UNITED STATES SECURITIES AND EXCHANGE COMMISSION
In the Matter of: }
} Volume II
REED SLATKIN AND ASSOCIATES } File No. LA-1961
WITNESS: Reed E. Slatkin
PAGES: 156 through 338
PLACE: Securities and Exchange Commission
5670 Wilshire Boulevard
Los Angeles, California
DATE: Wednesday, February 2, 2000
The above-entitled matter came on for hearing at 10:0[7?]
a.m., pursuant to notice.
APPEARANCES:
On behalf of the Securities and Exchange Commission:
ANDREW J. DUNBAR, ESQ.
MARTIN J. MURPHY, ESQ.
Securities and Exchange Commission
Office of Enforcement
5670 Wilshire Boulevard, 11th Floor
Los Angeles, California 90036
(323) 963-3985
On behalf of the Witness:
GERALD E. BOLTZ, ESQ.
Bryan Cave, LLP
120 Broadway, Suite 500
Santa Monica, California 90401-2305
(310) 576-2134
Page 157
CONTENTS
WITNESSES: EXAMINATION
Reed E. Slatkin 159
EXHIBITS: DESCRIPTION IDENTIFICATION
31 Copy of check to Rakow,
dated 10/11/99 290
32 1/22/00 letter from Rakow 29[2]
33 Gibbs quarterly statement,
dated 10/13/99 29[5]
34 Schedule 1, Certified Public
Accountant and Independent
Contractors 29[9]
35 Independent contractors
agreement for O[w]ens 305
36 Copies of 5 checks 30[8]
37 Copies of 4 checks and
one deposit slip 311
38 Account value,
Montgomery Securities 316
39 Wire transfer, dated 12/24/98 320
40 Wire transfer, dated 6/29/99 322
41 Wire transfer, dated [8]/24/99 323
42 Wire transfer, dated 6/23/99 324
Page 158
1 PROCEEDINGS
2 MR. DUNBAR: We are on the record at 10:0[7?], on
3 Wednesday, February 2nd, 2000. I am Andy Dunbar and with me
4 is Martin Murphy. We are officers of the Commission for
5 purposes of this proceeding.
6 We are today resuming the examination of Mr. Reed
7 Slatkin, which was adjourned on January 21st, 2000. Mr.
8 Slatkin, are you represented by counsel today?
9 THE WITNESS: I am.
10 MR. DUNBAR: Would counsel please identify himself?
11 MR. BOLTZ: Yes, Gerald E. Boltz with the Bryan
12 Cave law firm, Santa Monica, representing Mr. Slatkin
13 individually.
14 MR. DUNBAR: Testimony today is pursuant to a
15 Commission subpoena, dated December 13th, 1999, which has
16 been previously marked as Exhibit Number 2. Mr. Slatkin, do
17 you understand that you remain under oath?
18 THE WITNESS: I do.
19 Whereupon,
20 REED E. SLATKIN
21 having previously been duly sworn, was called as a witness
22 herein, and was examined and testified further as follows:
23 MR. DUNBAR: Let the record reflect that a copy of
24 the Formal Order of Investigation in this matter will be
25 available for examination during the course of the
Page 159
1 proceeding.
2 THE WITNESS: Okay.
3 EXAMINATION
4 BY MR. DUNBAR:
5 Q First I would like to just do some quick follow-up
6 from last time. With regards to the bank accounts, I know [you]
7 did not have the account numbers for the two different bank
8 accounts. And I have them right here, just so if we want to
9 refer to the bank accounts we could refer to them as the last
10 four numbers of the account. It might make it easier during
11 this examination.
12 A Okay.
13 Q I believe last time we were referring to them as
14 your personal account and your friends account.
15 A Right.
16 MR. BOLTZ: You are referring to the Union Bank, I
17 think.
18 BY MR. DUNBAR:
19 Q The two Union Bank accounts -- the Union Bank
20 personal account, account number 0630057574 and the Un[ion]
21 Bank friends account 0630057582. Does that sound correc[t?]
22 A Yes.
23 Q And also last time, with regard to bank accounts,
24 we discussed bank accounts that you currently had open. [We?]
25 were not able to get to the question of what bank accounts
Page 160
1 have you had in the last ten years that have been closed?
2 MR. BOLTZ: That is your question.
3 THE WITNESS: Yeah. I take it that you are asking
4 me which ones I -- which ones have been closed.
5 MR. DUNBAR: Correct.
6 THE WITNESS: I'm trying to recall, as we spoke
7 last time, about the fact that some of these banks bought
8 other banks that I've been part of. And, so, it's sort of a
9 natural flow from bank to bank. We've been pretty
10 consistently with the banks I gave you.
11 If there were closed accounts I can recall just two
12 scenarios where that would happen. One is if we were -- the
13 bank we were involved in was bought by another bank, in which
14 case the account would be closed; a new number would be
15 assigned. And then, in the Union Bank or in Bank of
16 California, before it merged with Union Bank, we did have a
17 theft of some checks at one point, and we did close those
18 accounts and new numbers were issued. But I believe the
19 continuity of the relationship was unchanged. So, outside of
20 that, I don't think -- I don't recall closing -- in the last
21 ten years anyway -- don't recall closing any other accounts.
22 BY MR. DUNBAR:
23 Q In the accounts where you said the checks were
24 stolen was that the Union Bank accounts?
25 A This is Bank of California.
Page 161
1 Q And that was recently -- which was then bought by
2 Union Bank?
3 A Right.
4 Q So, the two numbers got changed about a year or
5 three years ago maybe?
6 A Yeah, it could have been longer than that ago. I
7 mean, I think we could -- if you would like us to go back we
8 could find all of that transitions for you. It's not hard.
9 We've been pretty stable with that bank pretty much for the
10 whole time.
11 Q And, also, a lot of times with -- since we have
12 already done testimony once I may summarize what was said
13 last time. I just want to make clear I am in no way trying
14 to misstate what you said. If I say anything that you think
15 that does not sound right or is wrong, just please let me
16 know.
17 A I will. I'd like to have the transcript sometime
18 too.
19 Q Yeah, we have not received the transcript.
20 A Okay.
21 MR. MURPHY: Did you give us an order for the
22 transcript?
23 MR. DUNBAR: Yes, he did.
24 MR. BOLTZ: We did, yeah. I just want to be sure,
25 I do not remember the last time he mentioned the
Page 162
1 Golden Pacific Bank, Pacific Century or Network Bank but
2 those were all banks that previously had been in Pacific
3 Century. Or maybe I mentioned it.
4 THE WITNESS: I think we went over those last time,
5 as they had changed their names.
6 MR. BOLTZ: Yeah, okay.
7 THE WITNESS: You know, this was Lincoln something
8 or other. This one was Golden Pacific. Again, there's a
9 continuity there.
10 MR. BOLTZ: I think they were mentioned last time,
11 but I --
12 THE WITNESS: Yeah, I think so too. I don't
13 remember. There's an example of these banks would get
14 bought, and then they'd change their name so they'd be --
15 change ownership.
16 MR. BOLTZ: Yeah, that is right, I have notes that
17 -- okay.
18 BY MR. DUNBAR:
19 Q Last time, also, you mentioned that you did not
20 have any professional licenses. Have you ever taken a Series
21 2 test --
22 A No.
23 Q -- with the NASD?
24 A Ever?
25 Q Ever.
Page 163
1 A I did take a -- it might have been a Series 2, it
2 might have been.
3 Q Do you recall what --
4 A Well, I don't remember exactly when.
5 Q Do you remember why?
6 A Yeah. I had a relationship with an advisor. This
7 is 1987. And I think I took the test for that reason.
8 Q Have you taken any other NASD tests?
9 A Un-uh. (Negative response.)
10 Q And what was this relationship with this advisor?
11 A I was hired to help them with their portfolio.
12 Q Who was that advisor?
13 A It was called Statistical Sciences.
14 Q And when did you get hired by them?
15 A 1987, I believe.
16 Q And how long did you work for them?
17 A A little over a year.
18 Q Why did you stop working for them?
19 A They were in Los Angeles and I was in Santa
20 Barbara. It was just too hard.
21 Q And how did you get hired there?
22 A It was an introduction from a mutual acquaintance,
23 I think.
24 Q Do you recall who the acquaintance was?
25 A I think it was Mr. Levine -- knew about them. I
Page 164
1 think I mentioned him last time.
2 Q Richard?
3 A Yes.
4 Q And why did you apply for a job at Statistical
5 Sciences?
6 A I didn't really apply. They asked me.
7 Q And what were your job duties?
8 A I was involved in portfolio management.
9 Q For your whole length of employment?
10 A Yes.
11 Q And what exactly did that entail? Like day to day,
12 what was your day to day --
13 A Well, I just want to ask Gerry just kind of a
14 stupid question.
15 (Witness and counsel confer.)
16 MR. DUNBAR: We can go off the record.
17 (Whereupon, a brief recess was taken.)
18 MR. DUNBAR: Back on the record.
19 THE WITNESS: Just a clarification. I had done
20 some extensive computer modeling of the stock in the middle
21 '80's. And they were interested in that particular aspect as
22 it applied. So, I would use that modeling to recommend
22 potential investments.
24 BY MR. DUNBAR:
25 Q How did they find out about the computer modeling?
Page 165
1 A I told them.
2 Q Do they still use your computer modeling?
3 A I have no idea.
4 MR. BOLTZ: Are they still in business?
5 THE WITNESS: I'm not even sure. I don't know.
6 BY MR. DUNBAR:
7 Q And when you say you did computer modeling in the
8 mid-'80's was this for yourself?
9 A Uh-huh. (Affirmative response.)
10 Q And what was this type of computer modeling?
11 A Well, in 1984, I believe, I read a book by a
12 gentleman named Larry Williams. Do you know him?
13 MR. MURPHY: I have heard the name.
14 THE WITNESS: He's a semi-famous commodities
15 mathematician. And, as you probably know, over the years
16 there's a whole industry built up about guys who think they
17 can use computers to make money in the stock market, right.
18 So, back then there weren't very powerful computers that
19 little guys could -- you know, individual guys could use.
20 But I read a book of his and I thought, gee, it would be
21 interesting to apply this to stocks, some of his theories.
22 So, I found a computer programmer, and I went over the
23 material with him, from the book, and said I wonder if we
24 could create a model that would take these particular price
25 and volume patterns and look for these -- we call them signal
Page 166
1 points. And, so, I had the software written to do that, and
2 I had a little Compaq computer. It's about the size of this
3 -- maybe bigger, but a little screen. And we put the Dow
4 Jones stocks in there and we did a computer sort against our
5 signals.
6 And it was -- it took all night long to do three of
7 these for 50 stocks or so, right. And we'd come in in the
8 morning, all excited, and we'd see a buy signal or a sell
9 signal, you know, on some stock. And, so, we started to test
10 this and see if -- you know, and it was interesting
11 because it seemed to have some efficacy.
12 So, over the next two or three years I spent a lot
13 of time developing more software that would allow us to have
14 more stocks and more signals. And I combined some -- what I
15 would call vanilla -- technical analysis tools, like moving
16 averages, end of day highs and lows, relative strength
17 indexes, and put them on this computer. And at that time --
18 nowadays you can buy this stuff off the shelf for fifty
19 bucks, you know. In those days it was really unique. And I
20 felt that it had a great deal of efficacy in showing where
21 there was interest in particular stocks. And I found it to
22 be a useful tool in making money, okay.
23 It was just a model. I didn't -- it was raw
24 mathematics. And during the middle '80's, if you recall --
25 not to get too much into this -- but there was a certain
Page 167
1 amount of -- there was a kind of expansion of the amou[nt of]
2 information that was available. The structures, research
3 facilities in many of the big firms -- I think Charles Sch[wab]
4 started during this time -- and the market went from a vo[lume?]
5 of something on the order of, you know, 20- to 30- or 40
6 million shares up to 60-, 80-, 90-, 100 million shares.
7 Sometimes you had a 200,000,000-share day. It was
8 remarkable.
9 This led to an interest in these kind of models.
10 And I think that just having the model and -- it was
11 interesting to these folks. When they met me they thoug[ht it]
12 was really fascinating. And it was efficacious. It wasn'[t -]
13 - I wouldn't have hung my hat on every single line of it, [but?]
14 it was efficacious, and it did give us a pretty good idea o[n?]
15 entry and exit ideas.
16 Nowadays you can look on -- I know you can pro[bably?]
17 look on Motley Fool or Yahoo and just pull up a chart o[n a?]
18 stock. But back in 1986, you couldn't do that. You co[uld?]
19 not do that. And we had that.
20 BY MR. MURPHY:
21 Q Did the O'Neil firm have stock charts back th[en?]
22 A That's an interesting question. I was just about
23 to mention the O'Neil firm. Do you know him? He's [an]
24 interesting guy.
25 Q Just know the paper and his publications, just
Page 168
1 vaguely.
2 A Yeah, he's a real pioneer in this industry. And we
3 were very fascinated with some of the tools that he had
4 developed on his charting. And I, to this day, subscribe to
5 his chart books. I still think he's very good.
6 Q Were they available back then?
7 A Uh-huh. (Affirmative response.)
8 Q They were?
9 A Just starting. Yeah, I think they were just
10 starting. I was getting his chart books back then, yeah.
11 The difference, of course, is with nowadays I think you can
12 get him online, I'm pretty sure. I think he's probably had
13 to really switch his business. But we were doing this every
14 day, and his books, I think, came out weekly and monthly, if
15 I remember correctly. The blue one was the New York Stock
16 Exchange, the green one was the American Stock Exchange, and
17 then he started adding Nasdaq stocks. And he would have --
18 show you when the dividends came and stock splits. And he
19 was very useful in sort of organizing the way we built our
20 charts. I was going to mention his name. So, have I given
21 you a thorough answer here?
22 BY MR. DUNBAR:
23 Q Did you have a name for this program?
24 A Let's see, we called it the Base Plate.
25 Q Did you make any other programs?
Page 169
1 A No, this had some evolution, you know, over the
2 years. It's now quite a bit more complex than it was in
3 1986-87.
4 Q Do you currently use it?
5 A I do.
6 Q And you said you found a programmer. Who is the
7 programmer?
8 A His name is Jeff Donovan. I believe you have his
9 name under one of my independent contractors.
10 Q Does he still do work for you?
11 A He still does do -- yes, he maintains the program
12 for me.
13 Q And I also want to go back to the Mindful Partners
14 account in San Rafael. When was that account opened?
15 A Three or four years ago.
16 Q And what was the purpose of that account?
17 A I had heard that Mr. Ruddick was a good money
18 manager.
19 Q I am sorry, who is this?
20 A Stu Ruddick runs it. Stuart Ruddick is the
21 gentleman who runs the account.
22 Q How do you spell his last name?
23 A I think it's R-u-d-d-i-c-k. I heard he was a good
24 manager and opened an account with him.
25 Q And you said about two or three years ago?
Page 170
1 A I think it was in '96 or '97.
2 Q And does he manage the account?
3 A Uh-huh. (Affirmative response.)
4 Q Do you have any say in the --
5 A Un-uh. (Negative response.)
6 Q How much money do you have in that account?
7 A I would think -- it's easy to find out, I just
8 have to call my office and ask. I don't pay too much
9 attention. I think there's about $1,300,000 in it, something
10 like that. Easy to get you the statement if you want it.
11 Q That is okay. And how did you hear of Stu Ruddick?
12 A I don't know exactly. I might have heard of him
13 through one of -- I think he was a friend of one of the
14 people that I met during my experience with EarthLink, I
15 think. Somebody knew him and recommended him.
16 Q And back to the Union Bank accounts, one is the --
17 the 7582 account is strictly for your friends' money?
18 A That's correct.
19 Q And the money that goes into the account, what type
20 -- what money would go into the account?
21 A Deposits from my friends and -- I think that's
22 basically -- that's the bulk of it.
23 Q Would there be any other deposits for any other
24 reasons in that account?
25 MR. BOLTZ: Probably in the liquidation process
Page 171
1 that you are talking about --
2 THE WITNESS: Oh, yeah, yeah, I'm sorry.
3 MR. BOLTZ: --there are other deposits from NAA?
4 THE WITNESS: Yeah, I would put money in -- when
5 liquidations take place money would go into that account to
6 liquidate, definitely.
7 BY MR. DUNBAR:
8 Q From NAA?
9 A Yeah.
10 Q From any other sources?
11 A That's basically it. I'm just trying to -- any
12 other sources, you know. I think from time to time there's
13 been probably a --
14 MR. BOLTZ: Essentially, that is it, or were there
15 others?
16 THE WITNESS: Well, I mean, essentially, if I'm
17 making a liquidation and the money has to be there, it gets
18 there. That's the point.
19 BY MR. DUNBAR:
20 Q Do you ever put money in that account from friends
21 who you do not invest money for?
22 A No.
23 Q And you also mentioned before that if there is a
24 mistake, sometimes money will go back over?
25 A Right, right.
Page 172
1 Q And with the withdrawals, what have you withdrawn
2 the money out of the 7582 account for?
3 A For requests of money and for liquidations.
4 MR. BOLTZ: From the friends?
5 THE WITNESS: From the friends, yeah.
6 BY MR. DUNBAR:
7 Q Do you ever refer to your friends as investors?
8 A Well, I'm not trying to -- I'm happy to use
9 whatever term you think you'd like to use for conversation.
10 I mean, the point here was this account was used to ensure
11 that the records were clear on who was -- you know, that this
12 was not my money.
13 Q I will use whatever term you want to use. It is
14 just a matter of --
15 A I mean, I'm not trying to -- I mean, I used the
16 word friends because that's how I look at it, but if you want
17 to use investors, that's fine.
18 Q Okay, other than money that has been sent out in
19 liquidation to your friends, what other -- any other
20 withdrawals? And the mistake.
21 A That's it, unless you've got a specific question.
22 Q Okay, now, start from the beginning. When -- can
23 you just kind of explain, starting from Meyer, when you first
24 met Meyer -- actually, I believe you said in 1983 you wanted
25 to do a career change. You were currently working full-time
Page 173
1 as a volunteer for the Church of Scientology. You were
2 getting honoraria from some of the people to continue. And
3 then you said you wanted to make a career change. And you
4 met -- then that was in '83, I believe you said -- and then
5 in 1986 you met Robert Duggan.
6 A No, I met him around -- no, I had met him. If i
7 say '86 that's a mistake. If I had the transcript here we
8 could check it carefully, but that's not exactly what
9 occurred.
10 Q Okay, we will start 1983, you said --
11 A I can reprise this for you, if you like.
12 Q Yeah, that is fine.
13 A Okay, very happy to do it. During my time when I
14 was working as a volunteer and as a counselor, I said that I
15 wanted -- I had two young children and I wanted to enhance my
16 income, and I had met Mr. Duggan, who is also a
17 Scientologist. I probably met Mr. Duggan in 1979 or '80, or
18 something like that, I think is what I told you. And then he
19 offered me -- to show me stock market investing. And I
20 probably started doing that in earnest with him in '84 -- not
21 '86, '84. So, if I said '86 it was incorrect. But he had
22 been showing me things probably even a little earlier than
23 that. I don't know, I couldn't give you the exact date. But
24 during that '84 period was the main period.
25 Q Before you met Mr. Duggan had you invested in the
Page 174
1 stock market?
2 A No.
3 Q And in 1983 what was your net worth at that time?
4 A Well, it was probably a negative net worth. I owed
5 my dad the down payment on my house, and my cars were leased
6 or, you know, on payments. I probably had a negative net
7 worth at that time.
8 Q With regards to, like, your bank accounts at that
9 time, how much money did you have in your bank accounts would
10 you estimate?
11 A 20- to $30,000 at the most, something like that --
12 maybe 50-. That depends. I still maintained an account with
13 my mother at that time, I believe. She was helping me out
14 with the rent -- you know, with the house payments.
15 Q And explain your meeting with Mr. Meyer and when
16 that occurred?
17 A Mr. Meyer is a Scientologist. Probably met him in
18 -- well, I knew him already; I've known him for years. We
19 just -- I mean, I've known him since about 1968 or '69. He
20 was an old friend of mine. So, I met him at the Scientology
21 college in England.
22 Q And describe the interaction with him that occurred with
23 regards to investing his money for him.
24 A Mr. Duggan had a pretty good reputation as a very
25 successful stock investor, and I was his apprentice at that
Page 175
1 time; I was working with him. And we had had some success --
2 I'm answering the question, I think -- we had some success in
3 some of the high tech companies that had come out that I
4 could probably remember a couple of the names for you.
5 Q You and he did?
6 A Mr. Duggan and I did, yeah. Mr. Duggan, yes. I
7 did some of the leg work, but I was successful in making some
8 money with him.
9 Q I am sorry, I do not mean to interrupt you, but
10 when you say "with him" did you have an account with hi[m,?]
11 was this in your own account?
12 A Yeah, I gave him my meager amount of money. I
13 actually borrowed some money from my parents to do this.
14 Q To give to Mr. Duggan?
15 A Yeah.
16 Q So, Mr. Duggan invested money for you?
17 A Yes, he had an account for me, yeah. It was -- you
18 know, that's right.
19 Q Okay, I am sorry, go ahead.
20 A Anyway, so I had a very successful, in my mind, run
21 with him and probably made five times on my money in a ve[ry]
22 short period of time. I could give you the names of the
23 companies if I -- I remember two of them.
24 MR. BOLTZ: I think his question, really, is being
25 directing to your establishing a relationship, your
Page 176
1 relationship with Meyer.
2 THE WITNESS: Yeah, I know, but this is -- I'm
3 getting there. I'm not trying to be too roundabout here, but
4 it's important because my association with Mr. Duggan is how
5 Mr. Meyer, who knew both of us, came to me and said -- I
6 think I explained to him what I was doing, and he said I'd
7 like to -- can you help me? I'd like to do that. I'm
8 working as a full-time Scientology counselor, and maybe you
9 can -- maybe I can be part of that. That was, essentially,
10 the conversation.
11 BY MR. DUNBAR:
12 Q And when was this interaction?
13 A Sometime in '85, I think, or late '85.
14 Q Had you already developed the program at this
15 point?
16 A Not completely. It was still under -- it was not
17 really developed; it was developing.
18 MR. BOLTZ: You may need to explain that the Duggan
19 program was more fundamental research.
20 THE WITNESS: Oh, it was completely, utterly,
21 utterly, oh, yeah.
22 MR. BOLTZ: -- as opposed to the technical --
23 THE WITNESS: My little program -- I'm sorry,
24 thanks, Gerry. My computer program was my own development
25 that I developed over, you know, between '83 and '88, or
Page 177
1 whatever, or '87 when it came to sort of fruition. I was
2 completely trained by Mr. Duggan in 100 percent fundamental
3 analysis; no technical at all. In fact, he thought it was
4 hocus pocus, that stuff.
5 BY MR. DUNBAR:
6 Q And how much money did you make with Mr. Duggan?
7 A I think I made a couple hundred thousand dollars on
8 my original investment over a year and a half, something like
9 that.
10 BY MR. MURPHY:
11 Q Was this on using fundamental analysis to pick --
12 A Only, only, only.
13 Q -- like Graham, Dodd, or whatever it is called?
14 A Yeah, exactly. In fact, I have a copy of that
15 book, as a gift from Mr. Duggan, signed by him on the jacket,
16 you know. May you always use this book. And it's pretty --
17 I could show it to you; I got it.
18 Yeah, he -- I don't want to waste your time, but
19 that was all made with visiting companies, talking to the
20 analysts, understanding the industries, doing comparative
21 analysis of companies, P/E ratios, understanding the
22 relationship between the suppliers -- and I remember one of
23 the companies was called Tandon Corporation. It was out here
24 in the Valley. They made disk drives for computers. At that
25 time it was a pretty exciting business. And we came down to
Page 178
1 visit him several times and learned about how those drives
2 were made and what the gross margins were for the business
3 and what the number of units they were selling. I remember,
4 it's all coming back to me now. They had a big contract
5 coming with IBM, and would IBM, who was just getting into the
6 PC business, would they really use their drives as opposed to
7 somebody else's. And this was all very exciting, you know,
8 and it turned out they did, and the stock went from $7 to $30
9 over a very short period of time.
