20090813b Exhibits To Motion For Discovery

u.s. Department of Justice U.S. Federal Bureau of Investigation

t.o In Reply, Please ReIer to

FIle No

450 Golden Gate Avenue San Francisco, CA 94102 February B, 1991

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II Mr. william T. Mc Givern

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united states Attorney Northern District of California 450 Golden Gate Avenue P.O. Box 36055 San Francisco, California 94102 Attn:

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Mr. Michael Yamaguchi

u.s. Attorney Assistant U.S. Re:

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Chip Armstrong, dba Hamilton Taft and Company company ~'Plaza, #1 Market "Plaza, Spear s~et Tower San Frqncisco, Fr~cisco, Ca 94105 Possi91e Possi~e Fraud by Wire, Wirer Tax raud 00: San Francisco

Dear Mr. Mc Me Givern: SUbmitting the following information to Our office is submitting you for a prosecutive opinion as to 'whether a violation of Federal Law has taken place.

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The San Francisco Division first became cognizant of the existence of Hamilton Taft and Company in August of 1988 when Il ~as interviewed at our office. I I was the co-founder of Hamilton Taft and the other founder was one, .I I who founded the company in ,1979. 1979 • For your information r Hamilton Taft is a service company which provides. a information, tax paying service on behalf of their clients. Hamilton Taft and Company collects money from their ~us clients and in turn state~ and local income pays their clients various feder~, staee~ 1 - Addressee 196A-2868 1 - 196A-2B6B

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taxes. Unemployment taxes and other various tax liabilities are also paid by Hamilton Taft. When a company becomes a client of Hamilton Taft, it notifies Hamilton of the companies payroll dates, pertinent payroll information, the state in which the

company is required to pay taxes and the type of taxes which need to be paid and on what dates. Hamilton collects monies from these various clients and in turn pays the clients tax obligation whether they be local, county, state and/or federal income taxes, unemployment taxes and/or other tax liabilities. b7C I I advised that when a client company enrolls with Hamilton Taft, the company notifies Hamilton of its payroll dates, pertinent payroll information the state in which the company is required to pay taxes and the type of taxes which need to be paid. The company then remits to Hamilton Taft on a timely basis its payroll tax liability. The client company will also remit funds to Hamilton Taft which would be used to pay the aforernentionedtax liabilities. Historically the funds were either wired to a Hamilton Taft Impound Account each time a payroll is paid by the company or Hamilton Taft gains access to the companies account by a depository transfer check. Hamilton Taft was also responsible for filing all

applicable federal, state, county and local tax filing

information on behalf of its client and pay their various taxes as they become due for the service Hamilton Taft charges its clients a fee based on the number of times a client renders a payroll and the number of areas taxing agencies which have to be ultimately paid. Hamilton Taft also receives the interest in which it can generate on the funds its clients deposit with it. All this information is revealed to the client prior to a contract being entered into by the client and Hamilton Taft. This is also done orally by Hamilton Taft's sales representatives.

As Hamilton Taft grew, the company became concerned with what its liability may be with the funds they were collecting on behalf of their clients. Because of this internal concern in 1981, the firm contacted Baker and McKenzie Attorney's at Law, 555 California street, San Francisco, California, 94104 and requested that this firm provide Hamilton with an opinion of the characterization of the funds it was holding on behalf of its clients for tax payments. On October 29, 1981, Baker and McKenzie issued an opinion that basically stated that at the time a payroll is rendered, that is paid by the employer, the funds representing the withheld taxes belong to the federal government. The employer becomes a trustee for those funds and as such the duties and responsibilities of a trustee are mandated under common law. 2

Exhibits to Motion for Discovery - Page 2

In addition various state and federal law mandates how a trustee needs to act in his capacity as a trustee. "'.

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Although Hamilton Taft is not the employer but an independent agent, it was the opinion of Baker and McKenzie that the funds are still trust funds and the holder of these funds (Hamilton Taft) still bears the responsibility of a trustee.

