Free Response in Opposition - District Court of Colorado - Colorado

Case 1:04-cr-00103-REB-MEH

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Criminal Action No. 04-cr-00103-REB-06 UNITED STATES OF AMERICA, Plaintiff, v. 6. MICHAEL SMITH, Defendant. _____________________________________________________________________ GOVERNMENT'S RESPONSE TO MOTION FOR JUDGMENT OF ACQUITTAL _____________________________________________________________________ The United States (the government), by Wyatt Angelo and Matthew T. Kirsch, Assistant United States Attorneys, hereby responds to defendant Smith's MOTION FOR JUDGMENT OF ACQUITTAL [# 1257] and, for the reasons set forth below, requests that the motion be denied. I. INTRODUCTION 1. Defendant Smith asserts that no reasonable jury could have found him guilty of Counts 23, 26, and 27 (Securities Fraud) because there was no evidence adduced at trial to show that he knew about Norman Schmidt's conviction or that investor monies were being moved from the supposed non-depleting account and used for other purposes. He further argues that the NOT GUILTY verdict as to his participation in the charged conspiracy precludes a finding by the jury that he is guilty of securities fraud as alleged in the counts at issue. Finally, he argues that the Court must find that he was acting in good faith in reliance on

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counsel. All of these arguments should be rejected. II. STANDARD OF REVIEW 2. In reviewing a motion for judgment of acquittal, "the relevant question is, whether, after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia, 443 U.S. 307, 319 (1979); United States v Mains, 33 F. 3d 1222, 1227 (10th Cir. 1994). The reviewing court should "accept the jury's credibility determinations and resolution of conflicting evidence." United States v. Dowlin, 408 F.3d 647, 657 (10th Cir. 2005). If, using this standard, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt, the court may not disturb the jury's guilty verdict. United States v. White, 673 F.2d 299, 302 (10th Cir. 1982). A conviction may be sustained solely on the basis of circumstantial evidence. United States v. Notch, 939 F.2d 895, 898 (10th Cir. 1991). III. EVIDENCE 3. Defendant Smith testified that he first became aware of Smitty's Investments in January 2002 (Smith Tr. 5/3/2007 p. 7) and that he conducted ongoing "due diligence" with reference to that investment and those persons associated with it, including defendants Norman Schmidt and Charles Lewis, from that point until the execution of the search warrants on March 7, 2003 (Smith Tr. passim). Those efforts encompassed internet research concerning both defendants Schmidt and Lewis at various times as well as commissioning private

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investigators to investigate both. (Smith Tr. 5/3/2007 pp. 62-73; Smith Tr. 5/7/2007 pp. 99-103.) During his testimony, Smith admitted that documentation of criminal convictions for both defendants Lewis and Schmidt may have been in his home office as of March 7, 2003, specifically located in the office of John Schlabach, his best friend and business partner. (Smith Tr. 5/8/2007 pp. 74-77.) 4. Ben Ortize and Cory Kirkham testified that Calvary Chapel's discovery of both Lewis' conviction and the Nebraska Cease and Desist Order were disclosed to Smith's partner John Schlabach, who replied that he would forward the information to "Mike." (Gov't Exs. 350-352.) This disclosure was made to Schlabach at the end of June 2002. (Test. Kirkham.) Robert Wommack also testified that he informed Smith of the Nebraska Cease and Desist Order, and defendant Smith admitted that he received a copy of the Nebraska Cease and Desist Order in July or August of 2002 (Smith Tr. 5/8/2007 p. 27). Smith also admitted on cross-examination that he did not inform past or prospective investors of the Nebraska order, the later existence of an SEC investigation of Capital Holdings, or defendant Lewis' conviction. (Id. pp. 28, 31, 110.) 5. Testimony from Susan Veik and Tammie Goulet, in conjunction with bank records (E.g., Gov't Exs. 9201, 9330, 9331) indicated that defendant Smith and John Schlabach, operating as the Northwest Group, prepared their own monthly investor statements and made disbursements to investors using funds sent from the "non-depleting" accounts controlled by Schmidt to accounts controlled by Smith and Schlabach. Ms. Veik specifically testified that shortly after starting work in August 2002, she recognized that disbursements to investors were made 3

