F e vo l a . t x t

UN I TED STATES BANKRUPTCY COURT

EASTERN D I STR I CT OF W I SCONS I N

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I n Re : J ame s E . Pu t nam and Ca s e No . 10 - 32980 - mdm Ch r i s t i ne A . Pu t nam , Chap t e r 7 Deb t o r s .

Da v i d M . And Ba r ba r a G . Adv e r s a r y No . 10 - 02626 - mdm Ange l l , e t a l . P l a i n t i f f s ,

- v s -

J ame s E . Pu t nam ,

De f endan t .

* * * * * * * * * * * * * * * * * * * * * * * * *

Ex am i na t i on o f S I MONE FEVOLA , t a k en a s a

w i t ne s s i n t he abov e - en t i t l ed c aus e , t a k en unde r and

pu r suan t t o Se c t i on 804 . 05 o f t he W i s cons i n S t a t u t e s ,

be f o r e KAREN RENEE , Cou r t Repo r t e r and No t a r y Pub l i c i n

and f o r t he S t a t e o f W i s cons i n , a t Me l n i c k & Me l n i c k ,

10555 No r t h Po r t Wa sh i ng t on Road , Su i t e 202 , Mequon ,

W i s cons i n , on J anua r y 4 , 2011 , commenc i ng a t 9 : 30 a . m .

and conc l ud i ng a t 1 : 36 p . m .

2

1 A P P E A R A N C E S

2 MELN I CK & MELN I CK , by MR . DAV I D A . MELN I CK , 3 MS . STEPHAN I E MELN I CK , 10555 No r t h Po r t Wa sh i ng t on Road , Su i t e 202 , 4 Mequon , W i s cons i n 53092 , appe a r ed on beha l f o f t he P l a i n t i f f s . 5

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F e vo l a . t x t 6 A L S O P R E S E N T 7 Bob and Ma r c y Cog l i ane s e ; 8 C . H . Be r gmann , J r .

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2 I N D E X

3 Ex am i na t i on : Page 4 By M r . Me l n i c k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5

6 Exh i b i t I den t i f i ed : Page

7 No . 1 - Documen t S i gned By Joe Aa r on . . . . . . . . . . . 14 No . 2 - Two - S i ded G r yphon Documen t . . . . . . . . . . . . . 23 8 No . 3 - T r ans c r i p t Page s F r om Tom R i e k ' s Depos i t i on o f Ju l y 22 , 2010 . . . . . . . . . . . . 36 9 No . 4 - Documen t Us ed I n M r . Pu t nam ' s Depos i t i on Da t ed Ma r ch 31 , 2004 . . . . . . . . 56 10 No . 5 - Amoun t O f Mone y I nv e s t ed I n B r own By

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F e vo l a . t x t Wa t ch S t one Pa r t ne r s . . . . . . . . . . . . . . . . . . . 66 11 No . 6 - Le t t e r F r om Joe Aa r on Da t ed Nov embe r 1 , 2005 , Rega r d i ng Ex am i na t i on By The 12 SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 No . 7 - Le t t e r To Da v i d J ans en , S i gned By Joe 13 Aa r on , De a l i ng W i t h SEC Ex am i na t i on Da t ed De c embe r 4 , 2005 . . . . . . . . . . . . . . . . . 70 14 No . 8 - E - Ma i l F r om Pu t nam To R i e k Da t ed De c embe r 9 , 2005 . . . . . . . . . . . . . . . . . . . . . . . 72 15 No . 9 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - No . 10 - E - Ma i l F r om Tom R i e k To M r . F e vo l a 16 Da t ed De c embe r 6 , 2006 . . . . . . . . . . . . . . . . . 75 No . 11 - E - Ma i l F r om Tom R i e k To J i m Pu t nam 17 Da t ed De c embe r 14 , 2006 , . . . . . . . . . . . . . . . 77 No . 12 - E - Ma i l Sen t To M r . F e vo l a A l ong W i t h 18 Tom R i e k And J i m Pu t nam Da t ed De c embe r 30 , 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 19 No . 13 - Sp r e adshe e t Pu t Toge t he r By The Se cu r i t i e s And Ex change Comm i s s i on . . . . . 85 20 No . 14 - Managed Se r v i c e Ag r e emen t . . . . . . . . . . . . . . 90 No . 15 - Documen t r ega r d i ng F eb r ua r y 27 , 2007 , 21 Me e t i ng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 No . 16 - E - Ma i l F r om Tom R i e k To J i m Pu t nam 22 Rega r d i ng A Me e t i ng On Ap r i l 3 , 2007 . . . 94 No . 17 - E - Ma i l F r om Joe Aa r on To Tom R i e k . . . . . . 99 23 No . 18 - Tom R i e k To J i m Pu t nam Ta l k i ng Abou t A Me e t i ng Da t ed Ju l y 3 , 2007 . . . . . . . . . . . . . 99 24 No . 19 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - No . 20 - Quad r i mus Documen t . . . . . . . . . . . . . . . . . . . . . 100 25

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1 No . 21 - E - Ma i l Con t i nua t i on F r om Joe Aa r on To M r . F e vo l a W i t h Copy To Tom R i e k . . . . . . . 101 2 No . 22 - M r . F e vo l a , R i e k And Pu t nam E - Ma i l , Who Buy s Ou r Po l i c i e s , Da t ed Ma y 27 , 3 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 No . 23 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - 4 No . 24 - Documen t F r om Fund Ac coun t i ng F i r m Da t ed De c embe r 31 , 2008 . . . . . . . . . . . . . . . . 103 5 No . 25 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - No . 26 - E - Ma i l Da t ed Augus t 27 , 2009 , F r om 6 E r i c Sm i t h To Tom R i e k . . . . . . . . . . . . . . . . . 106 No . 27 - Sp r e adshe e t . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 7 No . 28 - Ba e t i s Fund I n f o r ma t i on P r epa r ed By Ac coun t i ng F i r m I n Ch i c ago . . . . . . . . . . . . . 113 8 Nos . 29 - 30 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - No . 31 - Ap r i l 30 , 2004 , B r ochu r e . . . . . . . . . . . . . . . 116 9 Nos . 32 - 37 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - No . 38 - As s e t s Unde r Managemen t Fo r G r yphon . . . . 143 10 Nos . 39 - 50 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - No . 51 - As s e t s Unde r Managemen t Fo r G r yphon 11 Da t ed Augus t 2007 . . . . . . . . . . . . . . . . . . . . . . 146 Nos . 52 - 68 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - 12 No . 69 - As s e t s Unde r Managemen t Fo r Wa t ch S t one Da t ed De c embe r 2005 . . . . . . . . . . . . . . 144 13 Nos . 70 - 78 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - - No . 79 - As s e t s Unde r Managemen t Fo r Wa t ch 14 S t one Da t ed Nov embe r 2008 . . . . . . . . . . . . . . 144 Nos . 80 - 97 - No t I den t i f i ed . . . . . . . . . . . . . . . . . . . . . . . . . - -

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F e vo l a . t x t 15 No . 98 - E - Ma i l F r om Joe Aa r on To J i m Pu t nam Da t ed Nov embe r 10 , 2005 . . . . . . . . . . . . . . . . 69 16 No . 99 - Exh i b i t A On A Loan Ag r e emen t Whe r e Joe Aa r on On Beha l f O f B r own 17 I nv e s t men t Company Bo r r owed Mone y . . . . . . 84

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21 D i spos i t i on O f O r i g i na l Exh i b i t / s :

22 A t t a ched To O r i g i na l T r ans c r i p t 23

24 * * * * *

25

5

1 TRANSCR I PT OF PROCEED I NGS

2 S I MONE FEVOLA , c a l l ed a s a w i t ne s s

3 he r e i n , ha v i ng be en f i r s t du l y swo r n on oa t h , wa s

4 e x am i ned and t e s t i f i ed a s f o l l ows :

5 EXAM I NAT I ON

6 ( Exh i b i t Nos . 1 t h r ough 97 we r e ma r k ed . )

7 BY MR . MELN I CK :

8 Q S t a t e you r f u l l name f o r t he r e co r d .

9 A S i mone F e vo l a .

10 Q Whe r e do you r e s i de?

11 A K i mbe r l y , W i s cons i n .

12 Q You ' r e he r e unde r subpoena a s a w i t ne s s t o an

13 adv e r s a r y p r oc e ed i ng o f c l i en t s t ha t I r ep r e s en t

14 t ha t ha v e be en b r ough t aga i ns t J i m Pu t nam . Do you

15 unde r s t and t ha t ?

16 A Ye s .

17 Q B r i e f l y , and I ha v e mos t o f you r ba c kg r ound r i gh t

18 up t o t he t i me you we r e emp l oy ed by We a l t h

19 Managemen t , so when you we r e f i r s t emp l oy ed w i t hPage 4

F e vo l a . t x t

20 We a l t h Managemen t , wha t y e a r wa s t ha t ?

21 A 2002 .

22 Q Wha t we r e you r r e spons i b i l i t i e s a t t ha t t i me?

23 A I wa s t he ch i e f i nv e s t men t o f f i c e r .

24 Q Wha t we r e you r du t i e s a s ch i e f i nv e s t men t o f f i c e r ?

25 A To ov e r s e e c l i en t i nv e s t men t s t h r oughou t t he i r

6

1 po r t f o l i os .

2 Q Doe s t ha t i nc l ude do i ng due d i l i genc e?

3 A Ye s .

4 Q And a s I unde r s t and f r om you r ba c kg r ound , you had

5 e xpe r t i s e i n t ha t ?

6 A I had e xpe r i enc e i n t ha t a r e a , y e s .

7 Q Now , i n 2002 , how much mone y we r e you manag i ng on

8 beha l f o f We a l t h Managemen t i nv e s t o r s , do you

9 know?

10 A App r ox i ma t e l y - - t o t a l c l i en t a s s e t s?

11 Q Ye s .

12 A App r ox i ma t e l y $140 m i l l i on .

13 Q And a t t ha t t i me , mos t o f t he mone y wa s i n , wha t I

14 wou l d c a l l , t r ad i t i ona l i nv e s t men t s o f s t oc k s and

15 bonds?

16 A Ye s .

17 Q A t some po i n t i n t i me , t he i nv e s t men t s t r a t egy

18 changed f r om , wha t I c a l l and hope f u l l y you ag r e e ,

19 t r ad i t i ona l i nv e s t men t s t o wha t you f o l k s c a l l

20 a l t e r na t i v e i nv e s t men t s?

21 A Ye s .

22 Q When d i d t ha t oc cu r ?

23 A I be l i e v e t he p r oc e s s began i n 2003 . The

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F e vo l a . t x t 24 cons i de r a t i on o f i t began i n 2002 , and t hen t he

25 a c t ua l p r oc e s s began i n l a t e 2003 .

7

1 Q And do you r emembe r when t he f i r s t a l t e r na t i v e

2 i nv e s t men t wa s made?

3 A I t wa s i n 2003 , bu t I don ' t r e c a l l e x a c t l y when .

4 Q La t e r i n t he y e a r ?

5 A Ma ybe , I ' m no t su r e .

6 Q Do you r emembe r wha t i t wa s?

7 A The v e r y f i r s t i nv e s t men t ?

8 Q The v e r y f i r s t a l t e r na t i v e i nv e s t men t .

9 A We l aunched an a l t e r na t i v e i nv e s t men t v eh i c l e , an

10 LLC , named G r yphon .

11 Q And t ha t i s spe l l ed G - R - Y - P - H - O - N .

12 A Ye s .

13 Q And wha t wa s G r yphon ' s ob j e c t i v e?

14 A G r yphon ' s ob j e c t i v e wa s t o - - i t wa s a f a i r l y w i de

15 de s c r i p t i on o f wha t we cou l d do w i t h i n t he f und ,

16 bu t t he no t i on wa s t o c r e a t e , t o r ep l i c a t e e i t he r

17 t h r ough c a sh o r a c c r ua l - t ype a c coun t i ng , an

18 abso l u t e r e t u r n - t ype o f a r e su l t .

19 Q Te l l me wha t you me an by " abso l u t e r e t u r n " ?

20 A We t hough t o f i t a t t he t i me o f a t a r ge t r e t u r n o f

21 abou t 8 pe r c en t , wh i ch wou l d be no t co r r e l a t ed

22 w i t h t he mov emen t s w i t h i n t he t r ad i t i ona l , a s you

23 r e f e r t o t hem , equ i t y o r f i x ed - i ncome ma r k e t s .

24 Q Be c aus e a f t e r r e ad i ng t he ma t e r i a l , I ' m t r y i ng t o

25 unde r s t and wha t you r conc ep t , " you r " me an i ng

8

1 We a l t h Managemen t , o f abso l u t e r e t u r n i s . MyPage 6

F e vo l a . t x t

2 conc ep t wa s , be f o r e I r e ad t h i s , an abso l u t e

3 r e t u r n wa s l i k e ge t t i ng a T - b i l l f o r

4 3 1 / 2 pe r c en t , t ha t ' s an abso l u t e r e t u r n .

5 Obv i ous l y , you r conc ep t o f abso l u t e r e t u r n wa s

6 j us t a t a r ge t ; no t r e a l l y an amoun t t ha t t he

7 i nv e s t o r cou l d coun t on?

8 A R i gh t , t he r e wa s no gua r an t e e , bu t j us t a

9 t a r ge t - r e t u r n no t i on .

10 Q You us e t he t e r m " abso l u t e r e t u r n , " why? I ns t e ad

11 o f s a y i ng " t a r ge t ed r e t u r n " ?

12 A I t h i nk t he r e wa s a v a r i e t y o f de f i n i t i ons w i t h i n

13 t he ma r k e t p l a c e a t t he t i me , i nc l ud i ng t he no t i on

14 o f gua r an t e ed r e t u r n , t a r ge t ed r e t u r n , r e l a t i v e

15 v e r sus abso l u t e . And I t h i nk t ha t i s p r obab l y

16 whe r e we s t r uc k on t he abso l u t e i de a . Mos t o f t he

17 - - a t t ha t t i me , i n 2002 , mos t o f t he wo r l d , t he

18 i nv e s t i ng commun i t y , wa s s t i l l f ocus ed on r e l a t i v e

19 t o some benchma r k . We d i dn ' t ne c e s s a r i l y t h i nk

20 r e l a t i v e t o a benchma r k wou l d be cons i s t en t w i t h a

21 f i nanc i a l - p l ann i ng p r a c t i c e t ha t had an embedded

22 t a r ge t ed r e t u r n f o r t he i nv e s t men t po r t f o l i o .

23 Q Now , f r om r e ad i ng t he ma t e r i a l t ha t I ' v e be en

24 supp l i ed by my c l i en t s , e i t he r you o r J i m Pu t nam

25 o r o t he r s f r om We a l t h Managemen t wou l d me e t w i t h

9

1 you r i nv e s t o r s i n t he s e f unds on a r egu l a r ba s i s ,

2 i s t ha t co r r e c t ?

3 A Ye s .

4 Q And , t he r e f o r e , i n me e t i ng w i t h you r i nv e s t o r s

5 some t i me s y e a r l y , a l o t o f t i me s qua r t e r l y o r

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F e vo l a . t x t 6 s em i annua l l y , you knew wha t t he i r ne eds we r e , you

7 knew abou t t he i r a s s e t s , you knew wha t t he y ne eded

8 f o r c a sh f l ow du r i ng t he y e a r , i s t ha t co r r e c t ?

9 A Ye s .

10 Q And so when you we r e cons i de r i ng t he i nv e s t men t

11 v eh i c l e s , d i d you cons i de r t he f a c t t ha t t hos e

12 v eh i c l e s wou l d ha v e t o ha v e l i qu i d i t y t o me e t t he

13 c a sh ne eds o f We a l t h Managemen t c l i en t s?

14 A Ce r t a i n l y , we d i d t h r oughou t . And t he r e we r e

15 e x amp l e s o f a c t i ons we t ook t o l ook a t i t f r om

16 t ha t pe r spe c t i v e .

17 Q Now , wa s t he r e any l i s t i ng s t a r t i ng when you made

18 t he f i r s t a l t e r na t i v e i nv e s t men t ba s ed upon t he

19 amoun t o f i nv e s t o r s i n G r yphon a s t o add i ng up

20 wha t t he i r mon t h l y o r qua r t e r l y c a sh - f l ow ne eds

21 we r e so you knew how t o s t r uc t u r e t ha t i nv e s t men t ?

22 A I t h i nk t he r e we r e t wo pe r i ods o f t i me : t he r e wa s

23 a pe r i od o f t i me p r i o r t o some t i me i n ' 07 , whe r e

24 t he emp l oy e e s , t he r ep r e s en t a t i v e s o f We a l t h

25 Managemen t , who we r e r e spons i b l e f o r t he

10

1 r e l a t i onsh i p wou l d commun i c a t e i n gene r a l wha t

2 t he i r l i qu i d i t y r equ i r emen t s we r e f o r t he ne x t ,

3 s a y , s i x mon t hs t o a y e a r , and t ha t wa s l e s s

4 f o r ma l .

5 Some t i me i n 2007 , wh i ch I c an ' t r emembe r

6 e x a c t l y when , we t r ans i t i oned t o a much mo r e

7 f o r ma l app r oa ch whe r e e v e r y c l i en t wa s r e v i ewed , I

8 don ' t r e c a l l i f i t wa s mon t h l y o r qua r t e r l y , w i t h

9 v e r y spe c i f i c numbe r s abou t l i qu i d i t y ne eds go i ng

10 f o r wa r d .Page 8

F e vo l a . t x t

11 Q We l l , i n 2003 , you had on l y abou t , you had s e v en

12 i nv e s t o r s when you l aunched G r yphon i n 2003 , i s

13 t ha t abou t r i gh t ?

14 A I don ' t r e c a l l .

15 Q I gue s s wha t I wa s ge t t i ng a t i n c a sh - f l ow ne eds ,

16 d i d you mu l t i p l y , g i v en t ha t you knew wha t t he s e

17 peop l e ' s mon t h l y o r qua r t e r l y c a sh - f l ow ne eds

18 we r e , d i d you mu l t i p l y t ha t ou t so t ha t you had

19 some k i nd o f p l ann i ng boa r d t ha t s a i d we ne ed t o

20 t h r ow o f f t o ou r i nv e s t o r s t he $100 , 000 a qua r t e r ,

21 o r wha t e v e r t he amoun t , when you add up a l l t he i r

22 ne eds? Wa s t he r e some k i nd o f a boa r d o r some

23 k i nd o f pape r s c r e a t ed whe r e you knew e x a c t l y how

24 much c a sh had t o be c r e a t ed i n o r de r t o me e t t he

25 spe c i f i c ne eds t ha t you knew abou t o f you r

11

1 c l i en t s?

2 A P r i o r t o 2007 , i t wa s t he r e spons i b i l i t y o f t he

3 r e l a t i onsh i p manage r t o manage t ha t i n f o r ma t i on .

4 Tha t wa sn ' t i n f o r ma t i on t ha t wa s sha r ed w i t h t he

5 i nv e s t men t s i de p r i o r t o 2006 o r 2007 .

6 Q Bu t a s t he he ad o f i nv e s t i ng , I a s sume i t ma k e s a

7 d i f f e r enc e on you r i nv e s t men t v eh i c l e i n t e r ms o f

8 wha t c a sh f l ow i t t h r ows o f f a s t o wha t you r

9 r equ i r emen t s a r e , doe sn ' t i t ?

10 A Ye s , abso l u t e l y . And I wa s - - t he r e wa s an

11 i nv e s t men t t e am , and e a ch i nv e s t men t pe r son wa s

12 r e spons i b l e f o r who wa s a s s i gned t o t he c l i en t

13 unde r s t and i ng wha t t ha t wa s i n r e l a t i on t o

14 s t r uc t u r i ng t he po r t f o l i o .

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F e vo l a . t x t 15 Q And t hen t he y wou l d commun i c a t e t ha t t o you?

16 A No t ne c e s s a r i l y .

17 Q Tha t goe s ba c k t o my que s t i on . How wou l d you t hen

18 know wha t i nv e s t men t v eh i c l e s t o pu t G r yphon o r

19 t he s e o t he r f unds , how t o pu t you r mone y i n

20 be c aus e some i nv e s t men t v eh i c l e s t h r ew o f f c a sh

21 and some d i dn ' t ?

22 A I t h i nk t he p i e c e t ha t ' s m i s s i ng he r e i s , a s you

23 i nd i c a t ed i n you r i n t r oduc t i on , t he r e wa s a pe r i od

24 o f t i me o f t r ans i t i on whe r e c l i en t s wen t f r om

25 t r ad i t i ona l i nv e s t men t s , wh i ch we r e s t i l l i n t he

12

1 po r t f o l i o and had ma r k e t l i qu i d i t y , a s oppos ed t o

2 a l t e r na t i v e f unds t ha t cou l d p r ov i de l i qu i d i t y on

3 a r egu l a r ba s i s ou t s i de o f t he f und . And so , i n

4 t he beg i nn i ng o f t he l i f e o f t he f und , t he

5 i n t e r na l l i qu i d i t y wa s no t a s i gn i f i c an t i s sue

6 be c aus e t he r e we r e o t he r a s s e t s a v a i l ab l e t o

7 c l i en t s .

8 Q A l l r i gh t . Now , i n t he cou r s e o f you r t i me a t

9 We a l t h Managemen t , you s e t up v a r i ous f unds , one

10 you t e s t i f i ed wa s G r yphon?

11 A Ye s .

12 Q You a l so s e t up Wa t ch S t one?

13 A Ye s .

14 Q Wha t wa s t he d i f f e r enc e i n t e r ms o f t he i nv e s t men t

15 ob j e c t i v e o f Wa t ch S t one and G r yphon?

16 A The i nv e s t men t ob j e c t i v e wa s r ough l y t he s ame

17 no t i on . Wa t ch S t one wa s s e t up and s t r uc t u r ed

18 mo r e f o r r e t i r emen t , pa r t i cu l a r l y I RA a s s e t s .

19 Q So G r yphon wou l d t a k e t he i nv e s t o r s o f pe r sona lPage 10

F e vo l a . t x t

20 a s s e t s , whe r e a s Wa t ch S t one wou l d t a k e t he

21 r e t i r emen t a s s e t s f r om t he v a r i ous f unds?

22 A F r om t he v a r i ous c l i en t s , y e s .

23 Q The c l i en t s ' r e t i r emen t f unds , ok a y .

24 And t hen t he r e wa s a l so Pa l i s ade and

25 Pan t e r a?

13

1 A Ye s .

2 Q Wha t we r e t he y?

3 A A l so s i m i l a r i n ob j e c t i v e , Pa l i s ade and Pan t e r a

4 be c ame somewha t ne c e s s a r y i n t e r ms o f an ov e r a l l

5 r e s t r i c t i on on numbe r o f c l i en t s , a numbe r o f

6 i nv e s t o r s i n an LLC .

7 Q Be c aus e t he s e we r e g r ade D?

8 A Ye s , 99 ; l i m i t o f 99 .

9 Q R i gh t , and so when you go t be yond t ha t , you had t o

10 c r e a t e t h i s ov e r f l ow , bu t t he ob j e c t i v e s o f

11 Pa l i s ade and Pan t e r a we r e t he s ame i nv e s t i ng

12 ob j e c t i v e s ,

13 A Rough l y t he s ame , y e s .

14 Q A t some po i n t i n t i me , t he i nv e s t men t s we r e

15 conc en t r a t ed o f bo t h G r yphon and - - i n f a c t , a l l

16 f ou r f unds t ha t we t a l k ed abou t we r e conc en t r a t ed

17 i n t he i nsu r anc e p r em i um f i nanc i ng bus i ne s s , i s

18 t ha t co r r e c t ?

19 A Conc en t r a t ed , me an i ng mo r e t han 50 pe r c en t ?

20 Q Ye ah , mo r e t han 50 pe r c en t . Bu t a t some po i n t , i t

21 wa s e v en mo r e t han t ha t ?

22 A Ye s .

23 Q Now , when you wou l d pu t ou t - - i n f a c t , l e t me be

Page 11

F e vo l a . t x t 24 v e r y spe c i f i c . When you wou l d pu t ou t i n f o r ma t i on

25 t o you r i nv e s t o r s , you wou l d pu t ou t f o r ma l

14

1 p r i n t ed f l y e r s documen t i ng whe r e t he mone y f o r

2 t ha t f und wa s i nv e s t ed , i s t ha t co r r e c t ?

3 A Ye s .

4 Q Wa s t ha t c r e a t ed by you?

5 A No .

6 Q I ' l l ge t i n t o t ha t i n a m i nu t e . Le t me go ba c k t o

7 t he v e r y beg i nn i ng he r e . I ' m go i ng t o show you

8 wha t ha s be en ma r k ed a s Exh i b i t 1 .

9 O f f t he r e co r d f o r a s e cond .

10 ( D i s cus s i on o f f t he r e co r d . )

11 BY MR . MELN I CK :

12 Q I ' m show i ng you wha t ha s be en ma r k ed a s Exh i b i t 1 ,

13 and a s k you i f you r e cogn i z e t h i s documen t ?

14 A Spe c i f i c a l l y , no ; bu t gene r a l l y , y e s .

15 Q Do you know who c r e a t ed t h i s documen t ? We l l , l e t

16 me ma k e i t spe c i f i c , t h i s wa s c r e a t ed by Joe

17 Aa r on , wa s i t no t ?

18 A I t wa s c r e a t ed - - somebody d i d , Joe Aa r on ma y ha v e

19 s i gned i t , bu t whe t he r i t wa s c r e a t ed by Joe Aa r on

20 o r h i s a c coun t an t , I cou l dn ' t s a y .

21 Q And t he f o r ma t he r e , you ha v e s e en t h i s be f o r e

22 w i t h r ega r d t o o t he r l oans o r o t he r i nv e s t men t s

23 t ha t we r e made i n t o f unds managed by Joe Aa r on?

24 A Ye s .

25 Q F i r s t o f a l l , so we ge t t he r e co r d s e t , who i s Joe

15

1 Aa r on?Page 12

F e vo l a . t x t

2 A Joe Aa r on wa s e i t he r t he manag i ng membe r o r t he

3 gene r a l pa r t ne r o f a v a r i e t y o f i nv e s t men t f unds

4 ba s ed i n Ca l i f o r n i a .

5 Q He wen t unde r t he name o f Wood , Ha t & S i l v e r , LLC ,

6 d i d he no t ?

7 A Ye s .

8 Q And he wa s a gene r a l pa r t ne r f o r Be a t i s , among

9 o t he r f unds?

10 A Ye s .

11 Q Bu t Wood , Ha t & S i l v e r wa s j us t Joe Aa r on , wa s i t

12 no t ?

13 A As f a r a s I unde r s t ood , y e s .

14 Q How d i d you me e t Joe Aa r on?

15 A I me t Joe t h r ough an i n t r oduc t i on v i a Tom R i e k who

16 I wa s i n t r oduc ed t o by J i m Pu t nam .

17 Q So i f I unde r s t and , when you s t a r t ed a t We a l t h

18 Managemen t , you d i dn ' t know Tom R i e k?

19 A No .

20 Q And you we r e i n t r oduc ed t o Tom R i e k by J i m Pu t nam?

21 A Ye s .

22 Q Wha t wa s Tom R i e k ' s c apa c i t y a t t he po i n t you we r e

23 i n t r oduc ed t o h i m?

24 A I unde r s t ood t ha t he had h i s own adv i so r y

25 bus i ne s s , R i e k and As soc i a t e s , and t ha t he wa s a

16

1 consu l t an t t o Joe Aa r on .

2 Q Do you r emembe r wha t y e a r you f i r s t me t Tom R i e k?

3 A I t wa s some t i me i n 2003 .

4 Q And i t wa s , a s I unde r s t and you r t e s t i mony , i t wa s

5 Tom R i e k who i n t r oduc ed you t o Joe Aa r on?

Page 13

F e vo l a . t x t 6 A Ye s .

7 Q Be c aus e you s a i d t ha t he wa s an adv i so r o f Joe

8 Aa r on o r a consu l t an t ?

9 A Tha t i s how I unde r s t ood t ha t r e l a t i onsh i p , y e s .

10 Q And i n t he i n t r oduc t i on , wha t wa s t he pu r pos e o f

11 be i ng i n t r oduc ed t o Joe Aa r on?

12 A Tom and I , Tom R i e k and I - - Tom had i n t r oduc ed me

13 t o an i nv e s t men t g r oup i n Conne c t i cu t named

14 A r gen t . And A r gen t - - f o r t he pu r pos e o f

15 i nv e s t men t f o r ou r a l t e r na t i v e f unds , A r gen t wa s

16 c l os ed t o new i nv e s t o r s , bu t t he r e wa s a c apa c i t y

17 t o i nv e s t i n t hem v i a f unds managed by Joe Aa r on .

18 Q So i f you wan t ed t o i nv e s t i n A r gen t , you had t o

19 go t h r ough Joe Aa r on t o be ab l e t o do t ha t a t t ha t

20 t i me?

21 A I t wa s one o f t he op t i ons a v a i l ab l e t o us , y e s .

22 Q D i d you go ahe ad w i t h t ha t ? D i d you i nv e s t i n

23 A r gen t t h r ough Joe Aa r on?

24 A Ye s , A r gen t wa s an i nv e s t men t i n Be a t i s a t t he

25 t i me we f i r s t i nv e s t ed i n Be a t i s , y e s .

17

1 Q Le t me ma k e su r e t he r e co r d i s c l e a r on t ha t . A t

2 t he t i me you i nv e s t ed i n Be a t i s , one o f t he f unds

3 Be a t i s i nv e s t ed i n wa s A r gen t ?

4 A Ye s .

5 Q And wa s t ha t A r gen t C , " C " a s i n Cha r l i e?

6 A A r gen t C , y e s .

7 Q Be c aus e t he r e we r e v a r i ous A r gen t f unds , we r e

8 t he r e no t ?

9 A The r e we r e v a r i ous wa y s t o a c c e s s t he A r gen t

10 s t r a t egy , y e s .Page 14

F e vo l a . t x t

11 Q Wha t d i d A r gen t C i nv e s t i n a t t he t i me you made

12 t he i nv e s t men t ?

13 A Th r ough Be a t i s?

14 Q Th r ough Be a t i s .

15 A A r gen t C wa s e s s en t i a l l y t he wa y t ha t A r gen t

16 r a i s ed mone y f o r t he i r A and B s t r a t eg i e s . So i t

17 wa s f i x ed pa y w i t h a k i c k e r w i t h an i nc en t i v e

18 ba s ed on t he pe r f o r manc e o f t he unde r l y i ng

19 i nv e s t men t s t r a t egy , wh i ch wa s conv e r t i b l e

20 a r b i t r age .

21 Q Wha t d i d A r gen t pa y a s a f i x ed amoun t ?

22 A The y s t a r t ed a s a - - I don ' t a c t ua l l y r e c a l l t he

23 e x a c t numbe r be c aus e i t changed ov e r t i me . I

24 don ' t a c t ua l l y r e c a l l t he e x a c t numbe r , bu t i t

25 wa s , a t t he t i me , I r e c a l l i t wa s cons i s t en t w i t h

18

1 wha t we we r e t a r ge t i ng a s ou r r e t u r n .

2 Q Bu t when you s a y " pa y t he f i x ed amoun t , " i s t ha t a

3 f i x ed amoun t l i k e a t r e a su r y bond pa y s a f i x ed

4 amoun t , o r wa s t ha t , aga i n , you r abso l u t e - r e t u r n

5 conc ep t ?

6 A I t had a - - e s s en t i a l l y , i t l ook ed l i k e a l oan .

7 So we i nv e s t ed i n A r gen t , and t he y pa i d us , I

8 t h i nk i t wa s 1 . 08 pe r c en t pe r mon t h .

9 Q Pe r mon t h?

10 A Pe r mon t h .

11 Q And t ha t wa s i n t e r e s t on a l oan e s s en t i a l l y?

12 A Es s en t i a l l y i n t e r e s t , r i gh t .

13 Q Go i ng ba c k t o Exh i b i t No . 1 , i t shows t ha t , a t

14 l e a s t by t he end o f 2003 , t he G r yphon f und , wh i ch

Page 15

F e vo l a . t x t 15 wa s t he WML f und t ha t you managed?

16 A Ye s .

17 Q I nv e s t ed $12 . 5 m i l l i on i n Be a t i s , i s t ha t co r r e c t ?

18 A Ye s .

19 Q And t he f o l l ow i ng y e a r , ano t he r $15 . 7 m i l l i on wa s

20 pu t i n , i s t ha t co r r e c t ?

21 A Ye s .

22 Q Doe s t ha t compo r t w i t h you r r e co l l e c t i on?

23 A Ye s .

24 Q And no t h i ng wa s t a k en ou t a c co r d i ng t o Exh i b i t 1?

25 A Co r r e c t .

19

1 Q Now , mov e ov e r , i t s a y s " ne t ga i ns and l os s e s , " do

2 you s e e t ha t ?

3 A Ye s .

4 Q I n t he f i r s t y e a r , $280 , 423 wa s t he ga i n?

5 A R i gh t .

6 Q Wha t d i d t ha t ga i n come f r om i n t ha t f i r s t y e a r ,

7 a s be s t you r e co l l e c t ?

