Free Sentencing Statement - District Court of Colorado - Colorado

Case 1:04-cr-00103-REB

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Judge Robert E. Blackburn Criminal Action No. 04-cr-00103-REB UNITED STATES OF AMERICA, Plaintiff, v. 5. JANNICE McCLAIN-SCHMIDT, et al., Defendants. ______________________________________________________________________________

SENTENCING HEARING MEMORANDUM OF JANNICE McCLAIN SCHMIDT ______________________________________________________________________________ This sentencing hearing memorandum is submitted on behalf of defendant Jannice McClain Schmidt, and pursuant to United States v. Schmidt, No. 06-1412, slip op. (10th Cir. Aug. 10, 2007), to determine the amount of loss in support of sentencing enhancements pursuant to U.S.S.G. § 2B1.1. LEGAL AUTHORITIES: Fed. R. Crim. P. 32(i) requires this Court to resolve disputed Guideline factors and to make findings in support of an enhanced sentence. The Government bears the burden of persuasion to establish the sentencing enhancements, which burden may not be shifted to the defendant. Schmidt, supra at 10, citing United States v. Williams, 374 F.3d 941, 947 (10th Cir. 2004). Hearsay presented by the Government in support of a sentencing enhancement must possess "sufficient indicia of reliability to support its probable accuracy." Schmidt supra at 12,

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citing U.S. Sentencing Guidelines Manual § 6A1.3(a)(2002); see also, United States v. Dazey, 403 F.3d 1147, 1177 n. 7 (10th Cir. 2005)(citation omitted). Relevant conduct includes "jointly undertaken criminal activity" which is in furtherance of the criminal activity and reasonably foreseeable. U.S.S.G. § 1B1.3, App. Note 2. The jointly undertaken conduct is not necessarily the same as the scope of the entire conspiracy, and not necessarily the same for every participant. U.S.S.G. § 1B1.3, App. Note 2(ii). The Court is, therefore, required to determine the scope of the criminal activity each defendant agreed to undertake to determine the relevant conduct. Id. Conduct of others that was not reasonably foreseeable is not relevant conduct under the Guidelines. Id. Conduct of members of a conspiracy or scheme to defraud prior to a defendant's joining the criminal conduct is not included in relevant conduct, even if the defendant knows of that conduct. Id. In a ponzi scheme, loss is to be reduced by, the money returned to the victims by defendants before detection by law enforcement. U.S.S.G. § 2B1.1, App. Note 2(E)(i). Loss is not reduced by the money transferred to any individual investor in excess of that investor's principal investment. U.S.S.G. § 2B1.1, App. Note 2(F)(iv). Finally, this Court must make particularized findings on the critical facts pertaining to the sentencing enhancements, in order for the sentence to stand. Williams, 374 F.3d at 947; United States v. Guzman, 318 F.3d 1191, 1198 (10th Cir. 2003); United States v. Kirk, 894 F.2d 1162, 1164 (10th Cir. 1990). CRITICAL FACTS FOR SENTENCING: As part of the sentencing of Ms. Schmidt, this Court must make particularized findings with regard to whether Ms. Schmidt could have foreseen the full extent of the investor losses and the amount of the loss to be attributed to her conduct. SeeU.S.S.G. § 1B1.3, App. Note 2(ii);

