Free Trial Brief - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Criminal Action No. 03-cr-00232-M UNITED STATES OF AMERICA, Plaintiff, v. 1. 2. 3. EDWARD P. MATTAR, III, THOMAS ALAN BOYD, and JACK O. GRACE, Jr., Defendants.

GOVERNMENT'S CLOSING ARGUMENT

The United States of America, by John Haried and Michael P. Carey, Assistant U.S. Attorneys, submits the following closing argument: I. Elements of the Charged Crimes The indictment charges that the defendants committed, or aided, abetted, caused, counseled, induced, or procured, the commission of crimes with these elements: Count 1: Conspiracy 1. Each defendant conspired with at least one other person to commit at least one or more of the crimes alleged in Count 1. At least one of the members of the conspiracy did at least one of the overt acts alleged or referenced in paragraphs 60 through 73 of the indictment for the purpose of furthering the objectives of the conspiracy. That the defendants Edward Mattar, Alan Boyd, and Jack Grace deliberately joined in the conspiracy with knowledge of its purposes and objectives. That the defendants, Edward Mattar, Alan Boyd, and Jack Grace joined the conspiracy knowingly and voluntarily.

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5.

There was interdependence among the members of the conspiracy, that is, that in some way or manner, they intended to act together for their shared mutual benefit within the scope of the conspiracy charged.

Counts 2 - 44: Bank Fraud 1. Edward Mattar, Alan Boyd, and Jack Grace knowingly executed a scheme or artifice to defraud BestBank; Edward Mattar, Alan Boyd, and Jack Grace acted with intent to defraud; The false or fraudulent pretenses, representations, or promises that were made were material, meaning that they would naturally tend to influence, or were capable of influencing the decisions of BestBank. BestBank was insured by the Federal Deposit Insurance Corporation.

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Count 46: Bribery 1. 2. 3. Alan Boyd was an officer or director of BestBank; BestBank was then insured by the Federal Deposit Insurance Corporation; Alan Boyd corruptly accepted or agreed to accept a thing of value from another person; and Alan Boyd intended to be influenced or rewarded in connection with some business or transaction of BestBank.

4.

Counts 47 - 54: False Bank Reports 1. 2. BestBank was insured by the FDIC. Edward Mattar, Alan Boyd, and Jack Grace made a false entry in a book, record, or statement of BestBank; Edward Mattar, Alan Boyd, and Jack Grace knew that they were making a false entry described in the indictment in the Call Report when they made it; That the false entry was material to the accuracy of the Call Report; and Edward Mattar, Alan Boyd, and Jack Grace acted with the intent to injure or defraud BestBank or with the intent to deceive an officer of BestBank, the Federal Deposit Insurance Corporation, or a bank examiner.

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Counts 55 - 73: Wire Fraud 1. Edward Mattar, Alan Boyd, and Jack Grace knowingly devised or knowingly participated in a scheme to obtain money or property by means of false pretenses, representations or promises, substantially as charged in the indictment, that is to sell BestBank stock to Frank Farrar and Cerberus Partners and to sell subprime credit card accounts brokered through Infusion Capital; Edward Mattar, Alan Boyd, and Jack Grace acted with intent to obtain money or property by means of false pretenses, representations or promises; Edward Mattar, Alan Boyd, and Jack Grace used or caused to be used interstate wire communications facilities for the purpose of carrying out the scheme; and That the scheme employed false or fraudulent pretenses, representations or promises that were material to the transaction. For the statute of limitations as to Counts 55-58 and 65-67, and for sentencing as to all wire fraud counts: The wire fraud scheme affected BestBank, a financial institution.

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Counts 55 - 73: Wire Fraud ­ Additional Law Wire fraud generally: It is not necessary for the government to prove that the information transmitted by means of wire communication in interstate commerce itself was false or fraudulent or contained any false or fraudulent pretense, representation, or promise, or contained any request for money or thing of value. The government must prove beyond a reasonable doubt, however, that the use of the wire communication in interstate commerce furthered, or advanced, or carried out, in some way, the scheme for obtaining money or property by means of false or fraudulent pretenses, representations or promises. A wire communication is considered to be in furtherance of the scheme if it is incident to an essential fact of the scheme, or a step in the plot. In order for Mr. Mattar, Mr. Boyd, and Mr. Grace to have any responsibility for the wire transmission of another, the government must prove beyond a reasonable doubt that they were willing participants in the scheme to defraud, and it must be shown that the specific wire communication was reasonably foreseeable in the ordinary course of business or events to advance the objectives of the fraudulent scheme. O'Malley, Grenig, and Lee, Federal Jury Practice and Instructions, Fifth Edition, 2000, §§ 47.06-47.08, 47.13, 47.15 (modified to conform with the Court's instructions in United States v. Gallant and Baetz, No. 03-CR-232-RPM). "Affecting a Financial Institution": A wire fraud scheme affects a financial institution if it exposes the financial institution to a new or increased risk of loss. A financial institution need not have actually suffered a loss in order to have been affected by the scheme. A risk of loss to the bank is not limited to direct financial or Page 3 of 75

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monetary loss. Loss can also include exposure to legal liability, such as a civil suit, or out-of-pocket expenses for preparation of audits, additional manpower, or reports that are required in order to undo the damage the scheme may have caused to the bank. United States v. Serpico, 320 F.3d 691, 694 (7th Cir. 2003); United States v. Schinnell, 80 F.3d 1064, 1070 (5th Cir. 1996); United States v. O'Brien, No. 9630020, 99 F.3d 1147, 1996 WL 580554 (9th Cir. Oct. 7, 1996); United States v. Bouyea, 152 F. 3d 192, 195 (2d Cir. 2000);United States v. Pelullo, 964 F.3d 193 (3rd Cir. 1992); United States v. Agne, 214 F.3d 47, 51-52 (1st Cir. 2000); United States v. Wiant, 314 F.3d 826, 830 (6th Cir.), cert. denied, 538 U.S. 970 (2003). Counts 75 - 88: Money Laundering 1. Edward Mattar, Alan Boyd, and Jack Grace knowingly conducted or attempted to conduct a financial transaction; the property involved in the financial transaction in fact involved the proceeds of bank fraud or false bank reports; Edward Mattar, Alan Boyd, and Jack Grace knew that the property involved in the financial transaction represented the proceeds of some form of unlawful activity; Edward Mattar, Alan Boyd, and Jack Grace engaged in the financial transaction with the intent to promote the carrying on of specified unlawful activity, including bank fraud or making false bank reports.

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Counts 89 (Boyd) and 90 (Mattar, Boyd, Grace): Securities Fraud 1. Edward Mattar, Alan Boyd, and Jack Grace offered or sold the securities described in the indictment; In the offer or sale of these securities, the defendants made use of any means or instruments of transportation or communication in interstate commerce or made use of the United States mails; and In the offer or sale of these securities, the defendants directly and indirectly either: (a) (b) employed any device, scheme, or artifice to defraud; or obtained money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaged in a transaction, practice, or course of business which operated or would operate as a fraud or deceit upon the purchaser.

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(c)

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Transcript Citations The Federal Reporting Service numbered the transcript pages in an unconventional manner, which makes citations to the record difficult. Beginning with trial day 8, the transcript pages are numbered 1 through 4658. The transcripts for trial days 1 through 7 are not numbered consecutively. Please see Appendix 1 for a chart of the trial days, transcript page numbers, and witnesses. Thus, the government will cite to the trial transcript in this format: trial day, page, and line. For example, a citation to trial day 6, page 945, line 17 will be "D6 Tr. 945:17." Citations are to the initial line of the relevant testimony.