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When interviewed by the Federal Bureau of Investigation ~~ ~ 1988, II stat,e that some <:i::i:::(FBI) in August of 1.988, I went so far as to state ~~':::j.~;.;.~ individuals representing clients have stated that the collected "t:~,;~.'-.""'~~"~ account separate from other funds .,... ~ ."~ funds need to be put in a bank a'ccount ,~­ addition~ during his tenure at ~ of that particular entity. In addition, L~:::: :i;. ~;: "'~~,:~ Hamilton Hamil ton Taft, Hamilton Hamil ton ,Taft considered themselves to be trustees '-..I...Q·?,i "'-t..it ~i -'. , for those funds on behalf of the various taxing {[~'t:c; agencies. :L:"t>:;; . ~ "~ i.' ~~~

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By way of background information, Byway stated that in August of 1984, Hamilton Taft was sold to the Cigna.Corporation Philadelphia, the large insurance conglomerate out of philadelphia, Pennsylvania and Hartford, Connecticut. At that time, Hamilton Taft had approximately 900 corporate clients and was -handling handling on '"a daily basis, approximately $100,000,000 in client deposits. "a

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According to a personality conflict developed between himself and one formally Executive Vice W 0 was placed by that corporation President of cigna Corporat~on w as the person in charge of Hamilton Taft's operation. Because of be~enlI lonel I tbe persynality differences between the Ilandl and I lone I Jwas was appointed as President of Hamilton Taft.

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Shortly after leaving ,Hamilton Hamilton Taft in the latter half~\ of 1985, Istated he became aware that I1 19~5,1I ,1stated th. at Hamilton Taft started stc;rted approx1mately $100,000 per month. He noted that while whlle he ('(. to lose approximately was President of Hamilton Taft, that the company although not highly profitable, was able to stay in a slight profit position. He understands that Hamilton Taft hired another President but'the lose, money in C.igna and soon thereafter company continued to lose Hamilton "Taft. began to look for a buyer for Hamilton·Taft. In December of 1987, Maxphrama Incorporated of Dallas, Texas paid $500,000 to Cigna Corporation as a down payment for the purchase of Hamilton Taft. On February 29, 1988, Maxphrama Incorporated completed 'its .' purchase of Hamilton Taft from Cigna Corporation. /

onel I____~'also ~also stated to onel I former Executive Vice President in charge of operations for Hamilton Taft provided foregoing information. r--1allegedly toldl Ion him with the foreqoin: Ion 27,1988 thatC that~ February 27,1.988 I ~iml I! transfer $5,000,000 by wire transfer to a brokerage house in New brl~ans, Louisiana called the Howard Wiel Labluisse Friedricke Investment Security Incorporated. Allegediy~toldl Al1eqediy~toldl I that this wire td'"purchase B111 at 5 1/2% interest. r I transfer was to' purchase a Treasury Blll Iwhy she was purchasing a Treasury" Birr-allegedly asked I Treasury'Bi~

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I would not respond to with such a short yield period, I Mayl s question and just told him to do it. c:::Jtold! c::::::J told! May's II that exclusive~stomer funds which were put on the $5,000,000 was exc1usive~stomer ~that deposit with Hamilton Taft. ~told' ~toldl Ithat at the time the transfer was made, Hamilton Taft did not have any funds of its own. ~ __I noted that the form 8-K ~_...II a-K report which,. which. was filed in -'-'. -"', for the the Securities Exchange Commission (SEC) by Maxphrama far \ purchase of Hamilton Taft, Maxphrama states it has used a \ $5,000,000 Treasury Bill to secure a promissory note which funds i were used to conclude the ~urchase of Hamilton Hamilton' Taft from Cigna ~' Corporation. According to tal1 Itold him that these funds ~; had been transferred to th~s brokerage firm from customer funds ~ toL' in the custody of Hamilton Taft. According to L' . I~ also f ;~~" Ihad directed him to wire transfer $50,000 advised thatl that 1-; . i ,~):..: ! ,~ in an unrelated transaction.

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fs In order to assist you in preventing your opinion from a historical point of view~ view;~e - , Yle are enclosing a copy of the actual r ~I~ I with appropriate copies of -J /~'~ FD-302 noting interview Of, of, /~;-1:\'1\ to our agent. --/-t documents provided byl by' -,,/'r (>, (:!l. G '-'