8 A The r e we r e - - t he r e ma y ha v e be en mo r e , bu t t o my

9 r e co l l e c t i on a t t he momen t , t he r e we r e t wo p r i ma r y

10 i nv e s t men t s i n 2003 i n Be a t i s a t t he t i me : one

11 wa s A r gen t ; t he o t he r wa s S t r a t eg i c Equ i t y

12 Cap i t a l , a s I r e c a l l .

13 Q And wha t wa s S t r a t eg i c Equ i t y Cap i t a l ?

14 A Es s en t i a l l y an a r b i t r age r un by a sma l l hedge f und

15 i n New Yo r k C i t y .

16 Q We r e you i nv e s t i ng i n t ha t , o r we r e you l end i ng

17 mone y t o i t ?

18 A I t h i nk we we r e i nvo l v ed i n a l i t t l e b i t o f bo t h .

19 Q And i n t e r ms o f when t h i s s t a r t ed , I me an , we ' r ePage 16

F e vo l a . t x t

20 t a l k i ng abou t ba s i c a l l y a s i x - mon t h o r l e s s

21 pe r f o r manc e i n 2003 , i sn ' t t ha t a c cu r a t e?

22 A Tha t ' s abou t my r e co l l e c t i on , y e s .

23 Q Now , i n 2004 , t he r e ' s ano t he r $15 . 7 m i l l i on pu t

24 i n , and t he r e t he ga i ns we r e a l mos t $2 . 8 m i l l i on ,

25 i s t ha t co r r e c t ?

20

1 A Ye s .

2 Q I s t ha t t he y e a r t ha t G r yphon s t a r t ed i nv e s t i ng i n

3 t he p r em i um f i nanc i ng , i nsu r anc e p r em i um f i nanc i ng

4 p r oduc t s?

5 A Be a t i s d i d , y e s .

6 Q Be a t i s d i d . Bu t G r yphon i nv e s t ed i n Be a t i s?

7 A Tha t ' s co r r e c t .

8 Q So t ha t t he r e co r d i s c l e a r , d i d a l l o f G r yphon ' s

9 mone y go i n t o Be a t i s?

10 A A l l o f G r yphon ' s mone y?

11 Q Ye s .

12 A No .

13 Q So whe r e e l s e d i d G r yphon ' s mone y go t o o t he r t han

14 Be a t i s i n ' 03 and ' 04? Now , I unde r s t and i t wen t

15 t h r ough Be a t i s t o o t he r en t i t i e s - -

16 A R i gh t .

17 Q - - bu t ou t s i de o f Be a t i s?

18 A The r e we r e o t he r i nv e s t men t s a t G r yphon a t t he

19 t i me ; spe c i f i c a l l y , I don ' t r e c a l l e x a c t l y whe r e

20 t he y wen t . I know a t one po i n t we made a d i r e c t

21 i nv e s t men t i n A r gen t . A r gen t opened up t o new

22 i nv e s t o r s , and we we r e ab l e t o ma k e a d i r e c t

23 i nv e s t men t i n A r gen t . The r e wa s a l so an

Page 17

F e vo l a . t x t 24 i nv e s t men t , I ' m no t su r e o f t he t i me f r ame , i n

25 Ka yne Ande r son , Ka yne Ande r son Cap i t a l I ncome

21

1 Pa r t ne r s , I be l i e v e i t wa s c a l l ed , wh i ch wa s a

2 hedge f und i n Ca l i f o r n i a t ha t e s s en t i a l l y d i d

3 f i x ed i ncome a r b i t r age . The r e ma y ha v e be en

4 o t he r s , bu t I don ' t r e c a l l .

5 Q Jus t so we ge t ou r t e r ms de f i ned , wha t do you

6 de f i ne a s " a r b i t r age " ?

7 A We l l , an a r b i t r age c an me an v i r t ua l l y any t h i ng - -

8 Q Ye s .

9 A - - i n t e r ms o f Ka yne Ande r son , e s s en t i a l l y wha t

10 t he y we r e do i ng i s buy i ng and s e l l i ng s e cu r i t i e s

11 a t d i f f e r en t p r i c e s . I me an , i t wa sn ' t mag i c .

12 Q The i nv e s t men t i n MKA , wa s t ha t made s epa r a t e f r om

13 Be a t i s o r t h r ough Be a t i s?

14 A I be l i e v e i t s t a r t ed t h r ough Be a t i s .

15 Q Now , d i d you , on e v e r y i nv e s t men t t ha t wa s made

16 bo t h ou t s i de o f Be a t i s and t h r ough Be a t i s by

17 G r yphon , d i d you do t he due d i l i genc e on t hos e

18 i nv e s t men t s?

19 A On t hos e ou t s i de o f Be a t i s , y e s ; i ns i de o f Be a t i s ,

20 i t wa s pe r haps a mo r e mod i f i ed v e r s i on .

21 Q Wha t wa s t he d i f f e r enc e?

22 A I n some c a s e s , we we r e r e l y i ng on t he manage r who

23 we we r e pa y i ng a f e e , i n t he Be a t i s c a s e , t o

24 pe r f o r m some o f t he ne x t l e v e l o f d i l i genc e t ha t

25 we d i dn ' t do .

22

1 Q So i n t he c a s e o f i nv e s t men t s t h r ough Be a t i s , youPage 18

F e vo l a . t x t

2 we r e r e l y i ng on Joe Aa r on?

3 A I n many c a s e s , y e s . Tha t i s no t t o s a y t ha t we

4 d i dn ' t pe r f o r m i n some l a y e r s , some que s t i on i ng ,

5 pe r haps e v en me e t i ng o f t he p r i nc i pa l s o f t ha t

6 i nv e s t men t s t r a t egy ; we wou l d do t ha t . Some o f

7 t he de t a i l s we r e l e f t t o t he manage r t o ov e r s e e

8 h i ms e l f .

9 Q I n 2005 , a c co r d i ng t o Exh i b i t 1 , t he r e wa s no

10 mone y i nv e s t ed i n G r yphon?

11 A Ye s .

12 Q And i n 2006 , t he r e wa s $3 m i l l i on . And a t l e a s t

13 a c co r d i ng t o Exh i b i t No . 1 , t ha t wa s t he t o t a l

14 i nv e s t men t t ha t wa s made by G r yphon i n t o Be a t i s .

15 I s t ha t you r unde r s t and i ng?

16 A Ye s . I w i l l a l so no t e t ha t I don ' t - - a l t hough ,

17 t h i s wa s - - when i s t h i s da t ed?

18 Q Exh i b i t 1?

19 A Ye ah . The da t e t ha t t h i s wa s i s sued , i t s a y s

20 " Ma r ch 31 , 2009 , " a s t he l a s t en t r y . The s e

21 s t a t emen t s we r e pe r i od i c a l l y r e v i s ed ba s ed on

22 aud i t , so I don ' t know e x a c t l y . I n f a c t , I ma y

23 ha v e ne v e r a c t ua l l y e v en s e en t h i s pa r t i cu l a r

24 documen t be c aus e I wa s gone by t hen .

25 Q Now , I ' m go i ng t o show you wha t ' s be en ma r k ed a s

23

1 Exh i b i t 2 . I ' m go i ng t o ho l d on t o t he o r i g i na l

2 Exh i b i t 2 , bu t I ' m go i ng t o r ep r e s en t t o you t ha t

3 I ' m g i v i ng you Exh i b i t 2 .

4 A Ok a y .

5 Q Wa s Exh i b i t No . 2 , and l ook a t bo t h s i de s so you

Page 19

F e vo l a . t x t 6 ha v e a f e e l f o r i t , wa s t h i s c r e a t ed by you?

7 A No , no t d i r e c t l y . I r e v i ewed i t , bu t I d i dn ' t pu t

8 i t t oge t he r .

9 Q Do you know who pu t i t t oge t he r on De c embe r 31 ,

10 2003?

11 A I don ' t t h i nk t he pe r son who d i d i t wa s

12 subs equen t l y t he r e i n De c embe r o f 2003 , so I don ' t

13 r emembe r who phy s i c a l l y pu t t h i s t oge t he r .

14 Q Now , t he documen t , whe r e i t s a y s , " Be a t i s Fund

15 LP , " s e cond pa r ag r aph , do you s e e t ha t ?

16 A Ye s .

17 Q I t r ep r e s en t s t ha t abou t 70 pe r c en t o f t he mone y

18 i s i nv e s t ed i n Be a t i s . Wa s t ha t you r

19 unde r s t and i ng?

20 A 70 - - oh , I ' m so r r y , I ' m a c t ua l l y l ook i ng a t t he

21 a s s e t a l l oc a t i on . Ye s .

22 Q And t hen i t l a y s ou t t he o t he r t h i ngs t ha t you

23 we r e t a l k i ng abou t p r e v i ous l y , l i k e A r gen t C?

24 A Ye s .

25 Q And t ha t s a y s 5 . 4 pe r c en t , a s I s e e i t ?

24

1 A Ye s .

2 Q Now , I ' m t r y i ng t o unde r s t and t h i s so my que s t i ons

3 ma k e s ens e t o you . Th i s shows abou t 70 pe r c en t

4 go i ng i n t o Be a t i s , bu t s epa r a t e l y f r om Be a t i s ,

5 5 1 / 2 pe r c en t app r ox i ma t e l y go i ng i n t o A r gen t C .

6 So you we r e i nv e s t i ng i n A r gen t C t h r ough Be a t i s

7 and ou t s i de o f Be a t i s?

8 A Ye s , a t t ha t t i me .

9 Q So i t opened up f o r you?

10 A Appa r en t l y , a c co r d i ng t o t he ba c k , y e s . I don ' tPage 20

F e vo l a . t x t

11 r e c a l l t ha t d i r e c t l y , bu t i n Augus t o f 2003 , y e s .

12 Q Wha t abou t Cu t t h r oa t ?

13 A Cu t t h r oa t wa s a f und a l so managed by Joe Aa r on . I

14 don ' t r e c a l l wha t Cu t t h r oa t wa s i nv e s t i ng i n a t

15 t ha t t i me .

16 Q When you ga v e mone y t o Be a t i s Fund t o be managed

17 by Joe Aa r on , you s a i d you d i d mod i f i ed due

18 d i l i genc e ; t ha t i s , you d i dn ' t do a comp l e t e

19 wo r kup on wha t Joe Aa r on wa s i nv e s t i ng i n?

20 A We wou l d be awa r e o f t he s t r a t eg i e s , t he

21 p r i nc i pa l s . Depend i ng on t he e x t en t o f t he

22 i nv e s t men t i t s e l f , we m i gh t me e t w i t h t he

23 p r i nc i pa l s d i r e c t l y depend i ng on t he magn i t ude o f

24 i t s pe r c en t age o f a l l oc a t i on w i t h i n Be a t i s .

25 MR . MELN I CK : I ' m go i ng t o g i v e you t he

25

1 o r i g i na l so you c an k e ep e v e r y t h i ng i n f r on t o f

2 you .

3 THE W I TNESS : Ok a y .

4 BY MR . MELN I CK :

5 Q Do you r e c a l l when t he f i r s t i nv e s t men t wa s made

6 i n t he i nsu r anc e p r em i um f i nanc i ng a r e a?

7 A My be s t r e co l l e c t i on i s some t i me i n ' 04 .

8 Q Do you know how i t c ame t o be t ha t you wan t ed

9 i nv e s t men t i n i nsu r anc e p r em i um f i nanc e?

10 A I t s t a r t ed w i t h a con f e r enc e c a l l amongs t - - I

11 c an ' t s a y who i t wa s be c aus e I don ' t r e c a l l , bu t

12 i t wa s p r e s en t ed t o us by Joe who r ep r e s en t ed t he

13 s t r a t egy t ha t wa s a v a i l ab l e . And a t t ha t t i me , i t

14 wa s l i k e l y t h r ough Dan M i l l e r a t RangeT r e e .

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F e vo l a . t x t 15 Q D i d you e v e r me e t Dan M i l l e r a t RangeT r e e?

16 A No .

17 Q D i d you do any ba c kg r ound che c k s on Dan M i l l e r a t

18 RangeT r e e?

19 A I d i d no t pe r sona l l y .

20 Q The r e wa s ano t he r f e l l ow wo r k i ng w i t h Dan M i l l e r

21 named Be au Ga yne r , i s t ha t co r r e c t ?

22 A Ye s .

23 Q D i d you do any ba c kg r ound che c k s on Be au Ga yne r ?

24 A I d i d no t do i t d i r e c t l y , no .

25 Q We r e you awa r e l a t e r on o f Be au Ga yne r bo r r ow i ng

26

1 any mone y f r om Cadd i s f und?

2 A No .

3 Q Do you know wha t Cadd i s f und wa s , C - A - D - D - I - S?

4 A Tha t wa s one o f Joe ' s i nv e s t men t v eh i c l e s .

5 Q Th r ough We a l t h Managemen t , we r e you i nv e s t ed i n

6 any t h i ng t o do w i t h Cadd i s?

7 A No t t o my know l edge , no .

8 Q I n ' 04 , we r e you ab l e t o gene r a t e t he c a sh ne eds

9 ba s ed upon t he i nv e s t men t s you had a t t ha t t i me o f

10 We a l t h Managemen t i nv e s t o r s who we r e i nv e s t ed i n

11 t he v a r i ous f unds?

12 A I n 2004?

13 Q Ye s .

14 A To my r e co l l e c t i on , y e s .

15 Q And we r e you unde r any p r e s su r e t o gene r a t e mo r e

16 c a sh t han you we r e gene r a t i ng i n ' 04?

17 A No t t o my r e co l l e c t i on .

18 Q The i nv e s t men t i n t he i nsu r anc e p r em i um f i nanc i ng ,

19 wa s t he r e a d i s t i nc t i on made be t we en i nsu r anc ePage 22

F e vo l a . t x t

20 p r em i um f i nanc i ng and l i f e s e t t l emen t ?

21 A I t my m i nd , y e s .

22 Q Wha t wa s t he d i f f e r enc e?

23 A L i f e s e t t l emen t - - i n t e r ms o f p r em i um f i nanc e ,

24 wha t we we r e do i ng wa s p r ov i d i ng t he f unds t o pa y

25 t he p r em i ums f o r i nsu r eds on a t wo - y e a r ba s i s ;

27

1 s e t t l emen t s we r e t he a c t ua l pu r cha s e o f t he

2 po l i c i e s a t some po i n t a l ong t he wa y .

3 Q And t he d i f f e r enc e i s , i f you we r e pu r cha s i ng t he

4 po l i c y . Now t ha t i s d i f f e r en t f r om t he pe r son who

5 t ook ou t t he po l i c y , you ' r e t a l k i ng abou t an

6 i nv e s t o r pu r cha s i ng - -

7 A I ' m t a l k i ng abou t an i nv e s t o r .

8 Q Pu r cha s i ng t he po l i c y me ans t ha t you ha v e t o t hen

9 con t i nue ma k i ng t he p r em i um pa ymen t s un t i l t he

10 pe r son d i e s i n o r de r t o co l l e c t on t he po l i c y?

11 A Tha t i s co r r e c t , y e s .

12 Q I f you don ' t con t i nue ma k i ng t he p r em i um pa ymen t s ,

13 t hen you r i nv e s t men t be come s wo r t h l e s s?

14 A Tha t ' s co r r e c t .

15 Q Be c aus e t he po l i c y l aps e s?

16 A Co r r e c t .

17 Q Bu t you we r en ' t i n t ha t s i de o f t he bus i ne s s?

18 A No .

19 Q And when I s a y " you , " j us t so t he r e co r d i s c l e a r ,

20 t he We a l t h Managemen t f unds t ha t you i nv e s t ed i n

21 t h r ough Joe Aa r on?

22 A Tha t i s co r r e c t . Tha t i s no t t o s a y t ha t we d i d

23 ou r be s t a t t he t i me t o k e ep t r a c k o f t he l i f e

Page 23

F e vo l a . t x t 24 s e t t l emen t ma r k e t p l a c e be c aus e we unde r s t ood t ha t

25 t o be one o f ou r pos s i b l e e x i t s o f t he s t r a t egy .

28

1 Q Be c aus e i f you cou l d s e l l t he po l i c i e s t o t ha t

2 ma r k e t , t ha t wa s ano t he r wa y o f c a sh i ng i n on you r

3 i nv e s t men t ?

4 A E i t he r i n who l e o r pa r t .

5 Q Now , had you he a r d o f t he i nsu r anc e p r em i um

6 f i nanc i ng bus i ne s s be f o r e t he con f e r enc e c a l l w i t h

7 Joe Aa r on?

8 A I don ' t r emembe r spe c i f i c a l l y when I f i r s t he a r d

9 o f i t , bu t t he r e we r e conv e r s a t i ons o f i t w i t h i n a

10 s t udy g r oup , w i t h i n a l a r ge r adv i so r y g r oup , whe r e

11 we compa r ed no t e s w i t h o t he r adv i so r s i n t e r ms o f

12 i nv e s t men t s t r a t eg i e s . I t i s pos s i b l e i t c ame up

13 w i t h t ha t .

14 Q Wa s Tom R i e k i nvo l v ed i n t ha t a l so?

15 A The i n i t i a l i n t r oduc t i on , y e s , he wou l d ha v e be en .

16 Q Now , i n ana l y z i ng whe t he r t o ma k e t he i nv e s t men t

17 i n t he i nsu r anc e p r em i um f i nanc i ng , d i d you ha v e

18 t o t a k e i n t o cons i de r a t i on t he ne eds o f t he We a l t h

19 Managemen t i nv e s t o r s?

20 A I n t he f i r s t r ound o f ou r i nv e s t men t i n t o t ha t

21 s t r a t egy , be c aus e we cons i de r ed i t i n t wo r ounds

22 i n 2004 . I t h i nk a t t ha t po i n t , i t wa s no t a

23 s i gn i f i c an t cons i de r a t i on be c aus e t he r e we r e

24 i nv e s t men t s ou t s i de o f t he f unds a v a i l ab l e t o me e t

25 l i qu i d i t y ne eds o f t he f und .

29

1 Q Pu t t i ng a s i de l i qu i d i t y ne eds , a s I unde r s t and i tPage 24

F e vo l a . t x t

2 f r om r e ad i ng a l l o f t he i n t e r v i ews you had , you

3 and o t he r s f r om We a l t h Managemen t had w i t h We a l t h

4 Managemen t c l i en t s , wha t t he c l i en t s con t i nued t o

5 l ook f o r wa s r e a sonab l e s e cu r i t y , some r e t u r n on

6 i nv e s t men t , l ow vo l a t i l i t y? The y we r e l ook i ng f o r

7 a cons e r v a t i v e i nv e s t men t ?

8 A Cons e r v a t i v e , t he wo r d " cons e r v a t i v e " i s a l oaded

9 wo r d . I t ' s ha r d t o - -

10 Q We l l , how wou l d you de f i ne i t ? I don ' t wan t t o

11 pu t wo r ds i n you r mou t h . Wha t wa s t he We a l t h

12 Managemen t i nv e s t o r t ha t you me t w i t h l ook i ng f o r

13 i n t e r ms o f t he s e cu r i t y o r s a f e t y o f t he i r

14 i nv e s t men t ?

15 A I t h i nk p r i ma r i l y t he i r i n t e r e s t wa s i n a ch i e v i ng

16 a r a t e o f r e t u r n t ha t wa s i mp l i ed by t he i r

17 f i nanc i a l p l ann i ng .

18 Q And r i s k wa s no t a f a c t o r i n t ha t r a t e o f r e t u r n?

19 A R i s k i s a l wa y s a f a c t o r . The r e t u r n o f c ap i t a l i s

20 pa r amoun t t o t he r e t u r n on c ap i t a l , we unde r s t ood

21 t ha t .

22 Q So t he f i r s t cons i de r a t i on wa s s e cu r i t y o f t he i r

23 c ap i t a l i nv e s t men t , wa sn ' t i t ?

24 A How wou l d we ge t ou r mone y ba c k , c e r t a i n l y .

25 Q And t hen i t wou l d be , i f t he y cou l d ge t , wha t I

30

1 wou l d c a l l , a cons e r v a t i v e r a t e o f r e t u r n : 6

2 pe r c en t ma ybe?

3 A I t h i nk i t t ended t o be mo r e l i k e e i gh t , bu t

4 depend i ng on t he c l i en t , s i x t o n i ne , somewhe r e i n

5 t he r e .

Page 25

F e vo l a . t x t 6 Q Wou l d you cons i de r t ha t a doab l e r e t u r n on c ap i t a l

7 i n ' 04?

8 A Depend i ng on t he t i me f r ame , no , no t i n t he

9 t r ad i t i ona l ma r k e t p l a c e . I t h i nk one o f t he

10 i mpo r t an t cons i de r a t i ons f o r us , and when I c ame

11 aboa r d i n 2002 , pa r t o f t he conv e r s a t i on wa s ,

12 ok a y , ov e r t he cou r s e o f t he ne x t de c ade , wha t do

13 we e xpe c t f o r r e t u r ns w i t h i n t r ad i t i ona l a s s e t

14 c l a s s e s? And be c aus e t hos e numbe r s we r e

15 suba v e r age i n many c a s e s , I me an , f r om my

16 pe r spe c t i v e when I j o i ned t he f i r m wa s t ha t

17 equ i t i e s f o r t he ne x t de c ade , r e t u r ns wou l d be

18 z e r o . I wa s v e r y pub l i c abou t t ha t . I n t ha t

19 l i gh t , and g i v en t he f a c t t ha t i n t e r e s t r a t e s we r e

20 l i k e l y t o de c l i ne t o l e v e l s t ha t wou l d no t p r ov i de

21 t he r a t e o f r e t u r n ne c e s s a r y f o r t he f i nanc i a l

22 p l an , we ne eded t o come up w i t h ano t he r s t r a t egy .

23 Q Wa s t he r e a deg r e e o f r i s k t ha t you we r e w i l l i ng

24 t o t a k e on a s t r a t egy ; t ha t i s , we r e you l ook i ng

25 a t i t . Ze r o wa s a t r e a su r y bond , m i n i ma l o r no

31

1 r i s k ; and i nv e s t i ng i n t he penny s t oc k ma r k e t wa s

2 ma ybe t en? Whe r e wa s you r r i s k appe t i t e i n 2004?

3 A I t h i nk we we r e cogn i z an t o f t he t r adeo f f s i n

4 r i s k s , t ha t we we r e w i l l i ng t o t r ade o f f some o f

5 t he no t i on , be c aus e t he r e wa s i l l i qu i d i t y t ha t we

6 unde r s t ood , t ha t we we r e no t go i ng t o s e e ou r

7 mone y ba c k f o r a t l e a s t a m i n i mum o f a t wo - y e a r

8 pe r i od , t ha t we we r e w i l l i ng t o t r ade t ha t o f f

9 aga i ns t t he r e t u r n , wh i ch f r om ou r pe r spe c t i v e a t

10 t ha t t i me wa s abov e wha t wa s a v a i l ab l e i n t hePage 26

F e vo l a . t x t

11 t r ad i t i ona l ma r k e t p l a c e .

12 Q Ok a y . We r e you e v e r t o l d by e i t he r Tom R i e k , Joe

13 Aa r on o r J i m Pu t nam t ha t a r i s k i n t he i nsu r anc e

14 p r em i um f i nanc i ng wa s subs t an t i a l , t ha t t h i s wa s a

15 spe cu l a t i v e o r r i s k y i nv e s t men t ?

16 A No .

17 Q D i d you e v e r come t o a conc l us i on e i t he r a t t he

18 t i me o r w i t h i n a y e a r o r so t ha t i nsu r anc e p r em i um

19 f i nanc i ng wa s a r i s k y o r spe cu l a t i v e i nv e s t men t ?

20 A The na t u r e o f t he i nv e s t men t changed d r ama t i c a l l y

21 du r i ng t he c r ed i t c r i s i s ; t he buy e r s f l ed t he

22 ma r k e t .

23 Q Tha t wa s much l a t e r on?

24 A R i gh t . A t t he t i me , ba s ed on t he i n f o r ma t i on t ha t

25 I had i n 2004 c e r t a i n l y , and e v en t o an e x t en t i n

32

1 2006 when we began r ound t wo , t he end ma r k e t , i f

2 you wou l d , t he po t en t i a l e x i t s t r a t egy wa s

3 t h r i v i ng , wa s popu l a r , wa s popu l a t ed by some o f

4 t he l a r ge s t p l a y e r s a r ound t he g l obe .

5 Q Who t o l d you t h i s? You d i dn ' t do you r own due

6 d i l i genc e on t ha t , d i d you?

7 A I wen t t o a numbe r o f con f e r enc e s i n t he l i f e

8 s e t t l emen t and l i f e i nsu r anc e p r em i um f i nanc e .

9 Q I n New Yo r k?

10 A Ye s . And be s i de s New Yo r k , I s a t w i t h t he buy e r s

11 a t t ab l e s whe r e we t a l k ed abou t who wa s do i ng

12 wha t . The name s we r e l a r ge .

13 Q Le t ' s t a l k abou t t ha t , ok a y . A po l i c y w i t h a f a c e

14 v a l ue o f $10 m i l l i on i s i s sued o r so l d t o an

Page 27

F e vo l a . t x t 15 app l i c an t , i s t ha t co r r e c t ?

16 A I ' m so r r y , s t a r t aga i n .

17 Q You ' r e awa r e t ha t t he r e we r e po l i c i e s so l d w i t h a

18 f a c e v a l ue o f $10 m i l l i on?

19 A Ye s .

20 Q An app l i c an t wou l d f i l l ou t an app l i c a t i on f o r

21 t ha t po l i c y , and i f t he i nsu r anc e company app r ov ed

22 i t , t ha t ' s whe r e you , We a l t h Managemen t , and i t s

23 i nv e s t o r s wou l d do t he f und i ng o f t ha t p r em i um?

24 A R i gh t .

25 Q I n o r de r t o do t ha t , t he pe r son t a k i ng ou t t he

33

1 po l i c y had t o me e t c e r t a i n c r i t e r i a?

2 A R i gh t .

3 Q D i d you che c k whe t he r o r no t t he app l i c an t s me t

4 t ha t c r i t e r i a?

5 A Pe r sona l l y , no .

6 Q I n o r de r t o ge t a $10 m i l l i on po l i c y , t he y had t o

7 be h i gh - ne t - wo r t h c l i en t s , h i gh - ne t - wo r t h

8 app l i c an t s , we r e t he y no t ?

9 A Tha t wa s my unde r s t and i ng , y e s .

10 Q Do you know i f t he y we r e h i gh - ne t - wo r t h

11 app l i c an t s?

12 A I do no t know .

13 Q A l so , on t he s e app l i c a t i ons , i n mos t c a s e s , i t

14 spe c i f i c a l l y , t he i nsu r anc e company , a s k ed i f

15 you ' r e buy i ng t h i s t o s e l l v e r sus f o r you r s e l f ,

16 co r r e c t ?

17 A Tha t wa s i n a r egu l a t i on t ha t c ame a l ong somewhe r e

18 i n t he p r oc e s s . I don ' t r emembe r when .

19 Q We r e you awa r e t ha t mos t o f t he app l i c an t s ,Page 28

F e vo l a . t x t

20 whe t he r t he y che c k ed i t o f f o r t he agen t d i d , l i ed

21 on t ha t and s a i d , no , i t ' s no t f o r r e s a l e , when ,

22 i n f a c t , t he y knew i t wa s?

23 A I wa s no t awa r e o f t ha t , no .

24 Q Can you t h i nk o f a r e a son why someone , a

25 75 - y e a r - o l d , h i gh - ne t - wo r t h pe r son , $10 m i l l i on o r

34

1 mo r e , t a k i ng ou t a $10 m i l l i on po l i c y i n

2 r e a sonab l y good he a l t h wou l d ne ed a $10 m i l l i on

3 po l i c y?

4 A The t r ad i t i ona l r e a son t ha t , you know , we

5 d i s cus s ed - - t ha t wa s d i s cus s ed , gene r a l l y

6 spe a k i ng , i n t he ma r k e t , wa s e s t a t e - p l ann i ng

7 pu r pos e s : t o p r ov i de f o r l i qu i d i t y i n de a t h i n

8 t e r ms o f pa y i ng t a x e s ; t o p r ov i de f o r

9 t r ans a c t i ons , t r ans f e r s o f bus i ne s s ; t ha t t ype o f

10 t h i ng .

11 Q The po l i c y i t s e l f t hen , i n t e r ms o f t he v a l ue o f

12 i t , wou l d depend on t he l i f e e xpe c t anc y o f t he

13 pe r son , wou l d i t no t ?

14 A Tha t wa s one o f t he f a c t o r s , y e s .

15 Q Who de t e r m i ned t he l i f e e xpe c t anc y o f e a ch

16 app l i c an t ? Who t o l d you wha t t ha t wou l d be?

17 A The r e we r e , my unde r s t and i ng , t he r e we r e a hand f u l

18 o f a c t ua r i a l f i r ms t ha t p r ov i ded l i f e e xpe c t anc i e s

19 t o t he f o l k s who we r e pu t t i ng t oge t he r t he

20 f i nanc i ng .

21 Q And d i d you l ook a t t ha t a r e a a s pa r t o f you r due

22 d i l i genc e t o s e e wha t t he l i f e e xpe c t anc y on t he s e

23 po l i c i e s you we r e f und i ng wa s de t e r m i ned t o be?

Page 29

F e vo l a . t x t 24 A I had some conv e r s a t i ons a l ong t he wa y ,

25 spe c i f i c a l l y I c an ' t r e c a l l when , w i t h some o f t he

35

1 a c t ua r i e s .

2 Q Do you r emembe r t he name s o f t he a c t ua r i e s?

3 A We l l , t he f i r ms t ha t I - - t he r e we r e t wo f i r ms

4 t ha t I r emembe r t ha t we r e p r i ma r i l y us ed : 21s t

5 Cen t u r y , I t h i nk wa s one ; and AES ,

6 AE - some t h i ng .

7 Q Whe r e we r e t he y l oc a t ed?

8 A I don ' t r e c a l l .

9 Q Who wou l d r un t he s e po l i c i e s by t he s e f o l k s?

10 Whos e r e spons i b i l i t y wa s i t ?

11 A Tha t wa s Joe ' s r e spons i b i l i t y i n t e r ms o f

12 pu t t i ng - - we l l , I l e f t i t a t Joe ' s r e spons i b i l i t y

13 t o manage t ha t pa r t o f t he p r oc e s s .

14 Q Ok a y . An agen t ha s an app l i c a t i on f o r you f o r a

15 $10 m i l l i on po l i c y t ha t ne eds t o be f unded . I n

16 t he r e you ' v e go t t he app l i c a t i on , you ' v e go t t he

17 he a l t h , you ' v e go t , hope f u l l y , t he ne t - wo r t h

18 i n f o r ma t i on , and you ha v e t he l i f e - e xpe c t anc y

19 i n f o r ma t i on . D i d you r e v i ew a l l o f t ha t be f o r e

20 f und i ng a l l o f t he s e po l i c i e s?

21 A No .

22 Q D i d anyone r e v i ew a l l o f t ha t , t o you r know l edge ,

23 f o r We a l t h Managemen t ?

24 A Tha t wa s t o be t he r e spons i b i l i t y o f t he manage r

25 o f t he f und .

36

1 Q So t he answe r i s , nobody f r om We a l t h Managemen tPage 30

F e vo l a . t x t

2 r e v i ewed any o f t ha t ?

3 A No t p r i o r t o t he f und i ng .

4 Q Ok a y . And t he r e f o r e , i t wa s Joe Aa r on ' s

5 r e spons i b i l i t y?

6 A Ye s .

7 Q A f t e r t he f und i ng , d i d anyone r e v i ew i t ?

8 A The r e c ame a t i me , and I don ' t r e c a l l when , when

9 t he r e wa s a pe r i od i c sp r e adshe e t t ha t wa s p r ov i ded

10 t ha t ou t l i ned t he po r t f o l i o f o r t he po l i c i e s .

11 Q I ' m go i ng t o show you wha t i s ma r k ed a s Exh i b i t 3 .

12 I ' l l r ep r e s en t t o you t ha t t h i s i s f r om Tom R i e k ' s

13 depos i t i on t a k en on Ju l y 22 , 2010 . I ha v e c i r c l ed

14 an a r e a , do you s e e t ha t ?

15 A Ye s .

16 Q Page 49 , s t a r t w i t h L i ne 10 , t he que s t i on i s , " So

17 i f M r . F e vo l a wa s wo r k i ng a t We a l t h Managemen t i n

18 t he 2004 t i me f r ame , do you t h i nk you wou l d ha v e

19 sha r ed you r t hough t s abou t wha t t he r i s k s we r e i n

20 t he l i f e i nsu r anc e p r em i ums f i nanc i ng w i t h h i m? "

21 Answe r , " Abso l u t e l y . And he i s a sma r t guy , he

22 wou l d no t j us t t a k e my wo r d f o r i t . He doe s h i s

23 homewo r k . " " M r . R i e k , d i d you p r ov i de any so r t o f

24 w r i t t en de s c r i p t i on abou t t he r i s k p r o f i l e o f

25 t he s e l i f e i nsu r anc e p r em i um - t ype o f a r r angemen t s

37

1 w i t h anyone a t We a l t h Managemen t ? " " No , a l l o f

2 t he w r i t t en ma t e r i a l s we r e p r ov i ded by RangeT r e e

3 and UTC , t hos e p r ov i de r s . I d i dn ' t ha v e any

4 w r i t t en ma t e r i a l . " D i d you know a t any t i me f r om

5 M r . R i e k o r M r . Aa r on t ha t t he l i f e i nsu r anc e

Page 31

F e vo l a . t x t 6 p r em i um f i nanc i ng bus i ne s s wa s a v e r y r i s k y

7 bus i ne s s?