II. GOVERNMENT'S ARGUMENT OF THE FACTS 1. Defendants' backgrounds a. Edward Mattar: The evidence proved that Mattar was a highly educated,

savvy, and controlling man who ran BestBank on a short leash with his eye on the details of BestBank's business relationships and internal operations. Mattar owned BestBank, D15 Tr. 1115:7, D22 Tr. 2520:17, Ex.s #329.2, #B026.12; he was the Chief Executive Officer, D22 Tr. 2525:7, and Chairman of the Board of Directors, D22 Tr. 2524:9. Mattar had a law degree. D22 Tr. 2525:10. His duties are spelled out in Ex. #252; they included "maintain[ing] a safe and sound Bank at all times in compliance with all industry regulations." After 1994, Mattar spent most of his time at BestBank involved in the bank's affairs. D22 Tr. 2526:13; D23 Tr. 28792886. Mattar prepared the minutes of the Board of Directors ("Board") meetings. D23 Tr. 2763:13. Mattar, together with Boyd, oversaw the development and growth of the BestBank-Century credit card programs beginning in 1994. D22 Tr. 2521:4. In a letter

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to Baetz, Boyd summed up Mattar's role: "Without the support of Mr. Mattar, I am unable to commit to anything." Ex. #1007.4. Mattar's correspondence shows that he was knowledgeable about and gave directions concerning BestBank's ALLL, Ex. #1433; the bonus plan and calculations, Ex.s #1215, #1216, #1276, #1434; BestBank's strategic plan, Ex. #1429; and BestBank's contract with Century, Ex.s #1427, #1431, #1440. In February 1997 he spent three days in Ft. Lauderdale conducting "due diligence" at Century. Ex. #1300. b. Alan Boyd: The evidence proved that Boyd was an experienced banker,

who directed all of BestBank's internal and external operations. Boyd was President and Chief Operating Officer of BestBank, and a member of the Board. D22 Tr. 2529:17; 2530:25; Ex. #A071.2. Boyd was an experienced banker. D3 Tr. 103:9, 391:1. He oversaw the credit card operation, D22 Tr. 2533:2, and he was the main liaison with Century. D22 Tr. 2534:22; Ex. #39; D3 Tr. 124:5. c. Jack Grace: The evidence proved that Grace was an experienced

regulator and bank operations manager who controlled the financial side of BestBank. Grace came to BestBank in late 1993. Grace's financial statement shows that his net income was $4,325 for 1992 and $24,300 for 1993. Ex. #1370.3. Grace had been a bank examiner. D10 Tr. 527:21, D22 Tr. 2659:2. Grace was Chief Financial Officer of BestBank and a member of the Board. D22 Tr. 2531:11; Ex. #A082.11. He was responsible for daily settlement of credit card activity, the bank's general ledger, and wire transfers. D22 Tr. 2531:18. Grace was a "primary decision-maker at the bank." D22 Tr. 2619:24. Grace was Carney's principal point of contact for the audits. Carney's information was developed through Grace's detailed information. D9 Tr. 415:2. Page 6 of 75

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2.

BestBank and Century BestBank: BestBank was insured by the FDIC. Ex. #353; D23 Tr. 2975:6.

BestBank attracted depositor's money by setting it's interest rate a quarter-point above the going rate for certificates of deposit. Ex. #1002.2; D22 Tr. 2523:25. Most of BestBank's revenue was from Century-marketed credit card accounts. D15 Tr. 1103:15. BestBank's dependence upon Century-originated cards for income was demonstrated in Ex.s #763 and #764. BestBank's total income for 1997 was $27.6 million, of which $23.1 million came from Century. BestBank's Board of Directors included Mattar, Boyd, Grace, Wolfschlag, and three friends of Mattar: Joanne Novelli, Marilyn Haney, and Richard Duran. D22 Tr. 2524:12. Century: Century was in the business of marketing and servicing subprime credit cards. Century relocated its Bankcard Center operations to Thornton to be the exclusive servicer for BestBank. D6 Tr. 723:18. More than 90 percent of Century's income was derived from the BestBank credit card portfolio. D9 Tr. 349:8; 351:12; Ex. #1287. BestBank - Century partnership: The 1994 and 1997 operating agreements defined the partnership. See Ex. #41, 2/24/94 Operating Agreement; Ex. #465, 1/2/97 Operating Agreement.

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THE BESTBANK-CENTURY SECURED CARD PROGRAM: 1994 - 1996
Counts 1 (conspiracy), 2-11 (bank fraud), 47-48 (false Call Reports)

3.

Fraud in BestBank's Secured Card Program Overview: By January 1995, BestBank's subprime, secured card program was

knowingly operated in a fraudulent manner. The fraud had three components: fraud in the program's structure, fraud in the program's performance, and fraud in steps that Mattar, Boyd, and Grace took to hide the truth. The program's structure had three fraudulent features. First, BestBank prematurely funded accounts, meaning BestBank funded the $129 annual fee even when cardholders did not submit their $250 security deposit. Those accounts had no plastics and the monthly statements were withheld. Second, Mattar, Boyd, and Grace did not stop the fraudulent practices, they let the fraud continue. Third, they continued to add cards to increase the portfolio's size. The program performed poorly, as would be expected for a high risk venture with very lax controls. Not only did many cardholders not submit their $250 security deposits, but many cardholders did not make monthly payments. Several fraudulent practices hid the portfolio's poor performance. Reaging and simultaneous debits and credits concealed delinquencies. Mattar, Boyd, and Grace concealed those practices, ran BestBank with an under-funded reserve against bad loans, lied on their Call Reports, and paid bonuses to Mattar and Boyd with the money that should have been used to pay off bad loans. By their deception, they kept BestBank's doors open and added more cards. Secured card program characteristics: From 1994 to early 1996, BestBank and Century marketed their secured credit card program to people coming out of Page 8 of 75

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bankruptcy, D6 Tr. 685:1, Ex. #J110.1 ("bankruptcy list"), or who had a poor credit history. D6 Tr. 724:6 The program began with 117 accounts in May 1994, and grew to 45,000 accounts by January 1996. Ex. #117. The underwriting criteria, Ex. #236.30, was approved by BestBank. D3 Tr. 136.23; D6 Tr. 727:19. BestBank's secured credit card program required a signed application and $250 security deposit prior to BestBank funding the $129 annual fee charged to the account, a critical feature of a subprime loan. Ex. #236.32 (loan procedures); Ex. #46 (secured card telemarketing script); Ex. #90 (secured cardholder agreement); D4 Tr. 406:25. Mattar's, Boyd's and Grace's knowledge of the fraud: The first warning sign arrived in September 1994, when the Colorado Division of Banking alerted BestBank's Board that Century's marketing involved "high-pressure tactics ... [directed at] young, unsophisticated consumers, as well as the elderly, ... [which] are unacceptable and will not be tolerated." Ex. #1371, 9/23/1994 Dillon letter to BestBank. Beginning in 1994, accounts were opened without security deposits. In about October 1994, Century began falsely under-reporting the number of accounts in order to make the number of security deposits more closely align with the reported number of accounts. Ex.s #123, #68, #75. In about January 1995, Jon Wiedmaier, BestBank's credit card manager, began seeing fraudulent acts that concealed the non-performance of BestBank's credit card accounts. Those fraudulent acts are described in detail below. Wiedmaier immediately brought the fraud to the attention of Boyd and Grace; later he copied Mattar on his memos. In April 1995, at the same time that Wiedmaier repeatedly alerted BestBank's management to fraud in the secured card portfolio, Boyd raised Wiedmaier's salary. Ex. #103. Wiedmaier took home copies of some documents because he wanted to Page 9 of 75