10 And another company we invested in was called Dysan
11 Corporation. A gentleman who ran that company was a
12 wonderful guy. I can't think of his name right now. And
13 they made the five and a quarter inch floppy drives. And we
14 would go up and visit him, and he had some other -- so, that
15 was most of my work with Mr. Duggan; in fact, all of my work
16 was in fundamentals at the time.
17 BY MR. DUNBAR:
18 Q So, you met Meyer in '85. He said he would like to
19 get in on this. And how much money did he give you?
20 A I don't recall.
21 Q Can you give an estimate?
22 A I can probably give you a range. It was probably
23 $10,000 maybe.
24 Q And when he gave you this what exactly did you do
25 with the $10,000 -- like where did you put it?
Page 179
1 A Well, at the time I -- I'm going to guess. I
2 don't recall exactly. I just know that it was in a --
3 probably it was put in a brokerage account.
4 Q Can you recall which one?
5 A It was probably one I maintained at the time. I
6 don't know where it was.
7 Q And did you have any sort of arrangement with Mr.
8 Meyer? Did you guys discuss how you would invest the money,
9 or where it would be, or --
10 A Yeah, we invented a word called piggyback.
11 Q And how did you keep his money separate; or, like
12 how did you know which -- how did you guys work out that?
13 A Well, when I bought shares of a certain stock I
14 bought shares for him and kept a record of it.
15 Q Would you tell him?
16 A Yes, yes.
17 Q Did he ever receive any statements of any sort?
18 A I think not at the very beginning, but eventually,
19 yes, yes.
20 Q So, while Meyer had money invested the first couple
21 of months, years?
22 A Well, let me see how to answer this. At a certain
23 point in time, and I don't know the exact date, it became
24 apparent to me that it was very good for me to keep extremely
25 accurate records of what was going on here. And, therefore,
Page 180
1 I made sure that on a monthly -- or it might have been
2 monthly even -- I made sure that he received a letter from me
3 giving him the information about the money that he had given
4 me, and where it was, and how much it had grown, or what it
5 was comprised of.
6 Q And when you came to this point was Meyer the only
7 one with money invested with you?
8 A No.
9 Q When you came to this realization how many others
10 were invested with you?
11 A I would say there were -- well, a dozen or less.
12 That's a guess.
13 Q And why did you start to think this?
14 A Well, when you say why do I think I should keep
15 this special record, the separate record?
16 Q Yeah, when you said you realized it was important
17 for you to keep the --
18 A Right. Well, I mean the obvious answer is that,
19 you know, it's people's money. You know, they want to know
20 what's going on with their money. And I wasn't -- didn't
21 consider myself to be a stock broker or a manager
22 particularly. This was just helping my friends at the time.
23 But the impact that I seemed to be having on these people was
24 extraordinary to me. Do you want me to explain that?
25 MR. BOLTZ: Be sure you answer the question while
Page 181
1 you are doing it. In other words, as to why you decided --
2 THE WITNESS: Because I wanted to ensure that I
3 distinguished what was theirs and what was happening to it.
4 It just seemed to be appropriate to do that. I mean,
5 sometimes you ask a question and it's like a long,
6 philosophical answer. He's going to kill me for doing that,
7 but I'm not trying to do that. It's not so simple.
8 MR. BOLTZ: You are not in danger.
9 THE WITNESS: I mean, look, you asked me how I went
10 about that. You know, that's kind of a -- that's a big
11 question.
12 MR. DUNBAR: Correct.
13 THE WITNESS: I thought it was very important to
14 keep the records separate. That was the answer.
15 BY MR. DUNBAR:
16 Q And how did you implement this, then? When did you
17 -- how did you make the records?
18 A Well, there were particular purchases and sales
19 made on behalf of this person and I reported those.
20 Q And how did you report them?
21 A On a piece of paper.
22 Q I mean, you can be totally detailed on this one if
23 you want. It is a matter of -- so, you buy a stock. And
24 would you decide -- how would you decide out of these twelve
25 people who would it go to?
Page 182
1 A It was a percentage issue for me.
2 Q Can you explain that, please?
3 A Well, I had learned that, you know -- I was
4 operating on a sort of a 5 percent of the investable capital
5 for a position. Not clear?
6 Q Why don't you explain that for me?
7 A Well, if you have $1,000 or you have $10,000, in
8 order to keep -- for safety purposes you wouldn't put more
9 than 5 percent of that money in one position. Is that clear?
10 Q No, it makes sense.
11 A Yeah, that was my guideline, I guess.
12 Q Guideline with their money?
13 A Yes. My own money too.
14 Q So, in any one stock they will not have more than 5
15 percent?
16 A Well, if they went up in value sometimes they would
17 have more than 5 percent, but my initial idea was to have,
18 you know, 5 percent.
19 Q But would you buy -- you know, let's say you had [?]
20 would you buy just a big chunk of stock and then allocate [?]
21 to their accounts or how did that work?
22 A I figured out exactly how many shares it would take
23 to make sure that those ratios were kept in tact.
24 Q And would you invest your own money too, or wou[ld]
25 you pool their money and invest in the stock?
Page 183
1 A I'm not sure I understand.
2 Q Well, let me try to be clear on this. We are
3 talking at the point where you decided it was important to
4 keep records, which do you have an estimate of when tha[t]
5 was?
6 A Eighty-five. I mean, pretty much -- it would be
7 prior to '86. I mean, it was pretty much immediate. I mean,
8 once you had somebody else's money it was important.
9 Q And when you decided it was important to keep th[ese?]
10 accurate records is this pretty much the same time you o[pened?]
11 up the 7582 account?
12 A I'm not really clear. I was thinking about that,
13 since you asked me that last time, and I wasn't -- I don't
14 remember exactly when I opened that.
15 Q Well, what about the NAA Financial Account?
16 A That came a few years later.
17 Q After the Union Bank account?
18 A Yes
19 Q So, before NAA Financial which brokerage house[s were?]
20 you using for your friends' money?
21 A I believe there were two -- to the best of my
22 recollection, Merrill Lynch and Hambrecht & Quist.
23 Q Were these your own personal accounts at the tim[e?]
24 A Yes.
25 Q And did you have money in these accounts at the
Page 184
1 time?
2 A Yes.
3 Q Your own personal money in these accounts at the
4 time?
5 A Yes.
6 Q And were all the friends' money in just particular
7 one account in Merrill Lynch and one account in Hambrecht &
8 Quist?
9 A That's all I had, yes.
10 Q Did you differentiate if one person's money -- like
11 if somebody had asked you, if Meyer had asked you "Where is
12 my money?" would you have been able to say "Merrill Lynch" or
13 "Hambrecht & Quist"?
14 A Yes.
15 Q Why did you differentiate between two accounts?
16 A I don't think I did. You said "or"; I guess I took
17 that as "and/or".
18 Q What do you mean by that?
19 A Well, it was in one of those accounts, or both, at
20 the time, depending on where the stock was being held.
21 Q An individual person's money?
22 A Uh-huh. (Affirmative response.)
23 Q So, they could have had money in Merrill Lynch and
24 Hambrecht & Quist?
25 A Yes. If we bought one stock at Hambrecht & Quist
Page 185
1 and bought one at Merrill Lynch, their portion of each one of
2 those stocks would be held at whichever firm had that
3 particular stock.
4 Q So, at this time when you had twelve or less, when
5 you decided it was important to keep the accurate records --
6 we will go back in a minute -- if you bought a stock would
7 that stock be for everyone at that time? Let's say you would
8 buy -- you would figure out what would be 5 percent of each
9 person's holdings?
10 A I cannot say that it was 100 percent every single
11 time.
12 MR. BOLTZ: 100 percent what?
13 THE WITNESS: I'm sorry.
14 MR. BOLTZ: I am not sure I understood your
15 question.
16 THE WITNESS: I actually do understand the
17 question. I do understand.
18 MR. BOLTZ: Well, he is asking you, if you
19 allocated it how did you allocate it?
20 THE WITNESS: Right, right.
21 MR. BOLTZ: I think. I do not mean to misstate
22 your question, but --
23 MR. DUNBAR: No, no, it is actually better than I
24 said it.
25 THE WITNESS: And I actually understand exactly
Page 186
1 where you're going here too. So, I'm trying to just be
2 helpful, because we're all going to the same place here, but
3 we'll go the proper way, so no problem. All right, okay, to
4 answer the last question you asked me, I did not buy every
5 stock that I bought for my friends. I believe that was the
6 question you asked me.
7 BY MR. DUNBAR:
8 Q Yes. How did you decide which stocks were for your
9 friends and which stocks were for you?
10 A I bought the ones that I knew best for my friends.
11 Q And how would you record that?
12 A Record that. I had a file with each person's name
13 on it and recorded it in their file.
14 Q Would you notify them when you purchased a stock
15 for them?
16 A Sometimes.
17 Q Percentage-wise, would you notify them 50 percent
18 of the time?
19 A Less than that.
20 Q 30 percent of the time?
21 A Probably less than that.
22 Q 10 percent of the time?
23 A Maybe. I mean, I don't recall exactly. It wasn't
24 very often.
25 Q And when I say notify does that mean -- I mean, you
Page 187
1 would call them?
2 A Yeah. Yes, I would call them.
3 Q Would you, you know; send them a letter?
4 A No.
5 Q Were these people receiving statements as well at
6 this time?
7 A At some point they started -- I started to make
8 sure that they were, as I said earlier, getting a statement
9 from me.
10 Q And what did the statement entail?
11 A Purchases, sales and value.
12 Q When you say purchases, those are the stocks you
13 purchased for them?
14 A Right.
15 Q With the name of the stock?
16 A Right.
17 Q And the purchase amount?
18 A Right.
19 Q Would you include current holdings; would that
20 entail purchases -- purchases and not sales? Like you said
21 if there are purchases, like what stocks they purchased that
22 month, let's say.
23 A Okay.
24 Q The sales would be all the sales that they did that
25 month?
Page 188
1 A Right.
2 Q So, they actually saw all the stocks that they held
3 in their account at any one time?
4 A That's correct.
5 Q Would you ever notify them when you purchased
6 stocks in the account that were for you?
7 A No.
8 Q And at this time you said you had the Merrill Lynch
9 and the Hambrecht & Quist account. Did you have any other
10 personal brokerage accounts?
11 A I believe I had one at Pershing as well. It might
12 have been called Wedbush. I don't remember which way it was
13 in those days. They eventually became one, didn't they, or
14 something? I don't recall.
15 Q Pershing?
16 A I don't know. It might have been Wedbush. But
17 Pershing was the clearing firm. I can't recall exactly.
18 Q But you might have another one?
19 A Yeah, I'm pretty sure I did.
20 Q Just background again, we kind of -- we somewhat
21 skipped between Meyer and the twelve. And at the point when
22 you said it was important to keep accurate records, which was
23 about '85, '86, and Meyer was in '85. So, within that year
24 you increased the number of friends who were investing money
25 with you; and describe how that occurred.
Page 189
1 A Mr. Meyer -- I'll give you a very simple example.
2 I was having dinner with a friend, a fellow church member. I
3 was describing what I was doing for myself and how excited I
4 was about it. And he asked me to help him in a similar way.
5 Q Who was this?
6 A I don't know the -- this particular person?
7 Q Yes.
8 A His name is Anthony Hitchman.
9 Q And when you said you described what you were doing
10 for yourself, what do you mean by that?
11 A I told him I was working with Bob Duggan and that I
12 was enjoying what I was doing, that I was finally getting to
13 be very helpful for making money.
14 Q Did you mention Meyer?
15 A Did I mention him? I might have. I don't know for
16 sure.
17 Q So, throughout that year more people found out that
18 you were doing well in the market and wanted a piece of the
19 action?
20 A That's a fair description.
21 Q And at this point --
22 BY MR. MURPHY:
23 Q Could I ask, was that from word of mouth -- you
24 know, your meeting with these people socially -- or was it from
25 the other investors, other friends of yours talking?
Page 190
1 A Thank you. I mean, that's the question we want to
2 answer here, so let's answer it. I did not actively promote
3 what I was doing. You know, I was alive, when people asked me
4 what I was doing with my life. I was not looking for anybod[y]
5 to do this for. The people that I did it for seemed
6 appropriate when they asked me because of what they were
7 doing relative to the church. And they might have talked
8 together, but I didn't make those connections myself.
9 BY MR. DUNBAR:
10 Q And during this time period -- I am trying to limit
11 it to, you know, when you first met Meyer, and he first g[ave?]
12 you money in '85, to this time when you had probably b[?]
13 twelve or less investors and decided that it was importan[t to]
14 keep statements -- what were the profits like during that
15 time for your friends and for yourself?
16 A I believe -- I could go back and get it for you,
17 but I believe those first couple of years we were -- I'm
18 talking about Bob Duggan and I now; I'm not talking about
19 anybody else -- we probably had a couple of two or three 100
20 percent years.
21 Q Which brought you up to a couple hundred thousa[nd]
22 dollars, you said?
23 A Yeah. They were pretty amazing.
24 Q When did you and Bob Duggan sort of split?
25 A I believe it was in early '86 -- late '85 or early
Page 191
1 '86. But "split" is not really the right word. I guess I'm
2 not -- I wasn't clear. I mean, I think I stopped working
3 directly with him at that time. We still worked on companies
4 together in an informal manner after that for many years.
5 Q Did he ever compensate you for any work you did [for?]
6 him?
7 A Yeah.
8 Q And how much did he compensate you?
9 A Plane tickets, hotel rooms, rent-a-cars, meals,
10 good advice -- really good advice. And he was very good at
11 that.
12 Q Did he give you any monetary compensation?
13 A No.
14 Q So, we are at the point now where you are starting
15 to keep records. You have got about twelve people. And [you?]
16 think you are sending out, you said, monthly statements [at?]]
17 this point, possibly?
18 A Yes.
19 Q And yearly statements?
20 A I didn't get that.
21 Q And yearly statements or just monthly statements[?]
22 A I believe just monthly, and there was a synopsis at
23 the end of the year of tax information relative to purchases
24 and sales -- cost basis and proceeds and dates of purchase
25 and dates of sale.
Page 192
1 Q So at this time, '85, '86, did you have anybody
2 helping you with the administration of these people's money?
3 A Ms. Rogers was working for me at the time, relative
4 to keeping records of money and doing the reconciliations of
5 the brokerage accounts. I, personally, was providing the
6 monthly communication.
7 Q And when did you hire Ms. Rogers?
8 A 1981 or 2. She was a -- she worked for me for a
9 few hours a day when I was in my -- doing my counseling --
10 answering the phone and keeping track of the people that I
11 was working with; office, general office stuff.
12 Q And why did you hire her?
13 A Well, at the time I needed help to keep track of,
14 you know, basic files and --
15 Q In 1981?
16 A Yeah, yeah.
17 Q Did you compensate her?
18 A Oh, yeah, I did.
19 Q Now, let me just review. In '81 you were still
20 receiving honoraria, right?
21 A Right, right. And I had her come in a couple hours
22 a week to kind of get things in order, and I'd pay her for
23 that.
24 Q And what things would she get in order?
25 A Mail.
Page 193
1 Q Your personal mail?
2 A No, we had a lot of interaction with the church and
3 there was a lot of communication back and forth. I think she
4 probably -- I asked her to balance my check book. And I
5 think she came in a few hours a week. That's how it started.
6 Q And then when you started helping with your
7 friends' money when did she get involved with that; at the
8 same time?
9 A Well, I think that by that point she was -- once I
10 started working with Mr. Duggan, I had asked her to come in
11 and reconcile the brokerage statements and the bank
12 statements for me.
13 Q And at the time when you started sending our
14 records, '85, '86, how much money did you have under
15 management of your friends' money?
16 A Well, I'm guessing, but at the end of '86 it was
17 probably 7 or $8 million by then.
18 Q And how much of that seven or eight million would
19 you say would be -- was profit at the end of '86.
20 A I would not be able to tell you exactly, but it was
21 a substantial portion of it.
22 Q Can you recall how much they gave you -- each of
23 them individually gave you -- to invest? You said Meyer was
24 approximately $10,000?
25 A Yes, and then he added more to that. It seemed --
Page 194
1 or I can't remember the names of all these people exactly,
2 although I could go back and get them -- but there seemed to
3 be some money, and then some more money would come and some
4 more money would come and some more money would come. So, I
5 don't know exactly the numbers, but it grew pretty quickly.
6 I do remember that there was one stock that really went up
7 quite a bit that we all owned. It was very exciting at the
8 time.
9 Q Do you recall what stock that was?
10 A It was Apple Computer.
11 Q So, at the end of '86, '85, when you started to do
12 these records, how much did you have, would you say,
13 personally, in your accounts?
14 A I believe personally I probably got up to about
15 $1,500,000 of my own capital due to these gains. Yes, that's
16 the answer to your question.
17 Q At this time did these people compensate you in any
18 way?
19 A No.
20 Q Did they give you any gifts?
21 A I don't believe so, not those days.
22 Q So, now let's go from you started doing the records
23 to the switching of accounts. And that was a year
24 difference?
25 A I don't remember exactly. I wish I could give it
Page 195
1 to you exactly. I don't know. I could be off by months in
2 here too, you know. That's a long time ago.
3 Q Yeah, I understand. But, you know, your best
4 estimate?
5 A Switch accounts, what do you mean by that?
6 Q When you went to -- you moved the friends' money to
7 the NAA Financial account?
8 A Right. That was in '87, I believe, late '87.
9 Q And, I'm sorry, just to recall it, and the Union
10 Bank friends account came in '86, or before this?
11 A I think so. I mean, I would have to go back and
12 check. I don't know, I'm sorry. I don't know exactly when
13 it came into being. I could find out, I think.
14 Q So, before the Union Bank account, with the friends
15 account, when they gave you money would it go straight to one
16 of the brokerage houses?
17 A Or to the bank.
18 Q Or to your personal account, and then you would
19 send the money out?
20 A Right. You see, I have a letter that I was -- I
21 made a decision that I wouldn't take these people's money at
22 all unless I had an agreement with them. And this agreement
23 was -- I think it's obviously there for the protection. You
24 know, someone gives you money and you have their money,
25 there's some record that they gave it to you, you know what I
Page 196
1 mean? But the agreement specifically stated, and it always
2 stated, that the funds could be placed in my name or other
3 names that I would choose. So, that was the agreement that
4 we had. I think you've seen a sample of that. And everybody
5 who gave me money had that agreement signed at the time they
6 gave me the money.
7 Q I would like to hand you what has been marked as
8 Exhibit Number 5, with your heading letter dating: "Dear
9 _____, you have asked me to do you a favor and invest some of
10 your money as a friend..." Is this the letter you were
11 referring to?
12 A Yes.
13 Q And did you draft this letter?
14 A I did not draft this letter.
15 Q Who drafted this letter?
16 A I'm trying to remember. It was drafted by a friend
17 of mine who was an attorney.
18 Q And what was his name?
19 A His name was Dan Lang.
20 Q And when was this letter drafted?
21 A I think originally in '85.
22 Q Was Meyer the first one to receive it?
23 A I think so.
24 Q And why did you have this letter drafted?
25 A Well, I think I was advised by him that it was
Page 197
1 important to have an agreement in writing about the
2 arrangement that I had with these individuals.
3 Q Did anybody ever have a problem signing this?
4 A No. Maybe you could ask that in a little different
5 way.
6 Q Actually, yeah, did -- well, did they sign this?
7 A Yes. That's the answer.
8 Q Has this letter changed over time?
9 A I think that the fourth paragraph may have changed
10 from "calendar quarter"; I think we said "monthly" originally
11 and changed it to "calendar quarter". I think that was one
12 change. That's about it.
13 Q And everyone who invested money with you, did they
14 sign one of these?
15 A Yes.
16 Q Did anybody refuse to sign one?
17 A Well, if they did I wouldn't invest their money.
18 Q Did anybody refuse to sign one and you --
19 A I don't recall that. You have to understand that I
20 was being requested here. I wasn't soliciting. Someone
21 would say to me: Will you do this? And I'd say, well,
22 depending on who they were relative to their activities in
23 the church, I would say, okay, if that's what we're going to
24 do this is what we -- this is our agreement.
25 Q When you would give them this agreement, would any
Page 198
1 of them ever ask when -- did they ever ask specifics, whe[re]
2 was my money going to be put or what brokerage?
3 A I'm going to use the bathroom and then answer that
4 question, if it's okay with you. I've been holding on for
5 dear life, here.
6 MR. DUNBAR: Off the record.
7 (Whereupon, a brief recess was taken.)
8 MR. DUNBAR: Back on the record at 11:26. I
9 believe there was a question pending.
10 MR. BOLTZ: I am not sure what it was. Do you
11 remember?
12 THE WITNESS: It was --
13 MR. BOLTZ: Well, he could read it, I suppose, if
14 you -- we do not have to guess.
15 THE WITNESS: Yeah, we could play it back because [I]
16 don't remember.
17 MR. BOLTZ: That is why we have a record.
18 THE WITNESS: I remember it, that's okay, go ahead.
19 BY MR. DUNBAR:
20 Q Back to Exhibit Number 5 briefly, did your friends
21 receive these when they added to their account?
22 A Not as a rule.
23 Q But sometimes?
24 A Sometimes.
25 Q And why is that?
Page 199
1 A I think in the early days I did it just as a matter
2 of course, and then was advised it wasn't necessary.
3 Q Who were you advised by?
4 A Mr. Lang.
5 Q How long did you do that for? How long did you
6 send subsequent letters?
7 A I don't know. I don't know how long.
8 BY MR. MURPHY:
9 Q Would every investor sign a letter like Exhibit 5,
10 you know, the dates of statements?
11 A Yes.
12 MR. BOLTZ: We are going to be producing those,
13 hopefully, by Friday. There is a lot of copying but we are -
14 -
15 THE WITNESS: We're going back in the files. It's
16 going to be a lot of copying going on here. You'll have
17 them.
18 BY MR. DUNBAR:
19 Q Okay, I believe we are at 1987 -- I know it is a
20 while back -- 1987, moved to NAA Financial, the accounts wer[e]
21 moved; or you opened the NAA Financial account in '87,
22 approximately.
23 A Yes.
24 Q And when you opened that, I believe you said last
25 time that you opened that account for the purposes of keeping
Page 200
1 the friends account separate?
2 A Yes.
3 Q Now, when you did open that account how did you
4 transfer the money?
5 A I believe I said in my last testimony by bank wire.
6 Q From Hambrecht & Quist?
7 A I think it came from various sources at the time,
8 wherever the money was being held.
9 Q And what were those various sources?
10 A It would be the brokerage accounts and bank
11 accounts at the time.
12 Q When you say bank accounts --
13 A Oh, bank account. I mean, I don't remember
14 specifically.
15 Q And how did you know which was investor money that
16 you transferred over?
17 A We had a very clear accounting of what belonged to
18 the other people.
19 Q And these were in the records that you kept?
20 A Yes.
21 Q And where did you store these records?
22 A They were -- we had -- each person had a file, and
23 it was in a file cabinet.
24 Q At your house?
25 A In my office.
Page 201
1 Q Kellogg?
2 A Yeah.
3 Q And at this time, when the accounts were moved, did
4 you maintain a list of the investors?
5 A Yes.
6 Q I am now showing you what has been marked
7 previously as Exhibit Number 4. And I believe you saw this
8 document last time.