8 A We t a l k ed abou t t he r i s k s r e l a t i v e t o o t he r

9 i nv e s t men t s a s I de s c r i bed be f o r e i n t e r ms o f

10 l i qu i d i t y , and so on , and t he e x i t pos s i b i l i t i e s ,

11 and so f o r t h . I ne v e r - - we ne v e r t a l k ed abou t

12 ou t s i de subs t an t i a l r i s k s .

13 Q You d i dn ' t s e e t h i s a s a r i s k y i nv e s t men t - -

14 A I s aw i t - -

15 Q - - you pe r sona l l y?

16 A I s aw t he r i s k s f o r wha t t he y we r e r e l a t i v e t o ou r

17 o t he r op t i ons .

18 Q " O t he r op t i ons " l i k e wha t , i nv e s t i ng i n g l owwo r ms?

19 I me an , I don ' t know you ' r e s a y i ng : " r e l a t i v e t o

20 o t he r op t i ons " ?

21 A W i t h i n t he r ange o f - - w i t h i n a w i de r ange o f

22 i nv e s t men t oppo r t un i t y f r om t he t r e a su r y b i l l t o

23 p r i v a t e equ i t y and be yond , how d i d I s e e t h i s?

24 We l l , no t a t e i t he r end o f t he spe c t r um ; somewhe r e

25 i n t he m i dd l e .

38

1 Q Now , M r . R i e k s a y s t ha t you wou l d ha v e done you r

2 own homewo r k , t ha t you wou l dn ' t ha v e t a k en h i s

3 wo r d f o r i t , t ha t you wou l d ha v e done you r own

4 homewo r k . D i d you do you r own homewo r k?

5 A I ' m no t su r e wha t he me ans by t ha t .

6 Q We l l , d i d you do any homewo r k on t h i s o t he r t han

7 t a l k i ng w i t h some peop l e abou t i t ?

8 A We r e v i ewed t he s t r uc t u r e on how i t wo r k ed . We

9 r e v i ewed , mos t i mpo r t an t l y , how we wou l d ge t ou r

10 mone y ba c k .Page 32

F e vo l a . t x t

11 Q Le t ' s t a l k abou t t ha t . Le t ' s go ba c k t o ou r

12 $10 m i l l i on po l i c y , a l l r i gh t ? You wou l d ha v e

13 pa i d a p r em i um on , onc e t he po l i c y i s i s sued , you

14 wou l d ha v e f unded t ha t f i r s t - y e a r ' s p r em i um ,

15 co r r e c t ?

16 A Co r r e c t .

17 Q Now , i n mos t c a s e s - - I ' l l r ep r e s en t t o you , i f

18 you don ' t r emembe r t h i s , i t wa s abou t a

19 ha l f - m i l l i on do l l a r s f o r mos t peop l e .

20 A Ok a y .

21 Q Doe s t ha t compo r t w i t h you r memo r y a t a l l ?

22 A App r ox i ma t e l y .

23 Q Tha t mone y t hen i s i nv e s t ed i n t ha t p r em i um

24 f i nanc i ng , and a t t ha t po i n t , t he mone y l i e s

25 f a l l ow f o r up t o t wo y e a r s?

39

1 A Co r r e c t .

2 Q So t he r e i s a cos t t o t ha t mone y l y i ng f a l l ow

3 t ha t ' s go t t o be pu t on t he book s , i sn ' t t he r e? I

4 me an , you ' r e pu t t i ng t he mone y t o wo r k , bu t you ' r e

5 no t ge t t i ng any r e t u r n a t t ha t po i n t , r i gh t ?

6 A On a c a sh ba s i s , no ; on an a c c r ua l ba s i s , y e s .

7 Q And you wou l d a c c r ua l t he t a xpa y e r s , wou l dn ' t you?

8 A The f und ope r a t ed on i t s a c coun t i ng on an a c c r ua l

9 ba s i s , y e s .

10 Q Now , t he s e cond y e a r , be c aus e t he wa y I s e e i t ,

11 t he r e wa s a f i r s t - y e a r pa ymen t made , bu t t h i s wa s

12 f o r a t wo - y e a r pe r i od?

13 A Ye s .

14 Q How d i d you t hen pu t a s i de t he mone y f o r t he

Page 33

F e vo l a . t x t 15 s e cond y e a r ' s pa ymen t , o r d i d you?

16 A I n mos t c a s e s , we d i d no t .

17 Q Why?

18 A " We " me an i ng We a l t h Managemen t .

19 Q Why?

20 A A numbe r o f r e a sons , one o f wh i ch wa s t ha t Be a t i s

21 wa s who made t he i nv e s t men t , had a c c e s s t o c ap i t a l

22 j us t a s much a s we po t en t i a l l y d i d .

23 Q I n 2004 , whos e c ap i t a l wa s Be a t i s a c c e s s i ng o t he r

24 t han you r s?

25 A I don ' t know . O t he r t han be i ng - - i t wa s

40

1 r ep r e s en t ed t ha t Be a t i s wa s no t ou r - - i t wa s

2 Joe ' s f und ; he wa s r a i s i ng c ap i t a l .

3 Q Aga i n , I ' m on l y a s k i ng you t h i s be c aus e you we r e

4 t he due - d i l i genc e guy , r i gh t , f o r We a l t h

5 Managemen t ?

6 A Ye s .

7 Q He ' s t e l l i ng you " o t he r sou r c e s o f c ap i t a l , " d i d

8 you che c k t o s e e i f t he r e we r e any o t he r sou r c e s

9 o f c ap i t a l o t he r t han you?

10 A O t he r t han i n conv e r s a t i on , and conv e r s a t i on w i t h

11 Tom a s we l l , no .

12 Q D i d Tom t e l l you t ha t Joe had o t he r sou r c e s o f

13 c ap i t a l ?

14 A I r e c a l l t ha t Tom had c l i en t s h i ms e l f who we r e , i t

15 wa s r ep r e s en t ed t o me , we r e i nv e s t i ng i n Be a t i s .

16 Q R i gh t . And D r . Le shk y ( phone t i c ) , D r . J ans e l

17 ( phone t i c ) , we r e t wo o f t hem?

18 A Thos e name s a r e somewha t f am i l i a r t o me .

19 Q O t he r t han t ha t , do you know o f any o t he rPage 34

F e vo l a . t x t

20 compan i e s who we r e i nv e s t i ng w i t h Joe Aa r on ,

21 i ns t i t u t i ona l compan i e s l i k e you guy s?

22 A I don ' t r e c a l l . I know t ha t t he r e we r e

23 conv e r s a t i ons among o t he r adv i so r s w i t h Joe . I

24 don ' t r e c a l l whe t he r t he y pu t mone y i n w i t h h i m a t

25 a l l .

41

1 Q So a t any r a t e , one y e a r i s f unded , bu t you wou l d

2 ag r e e w i t h me , and , aga i n , p l e a s e , I don ' t wan t t o

3 pu t wo r ds i n you r mon t h , t h i s wa s a t wo - y e a r

4 p r oc e s s t ha t mone y wa s go i ng t o l i e f a l l ow ,

5 co r r e c t ?

6 A Ye s , we unde r s t ood t ha t .

7 Q The on l y wa y w i t h i n t ha t t wo y e a r s t he r e wa s go i ng

8 t o be any pa you t t o t he f und , i n t h i s c a s e ,

9 Be a t i s , be c aus e t he y ha v e t o f i r s t go t o Be a t i s

10 be f o r e i t goe s t o G r yphon o r Wa t ch S t one?

11 A B r own t o Wa t ch S t one , y e s .

12 Q Tha t , i f t he pe r son d i ed du r i ng t ha t t wo - y e a r

13 pe r i od , t he f a c e v a l ue o f t he po l i c y wou l d go t o a

14 pe r son ' s e s t a t e m i nus t he p r em i ums t ha t we r e pa i d

15 and t he i n t e r e s t on t he no t e t ha t wa s s i gned by

16 t he app l i c an t , co r r e c t ?

17 A Ye s , t ha t ' s co r r e c t .

18 Q Now , e x c ep t t ha t t he no t e t ha t wa s s i gned by t he

19 app l i c an t wa s a no - r e cou r s e no t e?

20 A Ye s .

21 Q So t he on l y wa y you we r e go i ng t o ge t pa i d on t ha t

22 no t e wa s i f t he pe r son d i ed du r i ng t ha t t wo - y e a r

23 pe r i od , and t hen be c aus e t he po l i c y wen t i n t o a

Page 35

F e vo l a . t x t 24 t r us t and t he t r us t wou l d pa y i t o f f t he t op o f

25 t he p r oc e eds o f t he po l i c y t o t he f und?

42

1 A Co r r e c t .

2 Q So t ha t ' s one wa y . Now , t he o t he r wa y i s , i s t ha t

3 t he app l i c an t had t he r i gh t t o buy t ha t po l i c y?

4 A Tha t ' s co r r e c t .

5 Q And wa s t ha t w i t h i n t he t wo - y e a r pe r i od?

6 A Ye s .

7 Q And l i k ew i s e , i n o r de r t o buy t he po l i c y , t he

8 app l i c an t wou l d ha v e t o pa y t he p r em i um and t he

9 i n t e r e s t t ha t had a r ange o f l i k e 9 , a l mos t 10

10 pe r c en t t o ma ybe 15 pe r c en t a t v a r i ous t i me s , i s

11 t ha t co r r e c t ?

12 A Co r r e c t .

13 Q Now , s t a r t i ng i n 2004 , do you r emembe r how many

14 po l i c i e s you i nv e s t ed i n i n ' 04?

15 A I don ' t r e c a l l .

16 Q Do you how much mone y you i nv e s t ed i n i n ' 04 i n

17 i nsu r anc e p r em i um f i nanc i ng?

18 A I don ' t r e c a l l t he ov e r l ap be t we en G r yphon and

19 Wa t ch S t one . $20 m i l l i on , I - - a c t ua l l y , I don ' t

20 know .

21 Q And , aga i n , we ' r e de a l i ng w i t h v a r i ab l e s he r e , bu t

22 i n ' 04 , you t h i nk i t wa s abou t $20 m i l l i on?

23 A App r ox i ma t e l y .

24 Q Wha t abou t i n ' 05?

25 A The r e wou l d ha v e be en , i f my r e co l l e c t i on i s

43

1 co r r e c t abou t t he l aunch o f Wa t ch S t one and t hePage 36

F e vo l a . t x t

2 t i m i ng , t ha t t he r e wou l d ha v e be en a r ound o f

3 f i nanc i ng done v i a Wa t ch S t one a s we l l i n ' 05 , so

4 pe r haps ano t he r $10 m i l l i on o r so .

5 Q Now , i n you r e xpe r i enc e , s t a r t i ng i n ' 04 , d i d any

6 o f t he app l i c an t s buy t he i r po l i c i e s?

7 A No t t o my r e co l l e c t i on , no .

8 Q So be t we en ' 04 and ' 09 , do you know o f any e x amp l e

9 whe r e a po l i c yho l de r bough t t he i r po l i c y ba c k?

10 A I don ' t r e c a l l .

11 Q D i d any o f t he po l i c yho l de r s d i e be t we en ' 04 and

12 ' 09 t ha t you ' r e awa r e o f ?

13 A I r e c a l l one de a t h .

14 Q Do you know i f t he company pa i d ou t on t ha t ?

15 A I t h i nk t he r e we r e i s sue s r ega r d i ng t he pa you t .

16 Q R i gh t . Be c aus e t he pe r son l i ed on t he

17 app l i c a t i on , o r a t l e a s t t ha t ' s t he a l l ega t i on?

18 A I r e c a l l t ha t t he r e we r e que s t i ons o f how a l l o f

19 t ha t come t o be .

20 Q So t he t h i r d wa y , wh i ch i s t he wa y t ha t I t h i nk

21 you we r e t a l k i ng abou t he r e , i s t ha t t he po l i c y

22 wou l d be so l d on t he s e conda r y o r a f t e r ma r k e t , i s

23 t ha t co r r e c t ?

24 A Ye s .

25 Q And t ha t r equ i r e s an i nv e s t o r com i ng i n and

44

1 s a y i ng , " I ha v e t h i s $10 m i l l i on po l i c y , " and i n

2 t he s ens e t he i nv e s t o r pa y s you you r p r em i ums ,

3 you r i n t e r e s t and a p r o f i t t o buy t ha t po l i c y?

4 A Po t en t i a l l y . Ce r t a i n l y , t he p r em i ums and t he

5 i n t e r e s t ; t he p r o f i t i s depend i ng on t he ma r k e t a t

Page 37

F e vo l a . t x t 6 t ha t po i n t i n t i me .

7 Q And when you i s sued t he po l i c y - - s t r i k e t ha t .

8 When you i nv e s t ed i n t he po l i c y , you had

9 an i de a o f wha t you we r e l ook i ng f o r a s a r e t u r n

10 on e a ch one o f t he po l i c i e s you i nv e s t ed i n ,

11 d i dn ' t you?

12 A I t h i nk t he r e c e r t a i n l y wa s a p r o j e c t ed v a l ua t i on

13 i n t he t wo - y e a r t i me f r ame .

14 Q Now , we ' v e a l r e ady d i s cus s ed , you wou l d a c c r ua l

15 Be a t i s ' t a xpa y e r s , co r r e c t ?

16 A Ye s .

17 Q Be a t i s wa s an a c c r ua l - ba s i s t a xpa y e r - -

18 A To my know l edge , y e s .

19 Q Du r i ng t he t wo y e a r s t he po l i c i e s we r e l y i ng

20 f a l l ow , t he r e wa s an a c cumu l a t ed i n t e r e s t r a t e

21 t ha t r anged f r om 9 . 95 up t o 15 pe r c en t t ha t you

22 we r e a c c r u i ng on t he book s , t he i n t e r e s t on t he

23 mone y t ha t you pa i d ou t , we r en ' t you?

24 A Ye s .

25 Q So t hen when you we r e r epo r t i ng e a r n i ngs t o We a l t h

45

1 Managemen t i nv e s t o r s , you we r e r epo r t i ng e a r n i ngs

2 ba s ed upon an a c c r ued i n t e r e s t t ha t , i n f a c t , you

3 ma y no t ge t ?

4 A Ye s , and we we r e - - a t some po i n t i n t i me , and I

5 don ' t r e c a l l when , i t ma y ha v e be en i n ' 04 , we

6 began , i n t e r ms o f ou r news l e t t e r s t ha t you showed

7 me be f o r e , sugge s t i ng o r i nd i c a t i ng t ha t t he s e

8 we r e e s t i ma t ed r a t e s o f r e t u r n .

9 Q We ' l l ge t t o t ha t . I ' m j us t t r y i ng t o unde r s t and

10 t he t r ans a c t i on pe r i od .Page 38

F e vo l a . t x t

11 The po i n t i s , you we r e a c c r u i ng

12 i n t e r e s t , wh i ch wa s non - r e cou r s e i n t e r e s t , on you r

13 book s?

14 A Co r r e c t .

15 Q And d i d you a l so a c c r ue you r PSV , t he po l i c y

16 s e l l i ng v a l ue , on you r book s a l so? Do you know

17 wha t PSV i s?

18 A Ye s . I ' m no t su r e wha t t ha t - - my r e co l l e c t i on o f

19 PSV s t ood f o r " p r o j e c t ed s a l e v a l ue . "

20 Q Ok a y . We l l , s ame t h i ng .

21 D i d you a c c r ue t ha t a l so?

22 A No t t o my r e co l l e c t i on . We a c c r ued t he i n t e r e s t ,

23 bu t we d i d i nc l ude wha t we e xpe c t ed t o po t en t i a l l y

24 ga i n abov e and be yond t he p r i nc i pa l and i n t e r e s t .

25 Q So when a po l i c y wa s i s sued i n 2004 , and , a s I

46

1 unde r s t and i t , t he r e r e a l l y we r en ' t t ha t many

2 po l i c i e s i s sued i n ' 04 , i s t ha t co r r e c t ?

3 A I don ' t r e c a l l t he numbe r .

4 Q When a po l i c y wa s i s sued f o r t he ne x t t wo y e a r s ,

5 you a c c r ued . And t hen a t some po i n t i n t i me , you

6 go ahe ad and a t t emp t , a f t e r t he t wo - y e a r pe r i od ,

7 you t hen t r y t o s e l l t ha t po l i c y?

8 A As sum i ng t he r e ha s be en no de a t h o r no i n t e r e s t i n

9 r epu r cha s e , co r r e c t .

10 Q Wh i ch we ha v e a l r e ady de t e r m i ned , i f i t happened ,

11 i t happened onc e , o f a l l o f t he po l i c i e s you

12 i s sued , co r r e c t ?

13 A Co r r e c t .

14 Q O r t ha t you f unded .

Page 39

F e vo l a . t x t 15 Now , l e t me t a l k abou t t he a f t e r ma r k e t .

16 I ' l l r ep r e s en t t o you , and I ' l l ge t t o i t

17 spe c i f i c a l l y , t ha t M r . R i e k ha s t e s t i f i ed i n a

18 depos i t i on be f o r e t he SEC t ha t he cons i de r ed t h i s

19 a r i s k y i nv e s t men t be c aus e t he r e wa s no t r a c k

20 r e co r d f o r t he s e po l i c i e s on t he a f t e r ma r k e t .

21 We r e you awa r e o f t ha t , t ha t t he r e wa s no t r a c k

22 r e co r d?

23 A I n wha t t i me f r ame?

24 Q Ce r t a i n l y , i n ' 03 , ' 04 , e v en ' 05 .

25 A The r e we r e buy e r s o f l i f e s e t t l emen t s i n ' 03 and

47

1 ' 04 , t o my know l edge .

2 Q D i d you hand l e any o f t hos e t r ans a c t i ons?

3 A I d i dn ' t do any o f t he t r ans a c t i ons , no .

4 Q Do you know any o f t he buy e r s o f t he s e

5 l i f e - s e t t l emen t po l i c i e s t ha t I cou l d depos e o r

6 t ha t I cou l d t a l k t o?

7 A Pe r sona l l y , no . On l y t h r ough r e s e a r ch t ha t I

8 r e ad , wha t t he ma r k e t wa s l i k e .

9 Q Bu t now go i ng ba c k t o my $10 m i l l i on po l i c y , a l l

10 r i gh t ? So a f t e r t wo y e a r s , you ha v e an

11 a c cumu l a t ed i nv e s t men t i n t ha t po l i c y , r i gh t ?

12 A Ye s .

13 Q You wou l d ha v e had t o ha v e pa i d t he s e cond - y e a r

14 p r em i um , wou l dn ' t you - -

15 A Co r r e c t .

16 Q - - t o k e ep i n i t f o r c e?

17 A Co r r e c t .

18 Q And , t he r e f o r e , you wou l d ha v e had t o ha v e

19 r e s e r v ed t he mone y on a t wo - y e a r po l i c y t o pa yPage 40

F e vo l a . t x t

20 t hos e s e cond - y e a r p r em i ums , wou l d you no t ?

21 A Co r r e c t .

22 Q D i d you r e s e r v e t he mone y f o r t he s e cond - y e a r

23 p r em i ums?

24 A Spe c i f i c a l l y , whe t he r we r e s e r v ed i t o r whe t he r

25 Be a t i s r e s e r v ed i t , I c an ' t s a y . I t wa s a

48

1 d i s cus s i on po i n t t ha t we knew s e cond - y e a r p r em i ums

2 wou l d come due .

3 Q Do you know o f any r equ i r emen t t ha t Be a t i s pa y t he

4 s e cond - y e a r p r em i um v e r sus G r yphon o r Wa t ch S t one?

5 O r l e t me a s k i t ano t he r wa y : Whos e ob l i ga t i on

6 wa s i t t o pa y t he s e cond - y e a r p r em i um?

7 A The r e wa s no f o r ma l ag r e emen t a s t o " you w i l l

8 p r ov i de add i t i ona l f unds t o pa y t he s e cond - y e a r

9 p r em i um . "

10 Q He r e i s wha t I ' m t r y i ng t o f i nd ou t , you ' v e go t ,

11 a t t h i s po i n t , $20 m i l l i on o r mo r e i nv e s t ed i n

12 t he s e po l i c i e s , r i gh t ?

13 A Ye s .

14 Q You know t he s e cond y e a r i s com i ng due?

15 A R i gh t .

16 Q You know t he r e i s a t wo - y e a r ho l d i ng pe r i od ,

17 r i gh t ?

18 A R i gh t .

19 Q Whos e j ob i s i t t o r e s e r v e t he mone y t o pa y t ha t

20 s e cond - y e a r p r em i um?

21 A We - - I unde r s t ood t ha t t hos e p r em i ums wou l d come

22 due . The f i r s t l i ne o f de f ens e , i n my m i nd , wa s

23 Joe f und i ng t hos e , be c aus e he wa s r unn i ng t he f und

Page 41

F e vo l a . t x t 24 and t he r e we r e o t he r i nv e s t o r s . I t wa sn ' t

25 spe c i f i c a l l y ou r r e spons i b i l i t y . Ha v i ng s a i d

49

1 t ha t , we , i n t he f und , had a c c e s s t o o t he r c ap i t a l

2 t ha t we cou l d r a i s e i f ne c e s s a r y t o do so .

3 Q A t any r a t e , we ' r e now a t t he po i n t whe r e you ' r e

4 t r y i ng t o s e l l t he po l i c y , r i gh t ?

5 A Ye s .

6 Q Now , pu t you r o t he r i nv e s t o r ha t on . You and I

7 ha v e a $10 m i l l i on f und t o buy t he s e po l i c i e s on

8 t he s e conda r y ma r k e t .

9 A R i gh t .

10 Q Do you know wha t t he c r i t e r i a wa s o f t he s e conda r y

11 ma r k e t when t he y we r e buy i ng t he s e po l i c i e s i n

12 t e r ms o f d i s coun t o f f o f f a c e v a l ue? F i r s t o f

13 a l l , do you know wha t " d i s coun t o f f o f f a c e v a l ue "

14 me ans?

15 A D i s coun t o f f o f f a c e v a l ue , you ' r e r e f e r r i ng t o

16 t he embedded cos t o f t he po l i c y up t o t ha t da t e ,

17 i s t ha t wha t you ' r e t a l k i ng abou t ?

18 Q Tha t ' s one wa y . The o t he r wa y i s t o s a y t ha t a

19 $10 m i l l i on po l i c y , t he mos t I ' m go i ng t o pa y f o r

20 t ha t i s 3 pe r c en t ?

21 A Su r e , I unde r s t and .

22 Q Wh i ch i s i t f o r you? I ' l l l e t you go e i t he r wa y .

23 A I - - wha t I f ocus ed on wa s how much mone y d i d we

24 ha v e i n t h i s - -

25 Q Ok a y .

50

1 A - - and wha t pe r c en t age o f t ha t numbe r wa s t hePage 42

F e vo l a . t x t

2 ma r k e t t r ad i ng a t . And t ha t i s v e r y

3 i d i os ync r a t i c be c aus e a l l o f t he unde r l y i ng

4 f a c t o r s a r e d i f f e r en t f o r e a ch po l i c y , bu t w i t h i n

5 - - t he r e wa s a r ange . I t wa s a l so a r ange

6 depend i ng on how c l os e , whe r e we we r e , and wh i ch

7 s i de o f t he t wo - y e a r t i me f r ame we we r e t a l k i ng

8 abou t : wa s t h i s we t pape r , o r had t h i s e x c e eded

9 t he t wo - y e a r t i me f r ame?

10 Q So w i t h i n t he t wo - y e a r t i me f r ame , you wou l d t r y t o

11 s e l l t hos e po l i c i e s w i t h i n t ha t pe r i od , i s t ha t

12 co r r e c t ?

13 A As sum i ng t he r e wa s no o t he r e x i t s t r a t egy , t ha t

14 wa s t he wa y we wou l d do i t , t r ue .

15 Q Bu t wha t r i gh t d i d you ha v e t o s e l l t he po l i c y

16 when t he po l i c yho l de r s t i l l had r i gh t s and t he

17 t wo - y e a r pe r i od o f i ncon t e s t ab i l i t y hadn ' t r un?

18 A I t h i nk t he i s sue wa s , l e t ' s ge t - - f r om my

19 pe r spe c t i v e , wha t wou l d t he ma r k e t pa y f o r t h i s ,

20 ge t a s ens e f o r a r e we abov e wa t e r ; be l ow wa t e r ,

21 whe r e a r e we w i t h r e spe c t t o t h i s pa r t i cu l a r

22 po l i c y g i v en t he unde r l y i ng c r i t e r i a : t he

23 unde r l y i ng c r i t e r i a i n t he ma r k e t p l a c e r i gh t now .

24 I t doe sn ' t me an we wou l d do i t , be c aus e we d i dn ' t

25 ha v e t he , a s you s a y , t he r i gh t t o do i t .

51

1 Q Bu t you d i d do i t . You d i d s e l l po l i c i e s be f o r e

2 t he t wo y e a r s , o r d i d you no t , t o t he be s t o f you r

3 r e co l l e c t i on?

4 A I don ' t r e c a l l do i ng t ha t . I don ' t r e c a l l t ha t

5 be i ng done .

Page 43

F e vo l a . t x t 6 Q So now a f t e r t he t wo - y e a r pe r i od , and now you ' r e

7 ou t s e l l i ng t he po l i c y , go i ng ba c k t o my

8 hypo t he t i c a l , t he que s t i on i s , you ' r e now l ook i ng

9 a t t h i s f r om ou r f und o f $10 m i l l i on t o buy t hos e

10 a f t e r ma r k e t po l i c i e s . Wha t wa s t he c r i t e r i a t ha t

11 t he ma r k e t us ed t o buy t he s e po l i c i e s? I s a i d

12 one : d i s coun t o f f o f f a c e v a l ue , bu t wha t wa s t he

13 o t he r c r i t e r i a , do you know?

14 A I t h i nk depend i ng on t he na t u r e o f t he buy e r , i t

15 wa s d i f f e r en t . Fo r e x amp l e , one o f t he l a r ge

16 buy e r s , pu r po r t ed l a r ge buy e r s , wa s Deu t s che Bank

17 and a f e l l ow named M i cha e l - - I don ' t r e c a l l h i s

18 l a s t name a t t he momen t , t ha t wa s a c cumu l a t i ng

19 l i f e s e t t l emen t s , a c cumu l a t i ng po l i c i e s e v en t ua l l y

20 t o s e cu r i t i z e , t o c r e a t e a s e cu r i t i z a t i on , i s sue a

21 bond aga i ns t t he s e a s co l l a t e r a l . Tha t wa s t he

22 s t r a t egy . The i r c r i t e r i a wa s l i f e e xpe c t anc y ,

23 be c aus e wha t t he y wan t ed t o do wa s c a r v e t he s e up

24 i n t o t r anche s ba s ed on l i f e e xpe c t anc y .

25 Q And I know wha t you ' r e t a l k i ng abou t , bu t so t he

52

1 r e co r d i s c l e a r , t e l l t he cou r t r epo r t e r wha t a

2 t r anche i s .

3 A Jus t a s egmen t , a ma t u r i ng s egmen t o f a s t r e am o f

4 c a sh f l ows .

5 Q Go ahe ad .

6 A ( No r e spons e . )

7 Q So t he y we r e go i ng t o , i n a s ens e , wha t t he y we r e

8 go i ng t o do , a s you t heo r i z e i t , t he s ame t h i ng

9 t he y we r e do i ng w i t h t he mo r t gage ma r k e t : t he y

10 we r e go i ng t o c a r v e t he s e up i n t o bonds and s e l lPage 44

F e vo l a . t x t

11 t h i s s t u f f on t he open ma r k e t a s a s e cu r i t y?

12 A Co r r e c t .

13 Q A r e you awa r e o f any o f t he We a l t h Managemen t

14 i nv e s t men t s , o r , I gue s s , spe c i f i c a l l y , Be a t i s and

15 B r own i nv e s t men t s , t ha t we r e so l d t o Deu t s che

16 Bank? D i d you e v e r s e e any o f t he pape r wo r k

17 show i ng you t ha t t he y we r e?

18 A Spe c i f i c a l l y , I c an ' t r emembe r .

19 Q I c an ' t f i nd a r e co r d o f any . So I ' m a s k i ng you

20 a s t he o f f i c e r who wa s i n cha r ge o f t he s e

21 i nv e s t men t s , d i d you s e e , o t he r t han s t o r i e s you

22 we r e t o l d , d i d you s e e any o f t he pape r wo r k

23 ba c k i ng up t he s e pu r cha s e s?

24 A I ha v e s e en t r ans a c t i on pape r wo r k . I don ' t r e c a l l

25 who t he buy e r wa s . Wha t e v e r pape r wo r k I s aw , i t

53

1 wou l d ha v e be en i n ou r f i l e , i nv e s t men t f i l e .

2 Q So you s a i d one o f t he c r i t e r i a i n t he s e conda r y

3 ma r k e t wa s l i f e e xpe c t anc y , r i gh t ?

4 A Mm mm .

5 Q Ye s?

6 A Ye s .

7 Q The sho r t e r l i f e e xpe c t anc y , obv i ous l y , i f I ' m

8 buy i ng a $10 m i l l i on po l i c y and somebody ha s s t age

9 I V c e r v i c a l c anc e r w i t h t he p r ognos i s o f a y e a r o r

10 so , t ha t i s a p r e t t y good be t , and I m i gh t pa y

11 mo r e f o r t ha t po l i c y t han someone who ha s go t a

12 20 - y e a r l i f e e xpe c t anc y , r i gh t ?

13 A You m i gh t . Depend i ng on you r ob j e c t i v e s , you

14 m i gh t .

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F e vo l a . t x t 15 Q Good po i n t . Te l l me , wha t wou l d be t he d i f f e r enc e

16 i n my ob j e c t i v e s? I ' m t a l k i ng abou t one

17 $10 m i l l i on po l i c y , s t age I V , v e r sus 20 - y e a r l i f e ,

18 wha t wou l d be t he d i f f e r enc e on how I wou l d l ook

19 a t t ha t ?

20 A I f you ' r e t r y i ng t o s t r uc t u r e a s t r e am o f c a sh

21 f l ow , t ha t m i gh t no t be a c a sh f l ow you ' r e

22 i n t e r e s t ed i n ; i t m i gh t be t oo sho r t f o r you r

23 po r t f o l i o . So you ma y no t be i n t e r e s t ed i n pa y i ng

24 mo r e f o r t ha t . I f t he ma r k e t sugge s t ed , and I

25 t h i nk you ' r e co r r e c t , t ha t a h i ghe r p r obab i l i t y ,

54

1 sho r t e r - t e r m c a sh f l ow wou l d be v a l ued h i ghe r ,

2 t ha t ma y be t r ue . Howe v e r , a s a buy e r , you ma y

3 no t be i n t e r e s t ed i n t he c a sh f l ow .

4 Q Le t ' s a s sume f o r t he momen t on my $10 m i l l i on

5 po l i c y t ha t Be a t i s had a t o t a l i nv e s t men t i n ,

6 l e t ' s s a y , t h r e e - qua r t e r o f a m i l l i on do l l a r s , a l l

7 r i gh t ?

8 A Mm mm .

9 Q And I ' m o f f e r i ng a m i l l i on do l l a r s f o r t h i s

10 $10 m i l l i on po l i c y , and I pu r cha s e i t f r om Be a t i s

11 f o r a m i l l i on do l l a r s and I know t h i s pe r son ha s

12 s t age I V c e r v i c a l c anc e r and t he y ' r e p r obab l y no t

13 go i ng t o l i v e l onge r t han a y e a r , a r e you t e l l i ng

14 me t ha t i s no t a good i nv e s t men t : my m i l l i on

15 ge t t i ng $10 m i l l i on i s no t good?

16 A I ' m no t ne c e s s a r i l y s a y i ng i t ' s a good o r bad

17 i nv e s t men t . I ' m s a y i ng f r om t he s t andpo i n t o f t he

18 i nv e s t o r , i s t ha t pa r t o f wha t you ' r e t r y i ng t o

19 a c comp l i sh i n you r po r t f o l i o , and i t ma y o r ma yPage 46

F e vo l a . t x t

20 no t be .

21 Q So ma k i ng mone y i s no t one o f t he t h i ngs I shou l d

22 be l ook i ng f o r a s a s e conda r y ma r k e t , o r a r e you

23 s a y i ng t ha t i t wa s mo r e i mpo r t an t t o t a k e t h i s

24 s t u f f , pu t i t i n t o a CDO - - you know wha t a CDO

25 i s?

55

1 A I ' m f am i l i a r w i t h a CDO .

2 Q And t ha t i s wha t Deu t s che Bank wa s t a l k i ng abou t ,

3 r i gh t , i n a s ens e , co l l a t e r a l i z e t ha t ob l i ga t i on?

4 A A v e r s i on o f i t , y e s .

5 Q Ok a y . And you ' r e s a y i ng i t wa s mo r e i mpo r t an t t o

6 ge t t h i s s t u f f i n so I cou l d c l unk i t up i n t o

7 p i e c e s and s e l l i t o f f on t he s e conda r y ma r k e t ?

8 A I n some c a s e s , y e s .

9 Q Now , c an you , i f i t ' s a sub t l e t y , t e l l me , bu t

10 be t we en ' 04 and ' 06 , d i d t h i ngs change?