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prove he was not part of the fraud. D4 Tr. 447:1, D5 Tr. 551:9. As Wiedmaier testified: "I'd been working in banks for a long time, and understood what good banking business practices are. Those practices weren't being followed at BestBank, and when you don't do that over a period of time, ultimately, the bank is going to be closed by regulators because that's what happens with poor business practices." D5 Tr. 552:20. Bankers' motive: The following documents and testimony show that Mattar, Boyd, and Grace knew about the fraudulent conduct Wiedmaier uncovered ­ and they allowed it to continue because (1) they were getting salaries and bonuses, and (2) telling the truth would have led to BestBank's closure and an investigation: Many cardholders did not make payments on the secured accounts: All payments were received at Bankcard Center between January 1995 and October 1997. D6 Tr. 729:12. However, many secured accounts did not receive monthly cardholder payments. Wiedmaier specifically pointed out the lack of cardholder payments in his January 1995 memo to Schultz, which Wiedmaier copied to Boyd and Grace. Ex. #50; D4 Tr. 447:22; 451:20. The CD-121 reports documented the wide gap between the number of accounts and the shortfall in cardholder payments. See, e.g., Wiedmaier's description the payments shortfall depicted in the 12/31/94 CD-121 for Prin 2000, Ex. #840.7 and .8, and D4 Tr. 440:4; and see Wiedmaier's identification of the 1/24/95 CD121, Ex. #841.10, as source of data in his January 1995 memo outlining fraudulent practices, Ex. #50. D4 Tr. 455:7. On June 8, 1995, Wiedmaier gave Mattar, Boyd, and Grace his memo warning that many cardholders were not making payments. Ex. #84. The dramatic shortfall in cardholder payments was consistent over time. The CD121s for September 1994 through May 1996 each tell the same story. They are contained in Ex. #837 - #857. Exhibit #120 is Loschen's spreadsheet of data from CDPage 10 of 75

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121s showing the shortfall. Exhibit #118 is Loschen's summary of gross active accounts and number of cardholder payments. Loschen's summary charts simply compile the data the defendants saw on a daily basis. Many "secured accounts" were opened and funded by BestBank without security deposits: BestBank's policy for secured accounts required a signed application and $250 security deposit prior to BestBank funding the $129 annual fee and a plastic being mailed. Ex. #236.32. However, as Wiedmaier pointed out in January 1995, Ex. #50, BestBank was funding the $129 annual fee on many accounts without security deposits. Wiedmaier saw accounts without security deposits show up in the CD-121 as "over-limit" accounts, which comprised a "very high" 42 percent of the secured card portfolio in January 1995. Ex. #50; D4 Tr. 456:2. Mattar, Boyd, and Grace knew that BestBank was prematurely funding secured accounts: Wiedmaier repeatedly warned of the problem of accounts with no security deposits in discussions and correspondence with Boyd, Grace, and Mattar. Ex.s #50, #84; D4 Tr. 462:10. Boyd and Grace repeatedly acknowledged the fact of accounts without security deposits, including correspondence copied to Mattar. Ex.s #78.2, #58.1 (copied to Grace), #80 (copied to Mattar). Boyd specifically acknowledged the problem of premature funding of secured accounts: "We will not allow a billing to the credit card to show up as a receivable on BestBank's books (i.e. Annual Fee) without first having a security deposit in the amount at least equal to the annual fee." Ex. #78 (5/4/95 letter to Baetz). In Ex. #80, a May 25, 1995, Grace memo to Boyd, copied to Mattar, Grace noted that secured accounts continued to be prematurely funded by BestBank: "There are two issues that we believe require immediate action. The first is to prohibit placing an account on the FDR system Page 11 of 75

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prior to having a cleared security deposit and completed application from the customer. You addressed this issue in your memo to Doug Baetz dated May 4, 1995." Boyd reiterated BestBank's policy against premature funding in a memo to Baetz the next day. Ex. #81. Boyd articulated BestBank's reasons for requiring security deposits: "we do not want unsecured credit card receivables." Ex. #78.2. Boyd even articulated the risks to BestBank: "Unless this situation reverses itself the reserves for loan loss will not be adequate...." Ex. #58.1. Boyd went further: "The point of the above perimeters [sic] is to prevent the credit card receivable balances that are being carried on the books of BestBank from being inflated and overstated from a collectability standpoint." Ex. #58.2. That notwithstanding, Mattar, Boyd, and Grace chose not to make changes that would stop the fraud. Security deposits were charged to accounts: At the August 1995 Board meeting, BestBank's management claimed an increase of 4,000 secured deposits during July 1995. Ex. #1298.3. Although it was not disclosed to the Board, the truth was that the security deposits were simply charged to the accounts when cardholders did not submit the $250 deposit. For example, the Weisen monthly statements show the security deposit charged to her account on 6/30/95 as a cash advance security deposit. Ex. #892.9. Per the Operating Agreement, Ex. #41.8, all program revenues, fees, and finance charges posted to a cardholder's account, including the $250 "cash advance," were deposited to Century's Operating Account. Exhibit #242 is a 6/27/95 deposit balance worksheet showing $23,000 in security deposits coming from Century's Operating Account and being deposited at BestBank to the security deposit account. Nemetz testified the worksheets were delivered to BestBank. Melody Long testified that Page 12 of 75

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Century paid for security deposits from Century's Operating Account. D19 Tr. 2047:10; D6 Tr. 735:11. Exhibit #1391 contains the documentation showing the money for security deposits, which had been posted as cash advances to cardholder accounts, being transferred from the operating account to the security deposit account during June and July 1995. Exhibit #1384 is Chamberlin's summary chart totaling the transfers: $2.5 million of $2.8 million in deposits during June 20 to July 31, 1995, came from Century. Mattar, Boyd, and Grace knew that no plastics were issued on many secured accounts: Wiedmaier testified that accounts with no security deposit were not issued a plastic; thus, the cardholders could not use those accounts. D4 Tr. 437:2, 437:21. Wiedmaier warned about accounts with no plastics in his correspondence to Boyd and Grace, Ex. #50, and in his detailed June 8, 1995, memo to Mattar, Boyd, and Grace. Ex. #84. The fact that no plastics had been issued on many accounts was apparent in BestBank's records. For example, Bill Schultz testified that the CD-121 for 4/30/95, Ex. #55, showed approximately 39,000 total accounts in Prins 1000, 2000, and 3000. D3 Tr. 169:5. However, Schultz testified, the Credit Card Report for April, Ex. #75.4, reported that only some 23,000 plastics had been issued. D3 Tr. 170:5. A simple comparison revealed the shortfall: 16,000 cards had no plastic. Monthly statements were withheld: On many accounts, Century withheld stacks and stacks of monthly cardholder statements, and Boyd and Grace knew that. D4 Tr. 438:16; Ex. #58.2. Mattar, Boyd, and Grace knew that many secured accounts were simply "reaged" to conceal delinquencies: In his January 1995 memo to Schultz, Ex. #50, which was copied to Boyd and Grace, Wiedmaier warned that 10,206 secured accounts Page 13 of 75