9 A We did.
10 Q And, once again, what is this document?
11 A This is a list of -- I think this is the answers to
12 the questions on the subpoena of current people that have
13 accounts, '87 to -- or '97 to current.
14 Q And when you just mentioned, you said you
15 maintained a list of your friends who had invested money with
16 you, is this similar to the list that you maintained at that
17 time?
18 A Yes, yes. Well, I mean, it wouldn't be in this
19 exact form. You say similar; what does that mean?
20 MR. BOLTZ: It would be similar in size.
21 THE WITNESS: Oh, no, not at all.
22 BY MR. DUNBAR:
23 Q Well, format, format-wise?
24 A Yeah, that's what I thought you meant. Maybe. I
25 think -- it might have been handwritten.
Page 202
1 Q And throughout the years have you consistently
2 maintained a list of your friends who --
3 A Yes.
4 Q For the purposes of keeping -- of knowing who has
5 money invested?
6 A Yes.
7 Q Is there any reason you would keep an investor off
8 the list?
9 A No.
10 Q Did any of your friends who invested money, would
11 they ever request to see the list?
12 A No.
13 Q Did any investor ever ask you if other people were
14 doing this, other than what they knew? Did they ever ask you
15 how many people were involved?
16 A Yes.
17 Q Do you recall who?
18 A Who asked me that?
19 Q Yeah.
20 A I don't recall specifically.
21 Q But people have asked you that?
22 A Yes.
23 Q Ten, over ten?
24 A I -- rarely, I don't know.
25 Q And would you tell them?
Page 203
1 A If I was asked, yes.
2 Q Did anybody ever ask you where their money was
3 held, what accounts?
4 A Yes.
5 Q Do you recall who?
6 A Not exactly.
7 Q Do you recall the last time you were asked that?
8 A Certainly in the last few years, for sure.
9 Q And what do you tell them?
10 A I told them it was held in accounts -- banks and
11 brokerage houses -- in my name.
12 Q Did you ever tell them specifics?
13 A Ever? I don't recall exactly.
14 Q Since '87, did you ever tell an investor their
15 money was held in NAA Financial?
16 A Did you ever tell an investor that their money was
17 held in a Union Bank account?
18 Q Well, that is where the money was sent, so I assume
19 they would assume that.
20 MR. BOLTZ: But that is not the question.
21 THE WITNESS: Yeah, I'm sorry.
22 MR. BOLTZ: I mean, they may know, because they
23 might have got the check or a deposit --
24 MR. DUNBAR: Right, did you ever tell them?
25 THE WITNESS: No, I didn't directly.
Page 204
1 MR. BOLTZ: Listen to the question.
2 THE WITNESS: Yeah.
3 BY MR. DUNBAR:
4 Q Who manages each individual friends account? Do
5 you manage their accounts? When they send money are you
6 solely in charge of that money?
7 A I'm clarifying the question. Do you mean in
8 regards to which stocks go into it?
9 Q Yes.
10 A Yes, that's my decision.
11 Q Anybody else?
12 A No.
13 Q Does the friend have any say in what they want you
14 to invest in?
15 A No.
16 Q Have you ever had someone call you up and say --
17 request you to invest in a particular stock?
18 A Yes.
19 Q How often does that happen?
20 A Very rarely.
21 Q Do you recall the last time that happened?
22 A No.
23 Q Do you recall who it was?
24 A Not -- I'm not sure.
25 Q Do you recall why they did that?
Page 205
1 A Yes.
2 Q What was the reason?
3 A I heard -- they said I heard this is a really good
4 stock. I want you to buy this for me.
5 Q And did you?
6 A No.
7 Q Did you tell them why?
8 A Yes.
9 Q And what did you tell them?
10 A I said that the research that I did on the stocks
11 defined the ones that I would buy, and if I hadn't done the
12 research on the stock I didn't feel comfortable owning it.
13 Q Going back to Exhibit Number 4, the list -- well,
14 does Ms. Janu invest money with you?
15 A Ms. Janu has an account.
16 Q With you?
17 A Yes.
18 Q And her name is not on this list.
19 A Right.
20 Q What is the reason for that?
21 A We went over that last time, that we gave you the
22 list of the people who were independent contractors. I think
23 there's a couple or three that we didn't get onto that list.
24 It's not that they're kept off the list, but they are sort of
25 separate, in a sense, in how they're classified.
Page 206
1 Q So, that would include Ms. Janu and who else?
2 A Mr. McMullin and his mother.
3 Q And his mother, oh.
4 A I think they're on the list, I believe they are,
5 Rubinstein.
6 Q Joanne Rubinstein?
7 A Yeah, I think it's on there. If it's not, you
8 know, it might --
9 Q She is not, unless I am looking in the wrong pl[ace.]
10 A All right, well, I'm not sure. It just may not be
11 on there.
12 Q And why are they kept off the list?
13 A I don't think they're kept off the list. I just
14 think we -- just because they're -- I don't know the answe[r.]
15 I would have to say they should be on it. I just don't kno[w]
16 why they wouldn't be. They are on it, but for some reaso[n]
17 when this list was printed they weren't on it. I don't kno[w]
18 why.
19 Q Okay. Would there be any other reason someb[ody]
20 would not be on this list?
21 A It's possible. It's a possibility.
22 Q Do you know for what reason they would --
23 A I don't -- I just -- I'm saying that because I'm
24 not 100 percent sure, but the fact that there may be anoth[er]
25 reason why somebody is not on the list. It's possible.
Page 207
1 MR. BOLTZ: But do you know of anybody else that is
2 not on the list?
3 THE WITNESS: Not off the top of my head, I don't.
4 MR. BOLTZ: That you -- which is the list of
5 current investors?
6 THE WITNESS: Right. They're -- the answer to your
7 question is I don't know why someone else wouldn't be on it,
8 but it's possible.
9 BY MR. DUNBAR:
10 Q And where is this list maintained?
11 A Ms. Janu's office.
12 Q Who maintains it?
13 A She does.
14 Q Does she maintain it with your assistance?
15 A I don't know what you mean.
16 Q How does she know when to put a name on the list?
17 A When we had somebody new come in she was informe[d.]
18 Q By who?
19 A By me.
20 Q Would she put a name on the list for any other
21 reason? Would she get a letter directly to her?
22 A I don't know what to say. I mean, I don't know if
23 procedurally, that maybe if I was out of town, or something,
24 and then one of the investor letters came back in; it was
25 sent over to her so she would know that it occurred. She
Page 208
1 certainly had, you know, knowledge at that point.
2 BY MR. MURPHY:
3 Q Can I ask a question. The list, Exhibit 4, is a
4 list of all the friends that invested excluding some
5 categories; would that be fair?
6 A Well, I don't think it excludes any categories. I
7 just don't know how to answer the question of exactly why
8 those people, Janu and Rubinstein, wasn't on there.
9 MR. BOLTZ: Who prepared the list?
10 THE WITNESS: Jean did.
11 MR. BOLTZ: All right, so maybe she could answer
12 that question.
13 THE WITNESS: Yeah, maybe she can answer that
14 question for you.
15 MR. BOLTZ: But, to your knowledge, anyone other
16 than the three people -- the independent contractors,
17 McMullin, Rubinstein, his mother, and Janu -- to your
18 knowledge, is there anyone else --
19 THE WITNESS: I'm not aware.
20 MR. BOLTZ: -- that is not on the list?
21 THE WITNESS: I'm not aware who else might be left
22 off; I don't know.
23 BY MR. MURPHY:
24 Q I was wondering, is there another category of, you
25 know, people who --
Page 209
1 A Well, what I thought of when you asked the question
2 -- and I would just make it brief -- is if somebody was new
3 the list might be incomplete, because it's missing somebody
4 who is new, okay.
5 Q Oh, they have not yet got into the process?
6 A They haven't quite got into the process. That's
7 what I was thinking when you asked me that originally. That
8 would be classified as a new person.
9 MR. BOLTZ: And I think we supplied two lists, one
10 the current, and then didn't we -- there was closed accounts.
11 THE WITNESS: Right. We gave you a list of all the
12 closed accounts too.
13 MR. DUNBAR: A list?
14 THE WITNESS: Yes, we did.
15 MR. BOLTZ: Gave you list or did we give the
16 statements?
17 THE WITNESS: Both.
18 MR. BOLTZ: I think that is right.
19 THE WITNESS: If it wasn't a list we simply sent
20 you all the closed account statements.
21 BY MR. DUNBAR:
22 Q Right. So, we are now at the point where all the -
23 - where NAA Financial opened; money has gone into NAA
24 Financial, or the stocks and money -- or was it just pure
25 stocks that you got transferred to NAA Financial?
Page 210
1 A And money both.
2 Q And money both?
3 A Yeah.
4 Q And, so, now with NAA Financial, since '87 that's
5 been strictly reserved for friends' monies?
6 A Yes.
7 Q Do you have any of your own money in there?
8 A Within the assets of NAA I have some money too.
9 Q And how do you -- what money is that?
10 A It's all in my name there. So, there is some money
11 there that belongs to me.
12 Q And how do you know it belongs to you?
13 A They have a -- well, how do I say this? It's --
14 MR. BOLTZ: They keep it segregated?
15 THE WITNESS: They keep it segregated. That's the
16 best way to say it.
17 BY MR. DUNBAR:
18 Q Who keeps it segregated?
19 A NAA.
20 Q How do they segregate it; how do they keep it
21 segregated? Did you receive two statements?
22 A Well -- I just want to refer with him just for one
23 second on this.
24 MR. DUNBAR: Okay, off the record.
25 (Whereupon, a brief recess was taken.)
Page 211
1 MR. DUNBAR: Back on the record.
2 THE WITNESS: They segregate the funds and I get a
3 statement of what's mine from them.
4 BY MR. DUNBAR:
5 Q Is it a separate statement?
6 A Yes.
7 Q Is it a separate statement from what you produced
8 to us?
9 A Yes.
10 Q Is it possible for us to receive those documents?
11 A Yes.
12 Q And do they actually separate it or is it two
14 separate accounts?
15 A They separate it by account.
15 MR. BOLTZ: Well, it is two separate accounts.
16 THE WITNESS: Two separate accounts, but as far --
17 I don't know how they do it internally.
18 BY MR. DUNBAR:
19 Q So, within NAA Financial you have two accounts?
20 A Right.
21 Q Any more than those two accounts?
22 A There's two accounts.
23 Q And one of them is your personal account?
24 A Uh-huh. (Affirmative response.)
25 Q And one of them is your friends account?
Page 212
1 A Yes.
2 Q And with regards to the two accounts, do you know
3 the account numbers?
4 A I will get them for you.
5 Q So, let's discuss your friends account first. Do
6 you have any money, personal money, in that account?
7 A No.
8 MR. BOLTZ: Have you ever?
9 THE WITNESS: Have I ever?
10 MR. BOLTZ: Yeah.
11 THE WITNESS: No.
12 BY MR. DUNBAR:
13 Q And in your personal account, how long have you had
14 that account?
15 A Pretty much same time frame, not exactly but --
16 Q Within the year?
17 A Within the year, yeah.
18 Q And how much money do you currently have in that
19 account; or what is the value of that account?
20 A It's -- exactly I don't know, but it's several
21 hundred million dollars.
22 Q Several? Is it --
23 A Three.
24 Q Three hundred. And are those statements sent to
25 your -- sent to you?
Page 213
1 A Yeah.
2 Q Does anybody else see those statements?
3 A No.
4 Q Do you have anybody consolidate those brokerage
5 statements?
6 A Consolidate those brokerage statements.
7 Q Well, I believe you mentioned Ms. Rogers sometimes
8 will take a brokerage statement --
9 A Right. She does not operate -- she does not do
10 these.
11 Q So, do you receive two separate statements?
12 A Right.
13 Q Do you ever transfer money between these two
14 accounts in the NAA Financial?
15 A Transfer?
16 Q Have you ever switched money from one account to
17 the other for any reason?
18 A Can I check with him just for a second?
19 MR. DUNBAR: Sure, off the record.
20 (Whereupon, a brief recess was taken.)
21 MR. DUNBAR: Back on the record.
22 THE WITNESS: We've used the domestic accounts that
23 we have to accommodate our requests for money in and out from
24 the friends accounts. And when necessary, if there has been
25 a change from the domestic accounts and there has to be an
Page 214
1 adjustment to make that changeover, we'll make that
2 adjustment over there.
3 BY MR. DUNBAR:
4 Q Would you explain, like, when you would do an
5 adjustment?
6 A Well, for example, if I sent somebody some money
7 from here, it would go into the Union Bank account, sent to
8 them. But it came from a domestic account of mine, then I'd
9 make the adjustment over there.
10 MR. BOLTZ: I think it needs to be clarified a
11 little bit more. In other words, if there were -- in order
12 to make a -- to accommodate a withdrawal, for example --
13 THE WITNESS: Right.
14 MR. BOLTZ: -- additional money were needed from
15 the money that is in the Union Bank account of the friends.
16 You would transfer money from one of your personal brokerage
17 account accounts --
18 THE WITNESS: Right.
19 MR. DUNBAR: Domestic.
20 MR. BOLTZ: Domestic. And that would be your
21 personal money. And then, in order to keep the record
22 straight, because that money was going to the friends, you
23 would make an appropriate -- or direct NAA to make an
24 appropriate adjustment, accounting adjustment, from the NAA
25 friends account to your personal account; is that correct?
Page 215
1 THE WITNESS: Right, that's correct.
2 MR. BOLTZ: And would that be the only occasion
3 that you would --
4 THE WITNESS: That's the only time.
5 BY MR. DUNBAR:
6 Q And how often does that occur? About how many
7 times a yea -- twenty, thirty?
8 A Oh, I see. Twice.
9 Q Twice a year, possibly?
10 A Yeah, possibly.
11 Q So, in the friends account at Union Bank money wil[l]
12 be put in also from your personal brokerage account?
13 A Yes, from time-to-time.
14 Q Is there any one particular account that we see
15 money coming in?
16 A You'd see it from various, depending on the
17 situation. Sometimes not at all, sometimes a bunch.
18 Q Why would you vary between your different broke[rage]
19 houses; like why would you pick one over the other?
20 A I don't have a -- I mean, just that's where there's
21 ease of movement, I guess. Just cash available, or whatever.
22 Q And do you recall when the last time you did this
23 was?
24 A The last time I did --
25 Q The last time you brought money from your broker[age]
Page 216
1 account into the friends Union Bank account?
2 A The day before yesterday.
3 Q Which was Monday?
4 A Monday. We're in a liquidation process right now.
5 We are in a very intense liquidation process. That's what's
6 going on.
7 Q So, for example, you brought money from what
8 brokerage house?
9 A Several different ones over -- on Monday? It was
10 from our Phillip Louis account.
11 Q So eventually you will make an adjustment between
12 the Swiss accounts?
13 A Correct.
14 Q And how do you keep track of that?
15 A I have -- I keep a record. Let's see, Ms. Rogers
16 has the record of the amount of money that came in from the
17 brokerage accounts, and that's how I do it. I get an
18 analysis of that.
19 Q Does Ms. Rogers produce that analysis?
20 A She produces the full activity and then I
21 extrapolate it from that.
22 Q Do you ever bring brokerage money from your
23 personal domestic accounts into the account for any other
24 reason?
25 A No.
Page 217
1 Q Do you recall the last time it was when you made an
2 adjustment in the Swiss accounts?
3 A Last year sometime, I think at the beginning of
4 '99.
5 Q And why was that?
6 A We had a lot of withdrawals for taxes at that time
7 -- I guess March, April, somewhere around there.
8 Q So, you needed to -- let me just get this right.
9 So, you had a lot of withdrawals to the Union account when
10 the friends account got low, so you needed to --
11 A Well, we needed to be able to give people money
12 when they asked it back.
13 Q Right, you needed to pay people their money. So,
14 you brought personal money over and then made the transition
15 in Swiss --
16 A Right, exactly, precisely.
17 Q Do you ever make this transfer of money from a
18 domestic brokerage house to your own personal account, would
19 you ever have to liquidate stocks?
20 A Have to liquidate. I don't -- no, not really.
21 That's not an issue.
22 Q I mean, would it always be you would have money in
23 the -- where you could just bring the money out?
24 A Yeah, there's -- yeah, just bring the money out,
25 yeah.
Page 218
1 Q Would you ever bring money over from the other
2 Union Bank account to cover if it gets low and you need to
3 pay people out?
4 A Yes, the simple answer.
5 Q And when was the last time that occurred?
6 A I believe the process is that the money comes from
7 the domestic brokerage house into the -- my account, and then
8 it transfers over. That's how we would do it, so we keep the
9 records really straight.
10 Q Okay, so money does transfer from one account to
11 the other?
12 A When it's for these kind of purposes.
13 Q So your domestic brokerage houses, do they ever go
14 straight to the 7582 account?
15 A I don't believe so.
16 Q Have they ever gone straight to the 7582 account?
17 A I don't believe so.
18 Q So, they go to the 7574 account and that is when it
19 moves over?
20 A Right.
21 Q And who makes that transition over?
22 A Ms. Rogers.
23 Q Does she call? Will she call you before that or --
24 A We discuss it; she calls the bank.
25 Q Has she ever called on her own that you know of?
Page 219
1 A I'm not sure.
2 Q Has she ever transferred money from one account to
3 the other without your knowledge?
4 A No.
5 Q Would she only do it with your knowledge?
6 A Yes, she would do it with my knowledge.
7 BY MR. MURPHY:
8 Q But is she authorized, if the account from which
9 you pay the friends is running low, to take money from the
10 other account to replenish it?
11 A Not without talking to me.
12 Q She is supposed to call you first?
13 A Yes.
14 Q We have a very direct line on that.
16 BY MR. DUNBAR:
17 Q When you opened up your personal account in the NAA
18 Financial where did that money come from, or stocks?
19 A From my accounts here.
20 Q Do you recall which ones or --
21 A Similar. I don't have the exact accounts at the
22 time, but I did have a Hambrecht & Quist account and I did
23 have a Merrill Lynch account, and I think I had a Bear
24 Stearns account also at the time.
25 Q And when did you open that account, your personal
Page 220
1 one?
2 MR. BOLTZ: Which account are we talking about?
3 MR. DUNBAR: His personal NAA Financial account.
4 MR. BOLTZ: Okay, all right, that is -- I wanted to
5 be sure.
6 THE WITNESS: Yeah. I felt that it was in my best
7 interest to have that account open. That's the best way I
8 can say it.
9 MR. BOLTZ: Well, I think you described last time
10 that you had a lot of confidence in that organization.
11 THE WITNESS: I mean, I had met Mr. deLamoussaye
12 and I had met Mr. Axiall, and I had watched it for a while
13 and seen the way they reported and the way they -- their
14 executions -- and reliability, and that and that, and I
15 thought it would be a good thing for me to have an account
16 there too. So, I opened my account as well. I think I was -
17 - you know, they wanted me to as well. I mean, it was a
18 sales situation on their part, to some degree. I was
19 definitely asked.
20 BY MR. DUNBAR:
21 Q And this was around 1987?
22 A No, this is later. This would be -- I would say
23 it's sometime after the first one. I can't give you the
24 exact dates, but it was after the first -- '88 maybe.
25 Q And how much money -- what was the value when you
Page 221
1 transferred it over?
2 A It was probably lower eight figures. That's why
3 I'm thinking it might have been '89 even. I'm not sure of
4 the exact year.
5 Q When you say low?
6 A Twelve, fifteen, somewhere in there?
7 Q Million?
8 A Uh-huh. (Affirmative response.)
9 Q So, '85, '86, you had about $1.5 million of your own
10 money to '88 to '89 where you had between $12 million and $15
11 million?
12 A Right, I did. I actually had more than that.
13 Q How do you have more than that? Well, I am sorry,
14 it was transferred over.
15 A Right.
16 Q So, just walk me through, you know, stocks,
17 whatever, from '85 to '88.
18 A Sure. Essentially, if you guys remember -- I don't
19 know if you remember this or not, but we had an interesting -
20 - I will make this as short as I can, I'm sorry.
21 MR. BOLTZ: That is all right. As long as it
22 answers his question.
23 THE WITNESS: All right. Well, he asked me how I
24 to that amount of money, I think is the question.
25 MR. BOLTZ: I know, and I think that is --
Page 222
1 THE WITNESS: So, the market went from -- in 19[8?]
2 to 1987, before the crash, it was up about 80 percent, I
3 believe was the number -- 1,200 to 2,200, am I correct,
4 something like that? That was a very lucrative time for m[e.]
5 And after that the market, in the early part of -- due to
6 circumstances that I was very fortunate, when the crash
7 occurred I was in a position to make some serious investm[ents]
8 at that time, put a lot of money to work.
9 BY MR. DUNBAR:
10 Q After the crash?
11 A Right after -- during and after the crash.
12 Q Did the crash hurt you?
13 A I was not hurt by the crash?
14 Q Why?
15 A I wasn't there. I was in Europe. I was meeting
16 with the people at NAA. And I was over there on a vacati[on]
17 and a business trip, and took my money out of the market [at?]
18 the end of September, 1987. And just a complete fluke.
19 BY MR. MURPHY:
20 Q What kind of stocks were you in that caused the
21 increase in value prior to the crash?
22 A We were in high tech, mainly high tech stocks.
23 Q Computer related and --
24 A Very much so. Very much involved in computer
25 related stocks at that time, mostly small companies in
Page 223
1 southern California. Some of the names come to mind: Xebec,
2 you know, Computer Memories. Maybe you remember some of
3 these names, I don't know. They were out in the Valley.
4 They're either the ones we have today, that just go up
5 ten, twelve times, you know, very quickly -- over the counter
6 stocks.
7 BY MR. DUNBAR:
8 Q So, you were away for the crash. And, then, you
9 said after the crash you had some prospects?
10 A Yes. On the day of the crash I purchased stocks
11 like Colgate, bought some blue chips, and bought Microsoft,
12 Apple and some of these other ones that I knew really well.
13 And the next two years were wonderful. And I held those
14 stocks for a long, long time. I remember selling Colgate --
15 I'm sorry, never mind.
16 Q And, so, are these stocks that you bought after the
17 crash attributable to your -- the $1.5 million, to what was
18 it when you transferred the $12,000,000 to $15,000,000?
19 A What was -- net worth?
20 Q Yeah.
21 A It was probably close to $25,000,000.
22 Q So, is it purely the stocks that brought your
23 wealth up from $1.5 million to $25,000,000? Was there o[ther?]
24 type of investments, real estate?
25 A I had --
Page 224
1 MR. BOLTZ: During that period.
2 THE WITNESS: During that period. I had two
3 venture investments that were very lucrative for me also.
4 BY MR. DUNBAR:
5 Q And what were those?
6 A One was called Computer Motion -- no, Computer
7 Motion Corporation, CMC Corporation, in Santa Barbara. And
8 I'm trying to think of the other one now. It's a while back.
9 Anyway, it was in the food business, eventually bought out by
10 Charthouse. I those two investments worth -- accounted for
11 about a third of that money, maybe up to a third-and-a-half.
12 Q And how did you get involved in these two -- when
13 you say venture what do you mean by venture?
14 A Private company.
15 Q And how did you get involved with these?
16 A From Mr. Duggan.
17 Q Did you get involved with any other ventures
18 through Mr. Duggan, even the ones that did not work?
19 A At that time?
20 Q At that time.
21 A It's possible. I don't recall exactly.
22 Q But you do recall these two?
23 A Yeah, I recall these two very well.
24 Q And how much money did you invest in each of those?
25 A Let me think. There were a couple different
Page 225
1 rounds. I don't think I had over $100,000 in each one of
2 them -- maybe a little bit more than that. I should say I
3 don't know, but I don't know exactly. That's a better
4 answer. I really don't know exactly.