11 A F r om wha t ?

12 Q F r om wha t t he ma r k e t wa s l i k e i n i nsu r anc e p r em i um

13 f i nanc i ng i n ' 04 t o wha t t he ma r k e t wa s l i k e i n

14 i nsu r anc e p r em i um f i nanc i ng i n ' 06 , d i d any t h i ng

15 change?

16 A I t s e emed t o me a t t he t i me t ha t t he l e v e l o f

17 i n t e r e s t i n t he s t r a t egy wa s s i gn i f i c an t l y h i ghe r .

18 Q I n ' 06 t han i t wa s i n ' 04?

19 A Ye s . And i t s e emed t o me a t t he t i me t ha t t he

20 l i f e - s e t t l emen t ma r k e t had de v e l oped t o a g r e a t e r

21 e x t en t . The r e wa s some s i gns t ha t - - I don ' t wan t

22 t o c a l l i t a " ma i ns t r e am ma r k e t , " bu t i t f o l l owed

23 t he t r a j e c t o r y o f some o f t he o t he r co l l a t e r a l i z ed

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F e vo l a . t x t 24 s e cu r i t i z ed ma r k e t s . I t s e emed t o be f o l l ow i ng

25 t ha t t r a j e c t o r y .

56

1 Q So wha t you ' r e s a y i ng i s , t he b i g hous e s we r e

2 l ook i ng f o r any t h i ng t he y cou l d cu t up and s e l l ,

3 and t h i s wa s one o f t hos e t h i ngs?

4 A I t h i nk i t wa s be i ng pe r c e i v ed t hen a s a good

5 supp l y o f s e cu r i t i z ab l e a s s e t s , t o answe r you r

6 que s t i on .

7 Q A l l r i gh t . I ' m go i ng t o show you wha t ha s be en

8 ma r k ed a s Exh i b i t No . 4 , wh i ch I ' m go i ng t o

9 r ep r e s en t t o you I us ed i n M r . Pu t nam ' s

10 depos i t i on . So I a s k ed h i m abou t t h i s when I wa s

11 a s k i ng h i m que s t i ons i n h i s depos i t i on , a l l r i gh t ?

12 A Ok a y .

13 Q F i r s t o f a l l , i t ' s da t ed Ma r ch 31 , 2004 . Do you

14 s e e t ha t on t he r i gh t - hand co r ne r ?

15 A Ye s .

16 Q D i d you c r e a t e , d i d you w r i t e t he ma t e r i a l t ha t

17 e x i s t s i n Exh i b i t No . 4?

18 A Ye s .

19 Q Now , p r i o r t o t oda y , you we r e supp l i ed w i t h a copy

20 o f M r . Pu t nam ' s depos i t i on , we r e you no t ?

21 A Ye s , I wa s .

22 Q And d i d you ha v e a chanc e t o r e ad i t ?

23 A B r i e f l y , y e s .

24 Q Now , i t t a l k s abou t " RangeT r e e s t r a t eg i e s . " Do

25 you s e e whe r e i t s a y s " RangeT r e e s t r a t eg i e s " ?

57

1 A Ye s .Page 48

F e vo l a . t x t

2 Q " I s t he mos t r e c en t add i t i on t o G r yphon and ha s

3 be en added t h r ough t he Be a t i s Fund t o p r ov i de

4 l i qu i d i t y t o t h i s i nv e s t men t . " A l l r i gh t . Le t me

5 s t op t he r e . Wha t wa s RangeT r e e supp l y i ng i n t e r ms

6 o f l i qu i d i t y?

7 A No , I t h i nk pe r haps my s yn t a x i s bad . Wha t I wa s

8 t r y i ng t o sugge s t i s t ha t Be a t i s p r ov i ded a mo r e

9 l i qu i d wa y t o a c c e s s t he RangeT r e e s t r a t eg i e s t han

10 a d i r e c t i nv e s t men t i n RangeT r e e .

11 Q Huh? I don ' t unde r s t and t ha t . C l a r i f y t ha t f o r

12 me , w i l l you?

13 A I n o t he r wo r ds , i ns t e ad o f i nv e s t i ng d i r e c t l y i n

14 RangeT r e e , wh i ch we unde r s t and t o be a t wo - y e a r

15 comm i t men t - -

16 Q Ye ah .

17 A - - wh i l e t e chn i c a l l y , a t t he end o f t he da y , wou l d

18 s t i l l be a t wo - y e a r comm i t men t be c aus e you ' r e

19 i nv e s t i ng i t , t r ue , Be a t i s i t s e l f had a 30 - da y

20 l i qu i d i t y p r ov i s i on t o We a l t h Managemen t ; i . e . , I

21 cou l d t heo r e t i c a l l y a s k Joe Aa r on a t any po i n t ,

22 " I ' d l i k e t o ma k e a r edemp t i on r eque s t . " And t hen

23 he wou l d t u r n a r ound and t r y t o hono r t ha t a s be s t

24 he cou l d .

25 So t he r e wa s a l i qu i d i t y e l emen t t o

58

1 Be a t i s t ha t we wou l d no t ha v e had t h r ough d i r e c t

2 i nv e s t men t i n RangeT r e e . Doe s t ha t ma k e s ens e?

3 Q Tha t ma k e s s ens e . I unde r s t and i t now .

4 So when you s a y - - bu t , t he wa y I ' m

5 r e ad i ng t h i s , i t ' s t ha t you ha v e added RangeT r e e

Page 49

F e vo l a . t x t 6 be c aus e i t p r ov i de s l i qu i d i t y t o t he i nsu r anc e

7 p r em i um f i nanc i ng i nv e s t men t , t ha t ' s t he wa y I

8 wou l d r e ad i t .

9 A Tha t ' s no t - -

10 Q You ' r e s a y i ng t ha t ' s no t wha t you me an t ?

11 A No . Th i s i s why I spen t t he l a s t t wo y e a r s i n

12 s choo l i n Eng l i sh .

13 Q Ok a y . Ve r y good .

14 And t hen you t a l k a l i t t l e b i t abou t

15 RangeT r e e , and t hen you t a l k abou t t he i nv e s t men t .

16 You s a y , " The t yp i c a l c and i da t e i s a 74 - t o

17 85 - y e a r - o l d pe r son i n good he a l t h . " And t ha t ' s

18 i mpo r t an t be c aus e i f you ' r e no t i n good he a l t h ,

19 you c an ' t e v en ge t t he po l i c y i s sued t o beg i n

20 w i t h . I s t ha t you r unde r s t and i ng?

21 A Tha t i s my unde r s t and i ng .

22 Q A l l r i gh t . So someone - - and I wan t t o go ba c k t o

23 t he v e r y t heo r y o f i nsu r anc e p r em i um f i nanc i ng a s

24 we l l a s l i f e s e t t l emen t , so someone who r e a l l y ha s

25 s t age I V c e r v i c a l c anc e r w i t h a one - y e a r l i f e

59

1 e xpe c t anc y i sn ' t go i ng t o ge t any po l i c y i s sued ,

2 l e t a l one one f o r $10 m i l l i on , i s she?

3 A Tha t i s co r r e c t . And I t h i nk t h i s wa s pe r haps a

4 nuanc e and so r t o f a wa y t o s a y t h i s i s no t

5 v i a t i c a l i nv e s t i ng .

6 Q And so we unde r s t and i t and t he r e co r d i s c l e a r on

7 t ha t , t he o r i g i na l conc ep t he r e wa s someone who

8 wa s ne a r i ng de a t h , a l r e ady had i nsu r anc e and

9 ne eded mone y t o l i v e ou t t he i r l a s t da y s f r om

10 a l mos t an human i t a r i an s t andpo i n t ; t he r e wou l d bePage 50

F e vo l a . t x t

11 i nv e s t o r s t ha t , y e s , t he y wou l d ma k e mone y upon

12 t he de a t h , bu t t he y wou l d buy t he po l i c y so t he

13 pe r son who wa s dy i ng wou l d ha v e mone y t o l i v e ou t

14 and pa y med i c a l e xpens e s and ma ybe e v en t a k e c a r e

15 o f t he i r f am i l y du r i ng t he i r l a s t da y s , i sn ' t t ha t

16 r i gh t ?

17 A Tha t i s a humane wa y t o cons i de r t ha t i nv e s t men t .

18 The r e a r e o t he r wa y s t o cons i de r i t t oo .

19 Q Bu t , i n f a c t , t he o r i g i na l i de a wa s t o t r y t o he l p

20 t he peop l e who we r e on t he i r wa y ou t , who we r e

21 dy i ng , wa sn ' t i t ?

22 A Pe r haps .

23 Q We l l , you d i dn ' t know t ha t ?

24 A I ' m no t s a y i ng I d i dn ' t know t ha t . I ' m s a y i ng

25 t ha t t he r e ma y ha v e be en o t he r mo t i v e s .

60

1 Q Wha t we r e t he o t he r mo t i v e s?

2 A I me an , i n t e r ms o f pu r e p r o f i t .

3 Q Oh , y e ah , be c aus e you knew you we r e go i ng t o ma k e

4 mone y be c aus e t he y we r e go i ng t o d i e ; t he po l i c y

5 had a l r e ady be en i s sued , r i gh t ?

6 A Mm mm .

7 Q Ye s?

8 A Ye s , so r r y .

9 Q I t had a l r e ady gone be yond t he t wo y e a r s , r i gh t ?

10 A R i gh t .

11 Q And t he r e wa s go i ng t o be no que s t i on abou t t he

12 pa you t a t t he end o f t he po l i c y?

13 A And I t h i nk t ha t t he na t u r e o f t ha t , pe r haps i t

14 sh i f t ed f r om so r t o f a humane pe r spe c t i v e t o

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F e vo l a . t x t 15 some t h i ng e l s e when , pe r haps du r i ng t he A I DS

16 c r i s i s he r e i n t he Un i t ed S t a t e s .

17 Q Bu t now , t h i s i sn ' t t ha t ?

18 A No .

19 Q Wha t you a r e de s c r i b i ng he r e i sn ' t t ha t ?

20 A No .

21 Q 74 - t o 85 - y e a r - o l d i n good he a l t h w i t h a m i n i mum

22 ne t wo r t h o f $10 m i l l i on . Do you know i f you r

23 i nsu r anc e app l i c an t s t ha t you us ed We a l t h

24 Managemen t i nv e s t o r mone y f o r had a ne t wo r t h o f

25 $10 m i l l i on?

61

1 A I c anno t s a y t ha t i n c e r t a i n t y .

2 Q Do you know i f any o f t he app l i c an t s had a ne t

3 wo r t h o f $10 m i l l i on , any o f t hem?

4 A I c an ' t s a y w i t h c e r t a i n t y .

5 Q D i d you che c k when t he s e po l i c i e s , be f o r e t he y

6 we r e f unded , d i d you che c k t o s e e wha t t he ne t

7 wo r t h o f any app l i c an t t ha t you f unded o r he l ped

8 f und , wha t t he i r ne t wo r t h wa s?

9 A No .

10 Q D i d t he i nsu r anc e - - d i d you e v e r t a l k w i t h t he

11 i nsu r anc e agen t s who we r e de a l i ng w i t h t he

12 app l i c ab l e app l i c an t s?

13 A I d i d no t .

14 Q D i d you e v e r he a r t ha t t he i nsu r anc e agen t s we r e

15 f i l l i ng ou t t he f o r ms f o r t he s e app l i c an t s?

16 A Tha t t he y t hems e l v e s we r e f i l l i ng t he app l i c a t i on

17 ou t ?

18 Q Tha t t he agen t s we r e .

19 A I d i d no t he a r t ha t .Page 52

F e vo l a . t x t

20 Q So you don ' t know t ha t t o be a f a c t ?

21 A I do no t know t ha t .

22 Q And you s a y , " The i nsu r anc e po l i c i e s a r e t yp i c a l l y

23 i n e x c e s s o f $3 m i l l i on , and a r e gene r a l l y de s i r ed

24 by t he i nsu r ed f o r e s t a t e p l ann i ng pu r pos e s , and

25 t he p r em i ums a s soc i a t ed w i t h such po l i c i e s a r e

62

1 subs t an t i a l . " A l l , i n f a c t , co r r e c t i n t e r ms o f

2 wha t t he gene r a l na t u r e wa s . And t hen you t a l k

3 abou t t he t h r e e pos s i b l e ou t come s .

4 Now , i n Ma r ch o f ' 04 , whe r e d i d you ge t

5 t h i s i n f o r ma t i on f r om , o r d i d you conc l ude t h i s on

6 you r own?

7 A No , t h i s wou l d ha v e be en i n f o r ma t i on t ha t c ame

8 e i t he r f r om Joe Aa r on o r f r om a RangeT r e e

9 p r e s en t a t i on .

10 Q F r om e i t he r Dan M i l l e r o r Be au Ga yne r ?

11 A Ye s .

12 Q The y bo t h wo r k ed a t RangeT r e e a t t h i s t i me i n

13 Ma r ch o f ' 04?

14 A Tha t i s my r e co l l e c t i on , y e s .

15 Q Now , you w r i t e a t t he end o f t h i s , s e cond

16 pa r ag r aph , i t s a y s , " Add i t i ona l l y , RangeT r e e i s

17 en t i t l ed t o 10 pe r c en t o f t he r ema i n i ng de a t h

18 bene f i t . " Le t me go ba c k t o t he s en t enc e be f o r e

19 t ha t , " The de a t h o f t he i nsu r ed a c c e l e r a t e s t he

20 co l l a t e r a l i z ed l oan , and p r i nc i pa l and i n t e r e s t i s

21 r epa i d . " We ' v e a l r e ady t a l k ed abou t t ha t ,

22 co r r e c t ?

23 A Ye s .

Page 53

F e vo l a . t x t 24 Q " Add i t i ona l l y , RangeT r e e i s en t i t l ed t o 10

25 pe r c en t , wh i ch i s t hen d i v i ded 30 pe r c en t t o

63

1 RangeT r e e and 70 pe r c en t t o t he i nv e s t o r , wh i ch i s

2 G r yphon v i a Be a t i s . " I s t ha t a c t ua l l y t r ue? Wa s

3 t ha t a c t ua l l y t he wa y i t wo r k ed?

4 A The r e we r e - - we l l , l e t ' s s e e , I don ' t know t ha t

5 we had any deb t s t o v e r i f y t ha t .

6 Q La s t s en t enc e , " Be c aus e o f t he subs t an t i a l amoun t

7 o f i nsu r anc e i nvo l v ed , t he r e t u r ns a s soc i a t ed w i t h

8 a de a t h bene f i t c an r e a ch up t o 30 pe r c en t . "

9 Obv i ous l y , t ha t wa s a spe cu l a t i on on you r pa r t , i s

10 t ha t co r r e c t ?

11 A Ye s , co r r e c t .

12 Q And , i n f a c t , a s we ' v e a l r e ady d i s cus s ed , you

13 r e a l l y don ' t ha v e - - ov e r t he y e a r s , d i dn ' t ha v e

14 any t h i ng t o subs t an t i a t e o r s a y t ha t t ha t ' s no t

15 t r ue?

16 A R i gh t , t ha t b r e a kdown wou l d ha v e come ou t o f t he

17 documen t a t i on p r ov i ded f r om RangeT r e e .

18 Q And you s a y , " Ba s ed on t he ma r k e t ' s h i s t o r i c a l

19 r e co r d , t he s e f i r s t t wo ou t come s e a ch oc cu r

20 app r ox i ma t e l y 10 pe r c en t o f t he t i me . " Ye t ov e r

21 t he y e a r s t ha t you we r e ma k i ng t he s e i nv e s t men t s ,

22 we ' v e a l r e ady d i s cus s ed , t ha t ' s no t pa r t i cu l a r l y

23 a c cu r a t e? D i dn ' t oc cu r - -

24 A Du r i ng t he f ou r - y e a r w i ndow , no .

25 Q " And t he f i na l , " you s a y , " and mos t l i k e l y

64

1 s c ena r i o i s a s a l e o f t he i nsu r anc e po l i c y i n t oPage 54

F e vo l a . t x t

2 t he s e conda r y ma r k e t . I n 2002 , ov e r $4 b i l l i on o f

3 i nsu r anc e po l i c i e s we r e so l d i n t o t he s e conda r y

4 ma r k e t . " Whe r e d i d t ha t i n f o r ma t i on come f r om?

5 A To t he be s t o f my r e co l l e c t i on , a Me r r i l l Lynch

6 r e s e a r ch r epo r t .

7 Q D i d you ha v e a copy o f t ha t r epo r t ?

8 A I f wou l d ha v e be en i n t he f i l e .

9 Q You s a y , " The Wha r t on Bus i ne s s Schoo l p r ed i c t s a

10 $15 b i l l i on annua l ma r k e t w i t h i n f i v e y e a r s . " I s

11 t ha t ano t he r r epo r t , o r wa s t ha t i n t he s ame

12 Me r r i l l Lynch r epo r t ?

13 A To my r e co l l e c t i on , t ha t wa s w i t h i n t he Me r r i l l

14 Lynch ana l y s t r epo r t .

15 Q Do you know i f Me r r i l l Lynch wa s s e l l i ng CDOs i n

16 t h i s a r e a ; t ha t i s , d i d t he y ha v e a v e s t ed

17 i n t e r e s t i n p r omo t i ng t h i s i nsu r anc e ma r k e t a r e a?

18 A To t he be s t o f my r e co l l e c t i on , t he f i r s t

19 s e cu r i t i z ed l i f e i nsu r anc e t r ans a c t i on d i d no t

20 oc cu r un t i l - - a c t ua l l y , I don ' t know , bu t i t wa s

21 l a t e r t han t h i s . I t wa s i n ' 06 , pe r haps .

22 Q Then you t a l k abou t Gen Re , wh i ch i s a r e i nsu r anc e

23 company , i sn ' t i t ?

24 A Ye s .

25 Q Whe r e d i d you ge t t he i n f o r ma t i on t ha t Gen Re i s ,

65

1 i n f a c t , buy i ng any o f t h i s?

2 A I don ' t know , and I ha v en ' t f oo t no t ed i t . I don ' t

3 r e c a l l .

4 Q D i d you ge t i t f r om M r . Aa r on?

5 A I don ' t r e c a l l .

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F e vo l a . t x t 6 Q Do you know i f t ha t ' s t r ue e v en t oda y , t ha t

7 s t a t emen t ?

8 A Subs equen t l y , i n a f oo t no t e , i n one o f Be r k sh i r e

9 Ha t hawa y ' s annua l r epo r t s , t he r e wa s a r e f e r enc e

10 t o l i f e - s e t t l emen t t r ans a c t i ons , l i f e - s e t t l emen t

11 bus i ne s s .

12 Q Do you know t ha t t he y i nv e s t ed i n t ha t bus i ne s s ,

13 i f t he y e v e r d i d?

14 A I don ' t r e c a l l . I j us t r e c a l l t he r e i s a f oo t no t e

15 t he r e d i s cus s i ng t he bus i ne s s .

16 Q Now , i t s a y s , " Upon a s a l e i n t o t he s e conda r y

17 ma r k e t , t he i nv e s t o r r e c e i v e s a r e t u r n o f

18 p r i nc i pa l , t he i nv e s t o r r e c e i v e s t he r e t u r n o f

19 p r i nc i pa l , t he s t a t ed i n t e r e s t r a t e , 13 pe r c en t ,

20 and a p r o - r a t a sha r e o f t he ga i n on t he s a l e . " I s

21 t ha t , t o you r know l edge , wa s t ha t an a c cu r a t e

22 s t a t emen t ?

23 A A t t ha t t i me , t ha t i s how I unde r s t ood i t , y e s .

24 Q We l l , f i r s t o f a l l , t he s t a t ed i n t e r e s t r a t e o f 13

25 pe r c en t , d i d t ha t e x i s t i n ' 04?

66

1 A I be l i e v e i t d i d , y e s .

2 Q " H i s t o r i c a l l y , t he s e ga i ns ha v e i nc r e a s ed t he

3 r e t u r n f r om 13 pe r c en t t o ov e r 20 pe r c en t . " Whe r e

4 d i d you ge t t ha t i n f o r ma t i on f r om?

5 A Tha t wou l d ha v e be en a r ep r e s en t a t i on f r om

6 RangeT r e e .

7 Q I ' m go i ng t o show you wha t ha s be en ma r k ed a s

8 Exh i b i t No . 5 , i t ' s s i m i l a r t o Exh i b i t No . 1 , a s k

9 you i f you ha v e s e en t ha t documen t be f o r e?

10 A I ma y ha v e no t s e en t h i s documen t , bu t documen t sPage 56

F e vo l a . t x t

11 l i k e i t , y e s .

12 Q I t ' s s i m i l a r t o t he Be a t i s . Th i s i s t he amoun t o f

13 mone y i nv e s t ed i n B r own by Wa t ch S t one Pa r t ne r s ,

14 r i gh t ?

15 A Ye s .

16 Q So Wa t ch S t one , wh i ch wa s a WML f und , i nv e s t ed i t s

17 mone y i n B r own , and G r yphon i nv e s t ed i t s mone y i n

18 Be a t i s?

19 A Tha t i s co r r e c t .

20 Q And mos t o f t ha t mone y wa s i nv e s t ed i n t he

21 i nsu r anc e p r em i um f i nanc e bus i ne s s?

22 A W i t h i n B r own , y e s .

23 Q We l l , w i t h i n Be a t i s . Ev en t ua l l y , mos t o f t he

24 mone y wa s i nv e s t ed i n t he i nsu r anc e p r em i um

25 f i nanc i ng a l so?

67

1 A U l t i ma t e l y , y e s .

2 Q S t a r t i ng i n , f o r e x amp l e , ' 06?

3 A Tha t ' s co r r e c t .

4 Q Now I ' m go i ng t o show you wha t ha s be en ma r k ed a s

5 Exh i b i t No . 6 . I ' m go i ng t o a s k i f you ha v e

6 r e c e i v ed a l e t t e r such a s t h i s f r om Joe Aa r on

7 a r ound Nov embe r o f ' 05 whe r e he wa s e x am i ned by

8 t he SEC and t he r e we r e de f i c i enc i e s f ound and he

9 wa s i n f o r m i ng you o f t hos e de f i c i enc i e s?

10 A I r e c a l l t h i s , y e s .

11 Q You d i d r e c e i v e such a l e t t e r ?

12 A Ye s .

13 Q Now , t h i s , I r ep r e s en t t o you , wen t t o Da v i d

14 J ans en ; i t d i dn ' t go t o you .

Page 57

F e vo l a . t x t 15 A R i gh t .

16 Q Bu t I ' m j us t wan t i ng t o know i f you we r e awa r e

17 t ha t t he SEC had come down , f i nd i ng t ha t Wood , Ha t

18 & S i l v e r had v a r i ous de f i c i enc i e s and o r de r ed h i m

19 t o no t i f y t he i nv e s t o r s?

20 A My r e co l l e c t i on o f t h i s i s t ha t be c aus e we had

21 i nv e s t ed a s i gn i f i c an t amoun t w i t h i n B r own , t h i s

22 l e t t e r wa s r equ i r ed .

23 Q D i d you e v e r s e e t he o r i g i na l l e t t e r t ha t t he SEC

24 s en t t o M r . Aa r on d i s cus s i ng t he v a r i ous

25 de f i c i enc i e s i n ' 05?

68

1 A I don ' t be l i e v e I s aw i t i n ' 05 .

2 Q D i d you e v e r s e e i t ?

3 A I c an ' t r e c a l l i f I ' v e e v e r s e en i t . I know i t

4 wa s d i s cus s ed , bu t I don ' t r e c a l l i f I ' v e e v e r

5 s e en i t .

6 Q Whe r e wa s i t d i s cus s ed?

7 A I t h i nk i t wa s d i s c l os ed by Tom .

8 Q Tom R i e k?

9 A Ye s .

10 Q I n ' 05?

11 A I don ' t r e c a l l .

12 Q We l l , I ' l l r ep r e s en t t o you t he r epo r t c ame ou t i n

13 ' 05?

14 A I don ' t r e c a l l when i t wa s d i s cus s ed .

15 Q Do you r e c a l l when M r . R i e k t o l d you abou t t he

16 r epo r t ?

17 A I don ' t r e c a l l .

18 Q D i d you r e c a l l how M r . R i e k knew abou t t he r epo r t ?

19 A I a s sume he knew be c aus e he wa s t he consu l t an t t oPage 58

F e vo l a . t x t

20 Wood , Ha t , so .

21 Q Wa s he a l so a consu l t an t t o We a l t h Managemen t ?

22 A No .

23 Q D i d he ha v e any t h i ng t o do w i t h We a l t h Managemen t

24 i n ' 05?

25 A No t on an o f f i c i a l ba s i s .

69

1 Q How abou t on an uno f f i c i a l ba s i s?

2 A He - - I know he and J i m had be en co l l e ague s and

3 had wo r k ed t oge t he r and r ema i ned i n t ouch .

4 Q I ' m go i ng t o show you wha t ha s be en ma r k ed a s

5 Exh i b i t No . 9 .

6 O f f t he r e co r d .

7 ( D i s cus s i on o f f t he r e co r d . )

8 ( Exh i b i t No . 98 wa s ma r k ed . )

9 BY MR . MELN I CK :

10 Q The e xh i b i t t ha t I ga v e you ha s now be en r ema r k ed

11 co r r e c t l y t o be 98 . A l l I wan t t o po i n t ou t t o

12 you i s , i t ' s an e - ma i l f r om - - t he o r i g i na l , you

13 ha v e t o go down be l ow , i s an e - ma i l f r om Joe Aa r on

14 t o J i m Pu t nam da t ed Nov embe r 10 , 2005 . Jus t l ook

15 be l ow t ha t Pu t nam r e spons e , ok a y?

16 A I s e e i t .

17 Q The l a s t l i ne , he , Aa r on , s a y s , " I wan t t o ma k e

18 su r e you know t ha t we app r e c i a t e you r bus i ne s s .

19 You ha v e be en t he d r e am c l i en t come t r ue . " We r e

20 you awa r e t ha t you we r e " t he d r e am c l i en t " t o Joe

21 Aa r on?

22 A I wa s no t awa r e , no .

23 Q D i d you e v e r s e e t h i s e - ma i l be f o r e t oda y?

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F e vo l a . t x t 24 A No .

25 Q Do you know why you wou l d ha v e be en cons i de r ed t he

70

1 d r e am c l i en t ?

2 A I do no t know .

3 Q Show you wha t ha s be en ma r k ed a s Exh i b i t No . 7 .

4 Aga i n , I ' m go i ng t o r ep r e s en t t h i s wen t t o Da v i d

5 J ans en , s i gned by Joe Aa r on , a l so de a l i ng w i t h h i s

6 SEC l e t t e r . I a s sume you ha v e ne v e r s e en t h i s

7 l e t t e r be f o r e?

8 A I t doe s no t l ook f am i l i a r , no .

9 Q Bu t now he r e he ' s d i s c l os i ng , he w r i t e s , " As a

10 r e su l t o f t he r e c en t e x am i na t i on o f t he book s and

11 r e co r ds o f Wood , Ha t & S i l v e r , t he gene r a l pa r t ne r

12 o f t he T i ppe t Fund by t he Se cu r i t i e s and Ex change

13 Comm i s s i on , I ' m w r i t i ng t o c l a r i f y some i mpo r t an t

14 a spe c t s o f you r i nv e s t men t i n t he pa r t ne r sh i p . "

15 Wha t wa s t he T i ppe t Fund?

16 A I on l y know i t t o be one o f t he f unds t ha t Joe

17 managed a s pa r t o f Wood , Ha t & S i l v e r . I don ' t

18 know wha t i t i s .

19 Q I t had no t h i ng t o do w i t h We a l t h Managemen t ?

20 A I don ' t r e c a l l i nv e s t i ng i n t he T i ppe t Fund o r

21 l ook i ng a t t he T i ppe t Fund .

22 Q Ok a y . And t ha t wou l d ha v e be en unde r you r

23 pu r v i ew?

24 A Conc e i v ab l y , i f we i nv e s t ed i n t he T i ppe t Fund , I

25 shou l d ha v e l ook ed a t i t .

71

1 Q Cou l d mone y ha v e be en i nv e s t ed i n t he T i ppe t FundPage 60

F e vo l a . t x t

2 by Joe Aa r on a s t he gene r a l pa r t ne r o f any o f t he

3 o t he r f unds?

4 A Ce r t a i n l y .

5 Q And i t cou l d ha v e be en you r mone y?

6 A I t cou l d ha v e oc cu r r ed , t r ue .

7 Q Wou l d t ha t ha v e be en d i s c l os ed t o you , i f he wa s

8 i nv e s t i ng i n t h i ngs you d i dn ' t know abou t ?

9 A No t ne c e s s a r i l y . He had con t r o l ov e r wha t

10 i n f o r ma t i on he pa s s ed and d i dn ' t pa s s .

11 Q Now he r e i t t a l k s abou t t he f und ha v i ng ma i n t a i ned

12 i nv e s t men t i n MKA Re a l Es t a t e Oppo r t un i t y Fund .

13 D i d We a l t h Managemen t i nv e s t i n MKA?

14 A We u l t i ma t e l y d i d , y e s .

15 Q Do you r emembe r when you d i d?

16 A MKA , I be l i e v e , s t a r t ed a s an i nd i r e c t i nv e s t men t

17 t h r ough - - t he r e we r e t wo MKAs : t he Oppo r t un i t y

18 Fund , and I c an ' t r e c a l l wha t t he o t he r wa s

19 c a l l ed . Thos e we r e - - MKA Oppo r t un i t y Fund wa s an

20 i nd i r e c t i nv e s t men t a t t he beg i nn i ng t h r ough

21 Be a t i s . Subs equen t l y , i t be c ame a d i r e c t

22 i nv e s t men t f r om G r yphon i n t o MKA Oppo r t un i t y .

23 Q D i d you know when you i nv e s t ed i n MKA t ha t Joe

24 Aa r on wa s r e c e i v i ng mone y ba c k f r om MKA on you r

25 i nv e s t men t ?

72

1 A I d i dn ' t know t ha t .

2 Q Wou l d t ha t ha v e a f f e c t ed how you f e l t abou t

3 con t i nu i ng t o do bus i ne s s w i t h Joe Aa r on?

4 A Ha r d t o spe cu l a t e a t t h i s po i n t . I t h i nk we wou l d

5 ha v e gone on t he me r i t s o f t he i nv e s t men t i t s e l f .

Page 61

F e vo l a . t x t 6 Q I ' l l show you wha t ha s be en ma r k ed a s Exh i b i t No .

7 8 . I t s t a r t s ou t f r om J i m Pu t nam t o Tom R i e k , bu t

8 i t shows you a s be i ng cop i ed i n a l ong w i t h Joe

9 Aa r on . Do you s e e t ha t ?

10 A Ye s , I s e e i t .

11 Q So i t ' s Pu t nam w r i t i ng t o R i e k De c embe r 9 , 2005 ,

12 and i t s a y s , " As w i t h o t he r manage r s , S i mone and I

13 wan t t o app r ov e any t h i ng t ha t i s i nv e s t ed i n

14 Be a t i s . " I s t ha t co r r e c t ? As o f De c embe r o f ' 05 ,

15 you and Pu t nam wan t t o app r ov e any t h i ng t ha t i s

16 i nv e s t ed i n Be a t i s?

17 A I t h i nk t he cho i c e o f " app r ov e " ma y be a s t r ong

18 wo r d . I t h i nk we wan t ed t o be awa r e o f wha t wa s

19 be i ng i nv e s t ed .

20 Q To you r know l edge , we r e you made awa r e a s o f

21 De c embe r 9 , 2005?

22 A To my know l edge , we we r e awa r e o f wha t wa s

23 happen i ng a t Be a t i s .

24 Q And t hen SFS , wh i ch , do you r emembe r wha t t ha t

25 wa s?

73

1 A SFS , I do no t .

2 Q I t had some t h i ng t o do w i t h Be au Ga yne r ?

3 A No i de a . I do no t know .

4 Q I t s a y s , " Can you o r Joe s end me t he due d i l i genc e

5 t ha t you ha v e done on SFS? I know you d i d a

6 t ho r ough j ob on RangeT r e e , and I e xpe c t t ha t you

7 wou l d do t he s ame on SFS . We know Be au , bu t we

8 don ' t know t he o t he r s . As f a r a s we a r e

9 conc e r ned , SFS i s a new oppo r t un i t y . " Now , d i d

10 Tom R i e k and Joe Aa r on do you r due d i l i genc e onPage 62

F e vo l a . t x t

11 RangeT r e e , i s t ha t t r ue?

12 A I t h i nk we l ook ed t o t hem t o do ba c kg r ound che c k s

13 and some l a y e r s o f d i l i genc e a r ound RangeT r e e ,

14 y e s .

15 Q Bu t you , a s ha v i ng a l l o f t ha t r e spons i b i l i t y t o

16 ma k e t he i nv e s t men t s , you d i dn ' t do t he - -

17 A On ma t t e r s o f ba c kg r ound che c k s i n pa r t i cu l a r w i t h

18 r ega r ds t o i nv e s t men t s i n Be a t i s , we r e l i ed on Joe

19 ba s ed on wha t he r ep r e s en t ed a s h i s ba c kg r ound .

20 And ha v i ng a c c e s s t o i n f o r ma t i on , pe r haps we

21 d i dn ' t .