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with a balance of $1,518,154 had been delinquent or over their credit limit for "several months," but were being "reaged on a monthly basis." Boyd's subsequent letters ­ which he copied to Grace ­ acknowledged that BestBank accounts were being reaged to conceal delinquencies. See Ex. #58, copied to Grace ("We can not simply keep reaging the accounts . . .," and by reaging "we could be covering up a big future problem. As you know our written agreement prohibits the re-aging of accounts without the bank's full knowledge and prior approval"); and Ex. #J108.2, copied to Grace ("there will be no re-aging of any account")(emphasis in original). Wiedmaier reported that 18,768 accounts were reaged in May 1995 in his 6/23/95 memo to Mattar, Boyd, and Grace. Ex. #86.1 Reaging was apparent in the cardholders' monthly statements. For example, Ex. #890.7 and .8 showed the account was not delinquent despite no cardholder payments. D6 Tr. 672:4. Neither Mattar, Boyd, nor Grace questioned Wiedmaier's figure of 18,768 reaged accounts in May. D6 Tr. 688:4. Hitt testified that in about May or June of 1996 Shatting assigned him to investigate reaging of BestBank accounts. D10 Tr. 632:1. By comparing mid-month and end-of-month CD-121s, Hitt saw that delinquencies dropped over the last half of the month, but there were not enough cardholder payments to explain the drop in delinquent accounts. Hitt reported his findings to Shatting, and together they went to Grace. Grace said he would look into it. D10 Tr. 553:25 - 556:24. Hitt testified that

The FDR records corroborate Wiedmaier's memo, Ex. #86. Prin 1000 contained the smallest number of accounts. Exhibit #846.9 - .46 is the reaging report for Prin 1000 for May 1995. It shows 2,258 reages in Prin 1000, out of 5,000 total accounts in Prin 1000 at the end of May 1995, as shown in Ex. #845.3. Thus, about 45% of Prin 1000 was reaged in May. Page 14 of 75

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Grace conferred with Boyd. D10 Tr. 632:5. Later, Grace told Hitt that "there is not an issue." D10 Tr. 556:22. After that episode, Grace did nothing to address the issue and no BestBank procedures changed. D11 Tr. 765:14. Mattar, Boyd and Grace also knew that simultaneous debit and credits were concealing delinquent secured accounts: Wiedmaier discovered simultaneous debits and credits, which caused accounts to appear current without a cardholder payment. D4 Tr. 489:1. The fact that they effectively "reaged" accounts was apparent on cardholder statements, e.g., the Zertuche statements at Ex. #890.4 and .6. Wiedmaier reported to Boyd and Grace that Century was applying simultaneous debits and credits to accounts. D4 Tr. 490.3. Wiedmaier also explained it to Mattar. D5 Tr. 558:24; D6 Tr. 670:9. The actions of Mattar, Boyd, and Grace demonstrated their intent to defraud and "consciousness of guilt": The "no reaging" provision of the 2/24/94 Operating Agreement, Ex. #41.5, was not enforced by Mattar, Boyd, and Grace. Likewise, they never adopted Wiedmaier's 6/3/95 draft reaging policy. Ex. #83; D5 Tr. 545:6; 632:5. Mattar, Boyd, and Grace permitted reaging to continue. Boyd and Grace never disclosed to Wolfschlag or to the Board the information in Wiedmaier's January 1995 memo, Ex. #50, about $1,635,180 of accounts with no security deposits that had been reaged for months because the cardholders were not making payments. D22 Tr. 2541:20. Similarly, they never disclosed the information Boyd put into his May 1995 correspondence, Ex. #58, about $1,000,000 of "secured" accounts with no security deposits, reaging of accounts, or withheld monthly cardholders' statements. D22 Tr. 2542:24. Mattar, Boyd, and Grace never disclosed to Wolfschlag or to the Board the Page 15 of 75

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information in Wiedmaier's June 1995 memo, Ex. #84, concerning $2,265,470 of accounts that were losses or probable losses because the accounts had no security deposits, no plastics, no cardholders' payments, and they had been reaged, etc. D22 Tr. 2546:2. Similarly, they never disclosed the information in Wiedmaier's June 1995 memo, Ex. #86, about 18,756 reaged accounts in May 1995. D22 Tr. 2550:18. On about June 25, 1995, there was a face-to-face meeting2 held at BestBank to discuss reaging and the $2.6 million of losses identified in Wiedmaier's 6/8/95 memo, Ex. #84. D4 Tr. 487:4, 488:18. In attendance were Boyd, Grace, Wiedmaier, Baetz, Gallant, and Schultz. Baetz and Gallant did not agree that Century would buy back the bad accounts. D5 Tr. 585:15. Nonetheless, Mattar, Boyd, and Grace took no action. D5 Tr. 597:24. Why? Because dealing with the problem meant that they would have to allocate BestBank's income to funding ALLL, and that they would lose interest income from the bad accounts, both of which meant reduced income and reduced bonuses. Mattar's and Boyd's intent to defraud is vividly demonstrated in Ex. #85. In that June 15, 1995, memo to all employees, Mattar and Boyd touted BestBank being named "America's Best Performing Small Bank." They acknowledged the contributions of Wiedmaier and other employees, and stated: "it is very clear that BestBank is more than a name ­ it is a group of committed, dedicated, innovative, and resourceful men and women." That memo, Ex. #85, was written just one week after Wiedmaier's memo to Mattar, Boyd, and Grace which detailed $2.6 million of potential losses, Ex. #84. Despite Boyd's and Grace's discussion of the need for tighter supervision of Century (Ex.s #58.2, #80), Wiedmaier testified that Boyd, Grace, and Mattar never

2

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instituted audit procedures to stop reaging and simultaneous debits and credits. D5 Tr. 543:5. Mattar, Boyd, and Grace did not stop, or even curtail, the Century program. D4 Tr. 466.11. The fraudulent practices continued through 1995 and 1996: Loschen's summary charts, Ex.s #118 and #120, show in the simplest of formats that cardholder payments for 1995 and 1996 continued to be very low in relation to the number of gross active accounts. The numbers for cardholder payments were so low that they raised a big red flag about the claimed delinquencies, which generally were less than 30 percent of the portfolio, and never over 50 percent, during 1995. Ex. #120 (total delinquencies are shown under "Delinquent Accounts" at the far right column under "System Total."). Similarly, the evidence showed that BestBank and Century did not charge off the $2,265,470 of "loss" and "doubtful" accounts that Wiedmaier identified in his June 8 memo. Exhibit #1211.10, BestBank's audited financial statements, reported 1995 charge-offs of only $415,467. Thus, reaging of accounts successfully concealed the true losses during 1995. Mattar, Boyd, and Grace did not put a stop to the fraudulent acts that Wiedmaier pointed out, and they "pretty much continued business as usual." D5 Tr. 545:20. 4. Mattar, Boyd, and Grace knew that Century had failed to and could not indemnify BestBank for secured card losses. In January 1995, Wiedmaier identified $1,635,180 of losses in Ex. #50, a huge 42 percent of the portfolio. Wiedmaier explained BestBank's risk to Grace. D4 Tr. 453:6. BestBank should have charged-off those accounts, and forced Century to indemnify it, but that did not happen. D4 Tr. 452:9. Century increased its reserve by only $100,000 and never paid BestBank the additional $1,535,180. D6 Tr. 676:8; Ex.