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~ ~ Il was also interviewed in December of I~--:===~Ih~a~d~b~e~e~n~hiiredby Hamilton Taft as Treasurer1988. l---===~Ih~a~d~b~e~e~n~h~ired ~J I is a Certified Public Accountant f~ Manager of the firm. I (CPA) having become a CPA in the state of ta~;f:rnia ~.: ~ I Ibasically stated that shortly after became \< President of Hamilton Taft, she told him t a sewall e making s e weu the day to day investment decisions regarding the funds of Hamilton Taft. She instructed him not to make any investment b7C unless she okayed them. He explained to her that any monies collected from the clients only had a two or three day "window" "windowll during Which which they could be invested prior to having to be paid to taxing entities. Thereafter, all investments he made, other than into commercial paper, were done at the direction ~ L I~ In connection with his responsibilitiesC: ~would I .Jwould assist in the preparation of the monthly financial statements for Hamilton Taft. Each month a meeting would be held to discuss a just completed financial statement for the previous month. At the close of such a meeting in April, 1988, after the close of lstated that he had a the April financial statements,l statements, I conversation with in her office. During this was bragging on the financial strength of conversation Maxphrama an ow axphrama was in the process of purchasing C & H Nationwide Incorporated, a specialized trucking company. Apparently, in order to sUbstanti~te herr her, statements and the _ the Hamilton financial strength of Maxphrama, she showedL statement which listed Hamilton Taft's assets in excess of 30,000,000. financial picture was quite different than the financial statements which he had prepared for Hamilton from the month month of of April, April, 1988. J3i{))~. x ~~'lJJ~~ l~.~'~~~~'~;} -{t7,:,: , :~: ~~'J~t::1JDL~~~ ~/~:.~~, the 1988. ~~t:;~;:~.t~:~;:,~~·~·~~~1; ~~s;C:;'°L~C; '1';:.~~.

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to~ pparent tol lin looking at the financial statement showed him that someone had taken the April, 1988 financ~a statements of Hamilton and re-did them. The financial statement prepared for Hamilton Taft showed its reta)U:d earnt'ngs at approximately $200,000. I, Istated he reta)u:d toldL _ . during this conversation that he thought the financ~al statements which she had showed him for Hamilton Taft were a fabrication and not rFpresenta~ive rl:prese:ta~ive of Hamilton Taft's _ actual financial condition. L ~ Jreplied that the people in Dallas were taking care of these f~nancial statements.

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~~~_rnoted ~~~~rnoted that the above incident concerning what he considered false and misleading financial statements was a major factor in his ultimate decision to sever his employment with Hamilton Taft. A copy of the interview form FD-302 the interview oil ofl I is incorporated as part of this communication.

onel It should also be noted that onel I was september of 1988 regarding his former employment interviewed in September with Hamilton Taft. At the time of this interview,c::J stated that he was self-employed as a consultant specializ~ng in employment taxes. He stated that prior to being self-employed, he was employed for five years with Hamilton Taft in San Francisco as their Chief Operations Officer and Executive Vice President. A copy of the interview conducted withc::J is attached hereto. united This matter was informally presented to the United states Attorney's office whioh which concluded that there was a lack of ((. States evidence to support the violation of any federal law at that time. Our case was subsequently closed. /.1'1I jj • OL..... !'.' Itt /$. ' .'.~...-,.•.'".-,.. ~/Dd tl~/ iJJ~~ w(J~ rJUV--i·_"'''' rJ~ . ..,..,,~.fJ _~,~M:., ?1'D(j~~, _.fJ. M:.,..... I

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-the. office o~fiqe receiyetf receiy..etf S/,.; }';:A, :..~j:A. On December 24, 1990 ,7 -the ~complaint SA) ~L .Cont.r~~ler "and CPA. I I Icall from one I ~Lcont.rf:)llerand I( stated that he was the current Controller of Hamilton Taft and was). . }11 that he was calling the FBI because he felt that his employer was} - (IRS) by not paying ta~es t'1~I:'~ (--/1'li'~ 1"1 I-J; I,ll ,'iiI cheating the Internal Revenue Service -(IRS) owing to not only the I~S but other taxing entities wh n th y 1. wh~n th~Y J t&~~ ;~~ 7J.n c11ent 7 ~advlsed that at least $20,000,000 1n cl~ent (l/I' rJIJ ' ! ~~:,t --~:'t wer,e due. I ladv1sed funds have been transferred to accounts controlled by Chip ':ljl,jj ~B~ .. Armstrong, the new CEO of Hamilton Taft. I I stated that Texi?-s. turdS were used to purchase one or more companies in Tex~s. ., _~ stated that Hamilton Taft had approximatel: 100 emp oyees in San Francisco in July of 1990. I t advised Armstrong is basically operating a Ponzi scheme, ut~lizing the tens of millions of dollars which are sent to Hamilton Taft for the ultimate payment of tax liabilities sustained by Hamilton Taft I s clients. I ~ Taft's I~ has documentation, to support his claims r~~ t; ~r\ ~r\';;; and is scheduled to present same to t~e FBI rBI on Jar;uary Jar:uary 13" ~991 =~t;;..~~ 7"~t:"S~'" <;; ~ at 10: 00 am. I ~s an ongolng ongo~ng , ;:;i.; ~:-% at, I furth 7r stated that th 7re 15 ~~% ~:s.: procedure for prov1d1ng ,_ ~::-< ~ prov1d~ng lul1J.ng lul11ng letters to cll.ents c11ents who actually ~ ~~~< complain z.~.~ ~, ~ comPlain to Hamilton Taft when they, the client, receive a late ~ t~·~ "-"" 'IV~'" "" ;= 'f\.~ ~ b: \ '.~, ~ s.;s;.-~.,--:: ~"\', ~ 'R ~ <