5 Q Can you recall where this money came from? Was it
6 your personal account?
7 A Yeah, it was money that was mine.
8 Q Was it given directly to Computer Motion or the
9 company you previously -- Charthouse? I mean, was it with
10 Mr. Duggan?
11 A I invested as a -- I had my own stock, my own
12 position.
13 Q Were your friends invested in either of these
14 ventures?
15 A No.
16 Q Did you tell your friends that you were investing
17 in either of these ventures?
18 A I think I did.
19 Q How did you tell them, or who did you tell?
20 A I mean, this is sort of an open question. I don't
21 know how to answer it.
22 MR. BOLTZ: Well, it is also a little imprecise in
23 whether you are talking about all of them or some of them.
24 MR. DUNBAR: Well, with regard to Computer Motion?
25 MR. BOLTZ: I mean all the friends or --
Page 226
1 THE WITNESS: Some, one, five. I mean, certainly,
2 I think in social situations I certainly talked about it.
3 BY MR. DUNBAR:
4 Q Did anybody ever ask you to get them involved in
5 some of these ventures?
6 A In a couple of these ventures a couple of people
7 who knew Mr. Duggan also invested in these deals -- not
8 through me -- who are also some of my friends.
9 Q And did they hold stock in their own name?
10 A Yes.
11 Q Besides yourself, did anybody else invest with Mr.
12 Duggan?
13 A I think so.
14 Q Do you recall who?
15 A I don't, but I think he had some family and some
16 friends that were working with him at the time.
17 Q Now, going back to the crash -- go ahead.
18 BY MR. MURPHY:
19 Q Did you purchase private placement stock, privately
20 placed stock, in those two companies; and, then, how did you
21 get out? Did you get out of those investments?
22 A Yes.
23 Q And what was your exit?
24 A In one case, the Charthouse bought the company.
25 Q Before it became public? I think it was --
Page 227
1 A I think it was before it became public, I think. I
2 don't remember when Charthouse went public, but I think it
3 was -- you probably remember that company. I like their
4 food. Anyway, and the other company was purchased by
5 Rockwell.
6 Q Directly from a private company by Rockwell, was
7 it?
8 A Right, that's correct.
9 Q And, then, in each case your $100,000 in the
10 computer company, your $100,000 mushrooms to --
11 A Well, in the case of the one with Computer Motion
12 we ended up with Rockwell stock, and the Rockwell stock went
13 crazy.
14 Q Oh, you were paid in stock, and you held the stock?
15 A Right.
16 Q And then the stock became valuable?
17 A Very, very valuable, yeah.
18 Q And then the other company --
19 A Well, we had Charthouse stock. That also became
20 very, very valuable.
21 Q You held the stock after the acquisition?
22 A Yes, that was the idea -- obvious reasons; I mean
23 tax events.
24 Q Capital gains?
25 A Capital gains. And there was a pooling, whatever
Page 228
1 the -- I don't know what the rules are, but that's what we
2 did.
3 Q There were tax reasons to do it that way?
4 A Tax reasons, exactly.
5 BY MR. DUNBAR:
6 Q Have you sold those stocks now or do you still hold
7 them?
8 A Oh, they're gone now.
9 Q And that accounted for a little bit over a third,
10 third-and-a-half, of --
11 A I'd say at least, yeah.
12 Q -- that gain during that time period?
13 A Yeah. I was very fortunate.
14 BY MR. MURPHY:
15 Q Was that Mr. Duggan's strategy to purchase private
16 placement interests in companies?
17 A Yes. I mean, if you want to ask me for more details
18 I'll give them to you, but the answer to the simple question
19 is yes.
20 Q I mean, was he purchasing not only listed stocks,
21 but also making investments in non-public companies?
22 A Can I make a clarifying --
23 MR. BOLTZ: Yeah, yes.
24 MR. MURPHY: Just briefly.
25 THE WITNESS: Very briefly I'll do this, okay. One
Page 229
1 of the companies that was purchased by Charthouse was started
2 by Mr. Duggan. The food company was actually his company.
3 He was the -- he and his friends started the company, okay.
4 It was a local bakery and had units all over the country by
5 the time Charthouse got it. I can't remember the name; it's
6 a cute name. The other company was also -- Mr. Duggan was a
7 founding -- well, he helped to finance the company he got
8 involved in -- the concept was that when you do investments
9 like this, which I don't want to elaborate, you get involved
10 in helping the company.
11 BY MR. MURPHY:
12 Q Taking a management role as a venture capitalist,
13 kind of?
14 A Exactly. That was the idea, which, as you know,
15 later on was very good for me as well.
16 Q And that was part of what Mr. Duggan taught you on
17 the --
18 A Taught me how to do it, exactly, yeah. It was the
19 application of the fundamental analysis to a private venture.
20 There was a leverage point there that was pretty good.
21 BY MR. DUNBAR:
22 Q And when you said you had all your money out before
23 the crash, is this including investor money?
24 A Uh-huh. (Affirmative response.)
25 Q So, all that money was out too?
Page 230
1 A Yeah, we were not 100 percent out, but we were -- I
2 mean, it was a non-event, remarkably.
3 Q Do you ever have any friends call you and say, how
4 did our money do, what is going on?
5 A Oh, man, I'm not going to say any more. There's
6 some great stories I could tell, but I'm not going to tell
7 them. You know, I don't want to -- I'm not trying to show
8 off here. Yes, I got a lot of phone calls.
9 MR. BOLTZ: Maybe it should be explained, if you do
10 not mind, why didn't you put friends into these two venture
11 capital private placements?
12 THE WITNESS: Oh. First of all, except for the
13 people that knew Mr. Duggan and had a chance to talk to him
14 directly, I didn't feel confident to make that decision.
15 That was not my charter. Number two, I wasn't in a position
16 to make the decision. They weren't situations that I had the
17 right to ask other investors into. It wasn't my role.
18 BY MR. DUNBAR:
19 Q Have you ever put these investors into any other
20 ventures other than stocks?
21 A No.
22 Q So, to NAA Financial, in '88, '89, to your personal
23 account at NAA Financial, with the $12,000,000 to $15,000,000
24 transfer, have you ever transferred any other -- other than
25 the transfer over between accounts and the initial transfer
Page 231
1 of the $15,000,000 to $17,000,000 at the beginning?
2 A Would you be more specific on what you're aski[ng?]
3 Q Well, have you ever deposited money, more m[oney?]
4 into that NAA Financial account?
5 A Yes.
6 Q When or how often?
7 A It's been a long time. I don't remember the last
8 time, but it's been a long time.
9 Q Okay, when was the last deposit, other than a
10 transfer or --
11 A Maybe 1990 or '91, something like that. I'd hav[e]
12 to look.
13 Q Did you ever transfer money from your person[al]
14 account to the friends account in NAA Financial?
15 A No.
16 Q Have you ever?
17 A No.
18 MR. BOLTZ: Maybe just another clarifying que[stion]
19 if I may, that -- did you ever use the friends' or the
20 investors' money, even temporarily, to invest personall[y,]
21 your personal --
22 THE WITNESS: No, I had my own funds. It w[asn't?]
23 necessary, ever.
24 BY MR. DUNBAR:
25 Q So, this is correct. In the last ten years you
Page 232
1 have not made a deposit to either of the accounts in NAA
2 Financial?
3 A I have not.
4 Q All right, for the friends accounts how do you
5 allocate the stocks? Walk me through that process, now that
6 we are at NAA Financial.
7 A Okay. I have -- I know exactly how much money is
8 there and I know exactly what it's invested in.
9 Q In NAA Financial?
10 A Yes. I know -- the allocation process is
11 essentially done, three criteria. The first one is to use
12 this 5 percent, and it's a maximum. And sometimes we buy
13 things in pieces. I don't buy it all in one day. You know,
14 so it sometimes takes over time, so it might be 1 percent,
15 then two percent, then 4 percent. Okay, you could see that in
16 the statement.
17 Q Right.
18 A And the idea is that I want to buy 5 percent of
19 this particular -- I want each person to have 5 percent of
20 this stock. And, so, I add up the amount of money that is
21 and how many shares that is and I buy that many shares --
22 that simple.
23 MR. BOLTZ: When you say "5 percent," you do not
24 mean 5 percent of the stock outstanding, or anything like
25 that. You mean 5 percent of --
Page 233
1 THE WITNESS: -- positions. I think it's clear
2 what I'm saying.
3 MR. BOLTZ: Yeah. You started to say three
4 criteria. What are the other two?
5 THE WITNESS: Oh, I'm sorry. Did you want me to
6 clarify something on that first?
7 MR. DUNBAR: Yes, please, sure. Oh, no, no, go
8 ahead, go ahead with the next two criteria, yes.
9 THE WITNESS: Okay, the second one is, if someone
10 has just started I make a decision of which stocks -- they
11 may not buy stocks that we already own, because of the change
12 in their value at this time.
13 BY MR. DUNBAR:
14 Q New person?
15 A A new person. So, one of the criteria, when is
16 this a -- it's a category that we talked about, a new person. If
17 we had a stock that we bought in February, and it had -- and
18 now it was September, and that stock had moved significantly
19 or it was in a position where I didn't feel it was
20 appropriate to allocate, or to buy or purchase anything of
21 that, I didn't do it. So, they wouldn't own that stock. And
22 you'll see this when you see the unrealized gains of theirs.
23 They're not all exactly the same by a long shot, okay, for
24 that reason. Timing is the second criteria.
25 MR. BOLTZ: That is what you are saying is timing?
Page 234
1 THE WITNESS: Timing, yeah. I could have just
2 said timing. It would have been great, huh? And the third is
3 risk. And I can elaborate if you want.
4 MR. DUNBAR: Yes, elaborate.
5 THE WITNESS: This would come under the heading of
6 how invested we should be at any given time in the cycle,
7 market cycle.
8 BY MR. DUNBAR:
9 Q And does this apply to everyone?
10 A Yes.
11 Q Do you make risk kind of analyses on individual
12 people? Like, will you not put them in a certain stock for
13 risk reasons, for individual people?
14 A I'm not sure I understand.
15 Q You mentioned earlier that sometimes -- I believe
16 you said that there have been accounts where you have not
17 accepted because you did not feel that they could maintain
18 the risk of the market.
19 A Yes, that's true.
20 Q Would you ever make an evaluation of a person and
21 decide not to put them -- put them in more conservative
22 stocks?
23 A No. We only know the ones we know. It's just a
24 question of how invested we want to be relative to the
25 situation at the time.
Page 235
1 MR. BOLTZ: In other words, once you decided to
2 take the account of the investor you would treat them
3 uniformly?
4 THE WITNESS: Uniformly, yes.
5 BY MR. DUNBAR:
6 Q Have you ever turned down an account, other than
7 for the purposes of since -- have you ever turned down an
8 account?
9 A Yes.
10 Q For what reasons?
11 A Lots of reasons. I didn't think the person -- it's
12 either an older person or a person with a very small amount of
13 assets, and this was, I thought -- my decision was, for me,
14 was not willing to -- as much as I wanted to help them I
15 wouldn't take -- didn't feel comfortable about it. I've been
16 approached by people I didn't know; institutions even;
17 individuals that got my name from somebody who heard that I
18 was this or that and this or that. I wasn't ever looking for
19 anybody except people that were associated with the church,
20 who came to me. You know, I never was looking for anybody.
21 So I turned down a lot of people.
22 Q And what was your criteria to take an account?
23 A Primarily it was someone who was associated with
24 the church, who was working to help the church.
25 Q And when you say "primarily," you are talking in
Page 236
1 the beginning or --
2 A Always.
3 Q Or always.
4 A Yeah. I mean, as you'll see on this here, a guy
5 has an account for his son. I mean, it's a relative; you
6 know, I would do that.
7 Q So, walk me through again, let's say somebody wants
8 to -- you talk to somebody, they say please invest my money
9 for me, and you say fine. What happens?
10 A Well, I don't just say fine.
11 Q Or, I mean -- what happens? You eventually agreed
12 that you will invest their money for them. What happens
13 next?
14 BY MR. MURPHY:
15 Q Well, let's go -- before you mentally agree, is
16 there a step that you have not described?
17 A Yeah, it's a big step.
18 Q What is the step?
19 A I mean, I tell them -- I mean, I want to know who
20 this person is.
21 BY MR. DUNBAR:
22 Q Okay, so let's start from, let's say somebody
23 approaches, and you have known them from some way or
24 another, and they say, "I'd like to invest my money with
25 you." And then what happens?
Page 237
1 A I'd say, "Do you know what my purpose here is? Do
2 you know what I'm doing here? Do you know what I'm up to?
3 Why I'm doing this?" And I explain to them. And I ask them
4 what they're doing in the church -- what are their
5 activities, what is their current contribution?
6 Q And, so, you have a meeting with each investor?
7 A Well, I certainly talk to them, yeah. It's a
8 meeting, yes.
9 Q So each one you have spoken with before, they have
10 invested their money?
11 A Absolutely.
12 Q And is it a formal conversation that you have? I
13 mean, do you always say meet me at this time or can it just
14 occur at a social event or --
15 A I'd say that, you know, mostly we -- I'd want to,
16 you know, get together and talk it over, yeah.
17 Q And when you talk with them, after -- next step?
18 A Well, you know, I sort of make my -- decide whether
19 I think this is someone I think is going to make a difference
20 in what we're doing. And if it is then I'm willing to go
21 forward and, you know, answer their questions.
22 Q And do they ask questions?
23 A Yeah, what do you do? How do you do it? What do
24 you charge? You know, what's the arrangement? Some of your
25 standard investor type questions.
Page 238
1 Q And how do you answer; what do you tell them?
2 A My purpose is to help the Scientologists who have
3 their attention away from their money and they're helping the
4 church. And that's the main thing. And that we have a
5 letter agreement, and that I will be investing the money in
6 stocks I've researched. And I talk about the -- my own
7 personal goals and why I'm doing this. Now, they may ask me
8 lots of questions. I mean, you can imagine, lots and lots of
9 questions. But those are originated by them.
10 Q And when they ask you how much do you charge wh[at]
11 do you tell them?
12 A I say I don't charge anything. There's no
13 requirement of any kind.
14 Q Do you tell them anything else?
15 A About?
16 Q Like, do you mention that some people give me gifts
17 or --
18 A No.
19 Q Do you mention anything about compensation or --
20 A I mean, if they ask me a direct question about
21 somebody else, you know, I usually say take it up with them.
22 Q You mean, like if they say they are giving you --
23 A Well, they may know me. I'm just thinking of a
24 time, you know, so-and-so sent you a case of wine, or
25 something. And I said, talk to them. You know, it's not my
Page 239
1 -- there's no requirements at all here.
2 Q Okay, so you have this meeting; and then what?
3 A Well, it's kind of odd because I give them the -- I
4 send the letter out to them and say, when you're ready, if
5 you want to do this, send it back signed with a check.
6 Q You are talking about Exhibit Number --
7 A Is this 29?
8 Q -- Number 5.
9 MR. BOLTZ: Five.
10 BY MR. DUNBAR:
11 Q Exhibit Number 5. You say that this is the letter yo[u]
12 send to them?
13 A Yeah.
14 Q Do you send a cover letter too?
15 A No.
16 Q And where do they send the money to?
17 A They send it back to our office or they wire it to
18 the bank. Occasionally, they ask for wire instructions.
19 Q And you tell them to wire it to the --
20 A -- friends account.
21 Q -- the friends account?
22 A Yes.
23 Q And, so, they send the money back -- they first
24 invest, they send it to the office address. Then what
25 happens?
Page 240
1 A Then what happens to what?
2 Q The money.
3 A It goes into the friends account.
4 Q Well, who -- you receive it. Who deposits it?
5 A I -- well, I put it in an envelope with a deposit
6 slip and send it down to the bank.
7 Q And do you make a mark somewhere, do you note it,
8 do you --
9 A Send a copy to Phyllis so she knows that --
10 Q Oh, a copy of the check?
11 A Yeah, oh, yeah.
12 Q And you send it to Phyllis?
13 A And I think you've got copies of all those checks,
14 yeah.
15 Q So, then it goes into the friends account?
16 A Right.
17 Q Do you send a copy of the check anywhere else?
18 A Did I send a copy of the check anywhere else? I
19 don't think so.
20 Q Or do you notify anybody else with regards to --
21 that this person is beginning to invest with you?
22 A I don't at that time notify anybody, at that time,
23 no.
24 Q Does anybody else notify anybody else?
25 A At that moment?
Page 241
1 Q Yes.
2 A I don't think so.
3 MR. BOLTZ: Well, Ms. Janu, when does she --
4 THE WITNESS: Well, at the end of the month, I
5 mean, she gets reconciliations from Ms. Rogers, and then she
6 gets the information from her.
7 BY MR. DUNBAR:
8 Q Okay, so now Ms. Rogers has a copy of the check,
9 which she will check against the bank statement that comes
10 in; is that correct?
11 A Right.
12 Q So, we have the new investor's money into the
13 account. Then what?
14 A Then I -- there's an allocation step at NAA. And
15 then I, when I'm doing my general purchases into the account,
16 I make sure and buy stocks for them.
17 Q And how often do you make purchases or trades?
18 A I think you have copies of the statements. You can
19 look at it. It's very -- it's sporadic. It's right there,
20 it's all there.
21 Q But how often do you make trades, would you say?
22 A I could look at the statements and tell you. I
23 mean, sometimes you go weeks without doing anything;
24 sometimes you do things right away. I think -- what, you
25 mean monthly, yearly, weekly?
Page 242
1 Q Monthly?
2 A Monthly. I mean, probably -- it really varies.
3 I'm sorry, I can't give you an exact example.
4 Q And so when this person's money goes into the
5 account, into the friends account, before they actually own
6 any stocks, I mean, do you invest their money right away or
7 does it depend on when you think it is a good time to get
8 into the market, or how does that work?
9 A Interesting question. If we're ready to buy the
10 stocks we buy them. If we're not ready we wait until we're
11 ready. Simple answer.
12 Q And when you go to buy a stock you said you figure
13 out what is 5 percent for everybody for their personal
14 accounts.
15 A Right.
16 Q Do you look to see who has not been invested yet
17 and say, well, we need to get that person --
18 A Oh, okay. Let me clarify your question.
19 Q Yeah, go ahead.
20 A I'm trying to make sure I'm answering the right
21 question.
22 MR. BOLTZ: Yeah, that is fine.
23 THE WITNESS: I think you're asking what the
24 allocation procedure is, or what the buy and sell decision
25 procedure is, in terms of timing. Is that what you're asking
Page 243
1 me?
2 BY MR. DUNBAR:
3 Q Well, I am asking both.
4 A Okay. Well, I'll just take something that's
5 relatively -- should I just give him an example or just --
6 Q That would be great, yeah.
7 MR. BOLTZ: Sure. He is trying to trace a new
8 account, as to the process when new comes in.
9 MR. DUNBAR: Right, right, just the whole process
10 of how it gets --
11 THE WITNESS: Okay, so, we have our portfolio.
12 This is the stocks that we know, or that I know, if you want
13 to put it that way.
14 BY MR. DUNBAR:
15 Q Right. And you are talking about a portfolio that
16 has already been -- we are talking NAA Financial, friends
17 account, fully-invested account; is that correct?
18 A Well, what I would call -- it's not always 100
19 percent invested, but fully-allocated, let's put it that way.
20 Q Okay. To your friends?
21 A Right. So, I look at the current stocks that we
22 own, and if they seem to meet the criteria for being buyable
23 at that time, then I purchase for them their allocation of
24 that particular stock. Now, there might be one, two, three,
25 four, five, but there's always research going on for new
Page 244
1 ideas. That's what I do. And, so, I might wait until we
2 prove out another position. And, so --
3 Q And what do you mean, prove out another position?
4 A Well, fundamental research is a lot of running
5 around and validating the story and making sure that the
6 fundamentals are in place. And I don't buy the stocks until
7 I feel that the company's prospects and our viewpoint on the
8 company is in a position where I would risk capital to put
9 money in there.
10 Q So, when you purchase the stock -- I mean, you have
11 a new investor and their money is in the account, waiting to
12 be invested, and let's say no other money has come in.
13 A That happens a lot, by the way, just like that.
14 Q Where you just have, like, you will get --
15 A Yeah. You know, the last two years, particularly,
16 we have taken virtually no accounts, so it's been, you know,
17 just -- years before that, yeah.
18 Q And, so -- what I am having a problem with is, you
19 said it is fully-allocated, all the stocks. So, each friend
20 owns a particular piece of each stock that is in that NAA
21 Financial account?
22 A It's a purchase for him in that account?
23 Q Right. Yeah, I mean, when you purchase a stock it
24 is for a particular person?
25 A Right, right, exactly.
Page 245
1 Q And so, like if somebody has -- somebody just
2 invested money; they have money in the account. And you go
3 to purchase the stock at NAA. Are you purchasing it just for
4 that friend?
5 A Right.
6 Q And you are purchasing just is the amount that will
7 -- you know, give or take -- 5 percent, that that would be
8 that person's portfolio?
9 A Exactly.
10 Q Do you ever buy stocks that would be allocated to
11 more than one friend?
12 A Yes.
13 Q And, okay, here is something else I do not
14 understand. You said you have not made a deposit in NAA
15 Financial in ten years. And if those stocks are all
16 allocated to someone, and somebody invests within the last
17 ten years, how does that work?
18 A Well, the sales are taking place over there also,
19 and there's plenty of capital to be allocated there, as well
20 as -- the capital is there. So, it's easy to just make that
21 allocation there.
22 Q But when you have a sale doesn't -- wouldn't that
23 money correspond to whoever owns that piece of the stock at
24 that time?
25 A It does, yes, exactly. But the money is not coming
Page 246
1 out; it's being reinvested.
2 MR. BOLTZ: I think what his question is, with a
3 new investor, or investors -- whether it is one or several [at]
4 a time -- let's say another $200,000 comes in, just as an
5 example. Then where does that money go, or how does it [?]
6 into NAA to be invested in stocks?
7 THE WITNESS: Yes, it's already in NAA.
8 MR. DUNBAR: Right.
9 MR. BOLTZ: Well, if it is new money, how can [it be?]
10 already in NAA?
11 THE WITNESS: Because it's -- this allocation
12 procedure.
13 MR. BOLTZ: Well, you have to explain that.
14 THE WITNESS: I'll explain it.
15 MR. BOLTZ: If it is new money -- I think that is
16 what you are asking, isn't it?
17 MR. DUNBAR: Right, yeah.
18 THE WITNESS: Do you want me to take a break [?]
19 explain it to you, and we'll go through it --
20 MR. BOLTZ: No, that is not necessary, unless y[ou]
21 want to?
22 THE WITNESS: Well, I mean, I just want to ma[ke]
23 sure that I'm --
24 MR. BOLTZ: -- doing it right.
25 THE WITNESS: -- doing it right, you know.
Page 247
1 BY MR. DUNBAR:
2 Q Why don't you just explain to me how it works?
3 A Essentially, since I'm -- when the money arrives
4 the money is allocated in NAA to that person. It's allocated
5 to them; it's theirs, allocated to them. It's cash in their
6 account.
7 Q So you are talking about -- I mean, okay, let's
8 start with somebody who already is an investor, and they [?]
9 stocks; you purchased stocks for that person with their
10 money. I mean, I understand that -- we will go back to t[?]
11 allocation thing. So, they own 200 shares of Emisphere, [?]
12 shares of another stock. And, so, in their account, when
13 they would receive their unrealized gains and losses
14 statement they could see what their positions are?
15 A Correct.
16 Q In addition, when they receive their realized gain[s]
17 and losses they would see what was bought and sold for [?]
18 A Right.
19 Q Now, that money that was bought and sold for th[?]
20 their realized gains, is not sent to them unless they requ[est]
21 it.