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Dazey, 403 F.3d at 1177. This Court must also make particularized findings as to when Ms. Schmidt joined the scheme, and the scope of the specific agreement Ms. Schmidt joined, in relation to the scheme to defraud as a whole. Id. at 1176, citing United States v. Melton, 131 F.3d 1400, 1404 (10th Cir. 1997). Dazey explains: A defendant convicted of conspiracy is accountable for reasonably foreseeable conduct in furtherance of the jointly undertaken criminal activity. See U.S.S.G. § 1B1.3(a)(1)(A). However, a defendant's accountability only extends to the criminal activity that he agreed to undertake. See id. § 1B1.2 n.2. This means "proper attribution at sentencing requires . . . particularized findings about, the scope of the specific agreement the individual defendant joined in relation to the conspiracy as a whole." United States v. Melton, 131 F.3d 1400, 1404 (10th Cir. 1997)(internal quotation marks omitted). In the context of a conspiracy to defraud, we have held that a defendant is accountable for the entire loss created by a fraudulent organization if the defendant played a major role in the organization and the losses were reasonably foreseeable. See United States v. Osborne, 332 F.3d 1307, 1311-12 (10th Cir. 2003). If the defendant's role in the conspiracy was less substantial, then particularized findings about the defendant's agreement to join the conspiracy must support the scope of the defendant's role in the conspiracy. See Melton, 131 F.3d at 1406. Moreover, a defendant is not accountable for the conduct of members of the conspiracy "prior to the defendant joining the conspiracy, even if the defendant knows of that conduct." U.S.S.G. § 1B1.3 n.2. 403 F.3d at 1177. At the previous sentencing, the Government presented the plea agreement and James proffer in support of the sentencing enhancements. See PSIR at ¶¶ 11-53. The plea agreement states that Ms. Schmidt learned of the fraud sometime in March of 2003: McLain Schmidt continued to assist in the operation of Smitty's, including soliciting investors, maintaining investor accounts, and preparing and sending monthly statements to investors which falsely represented the status of the investment, up to and until the execution of various search and seizure warrants stemming from the investigation of this case on March 7, 2003. She also participated in soliciting investments through and sending monthly statements to investors in other entities including Rocky Mountain Sports Promotions, LLC. During this period, McLain Schmidt became aware that investors' funds were not being deposited into non-depleting accounts, were not being used for the purposes

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represented to investors (see information related to Count 2 below), and that no trading of MTNs had taken place. See Plea Agreement and Statement of Facts Relevant to Sentencing at 5 (emphasis added). It follows that Ms. Schmidt joined the conspiracy sometime in March of 2003. See Dazey, supra. Even though the Government stipulated that Ms. Schmidt became aware that the investor funds were not being deposited into non-depleting accounts and that no trading of MTNs had taken place until sometime in March of 2003, at sentencing, the Government presented loss calculations as of August 1, 2001, a year-and-a-half prior to Ms. Schmidt's joining the conspiracy. 1 In August of 2001, Ms. Schmidt became a victim of this ponzi scheme and mortgaged her own farm in order to "invest" in the scheme. Her loan was finalized August 31, 2001. See Promissory Note attached as Exhibit A-1. For the Government to argue at sentencing that she knew of the scheme to defraud as early as August 1, 2001, is disingenuous. Ms. Schmidt pled guilty to Count One of the Superseding Information because she failed to tell Mr. Peterson that Mr. Lewis had a prior conviction, not because she had any idea about the overall ponzi scheme/conspiracy/scheme to defraud: SPECIFIC CONDUCT RELATING TO THE COUNTS OF CONVICTION Count 1: In December 2001, McLain Schmidt and Charles Lewis traveled from Colorado to Nebraska, where they met with Warren Peterson, a previous acquaintance of McLain Schmidt's, for the purpose, in part, of soliciting an investment from Peterson in the Smitty's high-yield investment program. At that time, McLain Schmidt was aware of Lewis' prior Colorado felony conviction. Mr. Peterson invested $5000.00 in the Smitty's program on January 11, 2002, via an interstate wire transfer from his bank in Nebraska to a Smitty's program on January 11, 2002, via an interstate wire transfer from his bank in Nebraska to a Smitty's account at Wells Fargo Bank in Denver, Colorado. At no point during
1

Initially the Government calculated the loss amount to be "more than $50,000,000." See Plea Agreement and Statement of Facts Relevant to Sentencing at 8. Later, the Government calculated the loss amount to be $27,342,442.92. See PSIR June 26, 2006, letter to Ms. Ricca. Still later, the Government calculated the loss amount to be $25,656,958.96. See Addendum to PSIR August 7, 2006, letter to Ms. Ricca.