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notice from the IRS. , I~ states that a letter on Hamilton Taft stationery is generated to the IRS berating the IRS for having made an error in showing at least the front copy of a check drawn on Hamilton Taft/s Taft's checking account allegedly demonstrating that payment was actually made on a particular date for a particular tax liability. liability_ These checks were never sent to the IRS but a copy of the letter was sent to the client, thereby stalling the clients further inquiries. Please contact us at your earliest convenience so that we might discuss this matter in greater detail. sincerely yours, Sincerely RICHARD W. HELD

special Agent in Charge Special

By:

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Exhibits to Motion for Discovery - Page 6

(12J31JI99~) (l2/311199S)

FEDERAL BUREAU OF INVESTIGATION Precedence: To:

PRIORITY

Date:

San, FranC1SCO FranClSCO San

From:

Sacramento Contact:

Attn:

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02/10/1997

SA Will Hatcher

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Drafted By: _________1epg Dra.fted Case ID #: i: Title:

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196D-SF-93255

CONNIE CHIP ARMSTRONG, JR.; I Formerly dba HAMILTON-TAFT COMPANY FBW (D) (D);i MF; ITSP

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synopsis: Synopsis: Caples Cop~es of FD-302s and inserts enclosed from Sacramento flle ille 196B-1364. Reference:

196D-SF-93255 Serial 124

Enclosures:

FD-302 "FD-302 FD-302 FD-302 Insert FD-302 FD-302 FD-302 FD-302 FD-302 FD-302

of Ion 2/19/86 of Ion 3/12/86 Ion 5 /23/86 of of Ion 6/19/8 6 ~uoene. Oreoon a-c Euaene at:. reaon from 5/1 4 - 6/18/86 of Ion 6/2 5/86 Ion 8/7/86 of of Ion 9/17/86 of Ion 3131/8 3/3l!8 7 Ion 3 /25/87 of of Ion 4/7/8 7

ille 196B-1364 revealed Details: A review of closed Sacramento flle the above enclosed FD-302s and inserts .

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Exhibits to Motion for Discovery - Page 7

U.S. Departmen, ..If Justice Departmen • ..Jf Federal Bureau

of In veStlgatlOn vesngatlOn

450 Golden Gate Avenue San Francisco, California 94102

PleaBe Reier to In Reply, Ple:lBe File Ftle No

September 23, 1988

Russonie11o Joseph P. Russoniello states Attorney united States Northern District of california 450 Golden Gate Avenue Box 36055 San Francisco, California 94102

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Attention:

Mr. Floy Dawson u.s. Assistant U. S. Attorney

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PRESIDENT, dba

HAMILTON TAFT AND COMPANY, FRANCISCO 1 CALIFORNIA ; SAN FRANCISCO, UNKNOWN SUBJECTS, dba MAX PHARMA, INCORPORATED, 200 CRESCENT COURT, SUITE 1375, D~.s D~.E

TEXAS;

POSSIBLE WIRE FRAUD

Dear Mr. Russoniello: I

Referenced conference between Assistant u.s. U.S. Attorney Special Agent (SA) IJ on September 14, 1988. (AUSA) Michael Yamaguch~ and

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This letter is to confirm the above referenced conference in which SAl I delineated the details of the allegation and the resuI~s OI or his investigation to date regarding matter. AUSA Mike Yamaguchi indicated based on what captioned matter was presented to him as well as his examination of documentation pertinent to the captioned matter, there was insufficient I

1 - Addressee ,1 ~1 - San 'R'ES Ibfo ItES/bfo (2)