22 A Correct.
23 Q So, that stays in the account?
24 A Correct.
25 Q Now, theoretically, isn't that money theirs?
Page 248
1 A Yes.
2 Q And so when that money gets reinvested, wouldn't
3 the new stocks purchased with that money be their stocks?
4 A I see what you're saying now, okay, okay.
5 MR. BOLTZ: Be sure you understand. In other
6 words, if --
7 THE WITNESS: I do understand.
8 MR. BOLTZ: Let's just, as an example, if there is
9 $120,000,000 in their account at NAA, and that represents the
10 money of, let's say, 200 people; now you get two more people
11 coming along, and they put in $100,000. This money is still
12 the money of the 200. And what you still have not explained
13 is how that additional $100,000 gets invested into NAA. How
14 does the money find its way from Union Bank to NAA?
15 THE WITNES: That is the allocation process back
16 with my account.
17 MR. BOLTZ: Well, explain it.
18 THE WITNESS: In other words, I say we do this
19 adjustment at the end of a period, on how the money needs to
20 be allocated back and forth between the two accounts at NAA.
21 MR. BOLTZ: All right, so, if it is $100,000, then
22 $100,000 goes from your personal account at NAA --
23 THE WITNESS: Right, right, correct.
24 MR. BOLTZ: -- into the friends account, and then
25 you order it to be invested --
Page 249
1 THE WITNESS: Exactly, exactly.
2 MR. BOLTZ: -- in either some of the existing
3 stocks, if they are still buyable, or new stocks?
4 THE WITNESS: Right, yeah, I thought I explained
5 that, yeah.
6 MR. BOLTZ: Well, you did not.
7 BY MR. MURPHY:
8 Q No, because we thought -- I thought there was no
9 money going from your personal account into the friends
10 account at NAA.
11 A Oh, I'm sorry, I misunderstood the question. I
12 consider it their money at that point. So, it's their money
13 that's moving over, through my account. I'm sorry, that was
14 a -- I'm not subsidizing that account. That's what I thought
15 you meant. In other words, I'm not keeping my money in their
16 account; I'm only keeping their money in that account. But
17 if I have to move money over there it goes from my account to
18 that --
19 MR. BOLTZ: It is an offsetting adjustment.
20 THE WITNESS: It's an offsetting adjustment.
21 BY MR. MURPHY:
22 Q So, if somebody gives you $1,000,000 here, into the
23 friends account at Union Bank, you transfer $1,000,000 from
24 your personal account --
25 A Exactly, yes.
Page 250
1 Q Is that what happens?
2 A Yeah, that's exactly -- I thought I explained that
3 earlier, that it was offset -- every so often we do an
4 offsetting adjustment as money comes in.
5 BY MR. DUNBAR:
6 Q So, that is how you maintained those two accounts?
7 A Right.
8 Q You never ever sent -- in the last seven years you
9 have never sent money over --
10 A Right. We don't do the back and forth, exactly.
11 Q Okay, so now you have, you know, let's say, the
12 $100,000 in the friends account. What happens then to that
13 money, since it is already -- $100,000 came in and you made
14 the adjustment.
15 MR. BOLTZ: So, it is now in the friends account at
16 NAA.
17 THE WITNESS: Right.
18 BY MR. DUNBAR:
19 Q Now it is in the friends account at NAA, but it is
20 also in the friends in Union Bank?
21 A Okay, we need to talk about the accounting here. I
22 think this is what I needed to go into here, how carefully we
23 do this.
24 MR. BOLTZ: Yes, I think that is exactly right.
25 THE WITNESS: I need to explain to you, you're --
Page 251
1 and, like I say, you don't have this now, and I'm sorry,
2 because I guess you thought you asked for it. We didn't
3 withhold it from you, this stuff about the unrealized gain
4 report. You're going to have this material in a day or two.
5 You know, you take a look at that, you take a look at the
6 realized gain reports, take a look at the quarterly
7 statements. You know, I have really been meticulous about
8 the way we keep these records, okay.
9 So, we very carefully make sure there's a deposit
10 to that person's account. When the stocks are bought he's
11 allocated his stocks. And each person, when he sells his
12 stocks, we then give him a credit in his account for the sale
13 of the stocks. Every person has their own individual, very
14 carefully kept account. And, so, for our purposes, the
15 procedure is as if we're just investing for each one of these
16 people separately. That's how we keep track of it. This is
17 not some, you know, up in the air, we'll have to see where it
18 lands. We know exactly how many shares we buy and we
19 allocate it exactly for their account. In each case they
20 only make those adjustments back and forth based on money
21 that came in or goes out. But it's done very specifically
22 for the person. It's not -- in other words, it's as if it
23 was just in their account. That's the concept.
24 MR. BOLTZ: All right, and I think you still need
25 to explain that, you know, under this hypothetical situation
Page 252
1 that [we are?] using of $100,000, I think, where $100,000 of an
2 investor's money went into the Union Bank friends account.
3 THE WITNESS: Right.
4 MR. BOLTZ: And then you moved $100,000 from NAA
5 personal to NAA friends account --
6 THE WITNESS: Right.
7 MR. BOLTZ: -- which was then invested. Well,
8 then, did you also make an offsetting or an entry deleting --
9 what happened to the $100,000 that was in the Union Bank
10 account, the friends? How was that accounted for?
11 THE WITNESS: Okay. Every month people take money
12 out of the accounts. You've seen that on the statements.
13 Okay, so at the end of the month there's a net number in the
14 Union Bank account of how [much?] was taken in or nets out in
15 that account from people taking money out. So, that $100,000
16 would be gone, perhaps, by the end of that month or that
17 quarter.
18 BY MR. DUNBAR:
19 Q Sent to investors?
20 A Send to another investor, exactly.
21 MR. BOLTZ: But from an accounting standpoint --
22 THE WITNESS: From an accounting standpoint we have
23 it separated by person. But the Union Bank account, there's
24 an accommodation to allow us to make these deposits and
25 withdrawals.
Page 253
1 MR. BOLTZ: So, if you are talking about Mr. Jones
2 who put in $100,000, he would not still be shown to have
3 $100,000 in both place?
4 THE WITNESS: No, not in Union Bank. He wouldn't
5 have it in both places. So, if that's what you're asking me
6 the answer is no; he wouldn't have it in both places.
7 MR. BOLTZ: But the $100,000 that went into the
8 Union, then after that accounting adjustment was made to show
9 it comes out of the Jones account, it would still be there
10 physically --
11 THE WITNESS: Physically there.
12 MR. BOLTZ: -- and used for other withdrawals.
13 THE WITNESS: Other withdrawals, or whatever,
14 exactly.
15 BY MR. DUNBAR:
16 Q Let me just clarify this one more time. You know,
17 the person makes $100,000, it goes into the Union Bank
18 account and you make the adjustment.
19 A Right.
20 Q So, theoretically, that $100,000 is now yours?
21 A Theoretically, it's mine. But we use that account
22 to keep track of the money we send out and receive from the
23 friends. So, money does not leave there or go into there, as
24 a rule, except to accommodate those particular transactions.
25 Q So, how does that $100,000 at this point get to
Page 254
1 your account, or does that $100,000 become your money?
2 A Okay, I'm not sure I understand exactly what you're
3 asking me here. Just let me try and follow your logic.
4 It's already my money in the sense that it's in that account.
5 Q Right. Well, it is in the friends account.
6 A Right, but it's -- you see, that --
7 Q Where do you make a notion to that?
8 A I feel like we're going around in a circle.
9 MR. BOLTZ: Well, how do you account for --
10 THE WITNESS: In other words, it's -- from out
11 accounting standpoint, we have the assets and cash and
12 securities in NAA. The accounts here are used as a facility
13 to accommodate the deposits and withdrawals. But outside of
14 the bookkeeping on the individual accounts and how we keep
15 track of it, no other adjustment takes place. That's how we
16 do it.
17 MR. BOLTZ: So, is there a bookkeeping entry, then,
18 that on the $100,000 that is still in the Union Bank friends
19 account, and now that you have moved the money over from NA[A]
20 personal to NAA friends of that amount, then what is the
21 bookkeeping entry that takes place and who makes it? In
22 other words, of that $100,000 that is at the Union Bank is
23 there a bookkeeping entry that moves that money to another
24 account?
25 THE WITNESS: Theoretically, that would happen,
Page 255
1 ultimately. We don't tend to do that.
2 MR. BOLTZ: You do not physically move it.
3 THE WITNESS: Don't physically move it.
4 MR. BOLTZ: I know, you explained that part. But
5 is there a bookkeeping entry that credits that money to --
6 THE WITNESS: By definition it is in that account.
7 That account is in my name. So, if I were to liquidate
8 everybody right now, okay, all the dollars would end up in
9 people's hands and there would be money left over, and what
10 was left over belonged to me. I mean, I never thought of
11 that. It doesn't work that way, because it's done on the
12 books. And so theoretically, you're right, that money would
13 belong to me, except I don't go -- I don't do that on this
14 end. That's a fact.
15 MR. BOLTZ: But you have got records that show that
16 the $100,000 that you put from your personal account over in
17 NAA --
18 THE WITNESS: Absolutely.
19 MR. BOLTZ: -- that that really is --
20 THE WITNESS: It's over in the friends account over
21 there.
22 MR. MURPHY: And you could bring in the bookkeep[ing]
23 records the next -- bring in the set of books and explain it
24 to us, you know, on another day.
25 THE WITNESS: If you want.
Page 256
1 MR. MURPHY: Yeah. At some point, you know, you
2 can explain the way --
3 THE WITNESS: I understand now where you are headed
4 on this and I --
5 BY MR. DUNBAR:
6 Q Well, you know, if somebody, let's say, made a
7 $50,000,000 deposit and it would go into the friends account,
8 you would move $50,000,000 over from your personal account.
9 So, your personal account up there would be $50,000,000 less.
10 A Theoretically, you're right.
11 Q Right?
12 A Yes. And it's on the books, it's true, yes.
13 Q And the $50,000,000 would be in there, that would
14 be sent out investors and everything --
15 A Yes. I mean, I guess I could -- you know, that's a
16 good point. I guess I could go back and make that change
17 every time something like that happened. I just don't do it.
18 Except we do it in the bookkeeping we have it. I just don't
19 do it physically.
20 Q Right. And when do you do the bookkeeping?
21 A Quarterly.
22 Q Quarterly?
23 A Yeah. I mean, you can look at the statements; it's
24 all there.
25 MR. BOLTZ: Is this a good time?
Page 257
1 MR. DUNBAR: This is a good time, break for lunch.
2 Off the record.
3 (Whereupon, at 12:42 p.m., a luncheon recess was taken.)
4 * * * * *
5 AFTERNOON SESSION
6 MR. DUNBAR: Back on the record after lunch at 1:56
7 p.m.
8 BY MR. DUNBAR:
9 Q We left off with the discussion with how the money
10 goes, and just one quick question back on that. With regards
11 to physical amounts, if an investor -- let's say you get
12 three investors; all send you a check for $100,000, let's
13 say, and it goes into the Union Bank friends account. Do you
14 then physically transfer $300,000 between the Swiss accounts?
15 A That transfer is done.
16 Q So, you would call -- you would pick up the phone?
17 A You would pick up the phone, yes.
18 Q And call Switzerland or --
19 A Yes, or wherever the number I'm supposed to call
20 is.
21 Q Do they have an office in the United States?
22 A No. It's always over there.
23 Q So, your phone bill is always to Switzerland?
24 A Right, right.
25 Q And say you transfer $300,000.
Page 258
1 A Yeah, we would -- it's exactly that.
2 Q Do you ever take -- either work [it] out where it is
3 a net or does --
4 A Yes, I think it's sometimes a net. But it depends
5 on the timing. You know, it's like trying to be as specific
6 to the day we can, but I can't say we do it every single --
7 the next morning.
8 Q So, it varies?
9 A It might vary. But the person gets credit for it
10 instantly.
11 Q Does your friends account at Union Bank receive
12 interest?
13 A Yes.
14 Q And how does that work?
15 A Okay, I need you to be more specific on that
16 question.
17 Q Well, how do you divide the interest up among the
18 friends?
19 A We have a money market interest rate that we are
20 given -- you know, that we make in the bank. We use that as
21 our standard for interest. And from the date of deposit any
22 funds that are not invested that are in the money market, or
23 from a bookkeeping standpoint not in the market, get the
24 money market interest rate. And you see those reports
25 associated with the tax returns, and you've got them. That's
Page 259
1 where that number comes from.
2 Q Sent to your friends? Is that what you are saying,
3 the tax report sent to friends?
4 A Yes.
5 MR. BOLTZ: So, regardless of when the accounting
6 adjustments are made with NAA --
7 THE WITNESS: They get the interest from the date.
8 MR. BOLTZ: -- they would get the interest from the
9 date of their deposit.
10 THE WITNESS: Date of the deposit, right.
11 BY MR. DUNBAR:
12 Q Which is the bank's money market rate?
13 A Bank's money market rate, correct, which varies, as
14 you know.
15 Q And what amount of money do they get the rate on --
16 the money that is not invested, like a particular amount of
17 money not invested?
18 A Uninvested capital by days, by quarter.
19 Q And the uninvested capital is what is separated --
20 A It's not in the securities.
21 Q Right. In the NAA Financial account in
22 Switzerland?
23 A Well, it's the accounting, the bookkeeping that
24 belongs to that person. Whether the funds - whatever the
25 funds happen to be, that's their account -- we keep it
Page 260
1 segregated in that sense -- and that they get interest on the
2 money that they've got in the account, as cash.
3 Q And that is daily?
4 A It's by month, daily, yes. And Ms. Janu would have
5 that exactly, but I'm -- that's my understanding. It's by
6 month, I know that. But we do it -- if a guy gets funding in
7 on the 15th of the month he'd get the fifteen days.
8 Q And with regards to dividends?
9 A Dividends are allocated exactly according to the
10 ones that we receive for the shares that they receive.
11 Q And with regards to this entire setup and how it
12 works, why do you have a set up like that? Why don't -- when
13 an investor sends money, why don't you just send it straight
14 to their account in Switzerland?
15 A Well, I've tried to keep -- my own standpoint of
16 security and confidentiality I've tried to keep the number of
17 transactions to a minimum.
18 Q And this, you feel, is at least the way that you
19 could keep the transactions to the bare minimum?
20 A Yeah, I've tried to do that.
21 Q And why is that?
22 A That was my decision about this whole concept of
23 confidentiality and security.
24 Q And you mentioned that you send statements to each
25 friend who has money invested with you. And what statements
Page 261
1 do you send and when?
2 A We send out a quarterly letter indicating the
3 change in the value of their account. And it goes out
4 usually after we've finished our accounting after the end of
5 the quarter.
6 Q And what else do you send?
7 A We -- you mean, like, at the end of the year?
8 Q Yeah, at the end of the year.
9 A We send them their -- the activity that they need
10 to have, as I explained before, their -- I guess it would be
11 the -- what they would use for their taxes, or their tax
12 reports.
13 MR. BOLTZ: Well, year end they would get a
14 realized gains and loss statement --
15 THE WITNESS: Yeah.
16 MR. BOLTZ: -- as well as unrealized?
17 THE WITNESS: The unrealized is up to them, but
18 it's always available.
19 MR. BOLTZ: Okay.
20 BY MR. DUNBAR:
21 Q I am not going to hand you what has been previously
22 marked as Exhibit Number 10, dated October 15th, 1999, with
23 the heading of Charles A. and Sally B. Culloden. Do you
24 recognize this document?
25 A I do.
Page 262
1 Q And what is it?
2 A It is a copy of a statement that was sent to
3 Charlie Culloden last fall.
4 Q Is this similar in nature to the quarterly
5 statements sent to all investors?
6 A Yes.
7 Q The date at the top says October 15th, 1999, at
8 fifteen days after the last statement. Is that generall[y]
9 when the statements are sent?
10 A No. Sometimes it's later or earlier. It just
11 depends on when we get the work done.
12 Q In regards to page 2, Bates-stamped RS 00775, [can?]
13 you explain that?
14 A [I can.] We keep a copy of all the statements sent
15 to the person on a quarterly basis. When we were reques[ted]
16 to supply all those statements we found that some of the[m]
17 were not filed properly. And we felt, in the interest of
18 making sure that we got the information to you, we sent [out?]
19 sort of a -- this is a transaction printout of all the -- in
20 other words, each of the month's net changes are in here; [?]
21 could be extrapolated from this. Even though we couldn['t]
22 find the '97, I guess you couldn't find the '97, '98
23 statements. For some reason they were filed wrong, or
24 whatever, and this was just to supply you with the
25 information that would be on these quarterly statements.
Page 263
1 Q Did you generate this report for every investor[?]
2 A Yeah.
3 Q What type of program do you use for this?
4 A I gave it to you last time. It's called RB Files.
5 Q Sorry.
6 A Yeah.
7 Q Did you ever send this to an investor?
8 A Possibly, but I don't think so, not generally.
9 Q If you look at the last line of RS 00775, just to
10 clarify, it says 11449; what is that?
11 A Well, it says at the top of the page it's the
12 account number.
13 Q And when it says negative $3,546, what does t[hat]
14 mean?
15 A Well, it says profit or loss for August.
16 Q Is that just for August or for the --
17 A Well, it says profit or loss for August. That's
18 what it says.
19 Q So, each month you have a profit or loss?
20 A Yeah.
21 Q And who maintains this file?
22 A Ms. Janu does.
23 Q Do you assist her in maintaining this file?
24 A Do I assist her? Do you mean do I tell her what
25 numbers to put in there? Do you mean do I put numbe[rs in?]
Page 264
1 myself? I don't know what you mean by assist her.
2 Q Yeah, do you put numbers in yourself?
3 A No, I don't do that.
4 Q Do you ever tell her what numbers to put in?
5 A I don't tell her what numbers to put in. This is
6 based on what's in the account.
7 Q So, this is sort of raw data for each account?
8 A Yeah. I mean, I supplied it to you because we
9 couldn't find the printouts.
10 Q Do you recall when this person first invested with
11 you?
12 A No. It looks like it might be 9/96, doesn't it?
13 Q Would this report generate when they first
14 invested?
15 A Yeah.
16 Q So, this is their -- if you produced this for every
17 investor it would start with their first day?
18 A Yeah.
19 Q So, they had money invested, $50,000, 9/1/96?
20 A That's what it says.
21 Q And then, I guess, so, for the first quarter it
22 appears their money -- well, explain that, those zeros.
23 MR. BOLTZ: What is the question now?
24 BY MR. DUNBAR:
25 Q The question is, it appears they invested $50,000
Page 265
1 9/1/96. And then -- oh, I see, there are seven -- well, is
2 that zeros? That is previous, before they invested?
3 A In other words, that -- I'm sorry, the reason
4 there's zeros is because the program -- I guess she must -- I
5 don't know what she did exactly. It's possible that this
6 money came in at the end of August, I believe. And by
7 putting August in the program it probably spit it out by
8 quarter. So, it started with July. That's what I'm guessing
9 that's why the zeros are there. Oh, here it says 8/21. So,
10 what probably occurred is that the --
11 Q 8/21 or 8/31?
12 A I think it says 8/21. Am I reading it wrong?
13 Here.
14 Q Oh, I see, wire in, 8/21/96.
15 A Yeah. So, I think maybe the program is built that
16 whatever quarter there is a starting point it gives the whole
17 quarter.
18 Q Who built this program?
19 A It's an off-the-shelf program. We had some
20 modifications done to it, I believe, but it was off the
21 shelf. So, since it started in the end of August, my
22 assumption is that the adjustment was made -- or the
23 reconciliation was done at the end of September, and that's
24 where that number comes from.
25 Q And when you say reconciliation what are you
Page 266
1 referring to?
2 A Well, you know, what stocks they own, how much they
3 made, what interest they made. That's the net change.
4 Q And if you go back to the first page, who generates
5 these reports, quarterly statements?
6 A Who generates them? In other words --
7 Q Whose computer are they printed off of?
8 A They're printed off of my computer at the Kellogg
9 office.
10 Q And does Ms. Janu assist you in generating these
11 reports?
12 A Yes.
13 Q And in what way does she assist you? I mean,
14 describe the process when these are made.
15 A Yeah, okay. I'm not sure of all the details.
16 Since we have all the information, has been entered --
17 deposits, withdrawals, gains, losses -- there's a utility in
18 the program that allows certain pieces of the data that's in
19 this raw data to be pulled off of that and put onto this
20 particular page. It's a software utility.
21 Q So, it gets down to a command; you, like, press
22 command and this will come out?
23 A I've never done it myself, but I would assume
24 that's probably true.
25 Q And who does it?
Page 267
1 A She does it.
2 Q Ms. Janu?
3 A Yeah.
4 Q And, then, how do you assist her? What do you do
5 in the process when she is -- when she comes to help generate
6 these reports?
7 A I sign them.
8 Q Do you do anything else?
9 A Well, that's basically what I do. I mean, I'm --
10 Q So, you said these records are maintained by Ms.
11 Janu?
12 A Right.
13 Q And I believe last time you said --
14 A If I said something that --
15 Q No, no, no, I am --
16 A -- just tell me, I'll clear it up.
17 Q -- just trying to recall. I think you mentioned
18 that Ms. Janu helps you generate these reports, right; you
19 guys generate them together? Well, describe the process,
20 like, around, I guess, you know, right before these come out.
21 What happens? Do you go see Ms. Janu, does she come see you?
22 A She comes to Santa Barbara.
23 Q She flies out?
24 A Yeah.
25 Q Every quarter?
Page 268
1 A Pretty much.
2 Q And then what? Because you said she maintains
3 these records.
4 A Well, I mean, she gets the reconciliations from Ms.
5 Rogers about deposits and withdrawals. And then she enters
6 all this, and then we print them.
7 Q Does she enter all in New Mexico?
8 A Probably some of the entry is done there -- I
9 think.
10 Q I mean, does she fly out with a computer? Does she
11 fly out with all these and you just sign them? Or how do
13 these --
14 A Okay, okay. I just can't tell what the question is
15 sometimes. You know, I just --
15 Q That is probably my fault, but go ahead.
16 MR. BOLTZ: Well, do not be bashful about asking to
17 clarify if you do not understand it, because we want to have
18 this clear.
19 THE WITNESS: Yeah, I don't have any -- the RB
20 Files program existed on the computer in Santa Barbara. And
21 through a utility, I believe called PC Anywhere -- I'm just
22 guessing now -- she was able to log in and do the work on it.
23 I think that's how it worked.
24 MR. BOLTZ: And logged in from Albuquerque -- or
25 Santa Fe?
Page 269
1 THE WITNESS: From Santa Fe, yeah.
2 BY MR. DUNBAR:
3 Q And where is it connected to? You said she logs in
4 somewhere.
5 A Well, if you understand how a modem works --
6 Q Right. Well, walk me through it.
7 A So, say the program is in Santa Barbara. It's not
8 dissimilar -- I'm trying to describe the technology. There's
9 a communications program; it's called PC Anywhere. Are you
10 familiar with this? And you can call another computer, and
11 then you control the screen and the computer while you've
12 logged into it.
13 Q So, she has this software -- so, she has the
14 ability to do this. And what computer does she
15 access when she does this?
16 A I'm not sure exactly which one it is.
17 Q Is it one in your office?
18 A Yeah.
19 Q Can other people access your computers in your
20 office?
21 A We have put a fire wall in, you know, for
22 confidentiality.
23 Q Who is allowed to log in and access these
24 computers?
25 A This particular computer, I believe it was just
Page 270
1 her.
2 Q And this particular computer had these files on
3 there?
4 A Yeah.
5 Q So, just you and Ms. Janu had access to these
6 files?
7 A I'm not even sure even I have access to them,
8 particularly. I'm not sure I would be able to sit down and
9 bring them up. I'm not sure I would even know how to do it.