22 Q Now on t he bo t t om pa r t , you know , e - ma i l s go on

23 and on , you ' v e go t Tom R i e k w r i t i ng J i m Pu t nam ,

24 and he s a i d , " Soon we w i l l ha v e r e i nv e s t men t mone y

25 i n Be a t i s and B r own and w i l l be pu r cha s i ng mo r e

74

1 c a s e s f r om Be au ' s new company , Sen i o r F i nanc i a l

2 Se r v i c e s , " wh i ch i s SFS , do you s e e t ha t ?

3 A Ye s .

4 Q F i r s t o f a l l , wha t d i d Tom R i e k me an by , " Soon we

5 w i l l ha v e r e i nv e s t men t mone y i n Be a t i s and B r own , "

6 wha t d i d Tom R i e k ha v e t o do w i t h t h i s?

7 A I do no t know . I do no t know .

8 Q Bu t a copy o f t h i s wo r k s i t s wa y t o you , do you

9 s e e t ha t , on t he s ame da y?

10 A Ye s .

11 Q 11 : 40 and 11 : 48 a . m . D i dn ' t you wan t t o know wha t

12 Tom R i e k ha s t o do w i t h t h i s , why he i s i ns e r t i ng

13 h i ms e l f i n t h i s t r ans a c t i on?

14 A I don ' t r emembe r t h i s .

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F e vo l a . t x t 15 Q Wha t wa s t he r e i nv e s t men t mone y Tom R i e k wa s

16 t a l k i ng abou t i n Be a t i s and B r own?

17 A I don ' t know .

18 Q And when he s a y s " pu r cha s i ng mo r e c a s e s f r om

19 Be au ' s new company , " I a s sume t ha t me an t you we r e

20 go i ng t o be i nv e s t i ng i nv e s t o r do l l a r s i n

21 i nsu r anc e p r em i um f i nanc i ng c a s e s t ha t Be au Ga yne r

22 had pu t t oge t he r ?

23 A Tha t ' s how I wou l d unde r s t and t ha t .

24 Q Bu t do you know any t h i ng mo r e abou t i t t han wha t ' s

25 on t h i s e - ma i l ?

75

1 A I don ' t r e c a l l . And 2005 - - I don ' t r e c a l l .

2 Q I ' m go i ng t o s k i p one and go t o Exh i b i t No . 10 ,

3 and show you wha t ha s be en ma r k ed a s Exh i b i t 10 .

4 Aga i n , i t ' s an e - ma i l f r om Tom R i e k t o you da t ed

5 De c embe r 6 , 2006 . Do you s e e t ha t ?

6 A Ye s .

7 Q Some o f i t ha s be en r eda c t ed , so I ha v e no i de a

8 wha t i t s a y s , bu t do you r e c a l l r e c e i v i ng t h i s

9 e - ma i l - -

10 A I don ' t r e c a l l .

11 Q - - abou t a Quad r i mus e x e cu t i v e comm i t t e e me e t i ng?

12 A I go t i t , bu t I don ' t r e c a l l i t .

13 Q Do you , I know i t ' s p r obab l y a l i t t l e b i t pa i n f u l ,

14 bu t you do r e c a l l Quad r i mus?

15 A Ye s , I do .

16 Q And you and R i e k and Pu t nam f o r med Quad r i mus?

17 A R i e k f o r med Quad r i mus , and I wa s a pa r t o f i t ,

18 y e s .

19 Q And t he a t t o r ne y on t ha t , a s I unde r s t and i t , wa sPage 64

F e vo l a . t x t

20 D i c k S t y l e s?

21 A Ye s .

22 Q D i c k S t y l e s , a s I unde r s t and i t , a l so r ep r e s en t ed

23 t he co r po r a t e a c t i v i t i e s o f We a l t h Managemen t a t

24 t he t i me?

25 A Sa y t ha t aga i n , I ' m so r r y .

76

1 Q D i d D i c k S t y l e s a l so r ep r e s en t ed We a l t h Managemen t

2 i n i t s i n t e r na l co r po r a t e a c t i v i t i e s?

3 A I n 2005?

4 Q 2006 , t h i s i s .

5 A 2006 , I t h i nk on some ma t t e r s , y e s .

6 Q And you a l so had ou t s i de couns e l somewhe r e ou t

7 e a s t , d i d you no t ?

8 A We had couns e l f o r t he i nv e s t men t v eh i c l e s , y e s .

9 Q And who wa s t ha t ?

10 A Cha r l e s Ha l l .

11 Q Whe r e a r e t he y l oc a t ed?

12 A The y we r e i n Penns y l v an i a somewhe r e .

13 Q Bu t l oc a l co r po r a t e ma t t e r s wa s D i c k S t y l e s?

14 A Ye s .

15 Q Now , a c co r d i ng t o t h i s , i t s a y s , " An e x t ens i v e

16 d i s cus s i on , " i f you l ook a t No . 3 , I don ' t know

17 wha t No . 1 and 2 s a y s , un l e s s you ha v e a memo r y?

18 A I do no t .

19 Q " An e x t ens i v e d i s cus s i on and r e v i ew o f UTC ' s l oan

20 s e cu r i t i z a t i on de a l f o r Quad r i mus wa s he l d . " Wha t

21 wa s UTC ' s l oan s e cu r i t i z a t i on de a l w i t h you guy s?

22 A Tha t t e r m i no l ogy i s no t c l e a r t o me .

23 Q Bu t t h i s wa s d i r e c t ed t o you?

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F e vo l a . t x t 24 A I unde r s t and .

25 Q D i d you s a y t o somebody , " I don ' t unde r s t and wha t

77

1 you ' r e t a l k i ng abou t " ?

2 A I ma y ha v e , bu t I don ' t r e c a l l wha t t ha t wa s .

3 Q You ha v e no e v i denc e o f t ha t ?

4 A No .

5 Q Then i t s a y s , " Joe Aa r on upda t ed pa r t ne r s on t he

6 L i f e Se t t l emen t Con f e r enc e i n New Yo r k and i t s

7 i mp l i c a t i ons f o r Quad r i mus i n ' 07 . " Wha t we r e t he

8 i mp l i c a t i ons f o r Quad r i mus i n ' 07?

9 A Tha t , on t he f a c e o f i t , s i t t i ng he r e t oda y ,

10 doe sn ' t ma k e any s ens e .

11 Q We l l , wha t d i d he t e l l you? Do you r emembe r wha t

12 he t o l d you?

13 A I don ' t r emembe r .

14 Q Show you wha t ' s be en ma r k ed a s Exh i b i t 11 . Th i s

15 i s f r om Tom R i e k t o J i m Pu t nam da t ed De c embe r 14 ,

16 2006 , and i t de s c r i be s a me e t i ng he l d on De c embe r

17 13 t h whe r e i t s a y s you we r e i n a t t endanc e . Do you

18 s e e t ha t ?

19 A Ye s .

20 Q Do you r e c a l l a me e t i ng whe r e you we r e i n

21 a t t endanc e on De c embe r 13 t h?

22 A Spe c i f i c t o t ha t da y , no ; bu t , gene r a l l y , I wou l d

23 ha v e be en pa r t o f t he conv e r s a t i on .

24 Q I t s a y s , " A r e v i ew o f 2006 y e a r - end r e c e i v ab l e s

25 wa s ana l y z ed . Joe Aa r on upda t ed us on J e f f

78

1 Ke l l e r , Ke v i n Yu r kus and UTC c a s e s t ha t a f f e c tPage 66

F e vo l a . t x t

2 Quad r i mus . " F i r s t o f a l l , " a r e v i ew o f y e a r - end

3 r e c e i v ab l e s , " who d i d you ha v e r e c e i v ab l e s f r om?

4 A I a s sume t h i s me an t t ha t w i t h r e spe c t t o t he

5 f e e - sha r i ng a r r angemen t , t ha t t he y we r e due bu t

6 unpa i d .

7 Q I wa s go i ng t o b r i ng i t up , bu t when you s a y " a

8 f e e - sha r i ng a r r angemen t , " you we r e ge t t i ng mone y

9 f r om t he i nsu r anc e agen t s who you we r e us i ng

10 i nv e s t o r mone y t o f und t he po l i c y w i t h?

11 A Ye s , t ha t ' s co r r e c t .

12 Q So you wou l d t a k e t he mone y , you wou l d f und t he

13 po l i c i e s , t he r e wou l d be a comm i s s i on pa i d t o t he

14 agen t , and t he agen t wa s k i c k i ng ba c k pa r t o f t he

15 comm i s s i on t o you guy s?

16 A The y wou l d sha r e t he i r f e e s w i t h us , y e s .

17 Q And a s we l l a s Joe Aa r on?

18 A I ' m no t su r e t ha t wa s e v e r c l e a r t o me .

19 Q You t hough t you we r e t he on l y one s ge t t i ng mone y

20 f r om t he s e agen t s?

21 A I wa sn ' t su r e wha t Joe ' s a r r angemen t wa s .

22 Q Le t me j us t a s k you t h i s . You we r e t he f und i ng

23 sou r c e f o r t he s e po l i c i e s , you r i nv e s t o r s ' mone y ,

24 wa sn ' t t ha t t r ue?

25 A We we r e pa r t o f t he i nv e s t men t i n t o Be a t i s , y e s .

79

1 Q And B r own?

2 A And B r own . And t hen t he y t u r ned a r ound and

3 p r ov i ded t he f und i ng , y e s .

4 Q Bu t t he i nsu r anc e agen t s knew t ha t i t wa s you r

5 i nv e s t o r s com i ng up w i t h t h i s mone y , and t ha t ' s

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F e vo l a . t x t 6 why you we r e ge t t i ng t he f e e sp l i t t i ng?

7 A Ye s .

8 Q And , i n f a c t , Tom R i e k wa s ge t t i ng t he f e e

9 sp l i t t i ng be f o r e you guy s we r e e v e r ge t t i ng t he

10 f e e sp l i t t i ng , wa sn ' t he?

11 A I wa s no t awa r e o f t ha t .

12 Q The y e a r - end r e c e i v ab l e s t hen wa s , you r t e s t i mony

13 t oda y i s , wa s t he f e e - sp l i t t i ng r e c e i v ab l e s?

14 A Ye s , t ha t ' s my unde r s t and i ng .

15 Q Do you know how much we ' r e t a l k i ng abou t a t t he

16 end o f ' 06?

17 A I do no t .

18 Q We ' r e t a l k i ng abou t mone y you d i dn ' t ge t y e t ,

19 r i gh t ?

20 A R i gh t , co r r e c t . I don ' t know wha t t ha t amoun t

21 wa s .

22 Q Now , wa s J e f f Ke l l e r k i c k i ng ba c k mone y t o you

23 guy s?

24 A I don ' t r e c a l l t he r e spons i b i l i t y o f Ke l l e r o r

25 Yu r kus i n t h i s c a s e .

80

1 Q Wha t abou t UTC? Tha t wa s Be au Ga yne r ' s company .

2 A Be au Ga yne r ' s company , and t he y we r e i nvo l v ed i n

3 pu t t i ng t oge t he r f i nanc i ng t r ans a c t i ons .

4 Q Wha t do you me an? The y we r e b r i ng i ng t he po l i c i e s

5 t o t he t ab l e f o r you t o f i nanc e?

6 A Co r r e c t , y e s .

7 Q And d i dn ' t Be au Ga yne r bo r r ow mone y f r om you guy s

8 a l so?

9 A I d i d no t know t ha t . I do no t know t ha t .

10 Q Wha t abou t i n any o f h i s compan i e s : UTC , o rPage 68

F e vo l a . t x t

11 anybody e l s e , d i d t he y bo r r ow any mone y f r om any

12 o f t he f unds?

13 A No t ou r f unds . No t t he We a l t h Managemen t f unds .

14 Q Wha t abou t Be a t i s and B r own?

15 A I don ' t know .

16 Q Then i t s a y s , " Fu r t he r r e v i ew o f t he UTC l oan

17 s e cu r i t i z a t i on de a l f o r Quad r i mus by Joe Aa r on . "

18 Wha t wa s , aga i n , t he UTC l oan s e cu r i t i z a t i on de a l ?

19 Now , t h i s t i me you ' r e a t a me e t i ng , wha t doe s t ha t

20 me an?

21 A I do no t r emembe r .

22 Q The ne x t t h i ng , " He i s nego t i a t i ng t he f i na l i t em

23 f o r pa r t i c i pa t i on by Quad r i mus i n t he equ i t y p i e c e

24 o f t he de a l . " I t hough t you guy s we r e j us t

25 ge t t i ng f e e - sp l i t t i ng mone y , why wou l d you be

81

1 ge t t i ng an equ i t y p i e c e o f a l oan s e cu r i t i z a t i on

2 de a l ?

3 A Wha t e v e r t h i s i s , i t ne v e r oc cu r r ed .

4 Q Bu t t ha t ' s no t t he po i n t . You we r e d i s cus s i ng

5 some t h i ng . Wha t we r e you d i s cus s i ng?

6 A I don ' t r emembe r t h i s .

7 Q Who i s T i m Cha s e?

8 A T i m Cha s e i s an adv i so r i n Ba l t i mo r e who wa s a

9 f r i end o f J i m ' s .

10 Q J i m Pu t nam?

11 A J i m Pu t nam . And T i m r an , managed - - I c an ' t

12 r emembe r t he name o f t he f i r m , bu t i t wa s

13 some t h i ng l i k e ou r own name . I t wa s an i nv e s t men t

14 adv i so r y f i nanc i a l p l ann i ng f i r m .

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F e vo l a . t x t 15 Q Bu t you we r e go i ng t o i nv e s t $7 . 5 m i l l i on l i m i t on

16 a t r anche . We r e you go i ng t o pu t t oge t he r you r

17 own CDO he r e?

18 A Th i s who l e i t em b r i ngs ba c k no t h i ng t o my memo r y .

19 I don ' t r e c a l l t h i s .

20 Q And t he t h i r d t h i ng he s a y s , " Joe Aa r on upda t ed

21 J i m and S i mone on t he s e l l i ng o f po l i c i e s i n

22 Be a t i s . He i s wa i t i ng f o r f i na l b i ds t o p r e s en t

23 t o WM I . " WM I , by t he wa y , i s We a l t h Managemen t

24 I nv e s t men t .

25 A I t h i nk he me an t WML , We a l t h Managemen t .

82

1 Q Bu t i t wa s We a l t h Managemen t , you r i nv e s t o r s?

2 A Ou r f i r m .

3 Q So Joe upda t ed J i m and S i mone on s e l l i ng po l i c i e s

4 i n Be a t i s . Do you know i f t hos e f i na l b i ds e v e r

5 c ame i n?

6 A I know po l i c i e s we r e so l d , I don ' t r e c a l l v i ew i ng

7 t he f i na l b i ds . My unde r s t and i ng o f t h i s wou l d be

8 t ha t p r e s en t me e t i ng t o i n f o r m us o f how t he y

9 t r aded .

10 Q Be c aus e t he y m i gh t ha v e t r aded a t a l os s?

11 A Po t en t i a l l y .

12 Q I n ' 04 and ' 05 , do you know spe c i f i c a l l y any

13 po l i c y t ha t e i t he r d i dn ' t s e l l , l aps ed o r wa s so l d

14 a t a l os s i n t hos e t wo y e a r s : ' 04 and ' 05?

15 A No t t o my memo r y , no . Tha t d i d no t oc cu r , bu t

16 t ha t i s my r e co l l e c t i on .

17 Q Tha t i t d i d no t oc cu r ?

18 A R i gh t .

19 Q Ok a y . Wha t abou t i n ' 06 ; l aps ed , l os s o r d i dn ' tPage 70

F e vo l a . t x t

20 s e l l ?

21 A I don ' t r e c a l l i f i t wa s ' 06 o r ' 07 , bu t I know a t

22 one po i n t , t he r e we r e po l i c i e s t ha t d i d no t s e l l

23 i n 2007 .

24 Q Show you Exh i b i t 12 . Aga i n , t h i s wa s s en t t o you

25 a l ong w i t h Tom R i e k and J i m Pu t nam . I t s a y s ,

83

1 " D i r e c t i on f r om We a l t h Managemen t . " Do you s e e

2 t ha t unde r t he sub j e c t l i ne?

3 A Ye s .

4 Q Th i s i s da t ed De c embe r 30 , 2005 . Do you r e c a l l

5 r e c e i v i ng t h i s l e t t e r ?

6 A I don ' t r e c a l l . C l e a r l y , i t ' s - -

7 Q I t s a y s you we r e ou t o f t he coun t r y , do you

8 r emembe r when you we r e ou t o f t he coun t r y? Do you

9 r emembe r be i ng ou t o f t he coun t r y?

10 A Ye s , i f t h i s wa s De c embe r ' 05 , I wa s i n Panama

11 adop t i ng my daugh t e r .

12 Q I t s a y s , " Le t me upda t e you on Tom ' s r e c en t

13 conv e r s a t i on w i t h J i m . Th i s i s some o f t he

14 gu i danc e I wa s l ook i ng f o r f r om We a l t h

15 Managemen t . " Wha t doe s Tom R i e k ha v e t o do w i t h

16 t h i s i n De c embe r o f ' 05?

17 A Tom and J i m we r e f r i ends . I don ' t know . The y

18 spok e o f t en abou t wha t e v e r t he y spok e abou t .

19 Q I t s a y s , " J i m ' s d i r e c t i on t o Tom wa s t o f ocus ou r

20 t i me k e ep i ng t he due d i l i genc e up t o da t e on ou r

21 t h r e e l a r ge s t pos i t i ons : RangeT r e e , MKA and

22 S t r a t eg i c . " I t sounds t o me l i k e Tom i s do i ng

23 wo r k f o r you guy s , i s t ha t t r ue?

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F e vo l a . t x t 24 A Tha t i s no t t r ue . Tha t wa sn ' t my unde r s t and i ng

25 ba c k i n De c embe r 2005 .

84

1 Q He t a l k s abou t , " I ha v e made an e f f o r t , " s e cond

2 pa r ag r aph , " t o ge t a s c l os e a s pos s i b l e t o Dan

3 M i l l e r , J a son Suga r man and t he Ch i ns . " Who i s

4 J a son Suga r man and t he Ch i ns? Tha t wa s MKA ,

5 wa sn ' t i t ?

6 A J a son Suga r man wa s MKA ; and t he Ch i ns , me an i ng t he

7 t wo Ch i n b r o t he r s , who we r e t he p r i nc i pa l s f o r

8 S t r a t eg i c I nv e s t i ng .

9 Q I ' m go i ng t o show you wha t ' s be en ma r k ed - -

10 a c t ua l l y , t he s e a r e t wo s epa r a t e one s .

11 ( Exh i b i t No . 99 wa s ma r k ed . )

12 BY MR . MELN I CK :

13 Q I ' m go i ng t o show you wha t ' s be en ma r k ed a s

14 Exh i b i t 99 . You ma y no t ha v e any i de a wha t t h i s

15 i s , bu t I ' l l r ep r e s en t t o you t h i s i s Exh i b i t A on

16 a l oan ag r e emen t whe r e Joe Aa r on on beha l f o f

17 B r own I nv e s t men t Company bo r r owed mone y . We r e you

18 awa r e he bo r r owed mone y f r om o t he r i nv e s t o r s t o

19 pu t i n t o B r own?

20 A I ' m no t awa r e o f t ha t , no .

21 Q We r e you awa r e o f h i m bo r r ow i ng mone y t o pu t i n t o

22 Be a t i s?

23 A I ' m awa r e t ha t he had a l i ne o f c r ed i t , I be l i e v e

24 i t wa s a t Un i on Bank , bu t t ha t i s a l l I know i n

25 t e r ms o f wha t h i s a c c e s s wa s .

85

1 Q And t o you r know l edge , we r e you awa r e when hePage 72

F e vo l a . t x t

2 bo r r owed t h i s mone y t o pu t i n , o r wha t e v e r he d i d

3 w i t h i t , bu t p r e sumab l y t o pu t i n t o t he B r own

4 Fund , t ha t he p l edged a l l o f t he a s s e t s o f t he

5 B r own Fund when he bo r r owed t he mone y , we r e you

6 awa r e o f t ha t ?

7 A No t t o my r e co l l e c t i on . I don ' t r emembe r t ha t .

8 Q Wou l d you ha v e app r ov ed o f t ha t had you known?

9 A I ' m su r e we wou l d ha v e had a conv e r s a t i on abou t

10 i t ; t ha t ' s wha t wa s f und i ng ou r i nv e s t men t .

11 Q 100 pe r c en t o f t he B r own mone y wa s We a l t h

12 Managemen t i nv e s t o r mone y , wa sn ' t i t ?

13 A I ne v e r knew t ha t i t wa s 100 pe r c en t , bu t I knew

14 i t wa s a s i gn i f i c an t po r t i on .

15 Q 95 pe r c en t ?

16 A I don ' t r emembe r wha t i t wa s , bu t I knew i t wa s

17 mo r e t han 75 .

18 Q He ne v e r d i s c l os ed t o you he had pu t up t he a s s e t s

19 o f t he B r own Fund a s co l l a t e r a l f o r a l oan he wa s

20 ma k i ng?

21 A No t t o my know l edge , no .

22 Q Now I ' m go i ng t o show you wha t ' s be en ma r k ed a s

23 Exh i b i t No . 13 . Le t me g i v e you a l i t t l e

24 ba c kg r ound . Th i s wa s pu t t oge t he r f o r t he

25 Se cu r i t i e s and Ex change Comm i s s i on by t he

86

1 agg r ega t o r . I be l i e v e t he agg r ega t o r ' s name wa s

2 PRG , I t h i nk i t i s .

3 A Ok a y .

4 Q A r e you f am i l i a r w i t h t ha t ?

5 A Tha t doe sn ' t sound f am i l i a r .

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F e vo l a . t x t 6 Q I ' l l ge t you t he co r r e c t t h i ng , bu t wha t I ' m

7 ge t t i ng a t i s t he agg r ega t o r pu t i t t oge t he r .

8 A Ok a y .

9 Q Ha v e you e v e r s e en t h i s sp r e adshe e t be f o r e ,

10 Exh i b i t 13?

11 A Th i s doe s no t l ook f am i l i a r t o me .

12 Q I n t e r ms o f wha t ' s on t he sp r e adshe e t , howe v e r , i t

13 ge t s t o t he da t e a po l i c y wa s f unded . Do you s e e

14 whe r e i t s a y s " f und da t e " ?

15 A Ye s .

16 Q Do you s e e whe r e i t s a y s " f i r s t p r em i um " ?

17 A Ye s .

18 Q Do you s e e whe r e i t s a y s " s e cond p r em i um " ?

19 A Ye s .

20 Q And t hen " f a c e v a l ue o f t he po l i c y " ?

21 A Ye s .

22 Q And t hen " l ende r f e e " ?

23 A Ok a y .

24 Q Ha v e you e v e r s e en t ha t be f o r e : l ende r f e e?

25 A I ha v e no t .

87

1 Q P r e sumab l y , you r c l i en t s , you r i nv e s t o r s , a r e t he

2 l ende r s o f t hos e po l i c i e s , co r r e c t ?

3 A I ' m no t su r e wha t t h i s e x a c t l y i s . I don ' t r e a l l y

4 know .

5 Q We r e you awa r e o f an a r r angemen t a s pa r t o f you r

6 a r r angemen t w i t h Joe Aa r on o r t he peop l e c a l l ed

7 agg r ega t o r s? Do you know wha t t ha t t e r m i s ,

8 " agg r ega t o r s " ?

9 A My r e co l l e c t i on wa s t ha t agg r ega t o r s we r e f i t

10 somewhe r e i n be t we en t he i nsu r anc e agen t sPage 74

F e vo l a . t x t

11 t hems e l v e s and t he f undo r ; t hos e p r ov i d i ng t he

12 f und i ng .

13 Q And you we r e t he f o l k s p r ov i d i ng t he f und i ng?

14 A Be a t i s and B r own e s s en t i a l l y , y e s .

15 Q Bu t you we r e supp l y i ng t he mone y?

16 A To Be a t i s and B r own , y e s .

17 Q So wha t happened i s t ha t t he agg r ega t o r s t hen

18 w i t hou t you wou l dn ' t be any t h i ng , wou l d t he y ,

19 be c aus e t he y d i dn ' t ha v e any mone y t o f und t he

20 po l i c i e s s epa r a t e f r om you?

21 A My unde r s t and i ng wa s t ha t t he y had a v a r i e t y o f

22 f und i ng sou r c e s , we be i ng one o f t hem , su r e .

23 Q Bu t when you d i d f und t he po l i c i e s t he agg r ega t o r s

24 b r ough t you , t he r e wa s a f e e t ha t t he y pa i d t ha t

25 t he y go t f r om t he i nsu r anc e agen t s who we r e

88

1 w r i t i ng and ge t t i ng pa i d comm i s s i ons on t hos e

2 po l i c i e s?

3 A Ye s , t ha t i s how I unde r s t ood i t .

4 Q Do you know how much mone y t he i nsu r anc e agen t s

5 we r e ge t t i ng pa i d by t he i nsu r anc e compan i e s f o r

6 t hos e po l i c i e s?

7 A My r e co l l e c t i on i s i t app r ox i ma t ed t he f i r s t

8 y e a r ' s p r em i um .

9 Q So i f an i nsu r anc e agen t w r o t e a $10 m i l l i on

10 po l i c y and t he f i r s t y e a r ' s p r em i um wa s a ha l f

11 m i l l i on , t ha t wa s a b i g pa yda y f o r t he i nsu r anc e

12 agen t ?

13 A Tha t wa s my unde r s t and i ng .

14 Q S i nc e t he po l i c yho l de r wa sn ' t pa y i ng f o r t he

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F e vo l a . t x t 15 po l i c y , t he i nsu r anc e agen t r e l i ed on somebody

16 e l s e f und i ng t ha t po l i c y?

17 A I n t h i s c a s e . I n t he c a s e t ha t we ' r e t a l k i ng

18 abou t , y e s .

19 Q And t he y we r e w i l l i ng t o pa y a f e e - sp l i t t i ng

20 k i c kba c k , wha t e v e r you wan t t o c a l l i t , t he y we r e

21 w i l l i ng t o pa y mone y i n o r de r t o ge t t ha t f und i ng

22 sou r c e t o f und t he i r po l i c i e s?

23 A Tha t i s how I unde r s t ood i t , y e s .

24 Q You unde r s t ood i t t ha t t he f und i ng t ha t t he y we r e

25 pa y i ng you wa s 10 pe r c en t o f t he p r em i um?

89

1 A I don ' t r e c a l l e x a c t l y wha t t he numbe r wa s . And I

2 t h i nk t he r e we r e d i f f e r en t pa ymen t me chan i sms o r

3 s t r uc t u r e s depend i ng on t he agen t agg r ega t o r .

4 Q Who wou l d nego t i a t e t ha t f o r you?

5 A I t h i nk pa r t o f t ha t wa s Tom R i e k .

6 Q Tom R i e k wou l d nego t i a t e w i t h t he agen t s?

7 A Tha t wa s my unde r s t and i ng , y e s .

8 Q And you t o l d h i m t ha t wa s ok a y?

9 A I don ' t r emembe r t e l l i ng h i m one wa y o r ano t he r .

10 I t h i nk t h i s wa s so r t o f wha t he b r ough t t o us , o r

11 t o me spe c i f i c a l l y .

12 Q D i d he t e l l you t ha t he wa s ge t t i ng 10 pe r c en t o f

13 t he f i r s t y e a r ' s p r em i um?

14 A I t h i nk t he r e we r e a v a r i e t y o f pe r c en t age s t ha t

15 he c i t ed .

16 Q O t he r t han 10 pe r c en t , wha t we r e t he o t he r s?

17 A I t h i nk some we r e l owe r ; some ma y ha v e be en

18 h i ghe r . I t h i nk some we r e a s l ow a s 5 pe r c en t .

19 Q D i d you e v e r ge t i nvo l v ed i n nego t i a t i ng w i t hPage 76

F e vo l a . t x t

20 t he s e agen t s f o r k i c kba c k s on t he p r em i ums?

21 A I ne v e r t a l k ed t o t he agen t s , no .

22 Q We r e you awa r e t ha t t he l ende r f e e t ha t t he s e

23 agen t s we r e g i v i ng ba c k , howe v e r you wan t t o c a l l

24 i t , we r e a s much a s 40 pe r c en t ?

25 A I wa s no t awa r e o f t ha t .

90

1 Q Show i ng you wha t i s ma r k ed a s Exh i b i t No . 14 , a s k

2 you i f you ha v e s e en t h i s documen t be f o r e?

3 A I ha v e no t s e en t h i s .

4 MR . MELN I CK : Le t me j us t t a k e a m i nu t e .

5 ( D i s cus s i on o f f t he r e co r d . )

6 BY MR . MELN I CK :

7 Q You ha v e ne v e r s e en Exh i b i t 14?

8 A No .

9 Q We r e you awa r e t ha t M r . Aa r on wa s en t e r i ng i n t o

10 t h i s k i nd o f a managed s e r v i c e ag r e emen t w i t h

11 agen t s o r agg r ega t o r s?

12 A I wa s no t .

13 Q Do you know who By r on F r i s ch i s?

14 A I be l i e v e he wa s an agen t .

15 Q And he wa s an agen t f o r PRG F i nanc i a l Re sou r c e s ,

16 wh i ch i s t he name I wa s t r y i ng t o t h i nk o f on t he

17 p r e v i ous Exh i b i t , No . 13 . PRG wa s an agg r ega t o r ,

18 we r en ' t t he y , o r we r e t he y an agen t , an i nsu r anc e

19 agen t ?

20 A I don ' t r e c a l l t he e x a c t r o l e t he y p l a y ed .

21 Q Ac co r d i ng t o t h i s , t he y a r e p r oduc e r s . Ac co r d i ng

22 t o Exh i b i t 14 , t he y a r e p r oduc i ng . Do you know

23 wha t a " p r oduc e r " me ans?

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F e vo l a . t x t 24 A I don ' t .

25 Q Ac co r d i ng t o t h i s ag r e emen t , i t s a y s t ha t a

91

1 p r oduc e r , you ' r e pu t t i ng a p r oduc e r t oge t he r w i t h

2 a l ende r , and f o r t ha t , you ' r e go i ng t o ge t a f e e .

3 Do you s e e t ha t on Page 2 , Pa r ag r aph 4?

4 A Unde r compens a t i on?

5 Q Ye ah . " Ea ch pa r t y a t t he c l os e o f t he t r ans a c t i on

6 sha l l r e c e i v e $96 , 121 . 00 . "

7 A I s e e i t .

8 Q And t ha t i s t he amoun t o f mone y t ha t i s go i ng t o

9 go t o t he l ende r , co r r e c t , wh i ch i s t he B r own Fund

10 i n t h i s ag r e emen t , i sn ' t i t ?

11 A I s e e t ha t , y e s .

12 Q So B r own Fund i s t he l ende r , and a t t he end o f t he

13 ag r e emen t t he y ' r e go i ng t o ge t , when t he de a l i s

14 c l os ed , $96 , 000 . Th i s i s f o r a po l i c y wh i ch ha s a

15 v e r y spe c i f i c name on i t , doe s i t no t : Geo r ge

16 D i xon , do you s e e t ha t on t he bo t t om?

17 A I s e e i t i n t he open i ng pa r ag r aph .

18 Q Th i s wa s an ag r e emen t on a spe c i f i c po l i c y w i t h a

19 spe c i f i c numbe r t o Penn Mu t ua l Company i n t he name

20 o f Geo r ge D i xon , i s i t no t ?

21 A I s e e i t , y e s .

22 Q Now you s e e i t ?

23 A Ye s .

24 Q And now you know wha t " l ende r " me ans , r i gh t ?

25 A I unde r s t and .

92

1 Q Ok a y . Th i s ne v e r c ame t o you r a t t en t i on be f o r ePage 78

F e vo l a . t x t

2 t oda y?

3 A I ha v e no t s e en t h i s .

4 Q I n he r e , t he ag r e emen t c a l l s f o r $96 , 121 be i ng

5 pa i d t o t he l ende r , wh i ch i s B r own Found , r i gh t ?

6 A Ye s .

7 Q I f you go t o ba c k t o t he p r e v i ous e xh i b i t , l ook a t

8 t he t h i r d l i ne , i t s a y s , " Geo r ge D i xon . " The

9 l ende r ' s f e e t he r e , howe v e r , i s no t $96 , 000 ; i t ' s

10 t w i c e t ha t : $192 , 000 . Wh i ch I ' l l r ep r e s en t t o

11 you , by t he wa y , i s 40 pe r c en t . Do you know why

12 t ha t oc cu r r ed?

13 A I do no t .

14 Q Le t ' s k e ep mov i ng a l ong . I ' l l show you Exh i b i t

15 15 . Ha v e you s e en t h i s documen t be f o r e? I t ' s ,

16 aga i n , you r name i s on i t a s be i ng p r e s en t a t a

17 me e t i ng on F eb r ua r y 27 , 2007 .

18 A Ye s .

19 Q Now he r e i t t a l k s abou t t he new t a r ge t da t e f o r

20 t he UTC l oan s e cu r i t i z a t i on de a l . The r e i s

21 ano t he r me e t i ng whe r e t h i s i s d i s cus s ed . You

22 s t i l l don ' t know wha t t ha t wa s? You don ' t

23 r emembe r wha t t ha t wa s?

24 A I do no t .

25 Q Now , you r eg i s t e r ed he r e , i t s a y s - - f o r t he f i r s t

93

1 t i me t ha t I c an s e e , you r eg i s t e r ed you r conc e r n

2 r ega r d i ng c a sh f l ow f o r t he s a l e o f Be a t i s and

3 B r own po r t f o l i o t o f und t h i s de a l . Wha t c a sh f l ow

4 we r e you t a l k i ng abou t ?

