundering group for Norman Schmidt is 44. The adjusted offense level for the money laundering count for Charles Lewis is 37. Additional Computations

51.

The defendants are likely in the following Criminal History Categories.

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a. b. c. d. 52.

Norman Schmidt - Category V, based on 10 criminal history points; George Alan Weed - Category I, based on 0 criminal history points; Charles Lewis - Category III, based on 6 criminal history points; and Michael Smith - Category I, based on 0 criminal history points.

The range of imprisonment for each of the defendants, based on offense levels and Criminal History Categories described in paragraphs 46 or 50 above, are below. U.S.S.G. Chap. 5, Pt. A. a. b. c. d. Norman Schmidt - life imprisonment.4 George Alan Weed - 235-293 months. Charles Lewis - 262-327 months. Michael Smith - 235-293 months, reduced to 180 months based on the applicable statutory maximums and U.S.S.G. '5G1.1(a).

53.

The fine range for each of the defendants, based on based on offense levels and Criminal History Categories described above, are below. U.S.S.G. §5E1.2(c)(3). a. b. c. d. Norman Schmidt - $25,000-$250,000. George Alan Weed - $25,000-$250,000. Charles Lewis - $20,000-$200,000. Michael Smith - $25,000-$250,000.

54.

The supervised release range for all of the defendants is 2 to 3 years. U.S.S.G. §5D1.2(a)(2).

The applicable statutory maximums for defendant Schmidt total 345 years, which would technically be the limit of any sentence which could be imposed on him. U.S.S.G. '5G1.1(a). 34

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55.

The defendants should be jointly and severally liable for restitution to all of the victims who invested in the HYIP on or after the date of their first respective counts of conviction. 18 U.S.C. § 3663A(a)(1) & (2). The government is in the process of obtaining the amounts returned to the victims identified and paid through the remission process in related civil forfeiture case numbers 03cv00385-REB-CBS, 03cv00403-REB-CBS, 03cv00749-REB-CBS, and 03cv00799-REB-CBS. Restitution should be ordered for each defendant based on the difference between the losses attributed to each defendant in paragraph 38 above and the amounts already returned to the victims. The government will separately provide the probation office and counsel for the defendants with spreadsheets supporting these numbers as soon as they are prepared. SECTION 3553(a) FACTORS

56.

The government contends that the factors outlined in Title 18, United States Code, Section 3553(a), which the Court must consider in imposing sentence, support the imposition of sentences within the applicable Guideline ranges. There is nothing about these offenses or about any of these defendants which suggests that the Guideline sentences described above are substantively unreasonable, see United States v. Hildreth, 485 F.3d 1120, 1127 (10th Cir. 2007), and such sentences are therefore presumptively reasonable based on their reflection of the considered and informed work done by the United States Sentencing Commission in crafting and revising the Guidelines to reflect the objectives identified in Section 3553(a), Rita v. United States, __ S. Ct. __,

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2007 WL 1772146, *6-*8 (June 21, 2007); United States v. Kristl, 437 F.3d 1050, 1054 (10th Cir. 2005). Respectfully submitted this 22d day of June, 2007, TROY A. EID United States Attorney

s/ Matthew T. Kirsch WYATT ANGELO MATTHEW T. KIRSCH Assistant U.S. Attorneys 1225 17th Street, Suite 700 Denver, CO 80202 Telephone 303-454-0100 Facsimile 303-454-0402 email: [email protected] [email protected] Attorneys for the Government

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CERTIFICATE OF SERVICE (CM/ECF) I hereby certify on this 22d Day of June, 2007, I electronically filed the foregoing GOVERNMENT'S SENTENCING STATEMENT with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses:

Peter Bornstein, Esq. [email protected] Thomas Hammond, Esq. [email protected] Declan J. O'Donnell, Esq. [email protected]

Richard N. Stuckey, Esq. [email protected] Thomas Goodreid, Esq. [email protected] Ronald Gainor, Esq. [email protected]

and I hereby certify that I have mailed or served the document or paper to the following participants in the manner (mail, hand-delivery, etc.) indicated by the non-participant's name. United States Probation Office (mail) 1929 Stout Street, Suite C-120 Denver, CO 80294-0101

s/ Matthew T. Kirsch MATTHEW T. KIRSCH U.S. Attorney's Office 1225 17th Street, Suite 700 Denver, CO 80202 Telephone 303-454-0100 Facsimile 303-454-0402 E-mail [email protected] Attorney for Government

37