Franc~sco

((196A-2868)

. I , \ {J.• Exhibits to Motion for Discovery - Page 8{J.{

Mr. Joseph P. RU5soniello

evidence to support a violation of federal law at this time and he would therefore decline prosecution. AUSA Yamaguchi added if further information could be obtained regarding the allegations presented, he would reconsider his opinion. Based on AUSA Yamaguchi's declination, our office will close its investigation into the captioned matter. Very truly yours, RICHARD W. HELD

Special Agent in Charge

By:

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Spec2al Agent

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Exhibits to Motion for Discovery - Page 9

fD-302a (R.:v (R~v 11-15-83) lD-302a

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She said that it was apparent to her within the first twenty-four hours while reviewing Hamilton Taft financial records She said it was that Hamilton Taft was in a cash flow crisis. then her job to look at investments and/or loans to determine the income~ She was to likelihood of these assets generating any income. lf investments". insure that any future capital outflow was ureal investments • She found out that almost immediately after Maxpharma purchased Hamilton Taft from cigna corporation that Hamilton Taft client funds were wire transferred out of Hamilton Taft. These funds were in the form of notes and were booked at Hamilton Taft as investments. But she saw no evidence of an attempt to collect on these notes by Hamilton Taft. She said that some of the transactions were incredibly complicated.

She said that she had frequent meetings concerning these notes with Hamilton Taft officers. She discovered that I chief Financial Officer, I (PHO) (PHD),, Chief Officer,l I PHO), Director of Operations, I 1 President ~ (PHD), lPresictent ~~~--~~~~(PHO), I(PHO), Comptroller, were the only Hamilton Taft off~cers that a knew about the loans by Hamilton Taft which Were outstanding and uncollected.

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She further explained that she recalls ten to fourteen million dollars in loans had left Hamilton Taft with no payments returning to Hamilton Taft. She discussed these loans with II Ibut with Ibut not withl All of these loans were "brokered lllJ through the Maxpharma office in Dallas, Texas. She discovered that Maxpharma officers would telephoner 1 at Hamilton Taft and instruct her to wire money to Ma~pharman Ma~pharma in Dallas a9d a9 d then a,~er the fact.Maxpharma would then send the notes toL San FranC1SCO.

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She felt that the officers at Hamilton Taft were of~ I oftenl IWQul~ accuse protective ofl I 10f jwas not IOf raiding the funds of Hamilton Taft.1 )was very helpful in her audit. She felt that this was because he was the person who actually wire transferred the funds from Hamilton alIas. She understood the process being that (FNU) allas. of Maxpharma in Dallas would Iwould then instruct o transfer un s an r---. . . . . .~o=-~wire the monies. I ~(PHO), r--"'--~o::-"~wire ~ (PHD), a director, often got irate at her inquiries regarding Hamilton Taft loans. A day or two after she started working at Hamilton Taft she discovered

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FD-302u (Re.v 11-15-83)

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a "funny" transaction where two to three million dollars of Hamilton Taft funds was wired to Dallas, Texas. She understood thatl ~were working on some deal to raise funds. She was told that these funds were supposedly to be used to "recapi talize" Hamilton Taft. I linstructed her that the details of the transaction was none of her business l but she believes that the funds went to either Amerimac Company in California or to Gulftex, a real estate business in Texas.

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~said that from her examination of Hamilton Taft financ1ai records she discovered that all the funds sent out for these loans had to be dedicated Hamilton Taft client funds. She said that' lhad to know that Hamilton Taft client funds were being used to finance these lactually assisted in investments. She understood thatl One of these loans the creation of the notes to Hamilton Taft. in 1988 in the amount of approximately $200,000.00 was to a CONNIE CHIP ARMSTRONG, JR. business in Dallas, Texas by the name of Dresdner Corporation (PHD).

She said thatl

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Sales Manager, and

1~------------l(PHO), Vice Presldent of dperations, at Hamilton

Taft were

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concerned and upset at the news of the loans. These loans violated Hamilton Taft's written cash management policy which stated that Hamilton Taft can onJY invest client funds in safe overnight type of investments. I said that she recalls that most of the notes for the 1988 loans were for a 90 or 180 day period. She stated that in or around March 1989 resigned. Iwas fired byl

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She said that Arthur Anderson C.P.A. firm withdrew from the Hamilton Taft audit a couple of days after they gave Hamilton Taft their appointment letter. At that point she said that management at Hamilton Taft felt that Hamilton Taft did not have enough interest money to pay Arthur Anderson. Therefore, Hamilton Taft did not receive any audited financial statements to EDS one give the increasingly concerned Hamilton Taft clients. of Hamilton Taft's largest clients was requesting audited financial statements.