5 A I ha v e no memo r y o f t h i s . I don ' t know .

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F e vo l a . t x t 6 Q Then i t s a y s , " Tom w i l l con t i nue t o s end upda t e s

7 on t he s e i s sue s a s r e c e i v ed f r om UTC . " Aga i n , I ' m

8 t r y i ng t o unde r s t and , wha t i s Tom R i e k i n a l l o f

9 t he s e de a l s? I s he r unn i ng t h i s t h i ng f o r you ,

10 M r . F e vo l a?

11 A Runn i ng wha t t h i ng?

12 Q Ev e r y t h i ng . I s Tom R i e k a t t he he a r t o f a l l o f

13 t he s e de a l s?

14 A No t a s - - Tom had abso l u t e l y no t h i ng t o do w i t h

15 wha t t he We a l t h Managemen t f unds de c i ded t o i nv e s t

16 i n o r no t i nv e s t i n .

17 Q Then why doe s h i s name k e ep com i ng up i n a l l o f

18 t h i s?

19 A Be c aus e t he sub j e c t - - my on l y susp i c i on wou l d be

20 t he sub j e c t be i ng Quad r i mus , and whe t he r t h i s wa s

21 some t h i ng t ha t wa s be i ng done . I don ' t r e c a l l t he

22 UTC l oan s e cu r i t i z a t i on de a l .

23 Q " The Laguna Be a ch conso r t i um b i d she e t on

24 Be a t i s / B r own c a s e po r t f o l i os i s e xpe c t ed t h i s

25 we e k . " Tha t ne v e r c ame t h r ough , d i d i t ?

94

1 A I f i t wa s , we d i dn ' t a c t on i t .

2 Q The E l de r L i f e Ca r e Founda t i on de a l ne v e r c ame

3 t h r ough e i t he r , d i d i t , t he y ne v e r bough t

4 any t h i ng?

5 A No t t o my memo r y , no .

6 Q Ne x t I ' l l show you wha t ha s be en ma r k ed a s Exh i b i t

7 16 . Aga i n , t h i s i s f r om Tom R i e k . Th i s t i me ,

8 onc e aga i n , t o J i m Pu t nam , and i t t a l k s abou t a

9 me e t i ng , t h i s t i me on Ap r i l 3 , 2007 . And t he r e i s

10 ma t e r i a l r eda c t ed . Ha v e you s e en t h i s be f o r e?Page 80

F e vo l a . t x t

11 A I don ' t t h i nk I ha v e e v e r s e en t h i s .

12 Q When e - ma i l s wou l d go ou t abou t t he s e me e t i ngs ,

13 wou l dn ' t you ge t a copy o f i t ?

14 A Appa r en t l y no t .

15 Q " A r e v i ew o f B r own ' s Ma r ch r e t u r n and f i v e c a s e

16 s a l e s we r e d i s cus s ed . " Do you r emembe r wha t t ha t

17 wa s?

18 A I do no t .

19 Q " The po t en t i a l s a l e o f Be a t i s and B r own c a s e s

20 t h r ough Ke v i n Yu r kus . " Do you know i f t ha t de a l

21 e v e r c ame t h r ough?

22 A I do no t be l i e v e i t d i d .

23 Q " Ca sh - f l ow i s sue s i n Be a t i s and B r own f o r Ap r i l

24 2007 we r e r e v i ewed . Be a t i s ha s one m i l l i on , B r own

25 ha s s i x t o e i gh t m i l l i on f o r c a s e pu r cha s e s . "

95

1 Wha t we r e t he c a sh - f l ow p r ob l ems you we r e de a l i ng

2 w i t h i n l a t e ' 06 and ' 07?

3 A I n 2007 , i t be c ame c l e a r t o us t ha t t he r e we r e

4 go i ng t o be - - I t h i nk a t t ha t po i n t , we

5 unde r s t ood t ha t s e cond - y e a r p r em i ums we r e go i ng t o

6 come ba c k t o some e x t en t upon us t o po t en t i a l l y

7 f und , t ha t t he r e wa sn ' t a c c e s s t o c ap i t a l

8 e l s ewhe r e a r ound i n ' 07 ; some t i me i n ' 07 , and I

9 don ' t e x a c t l y r e c a l l when . Th i s no t i on had a much

10 l a r ge r r e l e v anc e i n t he f i r m a s a who l e .

11 Ce r t a i n l y , wha t wa s go i ng on i n t he ma r k e t p l a c e

12 r equ i r ed some r e spons e i n t e r ms o f whe r e i s

13 l i qu i d i t y go i ng t o be a t v a r i ous l e v e l s : a t t he

14 c l i en t l e v e l , a t t he f und l e v e l , a t t he f i r m

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F e vo l a . t x t 15 l e v e l . And a numbe r o f i n i t i a t i v e s we r e begun

16 i nc l ud i ng a r edemp t i on r eque s t a t B r own and Be a t i s

17 f o r c ap i t a l i n e x c e s s o f s e cond - y e a r p r em i um

18 r equ i r emen t s . And t ha t wa s a c a l cu l a t i on t ha t

19 r equ i r ed e s s en t i a l l y , a s k ed Joe t o pe r f o r m t o t he

20 e x t en t t he r e wa s c ap i t a l be yond t he ne ed f o r

21 s e cond - y e a r p r em i um pa ymen t s , t ha t t hos e shou l d be

22 r e t u r ned a s a r edemp t i on r eque s t .

23 As ano t he r l a y e r , we r an l i qu i d i t y ne eds

24 f o r e v e r y c l i en t i n t he f i r m on a qua r t e r l y ba s i s

25 so t ha t we cou l d ma t ch up whe r e t ha t wou l d be me t

96

1 and how t ha t wou l d be me t , whe t he r f r om ou t s i de o f

2 t he f unds o r i ns i de t he f unds . We ch r ono l og i c a l l y

3 o r gan i z ed ou r r edemp t i on r eque s t f o r a l l t he o t he r

4 manage r s t ha t we had , when t hos e cou l d be made and

5 how much shou l d be r eque s t ed , and we pu r sued a

6 l i ne o f c r ed i t f o r t he f unds i nd i v i dua l l y .

7 Q Wh i ch you d i dn ' t ge t ?

8 A We d i d no t ge t .

9 Q Be c aus e you d i dn ' t ha v e co l l a t e r a l t ha t t he

10 l ende r s wan t ed?

11 A I t ne v e r e v en go t t o t he po i n t o f a co l l a t e r a l

12 e x am i na t i on .

13 Q He r e ' s t he p r ob l em I ' m s e e i ng a s l ook i ng a t i t

14 ob j e c t i v e l y : you knew you wou l d ha v e s e cond - y e a r

15 p r em i ums , and you knew you wou l d ha v e ne eds f o r

16 t he We a l t h Managemen t i nv e s t o r s who coun t ed on you

17 f o r t ha t mon t h l y o r qua r t e r l y che c k , co r r e c t ?

18 A Qua r t e r l y che c k s i n some c a s e s , y e s .

19 Q And you d i dn ' t ha v e t he mone y t o pa y t ha t be c aus ePage 82

F e vo l a . t x t

20 by 2007 , a l mos t a l l o f you r mone y wa s t i ed up i n t o

21 p r em i um f i nanc e o f bo t h Be a t i s and B r own?

22 A No t a l l o f t he f und mone y wa s . Some o f t he o t he r

23 i nv e s t men t s we r e cons t r a i ned i n t e r ms o f l i qu i d i t y

24 a s we l l .

25 Q We l l , i n f a c t , wha t i nv e s t men t i n ' 06 and ' 07 wa s

97

1 t h r ow i ng o f f c a sh f l ow?

2 A The r e we r e a f ew t ha t had a c t ua l c a sh f l ow on a

3 mon t h l y ba s i s : o i l - we l l i nv e s t men t s , ga s

4 i nv e s t men t s , a c r ed i t c a r d t r ans a c t i on t ha t we

5 i nv e s t ed i n . I don ' t r e c a l l any o t he r s .

6 Q O f you r t o t a l c a sh - f l ow ne eds , wha t d i d t ha t

7 r ep r e s en t ?

8 A I t wa s sma l l .

9 Q The t r u t h i s , i s t ha t t he on l y wa y you we r e go i ng

10 t o ge t t he c a sh you ne eded wa s f r om new i nv e s t o r

11 mone y?

12 A Ou r o r i g i na l e xpe c t a t i ons wa s t ha t t he r e wou l d be

13 s a l e s o f po l i c i e s t o r e - -

14 Q Bu t t he r e we r en ' t ?

15 A The r e we r e no t , t ha t ' s co r r e c t .

16 Q So t he on l y wa y t o f und i t wa s w i t h new i nv e s t o r

17 mone y?

18 A No t ne c e s s a r i l y . The r e c ame a t i me when we

19 s t opped t a k i ng new mone y .

20 Q When wa s t ha t ?

21 A I don ' t r e c a l l .

22 Q I f I had t o l d you I had c l i en t s i nv e s t i ng a s l a t e

23 a s t he summe r o f ' 08 , wou l d t ha t be a f t e r t ha t

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F e vo l a . t x t 24 t hen?

25 A My r e co l l e c t i on i s p r i o r , bu t I don ' t r emembe r .

98

1 Q You we r en ' t t a k i ng i nv e s t o r mone y i n ' 07 , we r e

2 you?

3 A We we r e .

4 Q Ye s?

5 A Ye s , we we r e .

6 Q And t ha t wa s f und i ng you r sho r t f a l l ?

7 A No t d i r e c t l y . Some o f i t c e r t a i n l y wen t t o pa y

8 ou t qua r t e r l y , and some o f i t wen t t o ma k e

9 i nv e s t men t s .

10 Q Do you know E l i z abe t h No t t i ?

11 A Ye s .

12 Q I t s a y s he r e you ' r e go i ng t o be me e t i ng w i t h he r

13 and Joe Aa r on on Ap r i l 9 t h t o s e t up you r own f und

14 t o r ep l a c e Be a t i s and B r own . D i d t ha t me e t i ng

15 t a k e p l a c e?

16 A Ye ah , we had a me e t i ng i n San F r anc i s co , Joe and

17 E l i z abe t h and I . The s e cond pa r t o f t ha t me e t i ng ,

18 o r t he s e cond pa r t o f t ha t s t a t emen t doe s no t come

19 t o my memo r y a s some t h i ng we d i s cus s ed .

20 Q And t he l a s t t h i ng i t s a y s , " The ne x t me e t i ng i s

21 Ma y ' 07 , o r upon suc c e s s f u l s a l e o f Be a t i s and

22 B r own ' s po r t f o l i o o f c a s e s . " Tha t ne v e r t ook

23 p l a c e , r i gh t ?

24 A No .

25 Q Be c aus e you d i dn ' t s e l l t he po r t f o l i o?

99

1 A We d i dn ' t s e l l t he who l e po r t f o l i o , no .Page 84

F e vo l a . t x t

2 Q Wha t pa r t o f t ha t d i d you s e l l ?

3 A I don ' t r e c a l l . I know t he r e we r e t r ans a c t i ons i n

4 ' 07 , I don ' t r e c a l l wha t pe r c en t age .

5 Q Show you wha t ' s be en ma r k ed a s Exh i b i t 17 , a s k you

6 i f you ' v e s e en t h i s documen t be f o r e? I t conc e r ns

7 t he s a l e o f t h i s po r t f o l i o . I f you l ook a t t he

8 bo t t om o f t he page , i t ' s aga i n , f r om Joe Aa r on t o

9 Tom R i e k , wh i ch de s c r i be s ano t he r e - ma i l be l ow i t ,

10 " Spok e w i t h a t t o r ne y l a s t n i gh t , and he i n f o r med

11 me t ha t t he CFO ha s s i gned t he con t r a c t and t ha t

12 we shou l d ha v e i t t oda y . " Tha t conc e r ned t he s a l e

13 o f t he po l i c y o f t he po r t f o l i o , wa sn ' t i t ?

14 A I be l i e v e so , y e s .

15 Q I ' m go i ng t o show you Exh i b i t 18 . Aga i n , i t ' s

16 f r om Tom R i e k t o J i m Pu t nam t a l k i ng abou t a

17 me e t i ng t ha t you we r e a t w i t h a numbe r o f gue s t s

18 bo t h named R i e k . Wha t me e t i ng wa s t ha t ? I t s a y s

19 Ju l y 3 , 2007 . Why a r e mo r e R i e k s a t t h i s me e t i ng?

20 A I don ' t r e c a l l a me e t i ng w i t h o t he r R i e k s .

21 Q So you t h i nk t h i s m i gh t be f ab r i c a t ed?

22 A I don ' t know . I j us t don ' t r emembe r .

23 Q I t s a y s he r e i n No . 2 , be c aus e No . 1 i s r eda c t ed ,

24 " A d i s cus s i on o f t he changed r e c e i v ab l e de a l w i t h

25 UTC . " Wha t wa s " t he changed r e c e i v ab l e de a l " ?

100

1 A I don ' t know wha t t he UTC r e c e i v ab l e de a l wa s .

2 Q " The cons ensus wa s t o ha v e Tom con t a c t Joe Aa r on

3 and i ns t r uc t Be au Ga yne r t ha t B r own , " t ha t ' s you

4 guy s , r i gh t , " w i l l no t be f und i ng any o f t he UTC

5 c a s e s he r e c en t l y s en t ov e r on t he de a l . " You

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F e vo l a . t x t 6 we r e t o l d t ha t , " He s t i f f ed us on a r e c en t pa ymen t

7 o f r e c e i v ab l e s . " Wha t doe s t ha t me an? Wha t d i d

8 he s t i f f you on?

9 A I don ' t r emembe r t h i s . I ' m a s sum i ng he j us t

10 d i dn ' t pa y o f f on h i s f e e - sha r i ng a r r angemen t .

11 Q Show you wha t ha s be en ma r k ed Exh i b i t 20 , a s k i f

12 you ha v e s e en t h i s documen t be f o r e?

13 A I don ' t be l i e v e I ha v e s e en t h i s .

14 Q You don ' t con t e s t i t s a c cu r a c y , do you?

15 A I ' d ha v e t o go t h r ough t he numbe r s .

16 Q You r e c e i v ed abou t $1 . 25 m i l l i on f r om Quad r i mus?

17 A Ye s .

18 Q Wha t d i d you do w i t h t he mone y?

19 A Do you wan t an a c coun t i ng o f i t ?

20 Q Jus t g i v e me a - -

21 A B r oad s t r ok e s?

22 Q Jus t b r oad , v e r y b r oad . I know a l o t o f i t wen t

23 t o t a x e s .

24 A Abou t $567 , 000 wen t t o t a x e s ; $109 , 000 wen t t o

25 pu r cha s e equ i t y un i t s f r om e x i s t i ng equ i t y

101

1 i nv e s t o r s ; $420 , 000 o f i t wen t ba c k i n t o Wa t ch

2 S t one ; and t he ba l anc e , $150 , 000 wen t t o l ega l

3 f e e s .

4 Q Now I ' m go i ng t o show you wha t ' s be en ma r k ed - -

5 t h i s i s , I ' l l r ep r e s en t t o you i s a con t i nua t i on ,

6 Exh i b i t 21 , i t ' s f r om Joe Aa r on t o you w i t h t he

7 c a r bon copy t o Tom R i e k . And , aga i n , i t

8 appa r en t l y cong r a t u l a t e s you , " S i mone , I wou l d

9 ha v e be t aga i ns t you r ge t t i ng t ha t de a l .

10 Cong r a t u l a t i ons . " Wha t de a l wa s t ha t ? Wa s i t aPage 86

F e vo l a . t x t

11 l oan de a l you we r e suppos ed t o ge t t ha t you pu t

12 t oge t he r ?

13 A I ha v e no i de a . I don ' t know .

14 Q Do you r e c a l l s e e i ng t h i s?

15 A No . I a s sume I go t i t be c aus e i t i s add r e s s ed t o

16 me , bu t I ha v e no i de a .

17 Q Who i s " J i m a t J ame son ; " J i m a t J - A - M - E - S - O - N?

18 A I don ' t r emembe r .

19 Q Ok a y . Now , ne x t , Exh i b i t 22 , t h i s i s f r om , aga i n ,

20 i t ' s add r e s s ed t o you , R i e k and Pu t nam , and i t

21 t a l k s abou t " Who buy s ou r po l i c i e s? " I t ' s da t ed

22 Ma y 27 , 2008 , " Fo r t he l a s t y e a r i t ha s be en L i f e

23 Equ i t y w i t h t he RangeT r e e c a s e s and C r ed i t Su i s s e

24 f o r t he UTC c a s e s , " i s t ha t co r r e c t ?

25 A Tha t wa s my unde r s t and i ng , t ha t t hos e we r e t he

102

1 buy e r s .

2 Q Do you know how many po l i c i e s t he y bough t ?

3 A I do no t know .

4 Q Do you know whe t he r you made o r l os t mone y on

5 t hos e po l i c i e s? Th i s i s now 2008 .

6 A I know t he r e we r e po l i c i e s we made mone y on and

7 some t ha t we l os t mone y on .

8 Q " The k e y i s no t t o t e l l t hem you a r e f i nanc i ng t he

9 c a s e s . " D i d you know t ha t ? D i d you know t ha t you

10 we r e suppos ed t o w i t hho l d t ha t i n f o r ma t i on?

11 A I d i d no t know t ha t .

12 Q Wou l d you ha v e app r ov ed t he w i t hho l d i ng o f t ha t

13 i n f o r ma t i on f r om t he i nsu r anc e compan i e s?

14 A I ' m no t su r e wha t t h i s i s i n r e f e r enc e t o .

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F e vo l a . t x t 15 Q We l l , i t s a y s , " The k e y i s no t t o t e l l t hem you

16 a r e f i nanc i ng t he c a s e s , " me an i ng L i f e Equ i t y ,

17 i sn ' t t ha t wha t i t me ans ; no t t o t e l l L i f e Equ i t y

18 o r C r ed i t Su i s s e you ' r e f i nanc i ng t hem?

19 A f t e r a l l we ha v e t a l k ed abou t t oda y ,

20 t h i nk abou t i t . The r e a son you don ' t wan t t o t e l l

21 t hem i s be c aus e t he i nsu r anc e compan i e s , i f t he y

22 we r e f r audu l en t app l i c a t i ons , ma y no t pa y o f f on

23 t hos e po l i c i e s o t he r w i s e , r i gh t ?

24 A Tha t I don ' t know . I me an , wha t I ma y ha v e

25 a s sumed a t t he t i me wa s t ha t he wa s t r y i ng t o

103

1 s epa r a t e t he f i nanc i ng on a s a l e t r ans a c t i on .

2 Q I t s a y s , " We a r e now t r y i ng t o f i nanc e sma l l e r

3 c a s e s , unde r $2 m i l l i on o f f a c e . I ha v e no t done

4 a c a s e f o r l e s s t han a m i l l i on , bu t I suspe c t I

5 w i l l t h i s y e a r . The app l i c a t i ons f o r t he sma l l do

6 no t ha v e any que s t i ons abou t f i nanc i ng o r

7 s e t t l i ng . Ano t he r bene f i t f o r do i ng bus i ne s s i n

8 t h i s a r e a i s t he numbe r o f buy e r s i nc r e a s e

9 d r ama t i c a l l y . " So t he y ' r e know i ng t he

10 app l i c a t i ons don ' t ha v e que s t i ons abou t t he s e

11 t h i ngs?

12 A Mm mm . And ba s ed on when t h i s wa s da t ed , my

13 t h i nk i ng , and t h i s i s my r e co l l e c t i on , i s t ha t we

14 we r e no l onge r pu r cha s i ng po l i c i e s a t t ha t t i me ,

15 we we r e no l onge r f i nanc i ng po l i c i e s a t t he t i me .

16 Ou r i n t en t i on wa s f o r r ede em i ng i nv e s t men t .

17 Q Show you wha t ha s be en ma r k ed Exh i b i t No . 24 , a s k

18 i f you ha v e s e en t h i s be f o r e?

19 A Ye s , t h i s c ame f r om ou r a c coun t i ng , ou r f undPage 88

F e vo l a . t x t

20 a c coun t i ng f i r m . Wha t ' s t he da t e o f t h i s?

21 De c embe r ' 08 .

22 Q Ye s .

23 A De c embe r ' 08 , I wou l d no t ha v e s e en t h i s .

24 Q Why?

25 A I r e s i gned i n Oc t obe r o f ' 08 .

104

1 Q He r e ' s my que s t i on on t h i s documen t , l ook a t whe r e

2 i t s a y s " End i ng NAV , " t h i r d co l umn f r om t he r i gh t ?

3 A Ye s .

4 Q " NAV " i s ne t a s s e t v a l ue , i s i t no t ?

5 A Tha t ' s co r r e c t , y e s .

6 Q Be a t i s Fund , t he y ' r e s a y i ng , had a ne t a s s e t v a l ue

7 i n sp i t e o f a l mos t a $1 . 5 m i l l i on l os s , o f

8 $32 m i l l i on , do you s e e t ha t ?

9 A Ye s , I s e e t ha t .

10 Q We l l , I me an , you had j us t r e s i gned t wo mon t hs

11 e a r l i e r . My que s t i on i s , d i d you be l i e v e t ha t t he

12 a s s e t s i n Be a t i s we r e wo r t h $32 m i l l i on i n ' 08?

13 A Aga i n , I ha v en ' t s e en t h i s , I ' m su r e t ha t t he

14 numbe r i n Sep t embe r wa s r e a sonab l y c l os e t o t ha t .

15 And i t wa s ba s ed on i f t he po l i c i e s we r e cu r r en t ,

16 t ha t t he p r em i ums had be en pa i d , t ha t t he y had

17 v a l ue ; t ha t t he y s t i l l had v a l ue , and t ha t t hos e

18 a t some - - pend i ng , and we c e r t a i n l y unde r s t ood

19 t ha t ou r aud i t wou l d add r e s s t ha t numbe r .

20 Q Le t me a s k you t h i s : By ' 08 , you knew t ha t t he r e

21 wa s d i f f i cu l t y s e l l i ng po l i c i e s , d i dn ' t you?

22 A Tha t ' s co r r e c t , y e s .

23 Q The r e f o r e , t he r e wa s a l i k e l i hood t he y e i t he r

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F e vo l a . t x t 24 we r en ' t go i ng t o s e l l and l aps e , o r t ha t you we r e

25 go i ng t o ha v e t o s e l l t hem f o r l e s s t han f a c e

105

1 v a l ue?

2 A I knew t ha t t he r e wa s a pos s i b i l i t y o f t ha t , y e s .

3 Q And , i n f a c t , you we r e ge t t i ng , a s I w i l l show you

4 i n o t he r e - ma i l s , be t we en one and 3 pe r c en t o f

5 f a c e v a l ue?

6 A I don ' t r e c a l l , bu t I ' m su r e you ha v e i t .

7 Q You don ' t r e c a l l t ha t ?

8 A I don ' t r e c a l l wha t we we r e ge t t i ng .

9 Q Bu t i t wa s penn i e s on t he do l l a r i n t e r ms o f wha t

10 you had spen t ?

11 A Aga i n , I don ' t r emembe r wha t i t wa s , bu t I know

12 t he r e we r e l os s e s on some o f t he po l i c i e s . I do

13 r e c a l l t ha t .

14 Q When you l e f t , you wen t t o W i nch , d i d you no t ?

15 A I d i d .

16 Q How l ong we r e you t he r e?

17 A Two mon t hs .

18 Q Wha t d i d you do t he r e?

19 A O r gan i z a t i ona l de v e l opmen t consu l t i ng . Mos t l y

20 t r y i ng t o he l p he r s t r uc t u r e , Ch r i s t i na W i nch ,

21 s t r uc t u r e t he company t o p r ov i de f i nanc i a l

22 p l ann i ng and i nv e s t men t s e r v i c e s .

23 Q We r e you t he one who b r ough t i n Joe Aa r on?

24 A To who?

25 Q To W i nch .

106

1 A No .Page 90

F e vo l a . t x t

2 Q We r e you awa r e he d i d t he s ame t h i ng a t W i nch t ha t

3 he had done t o We a l t h Managemen t ?

4 A I f ound t ha t ou t when I go t t he r e .

5 Q Wha t d i d you f i nd ou t ?

6 A Tha t t he y had made an i nv e s t men t w i t h Joe .

7 Q D i d you r e a l i z e t ha t t he y had bough t t en po l i c i e s

8 and no t one o f t hem panned ou t ?

9 A I d i d no t . I wa s no t engaged on t he i nv e s t men t

10 s i de o f t he f i r m .

11 Q D i d you wa r n he r t ha t by t he t i me you go t t he r e

12 t ha t ma r k e t had f a l l en on i t s f a c e?

13 A I t o l d he r t ha t t he r e we r e cha l l enge s i n t ha t

14 ma r k e t p l a c e , o f cou r s e .

15 Q Show you wha t ' s be en ma r k ed Exh i b i t 26 . I t ' s f r om

16 E r i c Sm i t h t o Tom R i e k . Do you know who E r i c

17 Sm i t h i s?

18 A I do no t .

19 Q And he i s w r i t i ng R i e k r ega r d i ng t he B r own Fund .

20 F i r s t o f a l l , aga i n , why i s somebody w r i t i ng Tom

21 R i e k r ega r d i ng t he B r own Fund? Th i s i s now Augus t

22 27 , 2009 .

23 A I don ' t know . Augus t 27 , 2009 . I don ' t know .

24 Q I t s a y s , " Un f o r t una t e l y , I ' m ou t o f t he o f f i c e

25 un t i l Monda y , so I c an ' t p r ov i de you w i t h de t a i l s

107

1 on a l l o f you r que s t i ons un t i l t hen . I ha v e t he

2 i n f o r ma t i on on my compu t e r a t home . I c an t e l l

3 you we shou l d be c l os i ng t h r e e t o f i v e c a s e s , and ,

4 y e s , t he y do f a l l i n t he 1 t o 3 pe r c en t r ange . "

5 Tha t ' s 1 t o 3 pe r c en t o f f a c e v a l ue , r i gh t ?

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F e vo l a . t x t 6 A Ye s .

7 Q So i f you ha v e a $10 m i l l i on po l i c y , 1 pe r c en t o f

8 t ha t i s $100 , 000?

9 A Ye s .

10 Q Tha t wou l d be be l ow t he amoun t o f mone y you wou l d

11 ha v e i nv e s t ed i n i t ?

12 A I wou l d suspe c t , y e s .

13 Q Now , on t he bo t t om pa r t o f i t , aga i n , i s f r om Tom

14 R i e k t o E r i c Sm i t h . Th i s one i s da t ed Augus t 27 ,

15 a t 9 : 31 , so t he bo t t om one c ame f i r s t , obv i ous l y .

16 He s a y s , " I am a no t eho l de r i n B r own Fund . " D i d

17 you know R i e k l en t mone y t o t he B r own Fund?

18 A I d i d no t .

19 Q I t s a y s , " E l i z abe t h sha r ed w i t h me abou t t he r e a r e

20 po t en t i a l l y t h r e e t o f i v e c a s e s t ha t ma y c l os e i n

21 Sep t embe r . Cou l d you sha r e w i t h me an an t i c i pa t ed

22 r ange o f s e l l p r i c e s? Fo r e x amp l e , i s t he cu r r en t

23 ma r k e t p r i c e 1 pe r c en t o f f a c e on t he l ow end and

24 3 pe r c en t o f f a c e on t he h i gh end? " So ,

25 obv i ous l y , he knew t ha t t he ma r k e t had p r e t t y much

108

1 gone awa y?

2 A R i gh t . I me an , f r ank l y , I ' m su r p r i s ed i n Augus t

3 o f 2009 t ha t t he r e we r e any s a l e s .

4 Q Why?

5 A I me an , t he c r ed i t ma r k e t had e s s en t i a l l y s t a l l ed .

6 The s e cu r i t i z a t i on ma r k e t had f r o z en : e v e r y t h i ng

7 f r om sub - p r i me t o t r ad i t i ona l au t o and c r ed i t

8 c a r d .

9 Q I ' m go i ng t o show you wha t ha s be en ma r k ed a s

10 Exh i b i t 27 , a s k you i f you ' v e s e en t h i s? I ' mPage 92

F e vo l a . t x t

11 go i ng t o t a k e t h i s ba c k . I ' m go i ng t o r ep r e s en t

12 t o you , I ' m g i v i ng you t he s ame t h i ng , bu t I ne ed

13 t he y e l l ow . Th i s i s Exh i b i t 27 , ok a y? And a l l I

14 wan t you t o do , I ' m go i ng t o he l p f o l l ow a l ong

15 t oge t he r he r e and ma ybe i t ' s be t t e r i f you l ook a t

16 m i ne , do you s e e , s e cond f r om t he t op - - f i r s t o f

17 a l l , t he r e a r e l abe l s on t he co l umns , co r r e c t ?

18 A Ye s .

19 Q The f i r s t one i s " pa r t ne r sh i p , " so t h i s i s Be a t i s ,

20 r i gh t ?

21 A Ye s .

22 Q Then " c a r r i e r " i s t he i nsu r anc e c a r r i e r , r i gh t ?

23 A Ye s .

24 Q The " i nsu r ed " i s t he pe r son who t ook ou t t he

25 po l i c y?

109

1 A Ye s .

2 Q And t he " s t a t e " whe r e t he y ' r e f r om?

3 A Mm mm .

4 Q Ye s?

5 A Ye s .

6 Q " Age a f t e r con t e s t ab i l i t y , " so t h i s one w i l l be 73

7 o r 79 , do you s e e t ha t ?

8 A Ye s .

9 Q " LE " i s l i f e e xpe c t anc y , r i gh t ?

10 A Ye s .

11 Q And t hen " p r em i um , " t ha t ' s t he f i r s t y e a r ' s

12 p r em i um , r i gh t ?

13 A Ye s .

14 Q And t hen you mov e ov e r , and t hen t he " f a c e amoun t

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F e vo l a . t x t 15 o f t he po l i c y " ?

16 A Ye s .

17 Q Now he r e i s t he s t r uc t u r i ng f e e , wha t ' s t ha t ?

18 A I ' m no t su r e .

19 Q Ha v e you e v e r s e en a sp r e adshe e t l i k e t h i s be f o r e?

20 A I t h i nk t he r e ma y ha v e be en a coup l e s i m i l a r i n

21 appe a r anc e t ha t c ame t h r ough t o me f r om E l i z abe t h

22 No t t i .

23 Q PSV , wha t ' s t ha t , po l i c y s a l e s v a l ue?

24 A I be l i e v e t ha t ' s po l i c y o r p r o j e c t ed s a l e s v a l ue .

25 Q So you p r o j e c t ed wha t t he po l i c i e s we r e go i ng t o

110

1 s e l l f o r , da t e o f f i r s t p r em i um , and t hen ma t u r i ng

2 da t e and t hen i n t e r e s t r a t e on t he no t e , r i gh t ?

3 A Ye s .

4 Q Ok a y . So l e t ' s j us t l ook a t t he s e cond one . The

5 s e cond name , i t s a y s , " Phoen i x " i s t he c a r r i e r and

6 " B r o z i o A r ama s ( phone t i c ) " i s t he guy , r i gh t ?

7 A Ye s .

8 Q So he i s 79 y e a r s o l d , so he wou l d ha v e be en 77

9 when he t ook i t ou t , and he ha s 134 mon t hs ' l i f e

10 e xpe c t anc y , r i gh t ?

11 A Ye s .

12 Q So 134 mon t hs i s abou t , my ma t h i sn ' t g r e a t , abou t

13 11 y e a r s?

14 A Ye s .

15 Q Do you know how much p r em i ums you wou l d ha v e had

16 t o pa y ov e r 11 y e a r s on t h i s $10 m i l l i on po l i c y?

17 A I suspe c t t he y wou l d be subs t an t i a l .

18 Q Bu t i t on l y shows t ha t one p r em i um wa s pa i d?

19 A Ye s .Page 94

F e vo l a . t x t

20 Q And i t wa s pa i d appa r en t l y on t he da t e o f t he

21 f i r s t p r em i um on 12 / 14 / 2006?

22 A Ye s .

23 Q So 12 / 14 / 2006 , you pa i d a ha l f - m i l l i on do l l a r s ,

24 ne v e r pa i d any t h i ng a f t e r t ha t . Do you know wha t

25 happened t o t h i s po l i c y?

111

1 A I do no t .

2 Q Look a t t he s e cond page . I ' m go i ng t o r ep r e s en t

3 t o you t ha t I p r e s en t ed t h i s t o M r . Pu t nam a t h i s

4 depo , so you m i gh t ha v e s e en t h i s be f o r e . I f you

5 l ook a t , aga i n , t he t i t l e s o f t he co l umns he r e ,

6 we ' r e ba c k t o " f a c e v a l ue , " do you s e e t ha t ?

7 A Ye s .

8 Q " O r i g i na t i ng f e e , " bu t you don ' t know wha t t ha t

9 i s?

10 A Ye s - - no , I don ' t know .

11 Q And " PSV , " we ' v e a l r e ady t a l k ed abou t t ha t ?

12 A R i gh t .

13 Q " Da t e o f f i r s t p r em i um , ma t u r i t y da t e , " do you s e e

14 t ha t ?

15 A Ye s .

16 Q " I n t e r e s t on no t e , " r i gh t ?

17 A R i gh t .

18 Q Th i s ha s t h r e e mo r e co l umns : " P r o f i t t o t he

19 f und . "

20 A Ok a y .

21 Q So d i d you r egu l a r l y ge t sp r e adshe e t s t ha t wou l d

22 show you p r o f i t o f t he f und?