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#51. In January 1995, Century's Reserve Account was just $225,272, Ex. #72.2. On May 16, 1995, Boyd stated that BestBank had $1,000,000 of reaged receivables with no security deposits. Ex. #58.1. On June 8, 1995, Wiedmaier sent Mattar, Boyd, and Grace his memo describing 16,113 accounts carried on BestBank's books as assets valued at $2,265,470 which were losses, highly doubtful receivables, or whose balances should be returned to the cardholders. Ex. #84; D4 Tr. 472:22. Wiedmaier discussed this memo with Boyd and Grace, who did not question Wiedmaier's conclusions. D4 Tr. 477:2, 481:4. On June 12, Mattar responded to Wiedmaier in writing in a memo copied to Boyd and Grace. Ex. #104. Mattar's memo illustrates that rather than deal with facts, Mattar's state-ofmind was to filibuster and obfuscate. Mattar never followed up with facts or solutions, D4 Tr. 483:16. Century did not purchase all of the loss accounts identified by Wiedmaier. D6 Tr. 681:19, 695:2. The fact that Century did not indemnify BestBank shows Century did not have the intent to indemnify. Century's Reserve Account at BestBank was just $292,191 on 6/30/95 and just $730,275 on 12/31/95. Ex. #762.10 and .14. Century's net equity on 12/31/95 was a negative: -$819,729. Ex. #1319.12. 5. Mattar, Boyd, and Grace knew that BestBank's ALLL during 1995 was not adequate: The ALLL reports were presented to the Board by Grace, D22 Tr. 2619:2, and prepared by Grace or someone working for him, D22 Tr. 2619:7. Wolfschlag testified that when he approved the ALLL calculations presented to the Board in the several pages of Ex. #273, he relied upon the information presented. D22 Tr. 2561:17. Wolfschlag testified that during the Board's review and approval of BestBank's

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ALLL for June 30, 1995, there was no disclosure or discussion of reaging of accounts, accounts with no security deposits, cardholders not making payments, or the losses identified in Ex. #84. D22 Tr. 2552:6. Wolfschlag testified that had he known about the reaging of accounts it would have affected his decision as a Board member about how high BestBank's ALLL should be, because reaging concealed delinquent loans. D22 Tr. 2544:22. Wolfschlag testified that if he had been informed by Boyd or Grace that in May 1995 BestBank had $1,000,000 in "secured" accounts with no security deposits ­ as set forth in Boyd's letter, Ex. #58, then he would have advised the Board to increase the ALLL to about $1,000,000, because it appeared to him the bank would have a loss in that range. D22 Tr. 2546:23. Wolfschlag testified that if he had been informed by Mattar, Boyd, or Grace about the probable losses set forth in Wiedmaier's memo, Ex. #84, he would have advised the Board to increase BestBank's ALLL to cover "a large portion" of the $1,351,000 identified for "Report #2," Ex. #84.1, and all of the $50,000 identified for "Reports #3 & 4," Ex. #84.2. D22 Tr. 2548:22, 2549.11. The ALLL approved by the Board and reported in BestBank's Call Reports for the following quarters during the secured card program was as follows: Quarter Board minutes showing approval of ALLL #1490.16 1st quarter 1995 #1493.5 2nd quarter 1995 #1496.3 & .4 ALLL from Board packet and Ex. # $138,342 #273.4 $288,859 #273.5 $303,606 #273.6 $340,000 #472.10 ALLL reported in Call Report and Ex. #

4th quarter 1994

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3rd quarter 1995 #1497.3 & .4 4th quarter 1995 #1500.11

$252 504 #273.7 $155,635 #273.8 $356,000 #473.10

Mattar, Boyd, and Grace knew that ALLL was not adequate to absorb losses. They lied and hid reaging and other fraudulent practices from the other Board members so that Mattar and Boyd would continue to receive bonuses, and to avoid having BestBank closed and an investigation ensue. 6. Mattar, Boyd, and Grace caused BestBank to submit Call Reports for 6/30/95 (Count 47) and 12/31/95 (Count 48) which were materially false. BestBank's Call Reports were prepared by Grace and people working under his supervision. D22 Tr. 2555:13. Wolfschlag signed all of them as the Authorized Officer. D22 Tr. 2555:22. Wolfschlag assumed that the information in them was true and correct. D22 Tr. 2566:20. On the Call Reports, Mattar, Boyd, and Grace lied in the face of data that disclosed the fraud. Not only was the fraud apparent in BestBank's records, but Wiedmaier specifically pointed it out to them, and they decided not to act. Mattar, Boyd, and Grace knew from the CD-121s how many accounts BestBank had funded, and they choose to ignore any other data ­ payments and plastics ­ that exposed true performance. Ex. #358 contains the Call Report instructions. The instructions direct that BestBank's ALLL must be "adequate to absorb estimated credit losses," which are defined as "an estimate of the current amount of the loan and lease portfolio (net of unearned income) that is not likely to be collected ... given the facts and circumstances as of the evaluation date." Ex. #358.2; D23 Tr. 2985:19.

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Count 47: BestBank's 6/30/95 Call Report is Ex. #801 (bank version) and #472 (FDIC version). It was signed by Boyd and Grace as directors. D22 Tr. 2554:10. Wolfschlag testified that he would not have signed the 6/30/95 Call Report because it misstated the past due accounts on Schedule RC-N, Ex. #801.24, and the ALLL, Ex. #801.8, was understated. Count 48: BestBank's 12/31/95 Call Report is Ex. #803 (bank version) and #473 (FDIC version). It was signed by Boyd and Grace as directors. D22 Tr. 2564:9. The reported delinquencies were just $755,000 for 30 to 89 days delinquent, and $96,000 for past due 90 days or more. Mattar, Boyd, and Grace knew those figures were falsely low because: · the cumulative effects of reaging and simultaneous debits and credits during 1995 concealed true delinquencies; · the low number of cardholder payments shown in Ex.s #118 and #120 could not justify BestBank's claimed delinquencies of less than 26 percent of the portfolio (Ex. #120.20); and · BestBank and Century did not charge off the $2,265,470 of loss accounts that Wiedmaier identified in his June 8 memo (Ex. #1211.10). Therefore, BestBank's receivable was overstated on the Call Report, as was interest income, and the provision for losses was understated. 7. Mattar, Boyd, and Grace committed bank fraud by the payment of bonuses during the secured card period - Counts #2 ­ #11 BestBank's quarterly bonus calculations, Ex. #272, were prepared and presented to the Board by Grace. D22 Tr. 2557:10. Wolfschlag voted to approve the bonuses for each quarter reflected in the bonus calculation, and that he relied upon the information

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presented in Ex. #272. D22 Tr. 2561:7. Wolfschlag testified that Mattar, Boyd, and Grace never returned any of their bonuses to BestBank. D22 Tr. 2588:22. BestBank's bonuses had been criticized because they were excessive and because the bonus plan focused on short term factors like income rather than capital, asset quality, and safety and soundness. That criticism was articulated in the 1995 examination: "The Board should require Chairman Mattar and President Boyd to reimburse the Bank for the bonuses paid in excess of the recalculated amounts." Ex. #B026.5. Mattar refused to recalculate. Ex. #1387.7. This chart correlates the bonuses paid to Mattar and Boyd charged in Counts 2 through 11with the proof: Count 2 3 4 5 6 7 8 9 10 11 Trial Exhibit #778 #784 #778 #784 #778 #784 #778 #784 #778 #784 Date January, 1995 January, 1995 April, 1995 April, 1995 July, 1995 July, 1995 October, 1995 October, 1995 January 26, 1996 January 26, 1996 Execution $77,728 bonus payment for EDWARD MATTAR made payable to Effective Management Systems $77,728 bonus payment to ALAN BOYD $95,869 bonus payment for EDWARD MATTAR made payable to Effective Management Systems $95,869 bonus payment to ALAN BOYD $65,751 bonus payment for EDWARD MATTAR made payable to Effective Management Systems $65,751 bonus payment to ALAN BOYD $85,184 bonus payment for EDWARD MATTAR made payable to Effective Management Systems $85,184 bonus payment to ALAN BOYD $59,432 bonus payment for EDWARD MATTAR made payable to Effective Management Systems $59,432 bonus payment to ALAN BOYD