10 Q Why do you maintain them at your place? Why
11 doesn't she just keep them?
12 A I think that's how it was originally set up. I
13 don't know. There's no -- I guess it could be. I mean, we
14 could change that, but I've got to sign them anyway, so.
15 BY MR. MURPHY:
16 Q How do you get from the -- if I could look at page
17 RS 775 of Exhibit 10 that is before you, the second page --
18 you know, the statement from Mr. and Mrs. Culloden?
19 A Culloden.
20 Q Do you see, it shows that they wired in $50,000 on
21 August 21, 1996?
22 A Uh-huh. (Affirmative response.)
23 Q And then in September they had a profit or loss of
24 $2,535?
25 A Uh-huh. (Affirmative response.)
Page 271
1 Q How was that computed -- do you know -- the gene[ral?]
2 process?
3 A Based on the stocks they bought and interest and
4 dividends that were -- that belonged to that particular
5 account.
6 Q But how is that -- like, does the big account over
7 in NAA that has most of the stocks, you know, how do yo[u]
8 track that?
9 A Okay, okay. You had another statement over there
10 to show the tax statement, for example. Let's bring that
11 out, just for --
12 BY MR. DUNBAR:
13 Q The realized gains and losses?
14 A Yeah, let's just bring that out for a second, okay?
15 This is pretty straightforward.
16 Q Okay, now handing an Exhibit which has previous[ly]
17 been marked as Exhibit Number 6. There are two of them
18 there.
19 A This is a different program -- aha, apparently,
20 right? Okay. So, this is the program where the transactions
21 are entered for the individual securities, for the individual
22 accounts. So, this would be the program that would be
23 accessed to -- for that individual person. This is the
24 record keeping program. This is the recording program.
25 That's basically the answer to your question. So, this
Page 272
1 number would be generated from this.
2 BY MR. MURPHY:
3 Q I see. So, the first step would be for the program
4 that generates Exhibit 6 would work on the record keeping?
5 A Right.
6 Q And who does that?
7 A Ms. Janu does that.
8 Q Oh, she does that from -- and how does she do --
9 A She gets -- I tell her what stocks are bought. She
10 records them and then they're in -- that's when that account
11 is set up.
12 Q Oh, so you -- like, for example, on Exhibit 6, the
13 first line is: Open date, 12/2/96. Exhibit 6, just for the
14 record, is a statement for Betty Carlton for January 1, '98
15 through December 31st, '98.
16 A Right.
17 Q And then it is a summary of the whole series of
18 statements, is it?
19 A A summary of the securities that were sold during
20 the tax year. This program also, just to -- again, I'm
21 extrapolating, but when you get the statements that have the
22 unrealized gain reports on them it's the same program that
23 generates those. And you'll get to see the whole history of
24 each of these accounts.
25 Q So, if you could take me through that allocation,
Page 273
1 you know, from when you buy a -- you do a transaction of
2 buying or selling a stock, and how do you allocate that out
3 to the -- how do you communicate down through your reporting
4 process?
5 A Well, I know, for example, how many dollars in each
6 account -- I know the size of each account. And I'm looking,
7 say, for a 5 percent allocation. I've already this question,
8 didn't I? I already answered this.
9 Q Right. So I am wondering about mechanically what
10 you do. Now you have decided you are going to buy -- let's
11 say -- make a transaction.
12 A Yeah. So, let's take this account. Take this
13 account right here. Take Mr. Culloden's account. Let's just
14 say we have an account here, $113,000, right? Now, let's
15 just call it $120,000 for the purposes of conversation. And
16 5 percent of that would be $6,000.
17 Q Right.
18 A Okay, so, I would say to Ms. Janu, we're going to
19 allocate $6,000 worth of Tupperware to Mr. Culloden's
20 account, based on my purchase of that particular stock, and
21 on the date --
22 MR. DUNBAR: I am sorry, did you say "Ms. Janu"?
23 THE WITNESS: Pardon me?
24 MR. MURPHY: You tell Ms. Janu to allocate $6,000
25 worth of that stock to that --
Page 274
1 THE WITNESS: Yes.
2 MR. BOLTZ: He did say that.
3 THE WITNESS: I did say that, yeah. And that's how
4 that gets on this page over here, which is -- you haven't
5 seen yet, but you'll see it.
6 BY MR. DUNBAR:
7 Q Do you tell her this right when the purchase is
8 made or do you wait and do it all at once?
9 A I do it pretty often. I mean, usually weekly,
10 sometimes daily. It depends on the situation.
11 Q So, when you make a purchase you write it down on
12 your own little note pad?
13 A Yeah, right.
14 Q And eventually call Ms. Janu and say --
15 A -- this is what we're doing.
16 Q And then she inputs it?
17 A Correct.
18 Q How does this information get to this program?
19 A I believe that it just generates it directly, and
20 then it's just entered over here.
21 Q It just transfers --
22 A Well, I think that there might have to be some data
23 entry that has to be put in there, but it comes from this
24 other side.
25 BY MR. MURPHY
Page 275
1 Q So, you are saying the realized gains and losses
2 information is used to generate through a program the
3 statement of account activity?
4 A Both of them are.
5 Q Both of them, realized and unrealized, yeah.
6 A Yeah.
7 BY MR. DUNBAR:
8 Q And Exhibit 6, this is sent to every investor at
9 the end of the year?
10 A Correct.
11 Q And going back to the Culloden account, which is
12 Exhibit Number --
13 MR. BOLTZ: Exhibit 6, though, includes this --
14 MR. DUNBAR: Plus Exhibit 10.
15 MR. BOLTZ: Oh, I am sorry, you are correct.
16 THE WITNESS: Yeah, I think he made the
17 distinction.
18 MR. BOLTZ: Yeah, right, okay.
19 BY MR. DUNBAR:
20 Q Going back to Exhibit 10, at the bottom of the page
21 it says: "Please note: The balances contained in this
22 statement are approximate and subject to change, based on our
23 yearly reconciliation." What does the yearly reconciliation
24 mean?
25 A Well, in general terms, the information that I
Page 276
1 receive from NAA, or from brokerage house, subject to
2 keypunch error, wrong pricing. You've probably seen this
3 happen. I mean, we like to check them, make sure it's all
4 right. So, there could be an error. And I think it's sort
5 of a standard disclaimer, based on the fact that, you know
6 we check things very thoroughly. I mean, to have somebody
7 pay taxes on something, we want to make sure it's right. So,
8 that's what we're doing right now. We're doing all the
9 reconciliation for the whole year, for '99.
10 Q Have you ever had a major difference?
11 A I've seen some errors, yeah. Yeah, I've seen
12 somebody get $500,000 when they sent in $5,000; seen that
13 happen. I think that we got a phone call on that one
14 probably. Those kind of things, I've seen that occur, where
15 we made a -- or there was a number on one of these, you know,
16 P and L's here that was transferred by human hand and the
17 decimal point was off, or a very typical sort of, you know,
18 keypunch error.
19 Q How often does that happen?
20 A Well, we're pretty thorough on the checking. Ms.
21 Janu will tell you about that. It's one of my important
22 points. We're as careful as we can be under the
23 circumstances. We feel pretty good about it.
24 Q I am now going to hand you what has been previously
25 marked as Exhibit Number 7.
Page 277
1 A This is -- see, this is where we got that
2 communication. We sent you the sample, and this is a sample
3 of the unrealized gain and loss report.
4 Q So, this is sent to the investor as well at the
5 year end?
6 A It's available. I would say mostly. Some people,
7 I can't say it's sent every single year, but it's certainly
8 there -- just to answer your question exactly.
9 Q And when you say available --
10 A Well, I guess some of these people are -- I mean,
11 you know, they're working down there in Clearwater and
12 they're -- just send a copy of my tax information to my CPA
13 and don't send me anything, literally. That's the --
14 totally, it's sent out to a lot of them, but not necessarily
15 all of them.
16 Q How many people does it get sent out to on a
17 regular basis, without someone asking?
18 A I don't know the answer. It's most people. But,
19 you know, the vast majority.
20 Q Just go over it again, so this is an account for
21 G. Lynne Hanson, and it appears on 7/30/97 she became
22 involved with Acorn, Inc., at $2.27 per share?
23 A Right. There's one above that, too.
24 Q Right, Advanced Energy, Inc. So, you took money
25 that was allocated to her and purchased Acorn with it?
Page 278
1 A Correct.
2 Q And made a note, and then told Jean?
3 A Yeah. It could have been part of a larger
4 purchase.
5 Q Okay, so, for example, on Apple Computer, Inc., [?]
6 quantity is the next line down. You could have purchas[ed]
7 shares of that and allocated it accordingly -- or a three
8 hundredth, or whatever?
9 A That was her allocation, it's what's there.
10 Q So, this 500 shares of Emisphere Technology, she
11 will hold that until it is sold?
12 A Yes.
13 Q Just hypothetical, let's say some you bought a big
14 [share] of Emisphere Technology and allocated it to ten
15 different people. Would you sell all of that Emisphere [or]
16 would you sometimes sell just half of it? And if you di[d]
17 sell just half of it how would you allocate that?
18 A With all due respect, I'm not sure that's exactly
19 the question that you want to ask me. I know where you're
20 headed, but --
21 MR. BOLTZ: Well, he is entitled to ask the
22 questions he wants.
23 THE WITNESS: I know. I'm not trying to be rude
24 here.
25 MR. MURPHY: Yeah, maybe explain what you are
Page 279
1 trying to get and let him explain it.
2 MR. DUNBAR: I was -- you know, I was just
3 wondering, like, if I could do it best with an example. I
4 mean, I am really not trying to get anywhere. I am just
5 wondering --
6 THE WITNESS: Well, no, I just want to make sure [to?]
7 give a very clear answer and I wasn't clear on what you we[re]
8 saying.
9 BY MR. DUNBAR:
10 Q To make it very simple, let's say you bought 1,0[00]
11 shares of Emisphere Technology and you split it up -- y[ou ?]
12 1,000 shares and you split it up between two people, 50[0]
13 shares each. And then you sell 500 shares of it. You d[on't]
14 sell the whole 1,000 lot; you sell only 500 of it.
15 A Oh, partial --
16 Q A partial sale of it.
17 A Partial sale, right.
18 Q Now, I mean, I understand you could split it up [and?]
19 each of them would have only 250 then; or would there [be]
20 times when you would leave 500 in one account and th[e other?]
21 account is fully-liquidated of the Emisphere Technolog[y?]
22 A I understand. That's what I thought you were
23 asking me, but it wasn't clear. The rule is that if we do
24 liquidations we do them across the board, same ratios.
25 Q When you say rule, how often do you follow tha[t?]
Page 280
1 A That's the rule. I mean, we're selling half, we're
2 selling half. Everybody sells half.
3 MR. BOLTZ: Everybody is treated the same?
4 THE WITNESS: Yeah, absolutely.
5 BY MR. DUNBAR:
6 Q So you would never hold one person in a position
7 while another person got fully-liquidated out of it?
8 A Well, it could happen if someone wanted to
9 liquidate their account.
10 MR. BOLTZ: But aside from that --
11 THE WITNESS: Aside from that, I mean --
12 BY MR. DUNBAR:
13 Q And if someone did want to liquidate they would
14 call you and say I want all my money?
15 A They would write to me.
16 Q And would you subsequently sell all their shares in
17 the NAA Financial account?
18 A Yes.
19 Q Would you ever just take the market value of those
20 shares and send out -- at that time that they want to be
21 liquidated -- and send out that amount of money?
22 A Are you asking me if you would keep the stocks and
23 just send them cash?
24 Q Right.
25 A Is that what you're asking?
Page 281
1 Q Yes, that is what I am asking.
2 A So you're asking me if I would cross a trade, is
3 what you're asking me, I guess.
4 Q Well, let's say, you know, you have an investor who
5 owns only 1,000 shares of Emisphere Technology, and they say
6 I want my money. Would you ever maintain that -- keep that
7 1,000 shares of Emisphere and send them that market value,
8 just like you sold it, and what they would get, but just kept
9 the stock in the account? Or do you actually call NAA
10 Financial and say, I need to sell --
11 A I see your point, I see your point. You're
12 thinking of things that I haven't even thought of. That's
13 good. Let's see, so, the question is, have you ever not sold
14 the stock when you were asked to liquidate the account and
15 just kept it in the account.
16 Q Correct.
17 A Okay. I'm trying to think of a situation where
18 that would take place. I'll have to think about that one.
19 MR. BOLTZ: Well, normally does that happen?
20 THE WITNESS: No, absolutely not. I mean, normally
21 I wouldn't do that. But when you say "ever", you know, I
22 mean, I'm trying to think of an example when it might not.
23 MR. BOLTZ: Well, can you ever remember an example
24 when it did happen?
25 THE WITNESS: I can't remember when -- I mean, I'm
Page 282
1 just -- you know, when I get this kind of question I get a
2 little confused, because when someone says "ever" or "any" or
3 "at all", I try and be completely -- you know, but did you
4 ever? I would say that normal activity was not -- no,
5 because when someone liquidated we sold.
6 MR. BOLTZ: And you ca not remember any exceptions
7 to that?
8 THE WITNESS: I'm trying to but I can't think of
9 one right now.
10 BY MR. MURPHY:
11 Q What about the crossing trade that you mentioned?
12 A I thought that's what he's asking me.
13 Q What did you mean by that?
14 A Well, actually, that's what I thought he was
15 originally asking me, was would I keep it for somebody else,
16 or something like that.
17 Q There is one investor buying in and another selling
18 out?
19 A Yeah, I mean, by default it might happen that way,
20 but on the books it wouldn't happen that way.
21 BY MR. DUNBAR:
22 Q It would actually be a sale on a repurchase?
23 A Yes, absolutely, yeah.
24 BY MR. MURPHY:
25 Q Why do these accounts -- and, like, I notice the
Page 283
1 shares are in even numbers on, for example, Exhibit 7, it
2 shows 1,100, 3,000?
3 A Oh, yeah, we round them up, round up the number of
4 shares.
5 Q Round up the number?
6 A Because I don't buy odd lots. It's just nutty.
7 So, it might not be exactly 5 percent. It would a round up
8 to the nearest 100.
9 Q Of shares on that person's account?
10 A Shares, shares, the shares in the person's account,
11 yes. Otherwise I'd have 21's and 33's and 59's, and it's
12 unwieldy.
13 Q But then do you have a balance in the holding
14 account, in the NAA account? And if you buy, like, 300,000
15 Emisphere and you have 799 investors, maybe it does not
16 divide up. How does it work out?
17 A Right. There's a -- it takes some time to make
18 sure that we get it right, but we do make sure that we round
19 up -- we buy enough shares to round up to hundreds.
20 Q For each investor?
21 A For each investor. And I suppose, you know, I
22 could take you through that whole thing, but it's not --
23 Q Eventually, we will get into detailed bookkeeping at
24 another day. We are just trying to get concepts now of how
25 you do things.
Page 284
1 A It's not really that complicated when you think
2 about it. I would do it just like you would do it probably,
3 just, you know --
4 BY MR. DUNBAR:
5 Q And on a withdrawal, let's say a -- we will use
6 Exhibit 7 -- let's say Lynne Hanson wanted to withdraw money.
7 How would that work?
8 A How would that work?
9 Q I mean, you could start from the beginning if you
10 want. She would write you a letter?
11 A Yeah.
12 Q And it would say, please withdraw $50,000, let's
13 say. And then what would you do?
14 A Well, I would look at the account and see what her
15 positions were, and what ratio of cash to stocks were, based
16 on the risk point we talked about earlier, and then make a
17 decision on just sending her the cash that was available at
18 that time or liquidating a particular position, as necessary.
19 Q So, you would choose which stocks to get her out of
20 to get her the funds she has requested?
21 A That's correct.
22 Q And that would either be liquidating an entire
23 position in a stock or just cutting her down some in a stock?
24 A Correct.
25 MR. BOLTZ: Or just using the cash balance?
Page 285
1 THE WITNESS: Or just using the cash balance,
2 correct.
3 BY MR. DUNBAR:
4 Q Now I am going to show you what has been previously
5 marked as Exhibit Number 8, Bates-stamped RS 00037. Do you
6 recognize this document?
7 A I do.
8 Q And what is this?
9 A This document is called Interest and Dividends.
10 It's sent out to Ms. Carlton here.
11 Q And how often is this sent out?
12 A Once a year.
13 Q It appears she made $3,993, approximately, in
14 interest?
15 A Correct.
16 Q And was that calculated by the method you mentioned
17 before?
18 A It was.
19 Q As was the dividends?
20 A Dividends would match exactly what I told you;
21 whatever stocks that she had that received a dividend she got
22 her --
23 Q -- her share?
24 A Well, she got whatever allocates to that particular
25 number of shares for that stock.
Page 286
1 Q With regards to the interest and the cash balance,
2 you [said?] it [is?] their cash balance which is no[t] in equities at
3 the time, and you do it monthly on a daily basis. Is it --
4 does that include interest?
5 A I'm going to write this down as you say it, so I --
6 Q Actually, no. I am actually not going to -- I am
7 going to pass on that. I will think of that in a minute.
8 So, the interest is on the cash balance of whatever their
9 account says their cash balance is?
10 A Correct.
11 Q Do you receive interest on the friends Union Bank
12 account; does that produce interest?
13 A Yes.
14 Q Do you receive interest on your personal Union Ban[k]
15 account?
16 A Yes.
17 Q Do you receive interest in the NAA Financial
18 accounts?
19 A Yes.
20 Q What are the interest rates on the NAA Financial
21 accounts?
22 A It's a money market rate. I think it's -- I
23 couldn't give you the exact number, but it's pretty equal to
24 what we get over here, I think within a couple of tenths, I
25 think.
Page 287
1 Q So, with the Union Bank accounts you also get the
2 money market rate?
3 A Money market rate, that's correct, right.
4 BY MR. MURPHY:
5 Q In the NAA accounts, when you have capital gains,
6 does the bank withhold taxes on those accounts?
7 A No.
8 Q So, the full capital gain is paid to the account,
9 is it, that there are no withholdings or anything?
10 A I've never seen a withholding in all the years I --
11 I don't recall seeing that. I think I saw once when there
12 was a -- anyway, nothing to do with that.
13 Q But with the capital gains there may be -- the
14 companies withhold tax on dividends and stuff, but there i[s]
15 not -- with respect to when you sell a stock, there is no ta[x]
16 withheld on the account level?
17 A I've never seen a withholding document myself.
18 BY MR. DUNBAR:
19 Q In your NAA personal account, other than yourself[,]
20 does anybody else have any sort of ownership in that acc[ount?]
21 A No.
22 BY MR. MURPHY:
23 Q Do they have any indirect interest in it? Is there
24 anybody else that has got a claim on that money, the acc[ount?]
25 A Claim on it. Like hypothecation, you mean, or
Page 288
1 something like that?
2 Q Well, any kind of claim. In other words, was t[he]re
3 any other institution or anybody else that has got like an
4 indirect claim on that account?
5 A I'd like to go with a specific example, but as far
6 as I know, no. If you have something particular --
7 Q There is nobody --
8 A There's no margin or anything like that.
9 Q Or nobody who says, well, look, you know, I own --
10 A I hope not.
11 MR. BOLTZ: Not that you know of.
12 THE WITNESS: Not that I know of, yeah.
13 MR. BOLTZ: Your attorney. No, just kidding.
14 THE WITNESS: Well, aside from my accomplice here,
15 yes.
16 MR. BOLTZ: Just kidding.
17 THE WITNESS: For the record, just kidding.
18 BY MR. DUNBAR:
19 Q I am now handing you what has been marked as
20 Exhibit Number 24, Bates-stamped RS 07298. Do you recognize
21 this document?
22 A I'm confused by this document.
23 MR. BOLTZ: Well, do you recognize it?
24 THE WITNESS: I don't recognize it.
25 MR. BOLTZ: That was his question.
Page 288
1 BY MR. DUNBAR:
2 Q Why are you confused by this document?
3 A Because I don't -- oh, I see, I didn't sign it.
4 Okay, I'm sorry. I thought if I signed it, I don't recognize
5 it; that's what I meant.
6 Q Do you know why Ms. Janu would write this type of
7 letter?
8 A I don't know. I could only speculate.
9 Q Speculate.
10 MR. BOLTZ: If an investor lost the original or
11 requested it, would that be something she --
12 THE WITNESS: That's the first thing I thought of.
13 But I also don't know -- I would speculate it has to do with
14 a close out of some kind.
15 BY MR. DUNBAR:
16 Q You mean like a liquidation of an account?
17 A Yeah, liquidation of account. You can certainly
18 ask her. I don't -- I am just only speculating. It was
19 certainly requested for some reason, or it was necessary to
20 send it for some reason. I don't know.
21 Q Do you know if these were commonly sent to people?
22 A I would say no.
23 Q Normally, they got the interest and dividend
24 statement?
25 A Yeah. That's why I'm speculating as to the close
Page 290
1 out of some kind.
2 MR. DUNBAR: I will now have this marked as Exhibit
3 Number 31. This is a copy of a check, it appears, from Reed
4 Slatkin to Lillian Rakow.
5 (SEC Exhibit No. 31 was marked for
6 identification.)
7 BY MR. DUNBAR:
8 Q Do you recognize this document?
9 A I've never seen it before. I mean, I could
10 speculate what it is if you want me to.
11 Q Yeah, speculate what it is.
12 A This is, like, a check written to -- and Phyllis
13 Rogers signed it.
14 Q Is Lillian Rakow an investor?
15 A I believe so, but I'm not, I mean -- okay, I know
16 what's coming now.
17 MR. BOLTZ: With the list?
18 THE WITNESS: I guess, does her name not show up on
19 the list? I'm sorry, it should have. I guess we should
20 offer to review this because it was done so fast. I don't
21 know why her name is not on here. Can we just take a -- I
22 mean, obviously, there's a name here which should be on this
23 list that's not on the list.
24 MR. BOLTZ: Yes.
25 THE WITNESS: Okay, apparently, that's the point of
Page 291
1 it being here. I just got a letter from her. And I sent her
2 the letter of liquidation.
3 MR. BOLTZ: Well, show him the letter.
4 THE WITNESS: I'm just trying to think; I don't
5 know why she wouldn't be on here.
6 MR. BOLTZ: Is her account closed, was that the
7 reason?
8 THE WITNESS: I don't think so. I think that
9 somehow or other --
10 BY MR. DUNBAR:
11 Q Well, how do you know her?
12 A Well, her -- she's the mother of one of my close
13 friends. Anyway --
14 MR. BOLTZ: Do you want me to look for it? Go
15 ahead, if you can find it.
16 THE WITNESS: I'll find it. I guess we should just
17 say that there's some people that are missing here. We need
18 to make sure we get them all back on the -- all on the list
19 MR. MURPHY: So, Exhibit 4, then, we would ask you
20 to update it and provide us with an updated list.
21 THE WITNESS: Yeah, we're happy to do it. I mean,
22 I'm not trying to hold back here. This was done very
23 quickly, when you first asked for the information, and I know
24 that, you know -- here's her letter, if I can just find it
25 here, briefly.
Page 292
1 MR. MURPHY: I can just run a copy.
2 MR. DUNBAR: Yeah, we [can?] not mark the original, so
3 we will have to --
4 THE WITNESS: Well, I mean, I was just going to
5 read it to you. "Dear Read, We received your letter and we
6 are very sad that our relationship was coming to an end. We
7 wanted to thank you from the bottom of our hearts for what
8 you have done to make us financially secure. It was a
9 pleasure to have been associated with you for the past twelve
10 years. Good luck and good health to you and your family
11 forever. Sincerely, Lillian and Irving Rakow."
12 MR. MURPHY: Why don't I just make a photocopy and
13 we can mark it. We will just pause a second.