23 A No t r egu l a r l y , no

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F e vo l a . t x t 24 Q D i d you ge t any?

25 A La t e r on , pe r haps beg i nn i ng - - pe r haps i n l a t e ' 07

112

1 e a r l y ' 08 , ma ybe .

2 Q And t hen t h i s shows " da t e o f pa ymen t o r s a l e , " and

3 a l mos t a l l o f t h i s i s 2008 . The r e i s some

4 s t a r t i ng i n 09 , do you s e e t ha t ?

5 A Ye s .

6 Q And t hen " c a sh f l ow t o f und . " I ' m j us t no t su r e ,

7 wha t doe s t ha t me an , " c a sh f l ow t o f und " ? Ok a y .

8 Do you s e e whe r e i t s a y s " p r o f i t t o f und? " A l mos t

9 a l l o f t he s e a r e nega t i v e numbe r s , a r e t he y no t ?

10 A Ce r t a i n l y , t he l a t e r one s a r e , y e s .

11 Q I ' m on l y s e e i ng t wo t ha t a r e pos i t i v e i n t ha t

12 co l umn .

13 A R i gh t .

14 Q So t he c a sh f l ow t o f und , t he r e c an ' t be much c a sh

15 f l ow t o t he f und ; t he s e a r e a l l nega t i v e numbe r s?

16 A I ' m a s sum i ng t he c a sh f l ow t o f und me an t wha t i t

17 wou l d t a k e i n p r em i um pa ymen t s t o k e ep t hem

18 cu r r en t .

19 Q D i d you ha v e any e xpe r i enc e i n a c coun t i ng?

20 A No t a c t ua r i a l a c coun t i ng , no .

21 Q Wha t abou t gene r a l a c coun t i ng?

22 A Some .

23 Q He r e i s wha t I ' m ge t t i ng a t , we t a l k ed e a r l i e r

24 t ha t you wou l d book t he i n t e r e s t , r i gh t ?

25 A We wou l d a c c r ue t he i n t e r e s t , y e s .

113

1 Q I t i s now t wo y e a r s l a t e r , you ' r e ge t t i ng you rPage 96

F e vo l a . t x t

2 bu t t s k i c k ed be c aus e o f t he wa y t he s e t h i ngs a r e

3 be i ng so l d . D i d you go ba c k and p i c k up t hen t he

4 i n t e r e s t t ha t , i n f a c t , you a c c r ued , be c aus e you

5 we r e g i v i ng ou t t a x i n f o r ma t i on t o you r i nv e s t o r s ,

6 r i gh t ?

7 A R i gh t , a l l o f t ha t - -

8 Q Fo r mone y t ha t d i dn ' t e x i s t ?

9 A A l l o f t ha t a t some po i n t had t o be r e v i s ed .

10 Q D i d you?

11 A I wa s gone be f o r e t h i s r e a l l y happened .

12 Q So you don ' t know , f o r a l l o f t he s e i nv e s t o r s ,

13 wha t wa s r e v i s ed?

14 A I wa s no t t he r e . We d i d t ha t on some o f ou r

15 i nv e s t men t s , we f o l l owed t ha t p r a c t i c e .

16 Q I ' m go i ng t o show you wha t ' s be en ma r k ed a s

17 Exh i b i t 28 , a s k i f you ' v e s e en t h i s e xh i b i t

18 be f o r e?

19 A Ye s .

20 Q D i d you p r epa r e i t ?

21 A No . Th i s wou l d ha v e be en p r epa r ed by ou r

22 a c coun t i ng f i r m i n Ch i c ago . I c an ' t r e c a l l t he

23 name .

24 Q Th i s i s t he Be a t i s Fund , and I wan t you t o j us t

25 p i c k a pe r i od o f t i me when t he f und wou l d ha v e

114

1 be en mos t l y i nv e s t ed i n t he i nsu r anc e p r em i um

2 bus i ne s s . You ' v e go t e v e r y mon t h o f e v e r y y e a r

3 he r e , so j us t t e l l me whe r e you t h i nk mos t o f

4 Be a t i s , 75 pe r c en t o r mo r e , wou l d ha v e be en

5 i nv e s t ed i n t he i nsu r anc e p r em i um bus i ne s s?

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F e vo l a . t x t 6 A Le t ' s s a y , a r guab l y , 2007 .

7 Q No t un t i l - - 75 pe r c en t - -

8 A I n Be a t i s , I ' m so r r y , i t wa s e a r l i e r i n Be a t i s .

9 P r obab l y 2005 .

10 Q And t ha t i s f i ne . Le t ' s j us t p i c k J anua r y 2005 ,

11 wh i ch i s c l e an be c aus e t he r e wa s no add i t i ons t ha t

12 y e a r , do you s e e t ha t ?

13 A Ye s .

14 Q And t he r e we r e no w i t hd r awa l s?

15 A R i gh t .

16 Q So e v e r y t h i ng wa s p r e t t y f a l l ow i n t e r ms o f you r

17 i nv e s t men t s i n t he po l i c i e s , r i gh t ?

18 A R i gh t .

19 Q Wha t I ' m ge t t i ng a t i s , No . 1 , e v e r y mon t h t he r e

20 wa s abou t $250 , 000 a c c r ued , e x c ep t f o r t he l a s t

21 mon t h , bu t t he r e wa s abou t $250 , 000 , wa s t ha t t he

22 i n t e r e s t on t he mone y t ha t had be en i nv e s t ed i n

23 t he s e po l i c i e s?

24 A I n Be a t i s a s a who l e , so t he r e wou l d po t en t i a l l y

25 be o t he r i ncome i f t he r e we r e any o t he r

115

1 i nv e s t men t s i n t he f und a t t he t i me . So i n 2005 ,

2 pe r haps t he r e wa s MKA , pe r haps t he r e we r e o t he r

3 t h i ngs , I don ' t r e c a l l , bu t t ha t wou l d be

4 r e f l e c t ed i n t ha t numbe r .

5 Q MKA t u r ned ou t t o be an i nv e s t men t you guy s l os t

6 you r mone y i n a l so , d i dn ' t you?

7 A We - - be f o r e I l e f t , i t wa s c e r t a i n l y , we had

8 ma r k ed t ha t down subs t an t i a l l y .

9 Q We l l , i t wa sn ' t any t h i ng ; i t wa s wo r t h l e s s?

10 A I don ' t know wha t happened a f t e r t he f a c t , bu t IPage 98

F e vo l a . t x t

11 c e r t a i n l y know we ma r k ed down a t l e a s t ha l f o f i t .

12 Q O f t he i nv e s t men t s you had , wa s t he r e any

13 i nv e s t men t s t ha t we r e suc c e s s f u l ?

14 A I don ' t know wha t you me an by " suc c e s s f u l . " Made

15 mone y on? P r obab l y a sma l l hand f u l .

16 Q Do you r emembe r any t h i ng I c an po i n t t o?

17 A Ka yne Ande r son , A r gen t , t he o i l we l l s .

18 Q You made mone y on o i l we l l s?

19 A F i v e s t a t e s , y e s . The r e we r e some i n

20 Ma t l i nPa t t e r son . Pe r haps I wa s gone be f o r e we go t

21 ou r mone y ba c k , bu t we we r e ma k i ng mone y be f o r e I

22 l e f t .

23 Q Le t ' s go ba c k t o ' 05 , aga i n . So i n ' 05 , i t shows

24 t he s e ga i ns , you ' r e s a y i ng t ha t o t he r t han

25 i n t e r e s t on t he po l i c i e s , some o f t he s e ma y ha v e

116

1 be en MKA?

2 A Some o f t hem ma y be r e l a t ed t o o t he r t h i ngs .

3 Q You don ' t r e c a l l spe c i f i c a l l y?

4 A And I don ' t know when t h i s wa s p r oduc ed , so t ha t

5 ma k e s a b i g d i f f e r enc e . The r e we r e r e v i s i ons made

6 t o t he s e s t a t emen t s .

7 Q Ok a y . Bu t now l ook a t whe r e i t s a y s " end i ng NAV , "

8 wh i ch i s ne t a s s e t v a l ue , r i gh t ?

9 A Mm mm .

10 Q Ye s?

11 A Ye s .

12 Q Onc e aga i n , you ' r e p i c k i ng up t he f u l l i nv e s t men t

13 i n t he s e po l i c i e s p l us t he a c c r ued i n t e r e s t t o

14 come up w i t h t ha t a s s e t v a l ue , a r e you no t ?

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F e vo l a . t x t 15 A Tha t i s co r r e c t .

16 Q Wha t t i me do you ha v e t o l e a v e?

17 A Abou t 1 : 30 .

18 Q I ' m go i ng t o s k i p a l l o f t h i s .

19 I wan t t o show you one o f t he b r ochu r e s

20 o r f l y e r s , t h i s i s Exh i b i t 31 . F i r s t o f a l l , I

21 wan t t o know i f you p r epa r ed i t ?

22 A I w r o t e t h i s , I d i dn ' t p r epa r e t he a c t ua l

23 documen t , bu t I w r o t e t he t e x t .

24 Q I t ' s da t ed Ap r i l 30 , 2004 . Se cond pa r ag r aph , i t

25 s a y s , " A t i t s one - y e a r ann i v e r s a r y da t e , G r yphon

117

1 ha s a ch i e v ed i t s s t a t ed goa l s on bo t h an abso l u t e

2 and r e l a t i v e ba s i s . As a subs t i t u t e f o r

3 t r ad i t i ona l bonds G r yphon p r ov i ded a subs t an t i a l

4 amoun t o f e x c e s s r e t u r n and d i d s e l l w i t h a

5 f r a c t i on o f vo l a t i l i t y . " On Ap r i l 30 , 2004 ,

6 G r yphon , a c co r d i ng t o t he ba c k o f t he she e t , wa s

7 i nv e s t ed i n A r gen t , MKA , RangeT r e e , wh i ch i s

8 i nsu r anc e f i nanc e , and t hen a s e r i e s o f o t he r

9 t h i ngs on a 3 pe r c en t o r l e s s ba s i s . Do you s e e

10 t ha t ?

11 A Ye s .

12 Q How cou l d you t e l l how t h i s wa s do i ng ba s ed upon

13 A r gen t , MKA and RangeT r e e? No t h i ng wa s t h r ow i ng

14 o f f any c a sh t o you , wa s i t ?

15 A A r gen t , MKA and Range - - we l l , A r gen t and MKA ;

16 RangeT r e e wa s embedded i n Be a t i s , and a c t ua l l y ,

17 p r obab l y a t t ha t po i n t , MKA wa s embedded i n Be a t i s

18 a s we l l . And so t ha t wa s ba s ed on ou r a c coun t i ng

19 f i r m t a k i ng t he r e t u r ns p r ov i ded by t he manage r sPage 100

F e vo l a . t x t

20 com i ng up w i t h a r e t u r n f o r ou r po r t f o l i o .

21 Q Bu t now , I ' m an i nv e s t o r , I ' m l ook i ng a t t h i s , t o

22 me , t h i s l ook s l i k e , " Boy , you ' r e r e a l l y do i ng

23 g r e a t . " And I ' m s a y i ng , l ook i ng a t i t , how do you

24 know how you ' r e do i ng? The r e i s no t h i ng t h r ow i ng

25 o f f any c a sh ; t he a s s e t s he r e a r e spe cu l a t i v e a t

118

1 be s t . I me an , you don ' t ha v e a r e co r d i n 2004 f o r

2 t hos e i nsu r anc e company a s s e t s , do you?

3 A We ha v e - - no , wha t we ha v e i s t he manda t ed me t hod

4 o f a c coun t i ng f o r ou r r e t u r n . Tha t wa s t he

5 manda t ed me t hod f o r a l l o f t he f unds i n t he

6 i ndus t r y .

7 Q I unde r s t and t ha t , bu t you ha v e no i de a how t ha t

8 i nsu r anc e company i nv e s t men t wa s go i ng t o do i n

9 2004 , do you?

10 A A l l we c an r e l y on i s wha t we ' r e ge t t i ng i n t e r ms

11 o f a mon t h l y a c c r ua l numbe r .

12 Q I ' m go i ng t o r ep r e s en t t o you t ha t on Ap r i l 17 ,

13 2005 , Joe Aa r on , a s ch i e f e x e cu t i v e o f f i c e r o f

14 Wood , Ha t & S i l v e r , r e c e i v ed an e x am i na t i on r e su l t

15 l e t t e r f r om t he Se cu r i t i e s and Ex change

16 Comm i s s i on , ok a y?

17 A Ok a y .

18 Q I t ' s qu i t e e x t ens i v e . D i d you e v e r s e e t ha t

19 documen t be f o r e?

20 A No .

21 Q Bu t you de s c r i bed t o me e a r l i e r , you s a i d , he ,

22 me an i ng Joe Aa r on , had d i s cus s ed t h i s w i t h you?

23 A He had d i s cus s ed t ha t t he r e wa s an SEC

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F e vo l a . t x t 24 e x am i na t i on .

25 Q And d i d he e v e r d i s cus s w i t h you t ha t he wa s

119

1 suppos ed t o s end a l e t t e r t o i nv e s t o r s de s c r i b i ng

2 t he k i c kba c k a r r angemen t he had w i t h MKA?

3 A No t t o my r e co l l e c t i on , no .

4 Q D i d he r e i mbu r s e Be a t i s Fund $47 , 554?

5 A I don ' t know .

6 Q He t o l d you t ha t t he SEC had come i n and done an

7 e x am i na t i on and f ound some t h i ngs w r ong , d i d he

8 t e l l you t ha t much?

9 A He t o l d us t ha t he had , i f my memo r y i s co r r e c t ,

10 t ha t he had an ob l i ga t i on t o d i s c l os e t o t he o t he r

11 i nv e s t o r s t he na t u r e o f ou r i nv e s t men t i n t he f und

12 s i nc e i t wa s subs t an t i a l .

13 Q Tha t ' s a l l he t o l d you?

14 A Tha t i s my unde r s t and i ng o f wha t wa s r equ i r ed a t

15 t ha t po i n t .

16 Q And you d i dn ' t l ook i n t o i t ? I me an , you had

17 known he had be en i n t r oub l e w i t h t he SEC

18 p r e v i ous l y , r i gh t , t ha t he had be en suspended f o r

19 a y e a r ?

20 A I don ' t r e c a l l when I d i s cov e r ed t ha t f a c t .

21 Q D i d you d i s cov e r i t be f o r e 2005?

22 A I don ' t be l i e v e so .

23 Q Do you r emembe r when a f t e r - - t h i s l e t t e r wa s ,

24 I ' l l r ep r e s en t t o you , Augus t 17 , 2005 , d i d you

25 d i s cov e r i t a f t e r t ha t l e t t e r ?

120

1 A I don ' t r emembe r when I d i s cov e r ed i t .Page 102

F e vo l a . t x t

2 Q I n t he f a l l o f 2006 , i f he d i d d i s c l os e i t t o you

3 a f t e r he go t t h i s l e t t e r , d i d you f e e l i t wa s

4 ne c e s s a r y t o i n f o r m We a l t h Managemen t i nv e s t o r s

5 t ha t onc e aga i n t he r e wa s some SEC p r ob l ems w i t h

6 Joe Aa r on?

7 A My unde r s t and i ng a t t he t i me wa s t ha t d i s c l osu r e

8 l e t t e r t ha t wa s r equ i r ed . I d i d no t know t he r e

9 wa s a subs t an t i a l documen t .

10 Q I ' l l r ep r e s en t t o you t ha t M r . Aa r on t e s t i f i ed

11 be f o r e t he SEC . We r e you awa r e o f t ha t ?

12 A No .

13 Q We r e you awa r e t ha t M r . Aa r on t o l d t hem t ha t o f

14 t he 300 po l i c i e s i s sued w i t h i n t he l a s t 18 mon t hs

15 o f h i s t e s t i mony , t ha t on l y 50 had be en so l d?

16 A No , I wa s no t awa r e o f t ha t .

17 Q Wou l d t ha t su r p r i s e you?

18 A The t i me f r ame aga i n?

19 Q We l l , i t wa s 18 mon t hs p r i o r t o h i s t e s t i mony , so

20 f i gu r e i t wou l d ha v e be en 2007 , m i dd l e o f 2007

21 t h r ough 2009 .

22 A I t doe s no t su r p r i s e me .

23 Q Why i s t ha t ?

24 A The r e wa s no s e cu r i t i z a t i on ma r k e t e s s en t i a l l y a t

25 t he end o f 2008 and i n t o 2009 .

121

1 Q I gue s s I wan t t o ma k e su r e t ha t we ' v e p i nned t h i s

2 down . I t h i nk you r t e s t i mony wa s , i t wa s i n 2007

3 t ha t you r e a l i z ed t ha t t he s e po l i c i e s we r e

4 d i f f i cu l t t o s e l l ?

5 A I t h i nk we began t o s e e t he c r a c k i ng i n t he ma r k e t

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F e vo l a . t x t 6 o f t he end buy e r , t he a v a i l ab i l i t y o f end buy e r s .

7 Q I n 2007?

8 A Some t i me i n 2007 . And by t ha t , I wan t t o c l a r i f y ,

9 by t ha t I me an t t he t r ad i t i ona l , t he p r e v i ous

10 pa r t i c i pan t s and t he ne ed t o po t en t i a l l y e xp l o r e ,

11 and we d i d e xp l o r e , o t he r buy e r s .

12 Q You t r i ed t o pu t t oge t he r a l l so r t s o f de a l s , I

13 c an s e e t ha t , f r om ' 07 on , bu t you we r en ' t ab l e t o

14 pu t t hem t oge t he r ?

15 A None o f t hem we r e suc c e s s f u l .

16 Q None o f t hem . And t ha t s t a r t ed abou t t he m i dd l e

17 o f 2007?

18 A App r ox i ma t e l y , y e s .

19 Q S t a r t i ng i n 2006 , why d i d you conc en t r a t e so much

20 on t he i nv e s t men t s o f G r yphon and Wa t ch S t one i n

21 one a r e a : l i f e p r em i um f i nanc i ng? I ha v e , f r om

22 r e ad i ng o t he r t h i ngs , s aw t ha t you we r e t r y i ng t o

23 ge t mone y ou t and d i v e r s i f y i t , bu t you l ook ed

24 l i k e you we r e t he l one vo i c e ou t t he r e , wha t

25 happened?

122

1 A You know , I t h i nk t he i r pe r c ep t i on wa s , wha t o t he r

2 a v a i l ab l e i nv e s t men t s cou l d we ma k e t ha t c e r t a i n l y

3 i n 2006 , when we we r e cons i de r i ng ou r s e cond r ound

4 o f t h i s i nv e s t men t . We cons i de r ed i t i n t wo

5 r ounds : s t a r t i ng i n 2004 t o 2006 ; and t hen 2006

6 t o 2008 , and i n 2006 ou r a s s e s smen t wa s t ha t t he

7 ma r k e t wa s s t i l l he a l t hy enough t o be a r ano t he r

8 r ound o f t h i s f i nanc i ng . Re l a t i v e t o wha t ou r

9 o t he r op t i ons we r e , we cons i de r ed t ha t a t t he t i me

10 t he mos t r e a sonab l e app r oa ch .Page 104

F e vo l a . t x t

11 Q Bu t conc en t r a t i ng you r i nv e s t men t s i n one a r e a ,

12 you d i dn ' t f i nd t ha t i n i t s e l f t r oub l i ng?

13 A No .

14 Q And , aga i n , you t ook t he pos i t i on e v en i n 2006

15 t ha t t h i s wa s no t a r i s k y i nv e s t men t ?

16 A We t ook t he pos i t i on t ha t r e l a t i v e t o t he

17 r i s k - r e t u r n t r adeo f f s a v a i l ab l e e l s ewhe r e , t ha t

18 t h i s wa s app r op r i a t e a t t he t i me .

19 Q So h i gh r i s k ; h i gh r ewa r d?

20 A No , h i gh r i s k , aga i n , I wou l d cha r a c t e r i z e a s

21 o t he r t h i ngs .

22 Q You wou l dn ' t cha r a c t e r i z e t h i s a s h i gh r i s k?

23 A No t i n my v i ew i n 2006 .

24 Q And you ' r e s a y i ng abso l u t e l y , c l e a r l y , w i t hou t

25 he s i t a t i on , t ha t you we r e ne v e r adv i s ed by Tom

123

1 R i e k o r Joe Aa r on t ha t p r em i um f i nanc i ng wa s a

2 h i gh - r i s k i nv e s t men t ?

3 A Aga i n , no t h i gh r i s k ; a l t e r na t i v e r i s k , d i f f e r en t

4 t ype s o f r i s k .

5 Q D i d you r e ad an o f f e r i ng memo on Be a t i s and B r own

6 w i t h r ega r d t o t he r i s k o f t he s e i nv e s t men t s ,

7 e spe c i a l l y t he amended memo i n 2006?

8 A I p r obab l y d i d . I c an ' t r e c a l l t ha t I d i d .

9 Q D i dn ' t t he memo t e l l you t ha t t h i s wa s a r i s k y

10 i nv e s t men t ?

11 A I don ' t r e c a l l .

12 Q Tha t wou l dn ' t ha v e made any d i f f e r enc e t o you?

13 A The l anguage , a s you wou l d unde r s t and , i n mos t

14 o f f e r i ng documen t s we r e a l mos t any t h i ng

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F e vo l a . t x t 15 non t r ad i t i ona l , bo i l e r p l a t e , so i t wou l dn ' t

16 su r p r i s e me t ha t t ha t wa s i n t he r e .

17 Q Le t me ma k e su r e I ' v e go t t h i s down . You ' r e no t

18 d i spu t i ng t ha t Pu t nam t o l d you - - no , t ha t R i e k

19 t o l d you t ha t t h i s wa s a h i gh - r i s k i nv e s t men t , a r e

20 you , you ' r e no t d i spu t i ng t ha t ?

21 A I don ' t r e c a l l whe t he r he e v e r s a i d t ha t o r no t .

22 Q Wha t i s S t r a t eg i c and S t ewa r dsh i p? S t r a t eg i c , you

23 t e s t i f i ed wa s an a r b i t r age f und?

24 A I t wa s an equ i t y , an op t i on a r b i t r age f und .

25 Q And S t ewa r dsh i p?

124

1 A S t ewa r dsh i p wa s , t o my r e co l l e c t i on , an

2 a s s e t - ba s ed l ende r .

3 Q Wh i ch me ans wha t ?

4 A Tha t t he y wou l d , S t ewa r dsh i p , p r ov i ded l end i ng

5 aga i ns t non t r ad i t i ona l a s s e t s : a r t co l l e c t i ons ,

6 co i n co l l e c t i ons , wha t e v e r .

7 Q D i d you know much abou t t he a r t ma r k e t , t he co i n

8 ma r k e t , t he s t amp ma r k e t , a s a l t e r na t i v e

9 i nv e s t men t s?

10 A No .

11 Q You d i dn ' t t h i nk t ha t t ha t wa s l e s s r i s k y t han a

12 ma r k e t t ha t you ne v e r knew wha t i t wa s go i ng t o

13 be?

14 A S t ewa r dsh i p , i f I r e c a l l - - we l l , I know t h i s f o r

15 a f a c t , S t ewa r dsh i p wa s i n Be a t i s ; no t d i r e c t l y

16 i n t o ou r f und , and i t wa s a r e l a t i v e l y sma l l

17 pos i t i on .

18 Q How cou l d you do a due - d i l i genc e i nv e s t i ga t i on

19 i n t o p r em i um f i nanc i ng when e v en R i e k wa s t e l l i ngPage 106

F e vo l a . t x t

20 you t he r e i s no t r a c k r e co r d on t he s a l e o f t he s e

21 po l i c i e s?

22 A We l l , I me an , I t h i nk t he r e wa s . The r e we r e

23 po l i c i e s t ha t we r e so l d . The r e wa s no o f f i c i a l

24 co l l e c t i on o f r e t u r ns ; t ha t c ame l a t e r .

25 Q How much l a t e r , when l a t e r ?

125

1 A Go l dman Sa chs began an i nde x , I don ' t r e c a l l , i n

2 ' 07 pe r haps .

3 Q Whe r e d i d you s e e t ha t ?

4 A The i nde x?

5 Q Ye s .

6 A Fo r a wh i l e , i t wa s p r i v a t e . I n o t he r wo r ds , i t

7 wa sn ' t pub l i shed , and t hen i t be c ame a pub l i shed

8 i nde x a t some po i n t on B l oombe r g , o r somewhe r e .

9 Q Why d i d you g i v e Tom R i e k a 1 pe r c en t f i nde r f e e

10 f o r MKA c ap i t a l ? I me an , he d i dn ' t i n t r oduc e MKS ;

11 t ha t wa s Joe Aa r on , so why d i d you g i v e h i m a

12 1 pe r c en t f i nde r f e e?

13 A I don ' t r e c a l l Tom ge t t i ng a 1 pe r c en t f i nde r f e e .

14 Q D i d Tom R i e k t e l l you why he wa s w i l l i ng t o sha r e

15 h i s comm i s s i on f e e s t ha t he wa s ge t t i ng f r om t he

16 agen t s w i t h you and J i m?

17 A No t t ha t I r e c a l l .

18 Q He d i dn ' t ha v e any l ega l ob l i ga t i on t o do so , d i d

19 he?

20 A No t t ha t I ' m awa r e o f , no .

21 Q D i d you a s k h i m , s a y , " Tom , why? I ' m no t en t i t l ed

22 t o i t , why do you do i t " ?

23 A I d i dn ' t a s k h i m .

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F e vo l a . t x t 24 Q D i d anybody t e l l you t ha t you had an ob l i ga t i on i f

25 you we r e t a k i ng t h i s mone y t o i n f o r m t he i nv e s t o r s

126

1 t ha t you we r e ge t t i ng t h i s mone y?

2 A No one t o l d me .

3 Q D i d you know you had an ob l i ga t i on t o i n f o r m t hem?

4 A I d i d no t a t t he t i me .

5 Q When d i d you f i nd ou t you had an ob l i ga t i on?

6 A P r obab l y t he f i r s t conv e r s a t i on w i t h t he f i r m ' s

7 couns e l .

8 Q When?

9 A I n Ma y o f ' 08 .

10 Q So a t t he t i me you s t a r t ed t o ge t t h i s mone y ,

11 wh i ch wa s i n 2006 , r i gh t ?

12 A Co r r e c t .

13 Q Ap r i l o f ' 06 , no one , t he r e wa s ne v e r a d i s cus s i on

14 t ha t you we r e p r e s en t f o r , no one e v e r t o l d you

15 t ha t you had a du t y t o r epo r t t ha t you we r e

16 ge t t i ng t he s e f e e s?

17 A No .

18 Q Ac co r d i ng t o M r . R i e k , a f t e r Sep t embe r o f 2006 ,

19 you and J i m Pu t nam made t he de c i s i on on how much

20 t he f e e sp l i t t i ng wou l d be pa i d t o you . Tha t i s ,

21 i n a s ens e , t he s e f o l k s s e l l i ng t he s e po l i c i e s

22 c an ' t do i t w i t hou t someone buy i ng , somebody

23 pu t t i ng up t he mone y , so i t wa s an i s sue o f how

24 you wou l d nego t i a t e t hos e f e e s . We r e you i nvo l v ed

25 i n s e t t i ng t ha t up w i t h J i m?

127

1 A No .Page 108

F e vo l a . t x t

2 Q D i d you t hen de c i de a f t e r Sep t embe r o f 2006 how

3 much o f t ha t f e e sp l i t t i ng wou l d a c t ua l l y ge t pa i d

4 t o Be a t i s and B r own?

5 A No .

6 Q So you ' r e s a y i ng , i f M r . R i e k t e s t i f i ed t h i s wa y

7 - - wou l d you l i k e t o he a r h i s t e s t i mony , o r don ' t

8 you c a r e?

9 A I don ' t c a r e .

10 Q Now , t he r e we r e t i me s when t he s e cond y e a r ' s

11 p r em i ums we r e pa i d , you ' r e awa r e o f t ha t ?

12 A Ye s .

13 Q D i d you r e c e i v e comm i s s i ons f r om t he agen t s on t he

14 s e cond - y e a r p r em i ums?

15 A I don ' t know t ha t . I don ' t know .

16 Q You know you r e c e i v ed t hem on t he f i r s t - y e a r

17 p r em i ums , I me an , t ha t ' s whe r e t he mone y wa s

18 com i ng f r om , r i gh t ?

19 A R i gh t , and I don ' t know t he sou r c e o f t hos e

20 che c k s .

21 Q The mone y a l l c ame i n t h r ough an a c coun t t ha t Tom

22 R i e k s e t up?

23 A Ye s .

24 Q And , a s you s a i d , you don ' t know t he sou r c e o f

25 t ha t mone y?

128

1 A I me an , I know gene r i c a l l y t ha t t hos e oc cu r r ed a s

2 a r e su l t o f f i nanc i ngs .

3 Q Now , we a l r e ady d i s cus s ed t he PS , po l i c y s a l e s ,

4 bu t t he r e i s a PVA a l so , po l i c y v a l ue ana l y s i s .

5 Do you know wha t t ha t i s? I w i l l t e l l you i t ' s on

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F e vo l a . t x t 6 t he she e t s a l so .

7 A Ye s . The r e wa s a v a l ua t i on so f t wa r e pa c k age t ha t ,

8 ba s ed on a v a r i e t y o f i npu t s , wou l d gene r a t e wha t

9 a po l i c y m i gh t be wo r t h i n U2 , t he conc l us i on o f

10 U2 .

11 Q Wa sn ' t t ha t a l so t he s t anda r d by wh i ch you de c i ded

12 whe t he r t o f und a po l i c y i n t ha t ?

13 A I t h i nk t he r e wa s a no t i on o f b r e a k - e v en ,

14 po t en t i a l l y b r e a k - e v en , g i v en t he i npu t s .

15 Q Ac co r d i ng t o wha t I r e ad , you wou l d no t f und a l l

16 o f t he po l i c i e s t ha t we r e p r e s en t ed t o you guy s?

17 A Tha t ' s co r r e c t .

18 Q Wha t wa s t he s t anda r d unde r wh i ch you wou l d f und

19 t hem v e r sus whe t he r you we r e no t f und i ng t hem?

20 A Pa r t l y ba s ed on t he PVA .

21 Q And whe r e wa s t he cu t o f f t hen?

22 A I t mov ed a r ound a b i t . My memo r y o f a l l o f t h i s

23 i s v e r y v ague , and t hos e de c i s i ons we r e made by

24 Joe .

25 Q On who t o f und o r no t t o f und?

129

1 A Co r r e c t .

2 Q The y we r en ' t made by you and J i m Pu t nam?

3 A No .

4 Q Do you know Denn i s Long?

5 A Ye s .

6 Q Do you know h i s r e l a t i onsh i p w i t h any o f t he f unds

7 a s an i nv e s t o r ?

8 A He wa s a s i gn i f i c an t i nv e s t o r i n G r yphon f o r a

9 pe r i od o f t i me .

10 Q And t hen he go t ou t o f t ha t ?Page 110

F e vo l a . t x t

11 A He made a r edemp t i on r eque s t a t a c e r t a i n po i n t , I

12 c an ' t r e c a l l when .

13 Q Do you know why?

14 A I don ' t r e c a l l why , bu t I do r e c a l l i t wa s a

15 s i gn i f i c an t r edemp t i on r eque s t .

16 Q Do you know i f i t had any t h i ng t o do w i t h a man

17 named Be au Ga yne r ?

18 A I don ' t know .

19 Q Do you know i f t he r e wa s a r e l a t i onsh i p be t we en

20 Be au Ga yne r and Denn i s Long?

21 A I don ' t know .

22 Q You don ' t know any t h i ng abou t a $6 m i l l i on l oan

23 be t we en Be au Ga yne r and T i bbe t ?

24 A No .

25 Q O t he r t han howe v e r you wou l d c l a s s i f y t hem , o t he r

130

1 t han t he i nsu r anc e p r em i um f i nanc i ng , wha t o t he r

2 i nv e s t men t s t ha t you made on beha l f o f We a l t h

3 Managemen t i nv e s t o r s wou l d you cons i de r h i gh r i s k

4 o r spe cu l a t i v e?

5 A We made some p r i v a t e - equ i t y - o r i en t ed i nv e s t men t s

6 i n t he Que t z a l Fund , w i t h a po r t i on o f t he Que t z a l

7 Fund . Tha t wa s done t h r ough ano t he r manage r ; we

8 d i dn ' t do i t d i r e c t l y . We us ed ano t he r manage r t o

9 ma k e p r i v a t e equ i t y i nv e s t men t s , and we a l so

10 pu r cha s ed de v e l opmen t a l p r ope r t y i n ou r r e a l

11 e s t a t e f und t ha t I wou l d cons i de r a h i ghe r r i s k .

12 Q You i nv e s t ed i n Gu l f I s l and?

13 A A wa t e r pa r k , y e s .

14 Q Wha t wa s you r e xpe r i enc e i n i nv e s t i ng i n wa t e r

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F e vo l a . t x t 15 pa r k s?

16 A We had made a p r e v i ous i nv e s t men t - - l e t ' s s e e i f

17 my t i m i ng i s r i gh t , an i nv e s t men t i n a l oc a l , i t ' s

18 he r e somewhe r e i n Wauk e sha , a wa t e r pa r k a s pa r t

19 o f a ho t e l r enov a t i on i n Wauk e sha , p r i o r t o t ha t

20 i nv e s t men t .