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Wolfschlag testified that he would not have voted ­ at the July 1995 Board meeting ­ to approve the $65,751 bonuses for Mattar and Boyd for the second quarter of 1995 if he had been informed about reaging of accounts or the size of BestBank's probable losses. D22 Tr. 2559:10, 2560:9. The charged bonus payments were executions of the bank fraud scheme, for several reasons. First, the bonus criteria required that ALLL was adequate and chargeoffs were taken in a timely manner. See Ex. #272, pages .5, .6, .7, .8, and .9. Those two criteria were not met in those quarters, but Mattar, Boyd, and Grace concealed the true facts from the Board. Second, because of BestBank's true losses during those quarters, BestBank needed to retain the money to shore up its ALLL, rather than spending the money on bonuses. As officers and directors of BestBank, Mattar and Boyd had a duty not only to disclose their knowledge of fraudulent practices, but also to put BestBank's interests first by not taking bonuses or by returning their bonuses to BestBank. U.S. v. Moran, 312 F.3d 480, 489 (1st Cir. 2002)(bank officials owe a fiduciary duty to the bank and its depositors which obligates the avoidance of fraud, bad faith, usurpation of corporate opportunities, and self-dealing).

THE UNSECURED (AATC) CREDIT CARD PROGRAM: 1996 - 19983
Counts 1 (conspiracy), 2-44 (bank fraud), 49-54 (false Call Reports)

8.

AATC program characteristics After the Universal Tours program was terminated, the All Around Travel Club

(AATC) was formed in May 1996. AATC was the primary marketing program of the

3

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BestBank-Century partnership. D6 Tr. 725:7. The AATC program offered a $498 travel club membership charged to a BestBank VISA credit card account with a $45 annual fee and $600 credit limit. For $498 the new member was supposed to receive a fulfillment package with a voucher for a discounted Caribbean cruise, valuable travel discounts, and more. The AATC fulfillment materials were not supposed to be shipped until the prospective member submitted his signed BestBank credit application and first $20 payment. Ex.s #1475.27, #14-#18; D19 Tr. 1932:11. 9. Overview of the fraud in the AATC program The very structure of BestBank's AATC card program fostered fraud. It had a built in catch-22: the subprime cardholder was not supposed to get his VISA plastic or his travel voucher until he submitted his signed application and $20. From the cardholder's perspective, he has no plastic and no membership package, but he owes $543. But, in fact, many of those subprime borrowers never sent in $20. BestBank did not want to delay booking the receivable because it meant no immediate $543 for Century, no fees for BestBank, and no bonuses. BestBank, therefore, ignored the cardholder's failure to submit his signed application and $20. Century set up the new account immediately and charged the $543, and BestBank funded the $543. Now BestBank had booked a $543 account as a "good" receivable, but there were two subsequent problems. First, there was still $57 of available credit, and neither BestBank nor Century wanted the cardholder to have access to that $57. Second, the membership package meant an immediate cash outlay for assembly and shipping. BestBank and Century solved those problem with policies that said no plastic and no fulfillment package until the $20 and application were received. These practices created a situation where cardholders were not going to pay. In Page 24 of 75

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practice, many cardholders not only failed to send in their first $20 payment, but also failed to make subsequent payments. That meant the $543 BestBank accounts were going delinquent. That problem was solved with another form of "reaging," ­ credits on accounts without cardholder payments. Rather than pay $543 to charge-off a delinquent account, Century applied $20 credits. Of course, that strategy forced Mattar, Boyd, and Grace to lie. They concealed from the Board what was really happening, they lied to the Board and to regulators about BestBank's delinquencies, and they pretended BestBank's ALLL was adequate because there were very low delinquencies. Mattar, Boyd, and Grace learned about the shortfalls in plastics, fulfillment, and cardholder payments, and they learned about credits. They kept that knowledge to themselves because telling the truth would have stopped their program, stopped their salaries and bonuses, and kicked off an investigation that could close BestBank and lead to criminal prosecution. 10. BestBank prematurely funded the $543, which created a BestBank receivable without the cardholder's commitment to pay the loan: By prematurely funding the $543, the defendants created a very high risk loan. BestBank required a signed application and initial $20 payment: The cardholder was required to submit a signed application with his initial $20 payment prior to the $543 being billed to his account and the cardholder receiving a plastic credit card, pursuant to BestBank policy's (loan policy - Ex. #1475.26 and .27), and the terms of the offer (confirmation letter, Ex. #11; marketing scripts, Ex. #14 - #18). BestBank's policy stated that the signed application and initial $20 cardholder payment was a prerequisite to billing the $543 and issuing the plastic. Ex. #1475.26-.27. BestBank prematurely funded the $543: Nemetz testified that AATC accounts

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were put on system prior to receiving an application. D6 Tr. 771:5. BestBank funded the $543 initial charges to the account the same day the account was put on the system. D6 Tr. 771:14. BestBank's records showed the premature funding: BestBank's daily settlement showed that the $543 was paid immediately to Century. Ex.s #1337, #1338. Boyd's responses to the cardholders' complaints show that he knew of and approved of premature funding of the $543: Michael Tapp found cardholders' complaints in a filing cabinet in BestBank's conference room. D24 Tr. 3084:18. Boyd's statements in responding to those complaints reveals that Boyd knew of the practice of BestBank funding the $543 AATC charges before the cardholder submitted his application. For example, in response to the Santoro complaint, Ex. #1455.2, Boyd stated: "Attached to Mr. Santoro's complaint is a copy of the confirmation letter sent out to him by our office. The letter states that a credit card will be issued upon receipt of the signed form, which is attached to the confirmation letter. Since Mr. Santoro has not returned the signed form, a credit card has not been issued. Mr. Santoro is not liable for any of the statements that have been sent out to him. A monthly statement is sent out to Mr. Santoro simply to remind him of the initial charges to the account if he were to accept the card." [Emphasis added.] Here Boyd clearly states that although $543 has been billed to Santoro's account and BestBank already has funded the $543, the cardholder is not liable until he submits his signed application and $20 payment. Boyd's statement is repeated in Ex. #1456.2, as well as in Penny McDowell's response, approved by BestBank, D31 Tr. 4381:18, 4405:2, to the Pamela Gross complaint, Ex. #237.1. Boyd knew that prematurely funding the $543 made those loans high risk: On 12/29/1997, Boyd wrote to Baetz and Gallant, Ex. #1007.4, and expressed his angst about premature funding of the $543: Page 26 of 75