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from the same "non-depleting" account into which investor funds were deposited. 6. Although defendant Smith testified that he relied on the description of the insurance protections supposedly applicable to the investment program as described in a letter from attorney Gary Herbert (Smith Tr. 5/3/2007 p. 32), defendant Smith's handwritten additions and corrections were identified by both Susan Veik, Tammie Goulet, and defendant Smith himself (Smith Tr. 5/8/2007 p. 68) on a draft of this letter found in defendant Weed's office on March 7, 2003. (Gov't Ex. 5002.) Defendant Smith also testified that he worked in the insurance industry for approximately twelve years. (Smith Tr. 5/3/2007 pp. 5-7). Timothy Wicker, a representative of the Marsh insurance company which issued the insurance certificates used while defendant Smith marketed the investment program, testified that those insurance certificates (Gov't Exs. 300-301) provided no rights of recovery to anyone other than the named insured, Wells Fargo Bank. Mr. Wicker also contradicted defendant Smith's claim that he had called Mr. Wicker to confirm the scope of this insurance coverage. (Test. Wicker.) 7. On April 8, 2002, Michael Vallone sent an email with attachments to defendants Smith, Schmidt, and Lewis, which set out a proposed agenda for an upcoming meeting and outlined his concerns with respect to securities regulators. (Gov't Exs. 1036.) Defendant Smith admitted that he received the email. (Smith Tr. 5/8/2007 p. 57.) The attachments to the agenda for that meeting included fraud warnings from the Federal Reserve website related to high-yield investment programs and the legal definition of a security. (Gov't Ex. 7004.) Smith admitted 4

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on cross-examination that he knew the definition of a security based on his previous status as a licensed investment advisor. (Smith Tr. 5/7/2007 p. 114.) 8. In order to convince potential investors of the value and validity of the investment program, Smith created elaborate fictions about his own criminal history (Test. Donald Hoener), seeing the trading of MTN's in London (Id.), and obtaining his own "trading number" from the Federal Reserve (Test. David Trotter). 9. Several witnesses testified that defendant Smith was present on numerous occasions when other defendants made various false representations about the investment program. (E.g., Test. Linden Markham, Gregory Hector, Valdemar Bough, William Dellapenna.) IV. ARGUMENT AND INFERENCES 10. There are two bases upon which a rational trier of fact could find the defendant Smith guilty of Counts, 23, 26, and 27. Defendant Smith's convictions may be upheld on either or both of these bases. 11. First, viewing the facts above in the light most favorable to the prosecution, a rational jury, making appropriate inferences, could have found that defendant Smith was: (1) a knowing participant in the scheme to defraud investors, based on his concoction of gross fabrications concerning his own "due diligence" efforts and his failure to disclose any adverse information admittedly in his possession; (2) aware that the investment contracts he was selling constituted securities; (3) aware of the convictions of Schmidt and Lewis from his own internet research and those investigators hired by him; (4) further aware that funds were being

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moved from the "non-depleting" accounts and used to pay other investors and overrides from those checks and wire transfers sent by defendant Schmidt to defendant Smith; and (5) aware that the investors would not have insurance protection as he and others represented. All of these facts contradicted the representations that Smith made to investors like William Dellapenna and Carol and Clarence Hendrickson, the investors at issue in Counts 23, 26, and 27, and they contradicted the representations which he knew other defendants were making to other investors. These facts were sufficient to establish the elements of securities fraud as set forth in INSTRUCTION NO. 32 with respect to defendant Smith's convictions on those counts. 12. Defendant Smith's argument that he must be acquitted is focused on his claims that he did not know of defendant Schmidt's conviction or how investor monies were being used, two of the specific material omissions alleged in the securities fraud portion of the indictment. Although defendant Smith testified consistent with his claims, the other evidence described above contradicts them, and the Court should not attempt judge witness credibility or weigh the conflicting evidence on these points. Dowlin, 408 F.3d at 657. It is reasonable to infer from the jury's verdict that it rejected defendant Smith's testimony, and the other evidence provided the jury with a rational basis on which to reject it. 13. Additionally, defendant Smith's argument that, before he could be convicted of securities fraud, the jury was required to find that he was aware of every material omission set out in the Second Superseding Indictment, is unsupported in the law. To support a conviction for an execution of a scheme to defraud, "the 6