21 Q And wa s t ha t i nv e s t men t i n Wauk e sha suc c e s s f u l ?

22 A I t wa s un t i l t he t i me I l e f t . I don ' t know wha t

23 u l t i ma t e l y happened t o i t .

24 Q Wa s t ha t Gu l f I s l and wa t e r pa r k suc c e s s f u l ?

25 A I t d i d no t me e t p r o j e c t i ons . I don ' t know wha t

131

1 happened t o i t u l t i ma t e l y .

2 Q Whos e ob l i ga t i on wa s i t t o do due d i l i genc e on t he

3 Gu l f I s l and p r o j e c t ?

4 A I t wa s sha r ed . J i m and I d i d t ha t t oge t he r .

5 Q And d i d you ha v e any e xpe r t s t ha t you b r ough t i n

6 t o he l p adv i s e you on t he suc c e s s o f t he p r o j e c t :

7 c a sh f l ow , t he amoun t o f t i me i t cou l d be open ,

8 t he amoun t o f peop l e i t wa s c a t e r i ng t o? O r d i d

9 you t wo do t ha t on you r own?

10 A I don ' t r e c a l l i f we b r ough t i n anyone e l s e , I

11 doub t i t .

12 Q I a l r e ady r ep r e s en t ed t o you t ha t MKA wa s g i v i ng

13 Joe Aa r on mone y f o r t he i nv e s t men t i n t o MKA . D i d

14 you and J i m o r any o f t he o t he r f unds ge t mone y

15 f r om MKA f o r ma k i ng i nv e s t men t s?

16 A No .

17 Q D i d you ge t any k i nd o f cons i de r a t i on f r om any o f

18 t he o t he r f unds whe t he r i t wen t t o you pe r sona l l y

19 o r t o a We a l t h Managemen t f und f o r ma k i ngPage 112

F e vo l a . t x t

20 i nv e s t men t s w i t h t he s e o t he r p r o j e c t s?

21 A No .

22 Q D i d you a s k f o r any mone y f o r t he f und?

23 A Le t me j us t go ba c k , be c aus e Gu l f I s l and i nc l uded

24 an equ i t y , a wa r r an t on pe r f o r manc e , a s pa r t o f

25 t he i nv e s t men t .

132

1 Q Tha t wan t ba c k t o - -

2 A To t he f und t o G r yphon .

3 Q So t he r e wa s a k i c k e r ?

4 A Ye s .

5 Q Any o t he r , wha t I ' m l ook i ng f o r , obv i ous l y , i s

6 cons i de r a t i on whe r e peop l e we r e a s k i ng you f o l k s

7 t o i nv e s t , and i n r e t u r n f o r t he i nv e s t men t , we r e

8 g i v i ng mone y t o , whe t he r i t wen t t o you pe r sona l l y

9 o r t he f und , we r e g i v i ng mone y ba c k?

10 A No .

11 Q And you ' r e s a y i ng t ha t ne v e r happened i n any o f

12 t he o t he r f unds?

13 A No t t o my know l edge , no .

14 Q And you r t e s t i mony wa s t ha t you d i dn ' t know abou t

15 MKA g i v i ng any mone y t o anyone?

16 A No .

17 Q Now , you s a i d t ha t a l l o f t he r e co r ds o f t he

18 t r ans a c t i ons we r e p i c k ed up by t he r e c e i v e r , o r

19 you j us t l e f t t hem beh i nd when you l e f t ?

20 A I l e f t e v e r y t h i ng beh i nd when I l e f t .

21 Q The Touchs t one Oppo r t un i t y Fund - -

22 A Ye s .

23 Q - - wha t wa s t ha t ?

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F e vo l a . t x t 24 A I t wa s a f und , I don ' t r emembe r who t he p r i nc i pa l s

25 we r e , bu t t he y e s s en t i a l l y i nv e s t ed i n mun i c i pa l

133

1 deb t .

2 Q The r e ' s a No . 3 and a No . 4?

3 A The r e we r e t wo d i f f e r en t de a l s .

4 Q How d i d t he s e f unds do?

5 A To my r e co l l e c t i on , t he y we r e do i ng we l l . I don ' t

6 r e c a l l when we r ede emed t hem .

7 Q Bu t you d i d r ede em t hem?

8 A I t h i nk we a t t emp t ed t o r ede em t hem . And t he y

9 we r e on some t r a c k t o g i v e us ou r mone y ba c k a t

10 some po i n t .

11 Q A l ma , A - L - M - A , wha t wa s t ha t ?

12 A O i l d r i l l i ng i n Kans a s .

13 Q And how d i d you do i n t ha t one?

14 A I don ' t u l t i ma t e l y know how t he y ended up , bu t

15 t he y we r e c a sh f l ow i ng when I l e f t .

16 Q Who de t e r m i ned t he ne t a s s e t v a l ue when you

17 r epo r t ed ba c k t o you r i nv e s t o r s on A l ma , who

18 de t e r m i ned t ha t v a l ue?

19 A The v a l ue , i f I r emembe r A l ma co r r e c t l y , t he r e wa s

20 an annua l v a l ua t i on ba s ed on t he i r t a x r e t u r n

21 aud i t s . So i n t he i n t e r i m , i t wa s s i mp l y v a l ued

22 ba s ed on t he c a sh f l ow .

23 Q Do you know a John Whops i ns k i ( phone t i c ) ?

24 A Ye s .

25 Q Who i s t ha t ?

134

1 A He wa s an emp l oy e e . He wa s emp l oy ed a t We a l t hPage 114

F e vo l a . t x t

2 Managemen t when I a r r i v ed i n 2002 , and ,

3 subs equen t l y , he wa s t e r m i na t ed i n - - I don ' t

4 r emembe r when .

5 Q Oc t obe r o f 2006 .

6 A Thank you . And wa s a c t ua l l y , had gone t o wo r k a t

7 W i nch Adv i so r y , and he wa s gone when I go t t he r e .

8 Q Wha t we r e h i s r e spons i b i l i t i e s a t We a l t h

9 Managemen t ?

10 A He wa s pa r t o f t he i nv e s t men t t e am and had

11 r e spons i b i l i t y f o r mu t ua l f und ana l y s i s .

12 Q D i d he a l so ha v e r e spons i b i l i t y f o r ana l y z i ng

13 t he s e i nv e s t men t s?

14 A Ana l y z i ng p r i ma r i l y t he t r ad i t i ona l i nv e s t men t s .

15 Q Bu t no t h i ng t o do w i t h t he s e a l t e r na t i v e

16 i nv e s t men t s do i ng due d i l i genc e?

17 A No .

18 Q D i d he ha v e any de a l i ngs w i t h Joe Aa r on o r Tom

19 R i e k?

20 A I d i dn ' t know t h i s a t t he t i me , bu t appa r en t l y ,

21 y e s , be c aus e he b r ough t t ha t t o W i nch .

22 Q He b r ough t wha t t o W i nch?

23 A Appa r en t l y , he made Ch r i s t i na W i nch awa r e o f Joe

24 Aa r on .

25 Q And wa s he ge t t i ng any mone y f r om Joe Aa r on f o r

135

1 do i ng t h i s?

2 A I don ' t know .

3 Q D i d he de a l w i t h Joe Aa r on when you we r e a t We a l t h

4 Managemen t ?

5 A No t t o my know l edge .

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F e vo l a . t x t 6 Q Pa l i s ade and Pan t e r a , you t e s t i f i ed , we r e ov e r f l ow

7 f unds t ha t you us ed t o comp l y w i t h SEC

8 Regu l a t i ons , i s t ha t co r r e c t ?

9 A Ye s .

10 Q The MKA c ap i t a l wa s i nv e s t i ng i n s i ng l e - f am i l y

11 home s , wa sn ' t i t ?

12 A Ye s .

13 Q Wa s i t p r ov i d i ng t he pu r cha s e o f t he home s , o r wa s

14 i t i n t he subp r i me mo r t gage bus i ne s s?

15 A My unde r s t and i ng wa s t ha t t he y we r e p r ov i d i ng

16 f i nanc i ng t o de v e l ope r s t o ge t t he cons t r uc t i on

17 go i ng .

18 Q And a s I unde r s t and i t , t he y ' r e i n bank r up t c y?

19 A I don ' t know .

20 Q O f a l l o f t he r e a l e s t a t e a v a i l ab l e t o you , why

21 wa s t ha t an a t t r a c t i v e i nv e s t men t t o you?

22 A P r i ma r i l y , t o us , i t wa s s t r uc t u r ed a s a

23 mon t h l y - r e t u r n v eh i c l e . I n o t he r wo r ds , i t had

24 t he l ook o f a l oan . I n o t he r wo r ds , we made t he

25 i nv e s t men t , t he y pa i d us 1 pe r c en t pe r mon t h , bu t

136

1 p l us a ba c k - end i nc en t i v e ba s ed on t he i r

2 p r o f i t ab i l i t y .

3 Q So i t wa s go i ng t o g i v e you ne eded c a sh f l ow?

4 A Tha t wa s one o f t he op t i ons . Ca sh f l ow wa s an

5 op t i on , o r r e i nv e s t men t wa s an op t i on .

6 Q Wha t d i d you t a k e?

7 A We t ook bo t h i n d i f f e r en t c a s e s .

8 Q When d i d you do one , and when d i d you do t he

9 o t he r ?

10 A I don ' t r e c a l l . I t h i nk we s t a r t ed ou t w i t h c a shPage 116

F e vo l a . t x t

11 f l ow and t hen sw i t ched t o a c c r ua l , wh i ch i n

12 r e t r ospe c t , we shou l d ha v e done t he oppos i t e .

13 Q D i d you i nv e s t i ga t e t he peop l e who r an MKA t o s e e

14 wha t t he i r t r a c k r e co r d wa s , whe t he r t he y had be en

15 i n t r oub l e be f o r e w i t h t he l aw , w i t h t he SEC ,

16 any t h i ng abou t t he i r ba c kg r ound?

17 A The r e we r e ba c kg r ound che c k s done on M i cha e l

18 Ab r aham and J a son Suga r man . I don ' t r e c a l l whe r e

19 t he y ended up , bu t t he y we r e done .

20 Q Who d i d t ha t ?

21 A I t h i nk - - we l l , t he y we r e i n i t i a l l y p r ov i ded t o

22 us f r om Joe .

23 Q Joe Aa r on?

24 A Ye s , be c aus e Joe - - t he i nv e s t men t wa s i nd i r e c t

25 f r om Be a t i s .

137

1 Q And wou l d i t ha v e a f f e c t ed you r j udgmen t t ha t he

2 had done t he ba c kg r ound che c k t o know t ha t he wa s

3 be i ng pa i d mone y by t hem? Do you t h i nk t ha t wou l d

4 ha v e had any e f f e c t on you r j udgmen t t o f i nd ou t ?

5 A I f I r e c a l l co r r e c t l y , t he ba c kg r ound che c k s we r e

6 done by an i ndependen t pa r t y .

7 Q D i d you s e e t hem on pape r ?

8 A I be l i e v e I d i d , and t he y shou l d be i n t he f i l e .

9 Q D i d RangeT r e e e v e r f und any po l i c i e s on i t s own

10 s epa r a t e f r om you guy s , o r d i d t he y j us t b r i ng t he

11 po l i c i e s t o t he t ab l e?

12 A I don ' t r e c a l l .

13 Q D i d you ha v e any de a l i ngs w i t h Dan M i l l e r a f t e r

14 ' 05?

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F e vo l a . t x t 15 A No .

16 Q Do you know why t he y d r opped ou t o f t he p i c t u r e?

17 A I don ' t .

18 Q Aga i n , a c co r d i ng t o you r c i r cu l a r s , RangeT r e e wa s

19 an i mpo r t an t sou r c e f o r you , and a l l o f a sudden ,

20 i t d i s appe a r s . Why d i d i t d i s appe a r ?

21 A My r e co l l e c t i on i s t ha t Dan M i l l e r go t ou t o f t he

22 bus i ne s s , i s my r e co l l e c t i on , and t hen Be au Ga yne r

23 p i c k ed up t he bus i ne s s .

24 Q D i d you e v e r ana l y z e t ha t g i v en a l l o f t he peop l e

25 t ha t had t he i r hands i n t he po t he r e i n l i f e

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1 i nsu r anc e p r em i um f i nanc i ng , t ha t when a po l i c y

2 wou l d e v en pa y ou t , how much o f t ha t mone y wou l d

3 a c t ua l l y go ba c k t o t he i nv e s t o r g r oup?

4 A On l y f r om - - my conc e r n wa s f r om t he s t andpo i n t o f

5 wha t we we r e s i gn i ng up f o r , and we we r e s i gn i ng

6 up f o r t h i s embedded i n t e r e s t r a t e p r i ma r i l y . And

7 f r om ou r pe r spe c t i v e , t he embedded i n t e r e s t r a t e

8 wa s su f f i c i en t g i v en wha t ou r i nv e s t o r r equ i r emen t

9 wa s .

10 Q Ex c ep t t he embedded i n t e r e s t r a t e wa s a f i c t i on?

11 A I t wa s an a c c r ua l , i t depended on an e x i t

12 s t r a t egy .

13 Q Bu t i t wa s a f i c t i on un l e s s you cou l d ma k e good on

14 an e x i t s t r a t egy , wh i ch had no t r a c k r e co r d?

15 A The r e we r e s a l e s . I t wa sn ' t t ha t t hos e po l i c i e s

16 we r e ne v e r so l d , bu t we knew t ha t t ha t cou l d

17 happen . Ou r s ens e a r ound t he ma r k e t p l a c e wa s t ha t

18 t he r e we r e p l a y e r s i n l a r ge enough s i z e t o ma k e a

19 ma r k e t , and we made a p r o j e c t i on t ha t t he y cou l dPage 118

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20 s e l l .

21 Q Do you know wha t a " bank p r e t z e l " i s?

22 A No .

23 Q I t i sn ' t a t e r m you us ed me an i ng p r e f e r r ed s t oc k

24 i n a bank?

25 A I t ma y ha v e be en , bu t I don ' t r emembe r .

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1 Q We l l , t ha t ' s qu i t e an unusua l t e r m . So you don ' t

2 r emembe r i t ?

3 A I don ' t r emembe r .

4 Q Do you know wha t " 20 / 20 " wa s t o ge t t o i nv e s t , why

5 J i m wan t ed 20 / 20 t o i nv e s t w i t h you guy s?

6 A The 20 / 20 g r oup wa s a g r oup o f o t he r adv i so r s , and

7 we me t pe r i od i c a l l y t o t a l k abou t ou r s t r a t eg i e s ,

8 and we sha r ed some o f ou r i nv e s t men t cho i c e s

9 amongs t e a ch o t he r . I t s i mp l y wa s , i f t he y we r e

10 i n t e r e s t ed , po t en t i a l l y , t he y cou l d i nv e s t a s

11 we l l .

12 Q The o f f e r i ng memo r andum you r e c e i v ed f r om Joe

13 Aa r on whe r e i t de s c r i be s , and I w i l l t e l l you t he

14 SEC us ed i t ; i t wa s Exh i b i t 10 , de s c r i b i ng t h i s

15 i nsu r anc e t h i ng , t he i nsu r anc e p r em i um i nv e s t men t

16 a s a spe cu l a t i v e i nv e s t men t , you ' r e s a y i ng t ha t

17 g i v en t ha t i t wa s i n t he o f f e r i ng memo r andum ,

18 be c aus e t he y ha v e t o be so cons e r v a t i v e , i t

19 wou l dn ' t ha v e had any e f f e c t on you , t hos e wo r ds?

20 A I t h i nk any - - mos t , t he ma j o r i t y o f a t t o r ne y s who

21 pu t t oge t he r t he documen t s , any t h i ng t ha t doe s no t

22 spe c i f i c a l l y r e l a t e t o equ i t i e s o r f i x ed i ncome

23 wou l d i nc l ude t ha t k i nd o f l anguage . I t wou l dn ' t

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F e vo l a . t x t 24 su r p r i s e me . I t wou l dn ' t be ou t o f t he o r d i na r y .

25 Q The documen t s de s c r i bed you ha v i ng a f a l l i ng - ou t

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1 w i t h Joe Aa r on . Do you r e c a l l ha v i ng any k i nd o f

2 f a l l i ng - ou t w i t h h i m?

3 A We we r e ne v e r c l os e . I me an , we had a d i f f e r en t

4 app r oa ch , a d i f f e r en t s t y l e o f i n t e r a c t i on .

5 Q D i d you e v e r ha v e any d i s ag r e emen t w i t h h i m on

6 po l i c y o r e t h i c s o r any t h i ng you c an t h i nk o f ?

7 A Un t i l ne a r t he end o f my t enu r e , when we we r e

8 ha v i ng f a i r l y f r equen t conv e r s a t i ons abou t s a l e s ,

9 t hos e we r e he a t ed a t t i me s abou t wha t wa s

10 happen i ng ; wha t wa s no t happen i ng .

11 Q I sn ' t i t t ha t you t hough t you we r e be i ng e i t he r

12 m i s l ed , o r he wa s l e ad i ng you on i n de s c r i b i ng

13 po t en t i a l s a l e s t ha t , i n f a c t , ne v e r a c t ua l l y c ame

14 t o be?

15 A I t h i nk my a s s e s smen t o f t he p r ospe c t o f t h i ngs

16 and h i s a s s e s smen t we r e some t i me s d i f f e r en t : he

17 t ended t o be a l i t t l e mo r e op t i m i s t i c t han I wa s .

18 Q And you r a s s e s smen t be c ame qu i t e nega t i v e s t a r t i ng

19 i n ' 07?

20 A I t mov ed a l ong a con t i nuum , c e r t a i n l y . I t wa sn ' t

21 one da y I wok e up and s a i d , " Oh , my God , t h i s i s

22 go i ng t o he l l , t he ma r k e t i s t i gh t . "

23 Q I wan t you t o - - I know you ha v e t o go , bu t a s o f

24 De c embe r o f ' 08 , i f I t o l d you t ha t M r . Aa r on s a i d

25 t ha t he ne v e r l os t mone y on a po l i c y un t i l

141

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2 e xpe r i enc e whe t he r t ha t wa s a t r ue s t a t emen t o r

3 no t ?

4 A My r e co l l e c t i on i s t ha t t he r e we r e a coup l e o f

5 po l i c i e s t ha t d i d no t r e t u r n t he p r o j e c t ed

6 v a l ua t i on . Whe t he r t ha t c ame i n a s a sho r t f a l l i n

7 t e r ms o f a r e t u r n o r an a c t ua l l os s , I don ' t

8 r emembe r t oda y , bu t t he r e c e r t a i n l y we r e po l i c i e s

9 t ha t d i d no t me e t p r o j e c t i ons .

10 Q Wa s t he r e a , i n Quad r i mus , wa s t he r e a f ou r t h

11 pa r t ne r e v e r i n Quad r i mus?

12 A No t t o my know l edge .

13 Q The r e wa s , a s be s t c an be de t e r m i ned ,

14 $3 . 72 m i l l i on d i s t r i bu t ed t ha t wou l d come ou t - -

15 s t r i k e t ha t .

16 I f you l ook a t a p r e v i ous e xh i b i t , i t

17 wa s ou r e xh i b i t , I f o r go t ou r numbe r on i t , bu t

18 l ook a t t h i s . I t s a y s t he r e a r e f ou r pa r t ne r s

19 a c co r d i ng t o a documen t you f i l ed w i t h t he I RS .

20 A Ok a y .

21 Q You ' r e s a y i ng t ha t documen t wa s w r ong?

22 A I wa s no t awa r e o f a f ou r t h pa r t ne r .

23 Q I n t e r ms o f whe r e t he mone y f o r Quad r i mus c ame

24 f r om , do you know i f i t c ame f r om t he a c t ua l

25 i nsu r anc e agen t s , o r d i d t he mone y come f r om t he

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1 agen t s t o t he agg r ega t o r s t o Quad r i mus? How d i d

2 t he mone y f l ow?

3 A I don ' t t h i nk I e v e r - - we l l , I don ' t r e c a l l t he

4 f l ow . And s i nc e t ha t wa s wha t Tom d i d , I don ' t

5 know a c t ua l l y .

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F e vo l a . t x t 6 Q Aga i n , s i nc e Tom i s no t r ep r e s en t i ng t he i nsu r anc e

7 agen t s a s t he i r agen t - - wa s he r ep r e s en t i ng t he

8 i nsu r anc e agen t s a s t he i r agen t ?

9 A I don ' t know t he na t u r e o f t he r e l a t i onsh i p

10 be t we en Tom and t he agen t s .

11 Q Wa s he an agen t f o r t he agg r ega t o r s?

12 A I don ' t know .

13 Q Wa s he an agen t f o r you?

14 A No .

15 Q So t he o r i g i na l mone y t ha t ' s be i ng pa i d t o Tom

16 R i e k , why i s Tom R i e k ge t t i ng any t h i ng?

17 A I ' m no t en t i r e l y c e r t a i n . My o r i g i na l

18 unde r s t and i ng wa s t he r e wa s so r t o f f i nde r ' s f e e

19 so r t o f a r r angemen t w i t h Tom .

20 Q F r om whom t o whom?

21 A As Tom a s a consu l t an t t o Wood , Ha t & S i l v e r .

22 Q Bu t Wood , Ha t & S i l v e r wa s ge t t i ng pa i d s epa r a t e l y

23 f r om you guy s , we r en ' t t he y?

24 A The r e wa s a managemen t f e e f o r t he a s s e t s unde r

25 managemen t .

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1 Q Bu t t he y we r e a l so be i ng pa i d by t he s ame peop l e

2 pa y i ng Quad r i mus , we r en ' t t he y?

3 A I d i dn ' t know t ha t . I don ' t know t ha t .

4 Q Le t me pu t i t t h i s wa y : The mone y t ha t R i e k wa s

5 ge t t i ng f r om , whe t he r he wa s ge t t i ng i t f r om t he

6 agen t s o r ge t t i ng i t f r om t he agg r ega t o r s , R i e k

7 wa sn ' t b r i ng i ng t he mone y f o r t he s e po l i c i e s t o

8 t he t ab l e ; you and J i m we r e , we r en ' t you?

9 A F r om G r yphon t o Be a t i s .

10 Q We l l , and i t wa sn ' t j us t G r yphon ; i t wa s Wa t chPage 122

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11 S t one?

12 A And Wa t ch S t one a s we l l .

13 Q And you b r ough t c l os e t o $100 m i l l i on t o t he

14 t ab l e , d i dn ' t you?

15 A I don ' t know wha t t he numbe r wa s . Tha t numbe r

16 s e ems t oo h i gh t o me . I t h i nk you ma y be doub l e

17 coun t i ng . I n o t he r wo r ds , we cons i de r ed i t

18 be t we en t he Be a t i s i nv e s t men t and t he B r own

19 i nv e s t men t . I don ' t t h i nk t hos e t wo comb i ned on

20 t he f i r s t r ound wa s mo r e t han $40 m i l l i on , and on

21 t he s e cond r ound , p r obab l y no t mo r e $40 m i l l i on

22 e i t he r .

23 Q I ' m go i ng t o show you Exh i b i t No . 38 and Exh i b i t

24 No . 69 . He r e i s 69 ; he r e i s 38 . Ac co r d i ng t o

25 t h i s , a s s e t s unde r managemen t f o r G r yphon and

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1 a s s e t s unde r managemen t f o r Wa t ch S t one t o t a l

2 abou t , and t h i s i s j us t 2005 , t o t a l a l mos t

3 $100 m i l l i on , doe sn ' t i t ?

4 A I s e e t ha t .

5 Q We l l , i sn ' t t ha t wha t t ha t s a y s? You p r oduc ed

6 t h i s , d i dn ' t you?

7 A Ye s .

8 Q And mos t o f t ha t mone y wa s i n Be a t i s and B r own?

9 A R i gh t , and a t t ha t po i n t , ha l f o f Wa t ch S t one wa s

10 MKA - - we l l , 40 pe r c en t anywa y .

11 Q I unde r s t and , bu t t ha t changed , I j us t p i c k ed

12 up - - I c an go l a t e r i f you doub t i t . He r e I ' l l

13 show you Exh i b i t 79 , t h i s i s Wa t ch S t one . Aga i n ,

14 i t s a y s $55 m i l l i on i n Nov embe r ' 08 . I t s a y s you

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F e vo l a . t x t 15 ha v e $55 m i l l i on i n f und a s s e t s . We r en ' t mos t o f

16 t hos e i nv e s t ed i n Be a t i s and B r own?

17 A 38 pe r c en t o f t he f und i s MKA , so ha l f o f t he

18 f und . I f you i nc l ude t he o r i g i na l , SageC r e s t , 10

19 pe r c en t , wh i ch , obv i ous l y , d i dn ' t pan ou t . So

20 ha l f t he f und i s no t w i t h Be a t i s , w i t h B r own .

21 Q I t ' s s t i l l a s i z ab l e amoun t o f mone y?

22 A Bu t i t ' s no t $100 m i l l i on ; i t wa s ne v e r r e a l l y

23 mo r e t han $40 m i l l i on i n d i f f e r en t po i n t s o f t i me ,

24 I don ' t t h i nk .

25 Q $40 m i l l i on i n i nsu r anc e p r em i um f i nanc i ng , among

145

1 a l l o f t he f unds?

2 A My v ague r e co l l e c t i on i s $40 t o $45 m i l l i on .

3 Q And t he r e s t o f i t wa s t hen i n MKA?

4 A O t he r t h i ngs .

5 Q The ne x t b i gge s t amoun t you ha v e i s - -

6 A MKA , y e s .

7 Q - - wa s i n MKA?

8 A Ye s .

9 Q And t hen you ha v e S t r a t eg i c?

10 A Be a r i n m i nd , aga i n , t ha t depend i ng on when t hos e

11 we r e p r oduc ed , i t ma k e s a d i f f e r enc e .

12 Q Th i s one i s Nov embe r o f 2008?

13 A Bu t t ha t doe sn ' t me an i t wa s p r oduc ed i n Nov embe r

14 2008 . I don ' t know when you go t t ha t , and when

15 t ha t wa s r e v i s ed . The s e we r e a l l r e v i s ed abou t

16 t h r e e t i me s , a t l e a s t . Mu l t i p l e r e v i s i ons we r e

17 made t o t he s e news l e t t e r s go i ng ba c k ba s ed on

18 aud i t s e v e r y suc c e ed i ng y e a r . I f you a s k an

19 i nv e s t o r who k ep t t hem a l l , t he y p r obab l y ha v ePage 124

F e vo l a . t x t

20 f ou r o r f i v e cop i e s o f t he s ame mon t h be c aus e t he y

21 we r e r e v i s ed a f t e r t he aud i t s we r e comp l e t ed . And

22 t hos e aud i t s s t r a i gh t ened ou t t he numbe r s ba s ed on

23 t he aud i t o r ' s conc l us i ons , so i t ma k e s a

24 d i f f e r enc e a s t o wha t r e v i s i ons you ha v e a s t o

25 wha t a c t ua l l y wa s oc cu r r i ng a t t ha t po i n t .

146

1 Q I s t he r e a wa y t o t e l l , doe s i t s a y " r e v i s ed , "

2 onc e , t w i c e , t h r e e - -

3 A The y d i d a t some po i n t , and I don ' t know when t ha t

4 con t i nued o r s t opped .

5 Q So t he r e i s no wa y f o r me t o t e l l f r om t he

6 documen t s I ha v e wha t wa s r e v i s ed and wha t wa sn ' t ?

7 A I t doe sn ' t appe a r t ha t you ha v e t he r e v i s ed

8 documen t s .

9 Q And i s t he r e any code o r any wa y I c an t e l l on any

10 o f t he s e documen t s wha t i s t he r e v i s ed one v e r sus

11 wha t my c l i en t s ga v e me?

12 A The r e wa s a pe r i od o f t i me when , I be l i e v e when we

13 s t a r t ed r e v i s i ng t hem , when i t r e f l e c t ed t ha t

14 t hos e we r e t he r e v i s i ons , and whe t he r t ha t wa s

15 f oo t no t ed a t t he bo t t om , o r on t he ba c k on t he

16 bo t t om , I don ' t r e c a l l .

17 Q So i n Exh i b i t 51 , i t s a y s t ha t G r yphon ha s

18 $62 m i l l i on i n f und a s s e t s i n Augus t o f 2007 .

19 You ' r e s a y i ng mos t o f t ha t wa sn ' t i n i nsu r anc e

20 p r em i um f i nanc i ng i n Augus t o f 2007?

21 A I f you l ook a t t he ba c k , 23 pe r c en t o f MKA i s no t

22 i n t he i nsu r anc e f i nanc e . Go t o t he r i gh t ,

23 s t a r t i ng w i t h SageC r e s t , and t hen e v e r y t h i ng t o

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F e vo l a . t x t 24 t he r i gh t o f SageC r e s t ; a l l no t i n p r em i um

25 f i nanc e . So wha t doe s t ha t add up t o? Then you

147

1 c an add t hos e numbe r s t oge t he r . My susp i c i on i s

2 t ha t a t mos t , i t ' s ha l f , i f t ha t much .

3 Q Wa s i n i nsu r anc e p r em i um f i nanc i ng?

4 A R i gh t .

5 Q Now , when you so l d ou t , t he r e we r e t i me s when you

6 a c t ua l l y go t r edemp t i ons on some o f t he s e t h i ngs ,

7 d i dn ' t you : $12 m i l l i on one t i me , r i gh t ?

8 A Redemp t i on f o r ?

9 Q F r om s e l l i ng ou t , c a sh i ng mone y ou t o f G r yphon?

10 A F r om ou r i nv e s t o r s , o r f r om ou r i nv e s t men t s i n t o

11 o t he r peop l e?

12 Q You r i nv e s t men t s i n Be a t i s .

13 A Oh , y e s .

14 Q You r ede emed c e r t a i n i nv e s t men t s i n Be a t i s - -

15 A Ye s .

16 Q - - and go t c a sh?

17 A Ye s .

18 Q Wha t d i d you do w i t h t ha t mone y?

19 A The l a r ge s t one t ha t you ma y be r e f e r r i ng t o wa s ,

20 mo r e o r l e s s , an a c coun t i ng t r ans a c t i on o f

21 s eg r ega t i ng t he MKA i nv e s t men t ou t o f Be a t i s and

22 d i r e c t l y t o us . We d i d t ha t a t one po i n t .

23 Q So i t wa sn ' t a c t ua l l y a l i qu i da t i on o f mone y t hen?

24 A The r e we r e pe r i od i c l i qu i da t i ons . And a t one

25 po i n t , we on l y had l i qu i da t i ons , bu t t he r e wa s

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1 a l so an a c coun t i ng t r ans a c t i on , and I be l i e v e a tPage 126

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2 t he end o f one o f t he y e a r s : 2007 , 2006 .

3 MR . MELN I CK : Le t me t a k e f i v e m i nu t e s

4 t o t a l k , and t hen we c an l e t you go .

5 ( D i s cus s i on o f f t he r e co r d . )

6 ( P r oc e ed i ngs conc l uded a t 1 : 36 p . m . )

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5 I , KAREN RENEE , a Cou r t Repo r t e r and

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F e vo l a . t x t 6 No t a r y Pub l i c i n and f o r t he S t a t e o f W i s cons i n , do

7 he r eby c e r t i f y t ha t t he abov e depos i t i on o f S I MONE

8 FEVOLA wa s r e co r ded by me on J anua r y 4 , 2011 , and

9 r educ ed t o w r i t i ng unde r my pe r sona l d i r e c t i on .

10 I f u r t he r c e r t i f y t ha t I am no t a

11 r e l a t i v e o r emp l oy e e o r a t t o r ne y o r couns e l o f any o f

12 t he pa r t i e s , o r a r e l a t i v e o r emp l oy e e o f such a t t o r ne y

13 o r couns e l , o r f i nanc i a l l y i n t e r e s t ed d i r e c t l y o r

14 i nd i r e c t l y i n t h i s a c t i on .

15 I n w i t ne s s whe r eo f I ha v e he r eunde r s e t

16 my hand and a f f i x ed my s e a l o f o f f i c e a t Bu r l i ng t on ,

17 W i s cons i n , t h i s 10 t h da y o f J anua r y , 2011 .

18

19

20 _________________________________ No t a r y Pub l i c 21 I n and f o r t he S t a t e o f W i s cons i n

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23 My Comm i s s i on Exp i r e s : Ma r ch 11 , 2012 . 24

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4 I , S I MONE FEVOLA , do he r eby c e r t i f y t ha t

5 I ha v e r e ad t he f o r ego i ng t r ans c r i p t o f p r oc e ed i ngs ,

6 t a k en on J anua r y 4 , 2011 , a t Me l n i c k & Me l n i c k , 10555

7 No r t h Po r t Wa sh i ng t on Road , Su i t e 202 , Mequon ,

8 W i s cons i n , and t he s ame i s t r ue and co r r e c t , e x c ep t f o r

9 t he l i s t o f co r r e c t i ons no t ed on t he anne x ed page .

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11 Da t ed a t ______________________________

12 t h i s _______da y o f ____________________ , 2011 .

13

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15 _________________________

16 S I MONE FEVOLA

17

18 Subs c r i bed and swo r n t o be f o r e me t h i s_________da y o f ___________ 2011 19

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21 _________________________ No t a r y Pub l i c 22

23 My Comm i s s i on Exp i r e s : 24

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