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the solicitation of Mr. Peterson to invest in the Smitty's program did McLain Schmidt disclose Lewis' felony conviction to Mr. Peterson. The investment contract signed by Mr. Peterson and Norman Schmidt as a result of this solicitation and pursuant to which Mr. Peterson made his investment constituted a security. The failure to disclose Lewis' conviction in connection with the solicitation of this security was a material omission, as it would have affected Mr. Peterson's decision about whether to invest. See, Plea Agreement and Statement of Facts Relevant to Sentencing at 6 (emphasis added). Pleading to the first Count is not tantamount to admitting knowledge of this ponzi scheme. At sentencing, the Government attempted to bolster its position by providing the probation officer with a copy of its James proffer under Fed. R. Evid. 801(d)(2)(E). See Doc. #290, #592 and #677. Ms Schmidt objects to the James proffer being accepted in support of sentencing enhancements. The James proffer consists of hearsay statements by the Assistant U.S. Attorney, which are not subject to cross examination. Ms. Schmidt requests that all evidence derived from the James proffer be stricken from the PSIR. The standard for entering co-conspirator statements into evidence by a James proffer, is substantially weaker than that required for sentencing purposes. As admitted by the Government, only "slight evidence" connecting the declarant and the defendants to a conspiracy is required under 801(d)(2)(E) analysis. See James proffer at 3 citing United States v. MedozaSalgado, 964 F.2d 993, 1005-06 (10th Cir. 1992). The James proffer does not provide, "sufficient indicia of reliability to support its probable accuracy," as required for sentencing. See Schmidt, supra at 12, citing U.S. Sentencing Guidelines Manual § 6A1.3(a)(2002); see also, Dazey, 403 F.3d at 1177 n. 7. Moreover, the statements made by a co-conspirator before she actually joins a conspiracy are admissible under 801(d)(2)(E) analysis. See James proffer at 4, citing United States v. Brown, 943 F.2d 1246, 1255 (10th Cir. 1991). The James proffer here

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does not distinguish whether statements attributed to Ms. Schmidt were made before or after she joined the conspiracy. The Government relied on the James proffer to support its theory of Ms. Schmidt's joining the conspiracy as of August of 2001. Except for hanging the handle "co-conspirator" on Ms. Schmidt, nothing in the James proffer explains what criminal activity she agreed to undertake and when she agreed to join the criminal activity. Nothing in the James proffer proves that Ms. Schmidt knew of the scope of the loss to investors. Nothing in the James proffer proves how Ms. Schmidt could have foreseen the full extent of losses to investors. The James proffer explains that, "The vast majority of the statements made by the defendants and others during the course of the conspiracy were false. The government's case will be designed to prove that those statements were false and that the defendants knew as much when making the statements." See Doc. # 290 at ¶ 56. It is obvious that the James proffer did not endeavor to prove what Ms. Schmidt knew about the ponzi scheme and when she learned of it. 2 Of note is the fact that in January of 2003, Ms. Schmidt told William Vigneulle, an accountant, that the federal government had shut down Capital Holdings LLC and froze the accounts. James Log Statement #241. This statement was, in fact, true. Any person with knowledge of this scheme would never have made such a statement to a potential victim. To the contrary, the James proffer indicates that Ms. Schmidt received the June 21, 2002, letter from Attorney Gary N. Herbert, which contains the legal opinion that the "investments" were legitimate. See James proffer at pp. 23-24, and letter attached as Exhibit A-2. Nothing in
A review of the statements attributed to Ms. Schmidt in the James proffer shows statements which were true as far as Ms. Schmidt knew. For instance, Ms. Schmidt told Mr. Peterson that she would "make his investment right." In fact, she made sure he was paid when he expressed concern. James Log Statement Nos. 85 and 119.
2