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"One of the glaring problems we have is in the number of monthly closed accounts. This item alone makes any form of participation or financing very difficult. Perhaps there is a way to delay booking an account onto the processing system immediately, perhaps waiting thirty (30) days or until we have a first payment on the credit card account." [Emphasis added.] However, Mattar, Boyd and Grace never enforced a delay in booking accounts. 11. Mattar, Boyd and Grace knew no plastics were issued on the majority of AATC cards created during the FDR period, and that the cardholder's use of plastics issued during the FICI period was blocked until activation. FDR reported the shortfall in plastics: Nemetz and Mansueto testified that no plastic was issued until the cardholder made his initial $20 payment. D6 Tr. 772:5; D6 Tr. 827:12; D19 Tr. 1910:23. Each day the FDR CD-061 new accounts journal showed whether a plastic was issued when the account was booked. Ex. #373; D8 Tr. 40:4. The daily FDR CD-121s showed that only a fraction of plastics were issued on new accounts. Also, the monthly CM-051s tracked the gross discrepancy, which was summarized by Opp in Ex. #394.1. FICI reported the shortfall in plastics: BestBank's FICI Visa Quarterly Report for the 4th quarter of 1997 showed 140,000 accounts without plastics. Ex. #413.1. Boyd noted BestBank's use of the Visa Quarterly Report in Ex. #1002.2. BestBank's MIS reports of credit card data were presented to management: Hitt prepared the MIS reports of credit card data for BestBank's management, which are collected in Ex. #303. D10 Tr. 557:10. Hitt's sources were the on-line FDR CD-121 and the FICI Cardholder Management Report. D10 Tr. 558:22, 563:23, 564:6, 566:12. It took Hitt just one to two hours to fill out each month's MIS report. D10 Tr. 563:6. Grace selected the categories of information listed in the left hand column. D10 Tr. 558:22. From June 1996 to February 1997, when Anne Shatting was his supervisor, Hitt gave the MIS reports to Shatting. After Shatting was fired in February 1997, Hitt Page 27 of 75

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gave the MIS reports to Grace each month. D10 Tr. 570:14. Shatting testified she gave the MIS reports to Grace, D11 Tr. 793:9, and she noted the preparation of the MIS reports in her Settlement Review Reports which were given to the Board. Ex. #1450; D11 Tr. 794:16. Wolfschlag testified that he and the outside directors only received the reports for June 1996 (Ex. #303.1), July 1996 (Ex. #303.2), and August 1996 (Ex. #303.3). D22 Tr. 2573:9. Mattar, Boyd, and Grace were present for the Board meetings when those three reports were presented. D22 Tr. 2573:18. BestBank's MIS reports tracked the low number of plastics: The low number of plastics was reported on BestBank's monthly MIS reports, Ex. #303. Hitt testified that the top three lines of his MIS reports described the number of plastic cards. D11 Tr. 754:9. Those three lines do not refer to the number of accounts. D11 Tr. 755:3. The chart of the AATC data reported in Ex. #303, discussed below in paragraph 12 on page 29, shows the gap between new accounts and plastics issued. The FICI reports revealed that the vast majority of AATC accounts had block codes during FICI period. During the FICI period, block code N was assigned to all new accounts, which required the cardholder to make his first $20 payment and call and request activation. D29 Tr. 4112:25. Cardholders were unable to use accounts with block codes A through H, L through S, and X and Z. Ex. #395 (Opp's summary of accounts with block codes at 7/23/98); D29 Tr. 4110:14. The FICI Cardholder Management Reports reported that a substantial portion of AATC accounts ­ well in excess of 50 percent ­ had block codes. See, e.g., Ex.s #884.14 (290,000 accounts with block codes); #884.20 (307,000 accounts); #884.26 (327,000 accounts); #394.2 (Opp summary of accounts with only G, N, or X block codes). The meaning of the block codes was available to BestBank. D30 Tr. 4280:24. FICI produced a regular Page 28 of 75

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report listing how many accounts were blocked by each code, which was available to BestBank. D30 Tr. 4278:9. 12. Mattar, Boyd, and Grace knew that more than half of AATC cardholders were not making monthly payments, and, therefore, the very low delinquencies claimed were false. BestBank's loan policy required that cardholders make their own payments. Ex.s #A003.68; D28 Tr. 3788.1. So did the cardholder agreement. Ex. #498.13. BestBank's monthly MIS reports disclosed the shortfall in cardholders' payments. Hitt prepared the MIS reports each month and gave them to Grace. D10 Tr. 557:10, 570:14. BestBank's entire Board received the reports for June 1996 (Ex. #303.1), July 1996 (Ex. #303.2), and August 1996 (Ex. 303.3). D22 Tr. 2573:9. BestBank's management continuously used the MIS, and provided the 12/97 MIS report Carney. Ex. #1237; D9 Tr. 330:17. The following chart of AATC data taken directly from Ex. #303 shows what Mattar, Boyd, and Grace saw about the AATC program's operation and performance: Date Ending Accounts Recv. # 17,207 25,923 33,443 45,857 63,753 79,804 New Cards Issued or Plastics4 5,770 5,121 1,119 2,804 3,109 5,245 Payments # Aging of Receivables # 3,117 1,993 8,852 5,870 3,526 5,748 % of Aging / End Rcvbls 19.7% 8.7% 29.2% 14.2% 5.6% 7.8%

Jul-96 Aug-96 Sep-96 Oct-96 Nov-96 Dec-96

2,922 5,682 6,888 7,720 8,590 12,807

The description changed from "New Cards Issued" to "Plastics" with the July 1997 MIS. Page 29 of 75

4

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Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97 Jul-97 Aug-97 Sep-97 Oct-97 Nov-97 Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98

100,075 116,337 133,535 153,939 174,989 189,238 211,509 227,754 246,612

3,767 8,273 8,158 9,621 8,181 6,940 9,640 7,969 9,999

14,052 18,950 22,006 25,940 27,214 29,541 31,266 31,049 33,134

5,807 6,468 11,610 12,901 18,433 15,096 16,427 16,317 13,893

7.1% 6.3% 9.6% 9.6% 12.2% 9.3% 9.2% 8.5% 6.7%

284,342 317,099 338,503 385,992 395,047 426,610 458,913

n/a n/a n/a n/a n/a n/a n/a

n/a n/a 0 0 0

12,837 12,957 6,629 8,184 15,090 9,290 18,037

4.9% 4.7% 2.0% 2.4% 4.1% 2.4% 4.1%

Mattar, Boyd, and Grace could see the results of the fraudulent practices in these MIS reports. First, there were far fewer plastics issued than the number of new accounts added per month. For example, from July to August 1996, approximately 8,700 new accounts were added, but only 5,121 plastics were issued. Second, the number of payments received is far less than the ending accounts receivable number from the previous two or three months. For example, in July 1996 there were 17,207 accounts that had a payment due by October, but in October BestBank only received 7,720 payments. That huge discrepancy recurred in each and every month: it was a giant red flag that something was amiss.

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And the "something" became apparent when they compared the shortfall in payments to the numbers reported for "Aging of Receivables #" and "% of Aging / End Rcvbls." These two categories reported delinquencies directly from page 2 of the CD121s, where delinquencies were recorded. Obviously, the number of cardholder payments received was grossly insufficient to yield the very low delinquencies BestBank claimed. The discrepancy between the number of payments and the claimed delinquency was a giant red flag that credits were hiding true delinquencies. In March 1998, Boyd made a telling admission in a memo to Baetz and Gallant: "We will be required to analyze the portfolio and show profitability and true losses." Ex. #1008.2 (emphasis added). BestBank's records showed the shortfall in cardholder payments: The FDR CD-121 and CM-051 reports recorded the shortfall in cardholder payments. So did the FDR daily reports used by BestBank in settlement, e.g., Ex. #1383.9 (11/25/96 SD-014 reported 6,736 returns ­ i.e., credits ­ and just 540 payments). Also, the BankCard Center's Deposit Balance Worksheets, submitted daily to BestBank, showed the number and dollar amount of payments. Ex. #242, D6 Tr. 765:13. Similarly, FICI's daily Transaction Balance Summary reported the number of payments ­ including cardholder payments and TC22 and TC21 credits ­ so that information was available at BestBank. See, e.g., Ex. #296 and D10 Tr. 569:17. Also, BestBank received the posted payments by description report which broke out TC21 "other payment" transactions by description and Org. See Ex.s #1302.6, #1304.6, #1539, and #C005.4 BestBank and Century were only set up to handle a small number of cardholder payments: Nemetz testified that at its peak BankCard Center only Page 31 of 75