14 MR. DUNBAR: We will go off the record.
15 (Whereupon a brief recess was taken.)
16 MR. DUNBAR: Back on the record at 2:51. First, we
17 will mark this letter, dated January 22nd, 2000: "Dear Reed,
18 We received your letter..." -- Exhibit Number 32.
19 (SEC Exhibit No. 32 was marked for
20 identification.)
21 BY MR. MURPHY:
22 Q Is Exhibit 32 a copy of the letter you just read
23 out from the investor?
24 A Yes.
25 BY MR. DUNBAR:
Page 293
1 Q Okay, back to Exhibit 31, the check from -- to
2 Lillian Rakow, upon your understanding, if Lillian, if Ms.
3 Rakow --
4 A Mrs.
5 Q Mrs. Rakow; wrote to you saying, I would like to
6 withdraw $18,000. The letter comes to you. What do you do
7 then? We have discussed that you go to the account, you will
8 see what -- if there are cash equivalents, or if you want to
9 sell some of her stocks to give her the withdrawal; is that
10 correct?
11 A Right.
12 Q And, then, once you decide, then what happens,
13 mechanics?
14 A Well, we would -- I would order a check to be
15 written to her in the friends account, either immediately or
16 after a liquidation took place.
17 Q And when you say "order" what does that mean? You
18 would order it?
19 A I would tell Ms. Rogers to write her a check.
20 Q And would this be a check that went out to Ms.
21 Rakow as a result of that?
22 A Right.
23 Q And how would you indicate to Ms. Rogers? Usually
24 you fax her, call her on the phone?
25 A I think mostly with phone calls. I mean, we
Page 294
1 usually discussed, you know, what needed to be done.
2 Q So, it appears she has some sort of program where
3 she can print out all these checks. Do you know what type [of?]
4 program it is?
5 A No.
6 Q Do you know how she writes these checks? I mean
7 do you know what her function is in -- I mean, do you call
8 her, and then what does she do, input the number?
9 A How she writes the check. I mean, I --
10 Q Well, I mean, you said --
11 A I assume that you could -- I mean, if she was here
12 you could ask her. I don't know exactly what program she
13 uses. I think it's a real -- I don't think it's Quicken.
14 It's some program that's -- excuse me, I d[on't] know the
15 answer, sorry. I'll stop speculating.
16 MR. BOLTZ: If you do not know --
17 MR. MURPHY: You do not have to guess. I mean, if
18 you do not know, you can just say you do not know. You are
19 not expected to know every answer to every question.
20 MR. BOLTZ: It is not a test.
21 THE WITNESS: I'm trying to help out here.
22 BY MR. DUNBAR:
23 Q Now, going back to your independent contractors
24 that you hired, who would you categorize as an independe[nt]
25 contractor?
Page 295
1 A You mean generally or as individuals?
2 Q Individuals.
3 A You're asking me to name people that I consider
4 independent contractors?
5 Q Yeah, for you.
6 A At that time period are we talking about?
7 Q We are talking the last five years.
8 A Well, where is that list? Excuse me for asking,
9 but where's the list? I can have the list in front of me.
10 MR. DUNBAR:
11 (Whereupon, a brief recess was taken.)
12 MR. DUNBAR: We will go back on the record. I am
13 actually going to take you -- I am going to take us one step
14 back and do one more quarterly statement. I would like to
15 have this marked as Exhibit Number 33. Exhibit 33 appears [to]
16 be a document, dated October 15th, 1999, care of Marla Gibb[s]
17 with an account number 12178, Bates-stamped RS02707 to [RS]
18 02709.
19 (SEC Exhibit No. 33 was marked for
20 identification.)
21 BY MR. DUNBAR:
22 Q Can you identify this document?
23 A It's a quarterly statement.
24 Q Similar to the ones that have been sent out to
25 every investor?
Page 296
1 A Yeah.
2 Q I would like to draw your attention to RS -- the
3 second page, Bates-stamped RS 02708. And it says that the
4 ending balance on 6/30/99 was $221,369 and the beginning
5 balance on 7/1/99, on the front page, Bates-stamped RS 02707,
6 is approximately $1.5 million. I was wondering if you could
7 just explain that?
8 A I have no idea. I know this particular person. I
9 think Ms. Janu could really fill that in for you. There's
10 documentation for all this, from the person. I don't know
11 what occurred here. The addresses, amounts, there may be an
12 error of some kind. But I'm sure she'd be happy to take -- I
13 have no idea. I don't know what happened here.
14 Q Just let me direct your attention to page 1 again,
15 RS 02707. Wire in, 8/12/99, $548,500. Does that indicate a
16 -- what does that indicate?
17 A Money was sent in.
18 Q Or wired in?
19 A Wired in.
20 Q And in the case that money is wired in, how does
21 that work?
22 A Don't understand what you mean specifically.
23 Q Like, do they need wire instructions, or do they
24 call you? Do they write you a letter saying -- I mean, where
25 does the wire come from and where does this wire go?
Page 297
1 A Well, the wire is going to the friends account at
2 Union Bank.
3 Q So, do they call you and ask for information, wire
4 instructions?
5 A Yeah.
6 Q Well, do they call anybody else or would they call
7 you?
8 A They'd call my office.
9 Q Would Jean be able to give them wire instructions?
10 A Don't think she does that.
11 Q And how often do people wire in money?
12 A I don't know exactly.
13 Q What is the common practice?
14 MR. BOLTZ: You say what is the common practice?
15 MR. DUNBAR: Yeah, mostly.
16 THE WITNESS: Mostly we get checks, yeah.
17 BY MR. DUNBAR:
18 Q Then the next line says: "Additional gain,
19 9/30/99." What does that represent?
20 A I'd have to speculate, but it looks like it --
21 these statements are unclear to me. I would like to get an
22 explanation and then come back and give it to you. I mean,
23 I'll make a note. I'm happy to do that. I'm sure there's an
24 explanation. I don't know if I should ask for a copy of
25 this. I know what to do. I'll just --
Page 298
1 MR. MURPHY: We can give you an extra, since it is
2 your record and you need to provide an explanation. If you
3 and counsel wish to take one of the extra copies --
4 THE WITNESS: That would be great, if you don't
5 mind. We'll do that.
6 MR. MURPHY: Right, because you are going to
7 provide us with an explanation.
8 MR. BOLTZ: Okay, we can keep that. That is
9 something you can take.
10 THE WITNESS: Yeah, okay, good.
11 MR. MURPHY: Since it is your own record.
12 THE WITNESS: I will provide you with an
13 explanation for this.
14 MR. DUNBAR: Do you mind if we mark that as an
15 Exhibit, or do we have to make copies of it or --
16 MR. BOLTZ: It is Exhibit 33.
17 MR. MURPHY: No, no, that is fine. We have Exhibit
18 33. He is just -- oh, I am sorry.
19 MR. DUNBAR: No, I am talking about the --
20 MR. MURPHY: Oh, the list? Sure, I can run a copy
21 if you want. Do you want me to?
22 THE WITNESS: Feel free. I think you've already
23 got this, but --
24 MR. BOLTZ: I think you do have it.
25 MR. DUNBAR: Yeah, but we have not marked it yet.
Page 299
1 MR. MURPHY: Okay, we will just mark it.
2 MR. DUNBAR: Yeah, it makes it easier. We will go
3 off the record.
4 (Whereupon, a brief recess was taken.)
5 MR. DUNBAR: Back on the record. I am showing you
6 now what is Government Exhibit Number 34, entitled Certified
7 Public Accountant and Independent Contractors.
8 (SEC Exhibit No. 34 was marked for
9 identification.)
10 BY MR. DUNBAR:
11 Q Do you recognize this document?
12 A I do.
13 Q And what is it?
14 A It's a record or schedule of certified public
15 accountants, independent contractors.
16 Q So, back to the questions, can you list who you
17 consider an -- in the last five years who has been an
18 independent contractor for you?
19 A Phyllis Rogers, Jean Janu, Richard McMullin, Joanne
20 Rubinstein, Jeffrey Donovan, Hank Owens, and there are a couple
21 more.
22 Q Who are the couple more that you can --
23 A Lawrence Carhartt.
24 MR. BOLTZ: This is in the last five years.
25 THE WITNESS: Yeah, I'm just -- Patrick Siefe.
Page 300
1 That's S-i-e-f-e. I guess we could start there. If I think
2 of somebody else I'll let you know. I don't think there's
3 anybody else.
4 BY MR. DUNBAR:
5 Q Starting with Ms. Rogers, you said she was hired in
6 approximately 1981?
7 A Uh-huh. (Affirmative response.)
8 Q And what was the purpose again?
9 A General administrative assistance.
10 Q Of your personal finances?
11 A Well, that was part of it, in terms of balancing a
12 checkbook. But she also did office filing and stuff like
13 that.
14 Q Office filing in relation to?
15 A Well, correspondence I was getting from the church
16 and my church activities at that time.
17 Q When did she begin start working full-time for you?
18 A She has never worked full-time for me.
19 Q Currently, how often does she --
20 A You'd have to ask her. I guess if it's during
21 March it might be pretty much full-time -- tax. Otherwise, I
22 think it's, you know, I'm going to guess ten or fifteen hours
23 a week, maybe a little bit more. Maybe twenty; it depends on
24 the situation.
25 Q And with Ms. Janu, when was she brought on?
Page 301
1 A I'm going to guess '91 or '92 -- '90? Maybe even
2 '89. I'd just say early '90's. I could look it up.
3 Q And why was she brought on?
4 A I brought her on to ensure that the -- our
5 accounting procedures and record keeping were done at the
6 highest possible standard.
7 Q And before Ms. Janu who was doing the accounting,
8 the accounting work and the breakdown?
9 A Ms. Rogers was doing the bank's reconciliations and
10 the brokerage reconciliations, and I was doing the rest.
11 Q And when you say the rest, taking the stocks that
12 were bought and then putting them into the program?
13 A I'm not sure exactly when that program started and
14 which program -- whatever program we were using, yes.
15 Q You were doing the manual?
16 A I was doing the manual, yes.
17 Q Was anybody else doing the manual?
18 A No.
19 Q And how did you meet Ms. Janu?
20 A Her sister was the -- went out with one of my best
21 friends there, almost married. So, that's how I originally
22 kn[o/e?]w her.
23 Q And resides -- she is in New Mexico; is that right?
24 A Right. And we had a mutual acquaintance in New
25 Mexico that I knew her through.
Page 302
1 Q Does Mr. Janu have her own business?
2 A Yes.
3 Q What is it called?
4 A I think it's called "Jean Janu, Inc."
5 Q And is she an accountant?
6 A Don't think so. You mean a certified public
7 accountant?
8 Q Yeah, certified public accountant.
9 A Don't think so.
10 Q What does her business entail, Jean Janu, Inc[.?]
11 A She's a bookkeeper.
12 Q Do you know if she does bookkeeping for any[one?]
13 else?
14 A Yes, I think she does -- although I don't know if
15 she still does; I'm not sure.
16 Q And with regards to your independent contrac[tors,?]
17 how do you compensate them?
18 A I -- well, it depends on the person. In some case[s,?]
19 I'm -- those that are on a regular schedule get a regular
20 check.
21 Q What do you mean regular schedule; what do[?]
22 mean?
23 A Well, like, Ms. Rubinstein comes in from 9:00 [to]
24 1:00 and answers my phone. So, she's on a regular sch[edule.]
25 Someone like Mr. Siefe, who works from time-to-time [?]
Page 303
1 computer related issues at the office, would send us for the
2 time -- we would pay him for the time he was there, for the
3 work he had done on computers.
4 Q And would you write him a check -- or these peop[le,?]
5 any of these people? Would you wire them money or w[ould you?]
6 send a check to them or --
7 A We'd send a check to them.
8 Q And was this on a yearly basis, monthly basis?
9 A I think that they're paid either once or twice a
10 month.
11 Q Once or twice a month?
12 A Yeah, I think so.
13 Q Why do you do it that way rather than a yearly
14 thing?
15 A Well, they're making a living, I guess they're
16 going to get paid.
17 Q Well, I mean, do you base their salary on a yearly
18 basis and then divide it or -- I mean, how do you base w[hat]
19 their salary is going to be?
20 A Oh, I see, I'm sorry. Yeah, we have an agreement
21 on what we're going to do for that year.
22 MR. BOLTZ: I am concerned about your generaliz[ing]
23 when you say that different people are paid in different
24 ways.
25 THE WITNESS: Okay, maybe I'm not clear.
Page 304
1 MR. BOLTZ: Maybe --
2 THE WITNESS: What I mean [to] say is that --
3 MR. BOLTZ: How do you pay Ms. Rogers and how do
4 you pay Ms. Janu? Is it on an hourly basis?
5 THE WITNESS: Right, they're all paid the same way.
6 They're all paid by -- no, excuse me. All right, I
7 understand what you're asking me. I will clarify. Mr. Siefe
8 is paid by the hour, I believe, whereas the rest of the
9 people on this list, for example -- and that would have
10 included Mr. Carhartt -- was on a yearly agreement with me,
11 and they were paid out either monthly or yearly.
12 MR. DUNBAR: Mr. Boltz, do you wish to ask any
13 clarifying questions?
14 BY MR. DUNBAR:
15 Q How would you and the independent contractor come
16 to this type of agreement?
17 A Communicate about the work that was being done --
18 the extent of it, hours involved, responsibilities.
19 Q And how would you come to a salary?
20 A It wasn't exactly a salary.
21 Q Or a number, I am sorry, how would you come to a
22 figure?
23 A I would, simplicity say, was one we agreed on.
24 Q And when you hired these people did -- and this
25 applies to Ms. Rogers, Ms. Janu, Mr. McMullin, Ms. Rubinstein
Page 305
1 and Mr. Donovan, Mr. Owens, Mr. Carhartt and Mr. Siefe -- did
2 they sign any sort of contracts when they started working for
3 you?
4 A I believe that we provided you with the ones that
5 we have. You have those on file. If you don't we'll get you
6 another copy of them.
7 Q Did any of them not sign any?
8 A I'm not sure. I believe there may be -- I'm not
9 sure that every single one of the people did sign one. I
10 could look in the file again.
11 MR. DUNBAR: I will now have marked as Government
12 Exhibit 35 --
13 MR. BOLTZ: Just to clarify, Siefe was not on a
14 yearly contract?
15 THE WITNESS: That is correct; he was not -- isn't.
16 MR. DUNBAR: I hand you now Exhibit Number 35,
17 which is entitled Independent Contractor Agreement, Bates-
18 stamped RS 07630 to RS 07631.
19 (SEC Exhibit No. 35 was marked for
20 identification.)
21 BY MR. DUNBAR:
22 Q Do you recognize this document?
23 A I do.
24 Q And what is it?
25 A It's an independent contractor agreement.
Page 306
1 Q For?
2 A For Mr. Owens, I believe.
3 Q And what was his duties?
4 A Mr. Owens is a technical analyst and looks over
5 stocks during the day and evening, and calls me with his
6 recommendations.
7 Q Do you ever use his recommendations?
8 A Yeah.
9 Q And when he calls you with recommendations do you
10 use them for your personal account, investors' accounts or
11 both -- or it depends?
12 A Well, if they're used they're not used
13 independently. They're part of a larger -- he's just one
14 input. So, it would be either.
15 Q If you look at the front page, I. Services:
16 "Contractor shall perform the service set forth on Exhibit
17 A." Was there at one time an Exhibit A to this?
18 A Don't remember.
19 Q And when they -- after you sign this where would it
20 be filed?
21 A I'm not sure. I'm being specific, I'll answer I
22 don't know for sure.
23 Q Would you keep them, though?
24 A Yes.
25 Q Is Hank Owens still an independent contractor?
Page 307
1 A Yes.
2 Q How often does he come into the office?
3 A I don't think he's been in my office once in ten
4 years.
5 Q So, does he work from home?
6 A Yeah.
7 BY MR. MURPHY:
8 Q How do your friends compensate you for all this
9 overhead -- the computers, independent contractors' offices?
10 A They don't compensate me at all.
11 Q So, how do you recover the costs? It is a lot of
12 overhead, isn't it?
13 A Well, I pay for it myself; I don't ask for
14 anything.
15 Q So, you take these costs out of your own account?
16 A Yes.
17 BY MR. DUNBAR:
18 Q For Ms. Janu, how much do you compensate her for
19 her work?
20 A How much? I don't know the current number. Let's
21 say it's in the -- I think last year it was eighty-seven,
22 ninety. I'd have to look it up. I think it was more this
23 last -- I think it's just switched over recently. I'm not
24 sure.
25 Q Does Ms. Janu do any work with your personal
Page 308
1 accounts?
2 A No.
3 Q And which account did you pay these people from?
4 A My -- the 74 account.
5 MR. BOLTZ: Which institution?
6 THE WITNESS: Union Bank.
7 MR. DUNBAR: Can I please have this marked as
8 Exhibit Number 36?
9 (SEC Exhibit No. 36 was marked for
10 identification.)
11 BY MR. DUNBAR:
12 Q I am now handing you Exhibit Number 36, which
13 appears to be copies of 5 checks. Do you recognize these
14 checks?
15 A I'm having trouble reading this, I'm sorry. It's
16 pretty tiny.
17 MR. BOLTZ: It is small.
18 THE WITNESS: I can't see it. These appear to be -
19 - all five of them? I mean, it looks like there are five
20 checks, they're expense checks from 7574, it looks like to
21 me, if I'm reading it right. I see, like, an American
22 Express check, you know, payment here at the bottom.
23 MR. DUNBAR: Okay, going to check number 2, paid to
24 Richard D. McMullin, is that representative of a check paid
25 to an independent contractor?
Page 309
1 MR. BOLTZ: You mean for compensation?
2 BY MR. DUNBAR:
3 Q For compensation, for their independent contractor
4 work?
5 A It appears to be, yes.
6 Q And with regards to this check sent out, it appears
7 to be signed by Phyllis Rogers. How does that work? Would
8 you dictate to Phyllis which -- how much to send to these
9 people, or does she know, or how did that work?
10 A Well, I think that I let her know what the
11 agreement was between myself and the person, and that became
12 the process every month.
13 Q So, she would know and be able to write the check
14 every month?
15 A That's correct.
16 Q And this check appears to be for $22,916.67. Just,
17 you know --
18 A Well, divide by 12. Maybe that's what that was. I
19 mean, it's obviously some percentage of some bigger number.
20 Is that what you're asking me; why is this such an odd
21 amount?
22 Q Yeah. Even if you multiply by 12 I believe it
23 comes to an odd amount too.
24 A Well, maybe it was done by the week and she's
25 divided it by 52. I wouldn't, not for sure, know. But
Page 310
1 there's an explanation for that.
2 Q Okay. And with regards to the Pacific Century
3 Bank, the third check down, what would that be for, if you
4 know?
5 A I think I had a credit line. I think we talked of
6 it the other day. I think that's probably what the -- I'm
7 not sure what date that's written, or how many months it
8 stands for, but that's what it looks like, a loan payment. I
9 think it says "Loan account" at the bottom there of the
10 check.
11 Q You mean loan 5067?
12 A Yeah, yeah.
13 Q What is the Joe Sussfolk Agency, check number 4?
14 A Joe Sussfolk Agency, 7/99?
15 Q Yes.
16 A I don't know. Might be anything. I have no idea.
17 BY MR. MURPHY:
18 Q Well, it says, on the deposit here, it is Joe
19 Sussfolk Agency, insurance trust account. Does that help
20 you?
21 A Insurance trust.
22 Q Is he the insurance agent, or something?
23 A It could be insurance on my house or on -- I have
24 no -- I don't know what it's for, I have no idea. It's for
25 insurance of some kind.
Page 311
1 Q Do not know?
2 A Don't know.
3 MR. BOLTZ: You are speculating.
4 THE WITNESS: Yeah, I don't know. Oh, I see,
5 you're looking at the stamp.
6 MR. MURPHY: Right, under the deposit on the back
7 of the check, which has reproduced what is on the --
8 THE WITNESS: I have no idea.
9 MR. DUNBAR: I would like to have this marked. I
10 am now handing you what has been marked as Exhibit Number [37.]
11 It appears to be a copy of four checks and one deposit slip.
12 (SEC Exhibit No. 37 was marked for
13 identification.)
14 BY MR. DUNBAR:
15 Q Mr. Slatkin, looking at the first check, once
16 again, is that similar to a check that would be paid to an
17 independent contractor?
18 A Can I have one second with Gerry?
19 (Witness and counsel confer.)
20 THE WITNESS: Yes.
21 BY MR. DUNBAR:
22 Q Was that particular check for independent
23 contractor work?
24 A Yes.
25 Q Was Mr. Carhartt paid monthly?
Page 312
1 A I'm trying to -- Mr. Carhartt was paid monthly.
2 This particular check -- do you have a specific question
3 about this particular one?
4 Q No.
5 A Okay. And I don't know exactly why that amount
6 particularly, but, yes, this is -- he was paid as an
7 independent contractor.
8 Q Was he paid $10,000 monthly?
9 A No, he was not.
10 Q How much was he compensated?
11 A I think it was $3,900 a month, something like
12 this. This may have been a bonus check for him of some kind.
13 Q Did you give bonuses to your --
14 A Yes.
15 Q Every year?
16 A Pretty much, yes.
17 Q With regards to, for instance, the last Exhibit we
18 were looking at, with regards to Mr. McMullin's paycheck, was
19 he paid monthly?
20 A Yes.
21 Q Looking at the same Exhibit 37, the fourth item
22 down, which is a check to Union Bank of California, dated
23 7/99, can you recall what that was for?
24 A No.
25 Q For that check to be written by Phyllis would you
Page 313
1 have told her to write that check?
2 A The $10,901.54?
3 Q Yes.
4 A I don't know who it was to.
5 Q Union Bank of California.
6 A Yeah, but I'm not sure why.
7 Q Would that be a check to your other account or
8 would it be a check to somebody else's account -- or to Union
9 Bank?
10 MR. BOLTZ: Well, it shows it goes over to the
11 Imperial Bank.
12 THE WITNESS: Yeah, but they bought them. I just
13 don't know what the check was for. I mean, I don't know. I
14 can try and clarify. If you want to clarify it I'm happy to
15 go over it with you. I don't know what it is.
16 BY MR. DUNBAR:
17 Q Did Ms. Rogers ever do wire transfers out of the
18 Union Bank accounts?
19 A Yes.
20 Q Would she ever do a wire transfer without your
21 authorization?
22 A No.
23 Q But she could write checks without your
24 authorization out of this account?
25 MR. BOLTZ: Which is this account? Is it the
Page 314
1 friends account we are talking about or the personal account?
2 THE WITNESS: I think it's 75, I'm just confused
3 MR. DUNBAR: I am sorry, we are talking about the
4 7574 account.
5 MR. BOLTZ: Okay.
6 BY MR. DUNBAR:
7 Q Like, for example, the Fire Safe Landscape; would
8 she call you up and say I am writing a check to Fire Safe
9 Landscape?
10 A When she's paying bills I go over the list of bills
11 and she would pay them.
12 Q Would the bills sometime be sent to her, straight
13 to her?
14 A Yes. Not to her personally, but to my P.O. box
15 down there.
16 Q And would she pick them up?
17 A Yeah.
18 Q And then pay them?
19 A Yes.
20 Q Would she contact you before she paid them?
21 A Yes.
22 MR. BOLTZ: If they were routine bills like a --
23 THE WITNESS: Yeah. I mean, mostly -- and
24 occasionally there would be something exceptional that she
25 wasn't aware of and she'd call me and ask me.
Page 315
1 MR. BOLTZ: But other than that she would just pay
2 it?
3 THE WITNESS: Yeah. A lot of that was just routine
4 stuff. Maybe I should use the bathroom now.