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government need not prove every allegation of fraud; proof of one or more is sufficient to support a guilty verdict." White, 673 F.2d at 305, see also United States v. Gatewood, 733 F.2d 1390, 1394 (10th Cir. 1984) (holding that "the government need not prove every allegation of fraudulent activity in an indictment"). 14. Second, even if not a principal to the offenses of conviction, Smith could have been found guilty thereof by a rational trier of fact pursuant to Title 18, United States Code, Section 2 as reflected in INSTRUCTION NO. 36. This Instruction only required the jury to find that defendants Schmidt, Lewis, or someone else committed the crime charged in the specific count, that defendant Smith "intentionally associated himself in some way with the crime charged in the specific count" and "intentionally participated in it as he would in something he wished to bring about by aiding, abetting. . . ." Defendant Smith's intentional participation could have been proven with evidence that he "consciously shared the other person's knowledge of the underlying criminal act, intended to help him, and intentionally associated himself with the venture through affirmative action." As instructed, the jury was not required to find that Smith was "aware the details of [the] commission [of the underlying criminal act] to be guilty of aiding and abetting." 15. Defendant Smith does not contest the existence of a scheme to defraud by Schmidt. The facts outlined in paragraphs 3 through 9 above, coupled with the convictions of defendant Schmidt on Counts 23, 26, and 27, support a finding

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that defendant Smith aided and abetted securities fraud with respect to these counts because he knew the essential elements of the scheme, intentionally associated himself with the scheme, and intentionally participated in it with defendant Schmidt concerning investors, including Mr. Dellapenna and the Hendricksons, to whom he directly communicated information about the investment. Dowlin, 408 F.3d at 658-659. 16. Defendant Smith's assertion that his convictions for securities fraud are inconsistent with the verdict on conspiracy and that he should therefore be acquitted of the counts of conviction is likewise without merit. 17. First, the jury's verdict is not necessarily inconsistent because the elements of conspiracy are different than those of securities fraud. Specifically, conspiracy requires proof of elements including that a defendant agree to violate the law, that a defendant know the essential objectives of the conspiracy, and that there was interdependence among the conspirators. INSTRUCTION NO. 20. Securities fraud requires proof that a defendant offer or sell a security, that the means or instruments of transportation or communication in interstate commerce or the United States mails be used in that offer or sale, and that the defendant willfully employ a scheme to defraud in that offer or sale. INSTRUCTION NO. 32. The fact that the Second Superseding Indictment alleged that the conspiracy and the scheme to defraud were perpetrated using the same manner and means does not mean that defendant Smith necessarily had to be either convicted or acquitted of both. If, for example, the jury found that defendant Smith did not

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know the essential objectives of the conspiracy or did not have an agreement with the other defendants to violate the law, he still could have been found guilty of being a knowing participant and actor in a securities fraud scheme which used instrumentalities of interstate commerce. Defendant's Smith's suggestion that the Second Superseding Indictment's incorporation of previous factual allegations from the conspiracy charge into the securities fraud charges somehow equates to the incorporation of the elements of conspiracy into the securities fraud charges is fanciful.1 18. Moreover, inconsistency of verdicts is not a basis for reversal or judgment of acquittal. United States v. Galbraith, 20 F. 3d 1054, 1057-1058 (10th Cir. 1994). As the Supreme Court has noted, inconsistent verdicts are just as likely the product of jury lenity as they are a windfall to the government. United States v. Powell, 469 U.S. 57, 65 (1984). Assuming that the jury's verdicts concerning defendant Smith were inconsistent, that would not support granting his motion. 19. Finally, defendant Smith's argument that must be acquitted because he was acting in good faith, in reliance on advice of counsel, is simply a request for the Court to impermissibly re-weigh the evidence and re-assess defendant Smith's own credibility. Defendant Smith presented evidence in support of this theory at trial, and the jury had ample other evidence to support its obvious rejection of that theory.

Defendant's Smith's citation to the definition of "knowingly" from Ratzlaf v. United States, 510 U.S. 135 (1994) is similarly baseless, as that case was not concerned with the definition of "knowingly" in the federal fraud statutes. 9

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THEREFORE, the government respectfully requests that defendant Smith's MOTION FOR JUDGMENT OF ACQUITTAL [# 1257] be denied. Respectfully submitted this 21st 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 21st day of June, 2007, I electronically filed the foregoing GOVERNMENT'S RESPONSE TO DEFENDANT SMITH'S MOTION FOR JUDGMENT OF ACQUITTAL 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]

s/Matthew T. Kirsch Matthew T. Kirsch Assistant United States Attorney 1225 17th Street, Suite 700 Denver, CO 80202 Phone: (303) 454-0100 Fax: (303) 454-0402 email: [email protected]

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