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processed 7,000 payments per week, or just 28,000 payments per month. D6 Tr. 768:11. Beard testified that FICI only processed 3,000 to 4,000 per day, or about 80,000 payments per month during October 1997 through July 1998 (D29 Tr. 4130:24), when the portfolio grew from 279,000 to over 500,000 accounts. Boyd wrote letters complaining about low payments: Boyd wrote Baetz and Gallant on 1/5/98: "When I review the historical data which was "pulled" by BestBank personnel, there are several glaring items; payments received and charge-off accounts. ... I have to believe that two primary factors contribute to low payments and high cancellations." Ex. #1017.1. 13. Mattar, Boyd, and Grace knew that the fulfillment shortfall was part-andparcel of BestBank's premature funding of the $543 and the shortfall in cardholder payments and plastics. BestBank's policy precluded shipment of the AATC membership package until the cardholder submitted his application and initial $20 payment. Ex. #1475.27 ("Fulfillment must occur immediately upon receipt of first payment."). D19 Tr. 1932:11. Because of the shortfall in cardholder payments beginning in June 1996, Mattar, Boyd, and Grace knew that many cardholders were not receiving fulfillment packages. By February 1998, they could no longer hide what had become a thorn in their side, and the fulfillment "backlog" became an issue. Ex. #1475.27 ("Quarterly review of fulfillment activity (to match against # of booked accounts) and determine if a fulfillment "backlog" exists."). Mattar, Boyd, and Grace never contacted the fulfillment vendors ­ NMR, Nordis, and Hurricane Golf ­ with questions. D21 Tr. 2491:24; D21 Tr. 2503:3. Why not? Because they knew cardholders were not receiving fulfillment and they were ok with that because it was a feature of their program. Baetz and Gallant were in charge of fulfillment, but the shortfall was a direct consequence of Mattar's, Boyd's, and Page 32 of 75

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Grace's decisions to continue prematurely funding the $543 and either not issue the plastic (FDR period) or not authorize the plastic (FICI period) until the cardholder submitted his application and $20. The shortfall in fulfillment packages was substantial. Up through June 1998, AATC only ordered about 130,000 vouchers and shipped about the same number of membership packages. See Ex. #719 (summary chart of the number of new members vs. number of vouchers purchased, showing shortfall of 342,365 as of July 1998); #720 (summary of vouchers purchased); #565 (summary of packages shipped; shows just 133,231 packages shipped as of 7/22/98). 14. Mattar, Boyd, and Grace knew about AATC $20 credits, and knew the credits hid delinquencies. They helped the AATC program continue in order to get their salaries and bonuses, and to avoid BestBank's closure and an investigation. Beginning of AATC credits: The AATC credits began in August 1996, about the same time the first AATC accounts would become 60 days delinquent. On August 28, 1996, Schultz wrote a memo to Baetz and Gallant, which he copied to Boyd, which stated that 11,000 credits of $60 and 8,000 credits of $45 "will appear on cardholder statements with a descriptor of `Annual Fee'." Ex. #64; D3 Tr. 194:14. That totaled $1,020,000 in credits. Schultz discussed the credits with Boyd. D3 Tr. 195:20. The credits were not a secret. Id. The MIS reports disclosed the effect of credits: About that same time, of course, Mattar, Boyd, and Grace were receiving Hitt's MIS reports from June, July, and August 1996. Ex. #303.1 - .3; D22 Tr. 2573:9. As discussed above, the number of cardholder payments did not support the very low delinquencies claimed by BestBank in the MIS reports, Ex. #303, or in the Credit Card Reports, Ex.s #68, #75, and #76.

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Knowledge of present and future losses: Also in August 1996, Grace told Melody Long that they knew BestBank faced at least $1,000,000 in losses. In Ex. #1164, Grace told Long about that the OCC had classified the secured accounts purchased by BankFirst from BestBank as "doubtful," and that BankFirst needed a 50% reserve for those accounts. "The risk to BestBank is that the OCC will cause the FDIC to scrutinize our credit card program." Grace went on to state that "Alan believes there is $1m which should be written off immediately." Finally, Grace proposed that $425 of every $543 charge be "set aside for reserves and write-downs;" i.e., an admission that the AATC program contained enormous future losses because cardholders were not paying. Cardholder complaints disclosed credits: The cardholder complaints in BestBank's possession disclosed AATC credits. Ex.s #1455 (March 1997), #1456 (March 1997), #1464 (June 1998). In November 1997, cardholder Hanna specifically pointed out the AATC credits on his monthly statement. Ex. #1459.13 -.16. Schultz talked to Schmalzer about credits sometime after Schultz left BankCard Center in mid-1997. D4 Tr. 314:13. McDowell also spoke to Schmalzer in 1997 about AATC credits being applied multiple times to same account. D31 Tr. 4409:4. Conversations and correspondence about credits: Long testified she discussed AATC credits with Grace in the first quarter of 1997. D19 Tr. 2092:13. Long's monthly spreadsheets of deals, cancels, and credits were sent to Grace and Boyd. Ex.s #923, #1091, #1151, #1155, #1411; D20 Tr. 2157:17. In his 12/29/97 letter to Baetz and Gallant, Boyd specifically noted that they needed to reserve money to pay for credits. Ex.s #1007.2 ("Reserve for Reversals/Credits $125 (Minimum based on experience."); #1007.3 ("5,000 Reversals/Credits."). Page 34 of 75

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In January 1998, Bour and Hitt presented Mattar, Boyd and Grace with their findings about credits: Bour first learned of AATC $20 credits in January 1998 during a phone call with Penny McDowell of BankCard Center. Hitt pulled information about credits that day (D15 Tr. 1110:24), which Hitt identified in his testimony as Ex. #314A-F. D10 Tr. 600:23. Bour calculated BestBank's loss to be $40 to $50 million. These were accounts that Century should have bought. D15 Tr. 1108:21; 1132:17; 1237:10; 1240:2. Schmalzer's quick estimate of bad accounts at that time was above $40 million. D15 Tr. 1248:20. Boyd called Bour in and related verbatim the substance of Bour's conversation with McDowell, including Bour's characterization of the AATC credits as posing a risk to BestBank's safety and soundness. D15 Tr. 1109:12. A reasonable inference is that Baetz or Peg Hirst called Boyd directly and related the Bour-McDowell discussion. Boyd told Bour that BestBank's relationship with Baetz and Gallant was very important and Bour shouldn't make statements about BestBank's safety and soundness. Id. Bour talked to Mattar and Grace about his calculation of a $40 to $50 million risk of loss to BestBank. Mattar said as sole shareholder he would address the problem. Bour responded that he doubted anything would change. D15 Tr. 1112.4. Bour resigned on January 27, 1998. Ex. #315. About two weeks after Bour's resignation, Boyd asked Bour to meet him at a Le Peep restaurant. Over lunch, Boyd attempted to obfuscate the existence of the credits, saying that the AATC credits could have been Western Union payments from cardholders. D15 Tr. 1118:10. Hitt testified that he was assigned task of preparing the spreadsheet of TC22 credits, Ex. #314A.1 - .6; D10 Tr. 600