5 MR. DUNBAR: We will go off the record, please.
6 (Whereupon, a brief recess was taken.)
7 MR. DUNBAR: Back on the record at 3:40.
8 BY MR. DUNBAR:
9 Q Just briefly, on this list of certified public
10 accountant and independent contractors, do any of these
11 independent contractors still work for you?
12 A Well, I thought I answered that but I'll answer it
13 again. Mr. McMullin does not work for me. The other ones
14 do.
15 Q Including Pat Siefe and Larry Carhartt?
16 A Oh, I'm sorry --
17 MR. BOLTZ: They were not on the list.
18 THE WITNESS: They weren't on this list.
19 BY MR. DUNBAR:
20 Q I am sorry, does Larry Carhartt still work for you?
21 A No, he does not.
22 Q Does Pat Siefe still work for you?
23 A Yes, he does.
24 Q For Mr. Carhartt and Mr. McMullin, did they sign
25 any documents to indicate that they were not working for you
Page 316
1 any longer, any releases or --
2 A I'll have to look for that. I'm not sure. I don't
3 know. It's possible.
4 BY MR. MURPHY:
5 Q All of the other people still work for you?
6 A Yeah. I mean, can I make a note to --
7 MR. DUNBAR: Sure.
8 MR. BOLTZ: I have made it.
9 MR. DUNBAR: I would like this document marked as
10 Exhibit Number 38, entitled NationsBanc, Montgomery
12 Securities.
13 (SEC Exhibit No. 38 was marked for
14 identification.)
15 BY MR. DUNBAR:
16 Q Mr. Slatkin, do you recognize this document?
17 A Yes. This is one I provided you the last time I
18 was here, I believe.
19 Q Well, do you recognize this document?
20 A Yeah.
21 Q What is it?
22 A It is an account value summary of NationsBanc,
23 Montgomery Securities, with a certain account number.
24 Q Is this your account?
25 A Yes.
Page 317
1 Q Will you please turn to page 5? If you look at the
2 bottom, where it says "Contribution and withdrawal activity",
3 there are three funds wired out, one for $2 million, one for
4 $6.1 million, one for $6 million; and then there is a wire in
5 for approximately $14 million. Can you explain those?
6 A I'm not exactly positive.
7 MR. BOLTZ: Okay. Well, we do not want you to say
8 if you do not know.
9 THE WITNESS: I think I know but I'm not sure.
10 It's one of those questions where you'd like to just go check
11 your records and come back and tell the answer, you know what
12 I mean?
13 MR. BOLTZ: Yeah. You are talking about all --
14 there are four of them.
15 THE WITNESS: I'm pretty sure I know what this is
16 about. I just wanted to -- can I just confer with Gerry just
17 for a second?
18 (Witness and counsel confer.)
19 THE WITNESS: I'm happy to make a note and go back
20 and verify this, but this is my best recollection. I believe
21 that there was a sale of EarthLink stock in January of '99.
22 MR. DUNBAR: I am sorry, there was what?
23 THE WITNESS: A sale of EarthLink stock in January
24 of '99, which is the lower -- the one at the bottom. And the
25 stock is held at NationsBanc, or Bank of America, in a
Page 318
1 different account. And I believe that they credited this
2 account with that amount of money, and I do believe that the
3 rest of this was all -- I believe it came -- I'm not sure
4 what the AV number of Union Bank is, but I believe most of
5 this came to Union Bank. I can check where these places are,
6 but this is associated with the sale of the EarthLink stock.
7 That's my -- that could be verified, but I have to check with
8 Phyllis and make sure. There's a window every quarter you're
9 allowed to sell stock, and I think this is right on the nose
10 for that first quarter, that --
11 MR. MURPHY: Oh, because you have a certain
12 percentage holder?
13 THE WITNESS: After the annual -- after the board
14 meeting and --
15 MR. MURPHY: -- announcements?
16 THE WITNESS: -- announcements and that kind of
17 thing. So I'm pretty sure that's what that is.
18 BY MR. DUNBAR:
19 Q In your personal account at NAA Financial how oft[en]
20 do you trade in that account?
21 A About the same.
22 Q And with regards to when you make a purchase for
23 your friends account and when you make a purchase for y[our]
24 personal account, when do you decide what stocks to buy [in?]
25 which account? I mean, do you invest in the same stocks [?]
Page 319
1 each account?
2 A I think pretty much.
3 Q And how do you decide when to buy one for your
4 personal account and when to buy them for the --
5 A I think it's pretty much the same decision.
6 Q Do you ever decide to buy a stock, buy it in your
7 personal account first and then divide it into the friends
8 account?
9 A If that's done it was inadvertent. I don't take a
10 better price than somebody else earlier. It could have -- [?]
11 happened, I wouldn't tell you 100 percent it never happened.
12 Q So, when you decided to buy stock -- and you like
13 it, and you want to invest it in your personal account [?]
14 -- what do you do? Would you buy it for the friends acc[ount]
15 and then buy it, or do you wait a period, or how does tha[t]
16 work, if you want to be dually invested?
17 A I think it happens around the same time. I don't
18 have -- my basic concept is that I wouldn't get a better
19 price for myself than for them.
20 MR. BOLTZ: In other words, buying or selling from
21 your account and/or the investor's account of a stock? We
22 all know that buying large amounts of stock can cause a pri[ce]
23 to go up; and selling a large amount can sometimes cause a
24 stock to go down. So, have you ever consciously bought sto[ck]
25 for you own account first, to get a lower price?
Page 320
1 THE WITNESS: No.
2 MR. BOLTZ: Or sold it from your account first to
3 get a better price?
4 THE WITNESS: No.
5 MR. BOLTZ: You have never done that?
6 THE WITNESS: I don't do that, no.
7 MR. DUNBAR: And you do own some -- it appears that
8 you own some pretty big positions in certain stocks. Are you
9 ever above 5 percent ownership in any stock that you know of?
10 MR. BOLTZ: Other than EarthLink?
11 MR. DUNBAR: Other than EarthLink, I am sorry.
12 THE WITNESS: Not that I know of. I mean, if it's
13 happened I don't know about it.
14 MR. DUNBAR: I would like to have this marked as
15 Exhibit Number 39. It is dated December 24th, 1998. It is a
16 wire with a wire service department heading, account number
17 0630057 582, which I believe was the friends account; is that
18 correct, 7582?
19 THE WITNESS: Okay.
20 (SEC Exhibit No. was marked for
21 identification.)
22 BY MR. DUNBAR:
23 Q Do you recognize this document?
24 A No.
25 Q Do you receive the wire transfer receipts?
Page 321
1 A Personally?
2 Q Yes.
3 A No.
4 Q Do they go to Ms. Rogers?
5 A I think so.
6 Q Would they go anywhere else?
7 A Not that I know of.
8 Q Do you know what CIBC Oppenmeyer Corp. is?
9 A It's a bank, I think, isn't it?
10 MR. BOLTZ: Is it a bank or a brokerage firm?
11 THE WITNESS: I think it's both.
12 BY MR. DUNBAR:
13 Q Is it your brokerage firm? It is an incoming wire
14 transfer.
15 A Right. I -- my reaction is that I would have to
16 go check and see what this is.
17 Q Have investors wired money from their brokerage
18 account before to the friends account?
19 A I don't know the answer to that. Possibly.
20 Q Do you recall anybody doing a wire transfer of
21 approximately $6.2 million?
22 A Is that what this adds up to?
23 Q Yeah, down at the bottom right.
24 A I don't know what this is. I'd like to check and
25 find out, though. Can I keep a copy of this?
Page 322
1 MR. MURPHY: This is your record. Yeah, you can --
2 we have got a record from him?
3 MR. DUNBAR: Yeah.
4 THE WITNESS: And I assume, like, I see a lot of
5 these coming up here, so you might as well just give me a --
6 MR. DUNBAR: Yeah, we do not know how many, though,
7 so --
8 THE WITNESS: I think it's going to be necessary
9 for me to go find out what this is, and I'm happy to do that.
10 MR. DUNBAR: I would like to have this marked as
11 Exhibit 40. I am showing you now Exhibit Number 40, wire
12 service department, dated June 29th, 1999.
13 (SEC Exhibit No. 40, was marked for
14 identification.)
15 BY MR. DUNBAR:
16 Q With regard to the $5,000,000 outgoing wire
17 transfer to Beverly Hills Escrow, in account number 29415,
18 L.L. Dayton. Can you explain that transaction?
19 A Yeah, I'd have to check it out for you.
20 Q Is it that you do not remember or you --
21 A I'm not sure. I can know this, I can know. I
22 just need to go look it up and see what it is. I mean, if I
23 don't know for sure I shouldn't say I know if I don't.
24 MR. MURPHY: We will take the marked copy and then
25 you can --
Page 323
1 THE WITNESS: And I'll be happy to look these up
2 for you, my pleasure.
3 BY MR. DUNBAR:
4 Q Have you ever heard of TNI Ledger?
5 A TNI Ledger?
6 Q Or just TNI?
7 A I don't know. It doesn't strike a bell, out of
8 context, I don't know.
9 MR. DUNBAR: Why don't we have this marked Exhibit
10 Number 41, a wire service, dated August 24th, 1999, outgoing
11 to J.P. Morgan Bank, Delaware, beneficiary: TNI.
12 (SEC Exhibit No. 41 was marked for
13 identification.)
14 THE WITNESS: Again, I'd be happy to find out what
15 this is about. Oh, this is the original back to you, Mr.
16 Murphy. Do we keep the copy?
17 MR. DUNBAR: It has also been known as TNI Ledger.
18 THE WITNESS: TNI Ledger?
19 MR. DUNBAR: Yeah.
20 THE WITNESS: Well, I guess I can write that in
21 here, I guess, and just find out.
22 BY MR. DUNBAR:
23 Q Who is Arwen Dayton?
24 A Arwen Dayton?
25 Q Yes.
Page 324
1 A She is the wife of a friend of mine.
2 Q Sky Dayton?
3 A Uh-huh.
4 Q Do you know a Sky Dayton?
5 A Sky Dayton is the founder -- co-founder of
6 EarthLink with me.
7 Q Does he invest money with you?
8 A No.
9 Q Would there be money going to Mr. Dayton from the
10 friends account?
11 A Well, we have some -- how to describe this.
12 MR. BOLTZ: Well, answer the question directly --
13 that you know of, whether or not you knew of any money going
14 in.
15 THE WITNESS: I have to look at the record.
16 BY MR. DUNBAR:
17 Q Okay. Well, do you know if -- you can go ahead and
18 try to explain what you are --
19 A No, I'm not sure where I'm headed here.
20 MR. BOLTZ: I do not see Dayton on here.
21 THE WITNESS: It's on there. It's coming.
22 MR. DUNBAR: Marked as Exhibit Number 42, dated
23 June 23rd, 1999. It appears to be 5.4 point four -- this one
24 is an incoming wire transfer from Mr. Dayton.
25 (SEC Exhibit No. 42 was marked for
Page 325
1 identification.)
2 THE WITNESS: Okay, okay. And then another one
3 that goes right out there, I see. Okay. Again, I want to
4 look into this for you and get the details, if that's all
5 right with you. I'm happy to do it.
6 BY MR. DUNBAR:
7 Q And who is Kevin O'Donnell?
8 A He's also a co-founder of EarthLink.
9 Q And why would there be money coming out of the
10 friends account to Mr. O'Donnell?
11 A Again, I want to get the detail of that for you,
12 okay. There's an answer. I just want to -- when there's
13 specific questions here I want to give you the specific
14 answers. So, I --
15 Q Is Mr. Dayton an investor?
16 A Mr. O'Donnell, you mean?
17 Q Mr. O'Donnell.
18 A Mr. O'Donnell and I do a lot of investing together.
19 We're business partners. And I can give you the detail on
20 that.
21 Q Who is Sidney Azeez?
22 MR. BOLTZ: Sorry, I just wanted to confer.
23 MR. DUNBAR: Sure.
24 (Witness and counsel confer.)
25 THE WITNESS: Oh, okay. Yeah, I just wanted -- I
Page 326
1 was going to do that, but I thought maybe it would be better
2 if I had the exact detail of what was --
3 MR. BOLTZ: Yeah, you can not explain the detail,
4 but you can explain the concept overall.
5 THE WITNESS: Yeah, these individuals that you're
6 mentioning to me are people that I do -- they're business
7 partners of mine. And we do a lot of mutual investing
8 together. Sometimes I am the source point of where the money
9 goes out to, sometimes they are. But when I get the money
10 that comes from anybody that I'm -- for example, if we're
11 investing in a venture deal of some kind -- if I receive any
12 money from anybody I don't put it in my account, I put it in
13 the friends account to make sure that it stays segregated,
14 for bookkeeping purposes. I know it didn't come to me. It
15 came as part of their money that we were then sending out to
16 another venture, or whatever we're investing in together.
17 That's the principle. The individual detail of the stuff I
18 can find you exactly.
19 BY MR. DUNBAR:
20 Q So, when you invested in partnerships?
21 A Partnerships or venture capital deals of some kind.
22 Q It all comes out of the 7582 account?
23 A If it's their portion.
24 MR. BOLTZ: In other words, what you are saying --
25 am I correct, Mr. Slatkin, that if money comes in from a
Page 327
1 business partner, which I guess you include in your
2 definition of friends --
3 THE WITNESS: Yeah.
4 MR. BOLTZ: -- you always put it into the friends
5 account rather than your personal account, to show that it
6 did not come from you, it came from someone else?
7 THE WITNESS: It came from someone else, exactly.
8 And then we have a --
9 MR. BOLTZ: So, if it goes out it goes out from
10 that same person?
11 THE WITNESS: Yes. And, like, I know the companies
12 that this money went to. I'm just going to try and get you
13 the details on that, so I could tell you where it went to, so
14 you could trace it.
15 MR. BOLTZ: But I think it is important they
16 understand the general concept.
17 THE WITNESS: Yeah. And it goes the other way too
18 sometimes, when I give them the money, then they invest it.
19 And I don't know what they -- you know, how that goes.
20 BY MR. DUNBAR:
21 Q So, sometimes money will come out of the 7582
22 account to invest in your personal -- you and somebody, no[t?]
23 the people involved with the NAA Financial?
24 A Right. This is just having to do with --
25 MR. BOLTZ: But it is not your money, is it?
Page 328
1 THE WITNESS: Isn't my money; it's their money.
2 MR. BOLTZ: It is their money.
3 THE WITNESS: It's their money.
4 MR. BOLTZ: It is the friends' money.
5 THE WITNESS: My portion would come out of my
6 account.
7 BY MR. DUNBAR:
8 Q The other Union Bank account, your personal Union
9 Bank account?
10 A Yeah. I mean, I can give you lots of examples of
11 this.
12 Q Well, when you said it goes the other way, you said
13 money comes out of the friends account.
14 A No, what I meant to say is -- boy, got to be real
15 clear.
16 MR. BOLTZ: You have to be clear.
17 THE WITNESS: I know this. There's a situation
18 where one of my business is investing money for myself and
19 for him -- these names, for example. I would send him my
20 money. He --
21 MR. BOLTZ: Out of?
22 THE WITNESS: From my personal account. He makes
23 the investment. That's what I mean by going the other way.
24 Whenever I receive money that is not my money I put it
25 through this account, so it's clearly demarcated.
Page 329
1 MR. BOLTZ: Is that all account for by Ms.
2 Rogers?
3 THE WITNESS: Yes.
4 MR. BOLTZ: That is all kept, the records are kept
5 in the --
6 THE WITNESS: Keeps the records, yes, she has them
7 all.
8 BY MR. DUNBAR:
9 Q And let's say, for example, if -- let's say you
10 wired a certain amount of money out to Mr. Dayton. That
11 would be possibly for -- give me an example.
12 A Well, he's involved in a venture called E-Companies
13 here, for example, on the west side here. I don't know if
14 you've read about it. It's a big --
15 MR. MURPHY: Today's paper, that thing where, like,
16 Internet incubator or something, is that it?
17 THE WITNESS: Yeah, exactly.
18 MR. MURPHY: Yeah, it was in the L.A. Times
19 recently.
20 THE WITNESS: And I don't want to speculate here,
21 but I know there's one time where money came in from him, and
22 I was going to send to a deal. We decided not to do it, so I
23 sent the money back to him, and it probably went back in
24 pieces. So, this is complex, obviously.
25 MR. BOLTZ: But that money is all kept separate --
Page 330
1 THE WITNESS: It's kept separate.
2 MR. BOLTZ: -- for bookkeeping from the investors?
3 THE WITNESS: That's right, yes. I mean, it's
4 earmarked to them.
5 BY MR. DUNBAR:
6 Q So, there is some money coming in to the 7582
7 account which does not get adjusted in this, between the two
8 Swiss accounts?
9 A Right, exactly.
10 MR. MURPHY: I do not know if it was today's paper.
11 I just read about it somewhere, about E-Company's --.
12 THE WITNESS: They're the ones who paid $7,500,000
13 for the name business.com.
14 MR. MURPHY: Is that the one?
15 THE WITNESS: That's the one.
16 MR. MURPHY: Are you getting tired, Mr. Slatkin?
17 THE WITNESS: Yeah, I'm getting pretty beat up
18 here. I'm just tired. You know, I got up pretty early here.
19 So, if you want to end off any time I'd be thrilled, but it's
20 your call.
21 MR. BOLTZ: Go ahead and ask your questions.
22 BY MR. DUNBAR:
23 Q With regards to those people who you do ventures
24 with you said this could happen. What other names might we
25 see besides Mr. Dayton and Mr. O'Donnell?
Page 331
1 A Oh, boy.
2 Q If you could just name a couple?
3 A Mr. Abbott, maybe; Mr. Azeez, did you mention him
4 already?
5 Q Yeah, Mr. Azeez. Greg Abbott?
6 A Yeah. I could come up with a nice long list for
7 you.
8 MR. BOLTZ: Richard Levine?
9 THE WITNESS: Richard Levine maybe, yeah.
10 MR. MURPHY: Do you want to provide us with a list
11 separate?
12 THE WITNESS: I'm not sure, because it's sort of --
13 MR. BOLTZ: In other words, a list of --
14 MR. MURPHY: -- venture capital investors that you
15 join in venture capital --
16 THE WITNESS: I mean, if you want to ask me a
17 specific name, I'm happy to respond to it. I mean, I'll try
18 and put a list together for you as well, if you like. I
19 mean, maybe I shouldn't volunteer that, but I'm happy to try.
20 BY MR. DUNBAR:
21 Q What about somebody like Brinton Young?
22 A Yes, I'll tell you exactly what that's all about.
23 He's an EarthLink employee. He's got a brother-in-law that
24 started a company on the east coast, and we've invested in it
25 together, and I was the source of the --
Page 332
1 Q So, when you say you invested in it together, did
2 he give you money?
3 A Yeah, he's busy working. He says, you take care of
4 this for me, and I'll, you know --
5 Q So, he sent you how much money for --
6 A I have no idea how much it was.
7 Q But he sent you a certain amount and you put it
8 into this account, this 7582 account?
9 A Yes.
10 Q And then --
11 A Then he would have -- I would keep his -- he would
12 have his own, you know, thing.
13 Q And then would you transfer money from your
14 personal Union Bank account over and then ship the money out;
15 or do you ship just his money out and then --
16 A No, no. There's a subscription agreement for this
17 particular investment. So, his money would go -- and he'd
18 get his own subscription agreement -- I would send my own
19 money for my subscription agreement.
20 MR. BOLTZ: From your personal account?
21 THE WITNESS: From my personal account.
22 BY MR. DUNBAR:
23 Q So, it would be two separate wires going out?
24 A Two separate wires. That's what I'm trying to
25 explain.
Page 333
1 MR. DUNBAR: We will do one more. It is getting
2 late.
3 THE WITNESS: Why don't we just not?
4 MR. DUNBAR: You want to end it right here?
5 THE WITNESS: I mean, if it's okay. I just -- I
6 don't want to be rude, but I just think maybe I'd be more use
7 to you next time if I was a little more wide awake. It's a
8 twelve-hour day here for me.
9 MR. DUNBAR: We will go off the record for a quick
10 break.
11 (Whereupon, a brief recess was taken.)
12 MR. DUNBAR: Back on the record at 4:15.
13 BY MR. MURPHY:
14 Q Like, managing this amount of money did you ever
15 consider, like, just, you know, registering with the SEC and
16 just formally setting this up as a formal investment
17 business? I mean, before -- I know now you have decided to
18 close it down, but prior to that, was that --
19 A You know, it was never intended to be a business.
20 It just -- it was -- I got into this and then I got a big
21 break with this EarthLink thing, and all of a sudden I had a
22 lot of money. And my venture experience early in the '80's
23 was great for me, and I was making a big difference to all
24 these people. And I never thought about it. I think I
25 mentioned the last time I was here, you know, I had -- when I
Page 330
1 was inquired about in '97, we sent back some material, I --
2 you know, my wife's been telling me to stop this for years
3 because it's a lot of work.
4 Q The operation?
5 A Yeah, it's a big -- I mean, it is. It's not -- but
6 my commitment to the people has been great. And since I got
7 involved in EarthLink my life has become much more
8 complicated and I've made a lot of money, and I've made these
9 other people a lot of money. And to be registered, it's just
10 -- that's the reason I'm -- I don't want it to be -- I don't
11 want to be in the business. I was motivated to help these
12 other folks, and that was great fun for me. It gave me a
13 reason to do it. And without that motivation it's just too
14 unwieldy. So, the answer to your question is, I really never
15 thought about it because I just didn't think that I wanted it
16 to be a business. I had plenty of business, you know. And
17 if I read you more of these letters -- you know, we can do it
18 off the record -- but they're pretty amazing.
19 MR. BOLTZ: You are welcome to look at them.
20 THE WITNESS: Yeah, there are some neat ones here.
21 You know, it's hard to describe to you how personal this all
22 is. You know, this is -- do you recognize this?
23 MR. BOLTZ: Well, that is not on the record.
24 MR. MURPHY: It is a postcard of -- what is it?
25 THE WITNESS: Patrick McGoohan. It's a TV show
Page 335
1 that I really like a lot and this is a friend of mine. She
2 says to me: "I just wanted to say a huge thank you for all
3 you've done for me over the past few years. Of course, I [am]
4 sad that my account is closed, but I totally understand that
5 perhaps there are other priorities in your life now, and
6 that's your decision. I really do wish you well and hope
7 that we won't lose touch." You know, closed account, yo[u]
8 know.
9 I mean, there's, you know: "Can't thank you enoug[h]
10 for your assistance. Please have all our money sent to
11 this broker at Bear Stearns. I am moving full speed ahead [to?]
12 retain two new money managers to replace you. Within a [?]
13 weeks I'll be traveling to meet these managers, and I will
14 have the detailed account listing all capital gains from you
15 to take with me. Would you please arrange this report?" I
16 mean, you know, so we're -- this is my own best interest.
17 You know, I'm sorry this came down to what we have to [do?]
18 with all this, but -- you know, I never thought of it becaus[e]
19 I didn't think of it as a business. That's where -- that's
20 the bottom line on it. And I hope that answers your
21 question.
22 MR. DUNBAR: All right, Mr. Slatkin, at this time
23 we are adjourning testimony to a future date, which we wi[ll]
24 determine later. We will speak with Mr. Boltz, speak with
25 you, and then figure out when it is a good time for you to
Page 336
1 come back. Although testimony is adjourned you do remain
2 under subpoena. Do you wish to clarify anything or add
3 anything to the statements you have made today?
4 MR. BOLTZ: I do not think so. Do you have
5 anything now?
6 THE WITNESS: No.
7 MR. DUNBAR: Okay, thank you. We are off the
8 record at 4:16.
9 (Whereupon, at 4:16 p.m., the examination was concluded.)
10 * * * * *