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the James proffer indicates that Ms. Schmidt had been disabused of the fact that this letter was, in fact, based on false statements. If anything, the Herbert letter offers exculpatory evidence that, as late as June 17, 2002, Ms. Schmidt believed that the investments were legitimate, and possessed a legal opinion to substantiate that belief. The Government attempts to bootstrap its argument that Ms. Schmidt knew of the ponzi scheme in August of 2001, based on her solicitation of other investors. However, many of the victims of this ponzi scheme solicited investors. Solicitation of investors is not proof of knowledge of the scheme. The Government also attempts to bootstrap its argument that Ms. Schmidt knew of the ponzi scheme in August of 2001, based on statements that she was the "bookkeeper" for Smitty's. But the Government cannot prove that Ms. Schmidt kept the books for any entity. 3 The Government cannot prove that Ms. Schmidt had access to bank account statements, checks, or deposit slips. The Government cannot prove that Ms. Schmidt knew that the invested money was being used for payment of personal bills. Ms. Schmidt was not a bookkeeper by any standard. At most she was a clerk. She did not keep any books for any of the companies, either electronically or otherwise. She did not write out checks, reconcile bank accounts, keep the checkbook, or prepare profit and loss statements, income statements or balance sheets. In fact, she did not even see the bank statements. She filled out "green sheets," sent statements to investors with information provided to her by the investors, and set up bank accounts per Norman Schmidt's instructions.

3

The Government never produced any set of books for any entity in this ponzi scheme, despite taking all of the computers for every entity in execution of the search warrants.

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The keeping of "green slips of paper" is not evidence that Ms. Schmidt was a bookkeeper with intimate knowledge of the fact that the bank accounts, in fact, were not "non-depleting" and that her investment was being utilized to fund a ponzi scheme. Ms. Schmidt was duped into believing in this scheme as were the other victims. Ms. Schmidt joined the conspiracy in March of 2003, after the F.B.I. executed its search warrants. At that point, she realized that non-depleting accounts did not exist and that MTN's had not been trading. She admitted this in the Plea Agreement. Ms. Schmidt should be held responsible for losses occurring after March of 2003, not before. See Dazey, supra. GUIIDELINE SENTENCE COMPUTATION: The Government has indicated that the loss to victims after March of 2003, is $48,000. This amount is drawn from deposited monies into the RMSP account by victims: Carol Hall, Darren J. McGee, and Alisha Keating. See Addendum to PSIR August 7, 2006 letter to Ms. Ricca and Spreadsheet attached as Exhibit A-3. 4 Base Offense Level: U.S.S.G. § 2B1.1(a) Enhancement based on intended loss of more than $30,000 but less than $70,000 Enhancement for use of "sophisticated means" Role in the Offense Adjustment: U.S.S.G. § 3B1.2(a) as minimal participant in criminal activity Adjusted Offense Level: Acceptance of Responsibility Reduction +6

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4

The $25,000 payment to Cliff Seigneur, the victim in Count 2 of the Information, was paid back and, therefore, not to be included in the loss calculation. See U.S.S.G. § 2B1.1, App. Note 2(E)(i).

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Aggregate Offense Level: Criminal History Category Advisory Guideline Range U.S.S.G. § 5B1.1 CONCLUSION:

8 I 0-6 months imprisonment, Zone A

The previous sentence grossly over stated Ms. Schmidt's role in the ponzi scheme, and the loss which should be attributed to her conduct under U.S.S.G. §1B1.3. It failed to consider the Sentencing Guidelines requirements for particularized findings regarding: (1) the extent of the conspiracy Ms. Schmidt agreed to undertake; (2) her agreement to join the conspiracy in relation to her role in the conspiracy; and (3) the date on which she joined the conspiracy. Upon resentencing, Ms. Schmidt should be resentenced to time served and released from custody. DATED this 8th day of October, 2007. PAULA M. RAY, P.C.

s/ Paula M. Ray 1801 Broadway, Suite 1100 Denver, CO 80202-3839 Telephone: 303.292.0110 Email: [email protected]

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CERTIFICE OF SERVICE I hereby certify that on this 8th day of October, 2007, I electronically filed the foregoing 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] Matthew T. Kirsch, Esq. [email protected] I have sent a copy via U.S. mail, postage prepaid to: Caryl Ricca Senior U.S. Probation Officer United States Probation Office 1929 Stout Street, Suite C-120 Denver, CO 80294-5424 Richard N. Stuckey, Esq. [email protected] Thomas Goodreid, Esq. [email protected] Ronald Gainor, Esq. [email protected]

s/ Paula M. Ray

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