I 'said that she started taking legal action on the debtors at the notes to Hamilton Taft. She was taking aggressive collection acti~she felt that she could have rates if not for collected on the Amerimac'L----Jandl Exhibits to Motion for Discovery - Page 11

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the ARMSTRONG takeover of Hamilton Taft in March of 1989. She ~ and Amerimac notes totaled approximately $6 million dollars. She personally told ARMSTRONG at the Petit and Martin law offices about the notes outstanding and her collection efforts at Hamilton Taft. She told him that he should be able to collect on some of these loans. She said that he did not seem interested.

said that the I

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She said that in March of 19891 I concluded that he was not able to recapitalize Hamilton Taft and that Hamilton Taft would have to file for Chapter Seven bankruptcy protection so he conceded Hamilton Taft to ARMSTRONG She recalls a $20 million dollar figure being used at Hamilton Taft around the time ARMSTRONG took control of Hamilton Taft. She said that the $20 million dollars represented the negative capital and the negative cash flow at Hamilton Taft. She said that she felt at that time that this much capital would be necessary to keep Hamilton Taft a viable company. The financial condition of Hamilton Taft was constantly being communicated to ARMSTRONG and his attorneys during the legal actions. 'said that she sat through all of the depositions during ARMSTRONG's legal action to gain control of Hamilton Taft. 4

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She said that she understood that ARMSTRONG's plan for Hamilton Taft was to recapitalize Hamilton Taft by investing $20 million dollars, rehirel Ito satisfy Wells Fargo Bank and expand Hamilton Taft's customer base to infuse more revenue into Hamilton Taft.

Exhibits to Motion for Discovery - Page 12

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Octc=er 19, 1981 Mr. :·iarc Paiva ~amilton Taft & COffi?any 1255 Post Street San Francisco, CA 94109 Re:

Charac:erization of Funds 'E'or Tax Payments

~ichheld

by Employer

Dear Marc: Per your request, this letter Q1SCUSSes the characterization of funds withheld by employers from employee pay checks in satisfaction of federal and sta~e income taxes, Social Security taxes, and state ~nemployment insurance '. taxes. This letter is limited to a discussion of the Internal Revenue Code ("I.R.C."), t~e California Revenue and Taxation Code ("Cal. Rev. & Tax. Code"), ;:he California Unemployment Insurance Code ("Cal. U. Com. Code"), and the general responsibilities and duties of a trustee as reflected in the California Civil Code ("Cal. Civ. Code"). An employer is required to withhold from the wages of employees amounts in respect of federal income taxes (I.R.C. § 3402], Social Security taxes [I.R.C. § 3102], state income taxes [Cal. U. Corn. Code § 13020], and state unemployment insurance "taxes [Cal. U. Com. Code § 986]. The employer is liable for the deduction and witr.holding of taxes. I.R.C. 5 3403: Cal. U. Corn. Code § 13021. Characterization of Withheld Funds Funds that are withheld or collected as income tax or Social Security Tax are to be held by the employer as " a special f:..1nd in trust for the United States." LR.C. § 750l. u.s ..... Hill, 368 F.2d 617,66-2 ::.S.T.C. ~[9736 at 87382 (5th

Exhibits to Motion for Discovery - Page 13

r c ? ..= ': r :::?, ?-".:ls:e :'·... 0

:-: :'. :.: 3 , 'C ::.:)0-2

j.

.J

~ ~

;

~

2i.~., 1966~. ="...!~ds Lhat are inco~e c~x 3re ~o be held by

.....'l.-:::~eld

cr

:::: __ ~cr:ed as s~ate

~~e

employer aE "3 special fund in tr'Jsc for the S't'ate ot Cali=ornia rCcl. -,:. Com .. Cocie § 13070]; '..."hile :~nds withheld 2.5 unemcl~vmen~ :'nsurance tax .:i r e t 0 be \.; i t h he 1 d "i n t r L1 st. Cal . - U • - Ca ~ . :: 0 d e § 9 8 6 • The duty to keep Withheld taxes as a trust arises as the taxes are withheld from wages regardless of the or~scribed dace for ~ayment to the government and does not termi~ate until the ';stleforc ' I . U.S., 75-1 U.S .T.C. I! 9464 taxes are paid over. ,;stleforc ( D. ~1 i nn. 1975). ll

II

During the ?eriod the funds are held i~ trust, the person holding the f~ndsassumes, with a few except~ons discussed ~elow, the duties and resDonsibilities of a ~rustee as such duties and responsibiliti~s are mandated under common law. ~arsh v. Home Federal Savinas & Loan Assn, 66 Cal. App. 3d 674, 136 Cal. Rptr. 180 (4th D.C.A. 1977). In general, a trustee is a fiduciary and is bound to act in the highest good faith toward his beneficiary, must make full disclosure of material facts, must not acquire any adverse interest, and must not use his position to gain any advantage over the beneficiary or to make any special ~rofit. Cal. Civ. Code §§ 2228-2233. A trustee normally should not ~ingle trust property with his own, but if he do.es willfully mingle the trust funds with property of his own, he is absolutely liable for their safety and for the value of thei~ use. Cal. Civ. Code §§ 2236. A trustee has a general duty to invest funds for the benefit of the beneficiaries, but he must account over to the beneficiaries any interest earned. Cal. eiv. Code § 2262. In investing, reinvesting, or otherwise managing trust property, a trustee must exercise the judgment and care which people of prudence, discretion, and intelligence exercise in the management of their own affairs. Cal. eiv. Code § 2261. California law provides a-fairly liberal description of the type of investment a prudent person would make, including every kind of property, real, personal, or mixed, and every kind of investment which a prudent person might enter into. Id. Notwithstandin~ the foregoing, the parties to the trust may alter or waive any of the standard pro~isions and duties. Rest. 2d, Trusts § 216. It is possible for the parties to a trust arrangement to authorize commingling of funds, to authorize rrom the trust assets, and the trustee to retain any income from

Exhibits to Motion for Discovery - Page 14

.' : r. ~·1 arc r' 2 >: tobe r .2 9,

V

i..J : 9S1

?age Three :0 consent ~o various ki~ds of investmen~s. The ~ase G[ :·;acsh 66 C::. ';?p . .,)0 :·:acsh Va HOi7le Federal Savir.qs &. Loan Assn. 6 7 4 , 1 36 Cal.. R~ t: r--:. 1 8 0 (4 t h D. C .. rl.. 1 9' 7 7), i spa =- tic u 1 a t 1 Y instructive. At issue in Marsh was the proprie~~ and :egality or ':he lIimpoundll or llreserve" accounts :::.lstomar-ily required by savings and loan 2ssocia~ions and ba~Ks in connection with residential ~ortgages to insure ~ayment of ~axes and insurance.. The suit was a class action seeking general and punitive damages and seeking an acco~nting of interest on the impound accounts, which were customarily held ~ithout interest. I

The Court first determined that the impound accounts trusts, not escrOws. It then considered in detail the nature of a trust and the duties of a trustee, observing that the beneficiary of ' the trust may ~aive the right to any income and may authorize the commingling of Eunds. Thus, the Court noted that the deed of trust authorizing the impound account stated specifically that the payments by the plaintiff would be held by Home Federal "in its general fund without interest," and concluded that the parties had agreed that the trustees could commingle and use the trust funds, but did not have to account for any interest earned. ~onstituted

9.

The statute and cases indicate that the trust funds created by I.R.C. § 7501, Cal. U. Com. Code § 986, and Cal. U. Com. Code § 13070 are subject to some modification of the general rule. Thus, although normally a trustee must segregate the assets of a trust and not commingle the assecs with his personal funds, see Cal. eiv. Code § 2236, it is not generally required that the-Iunds withheld for taxes be held separately from the general accounts of the corporation or chat they be deposited in a separate bank account, Slodov v. ~.S., 436 U.S. 238, 78-1 U.S.T.C. ,[ 9447 at 84,206 (1978); Newsome v. U.S., 431 F.2d 742, 70-2 U.S.T.e. ~ 9504 at 84,1~9 (5th Cir. 1970). The Treasury or the Franchise Tax Board, as the case may be, may specially require that withheld taxes be put into separate accounts, however, in the event the employer has failed previously to make appropriate deposits, payments, or returns for such taxes, I.R.C. § 7512; Cal. Rev .. & Tax. Code 5 18492. Furthermore, there is nothing in the statute or any regulation or case with which we are acquainted to imply that the government is entitled to any additional interest on the trust funds doring the period such funds are held in trust. Thus, it would follow that if an employer decided to forego interest on the trust funds, he, too, could do so.

Exhibits to Motion for Discovery - Page 15

:·1 r.

:·1.3 r c ? a \. i

Oc tobe r :2 9, ?age four

~ole

of

3-

1981

Co11ec~ing Ager.~

The foregoing discussion has considered the situation of an emclover. There does noe appear to be any case law, regulation, or statute dealing wit~ an :~dependent agent who actually pays over the taxes to the sovernment. The funds presumably are still trust funds, and che holder of those funds still bears the responsibilities of a trustee. Presumably, however, the collecting agent may use the f~nds in the same manner as the employer ~ight have, ana is noe required, insofar as the Internal Revenue Service or the Franchise Tax Board are concerned, to segregate the =unds from the general fund of the collecting agent. Penalties The normal penalty for a breach of fiduciary duty by a trustee is the amount of the loss to the beneficiary. A similar penalty is imposed by I.R.C. § 6672 or Cal. Rev. & Tax. Code § 18815: any person required to collect, account for, and pay over withholding taxes who willfully fails to collect, account for, or pay over such tax, is liable for a penalty equal to the total amount of the tax evaded, not collected, not accounted for, or paid over. ~ The test is " w illfullness." Basicallv, "willfullness" does not require anintent to deprive the government of its taxes, Newsome v. U.S., suora, 70-2 U.S.T.C. at 84,151, but can be evidenced merely by use of the withheld funds for any other corporate purpose, regardless of any expectation that adequate funds would be available at the due date for the taxes. WavchofE v. U.S., 79-2 U.S.T.C • • 9602 at 88,195 (S.D. Tex. 1979). Any person who voluntarily and consciously risks the withheld taxes in the operation of a corporation is subject to liability under I.R.C. § 6672 (Cal. Rev. & Tax. Code § 18815) if subsequently the corporation is unable to remit the withheld taxes. ~ewsome v. U.S., supra. In addition to the civil penalties, however, there are also ciminal penalties. I.~.C. § 7202 provides that any person required to collect, account for, and pay over any tax who willfUlly fails to collect, account for, or pay over such tax shall be guilty of a felony and, upon conviction thereof, shall be fined not more than S10,000, or imprisoned not more

Exhibits to Motion for Discovery - Page 16

:·lr. :·larc Pa'.'.:..3 October 29, :981 ?age Five

than five years. o~ both, together with the costs of prosecution. Cal. Kev. & Tax. Code § 19408 imposes a fine of nat maximuml, or both mOre than $2,000 or imprisonment [no staeed maximumj, for the similar offense. Although the penalties under these sections have been imposed only rarely and only in particularly egregious situations, there is considerable need to be concerned about the potential criminal penalties as well.

If you have any questions or comments.concerning the foregoing, please do not hesitate to contact us.

t;;jY,

~id

L. Kimpert

DLK/aw

..

Exhibits to Motion for Discovery - Page 17

FD-36 (Rev 11-17-88)

FBI TRANSMIT VIA: Teletype Facsimile

PRECEDENCE: Immediate D IJriority Inority D Routine

o o

CLASSIFICATION: TOP SECRET SECRET CONFIDENTIAL UNCLAS EFT 0 UNCLAS

o o o

!KJ tKl AIRTEL

o o o o

o

Date

8/4/93 8/4 / 93

TO

DALLAS, SAC

FROM

SAC, SAN FRANCISCO (196A-SF-93255) (P)

SUBJECT

CONNIE CHIP ARMSTRONG, JRj JRi

ET ALi WIRE FRAUD (A)i FRAUDj MAIL FRAUDi 00: SAN FRANCISCO

Reference airtel dated February 22,

/a1i{~~ti

verbal/ailth~l::i:~tion SA HATCHER has obtained verbal ::tign from united States states Attorney Attorney,I MICHAEL YAMAGUCHI, YAMAGUCHT, forL United _ I Iconfidential source to record conversa lons with b2 subiects of this case. I I

I

2 - DALLAS (1) tfj,) -

SAN FRANCISCO

WLH/wlh l. 1.

APP,oved:~ Approved: ":fS:~

. . "'

Per PCI'

Transmitted (Nwnher) (Nmnber)

'

~-;r

-.

(:5-

0"

__

(Tune)

Exhibits to Motion for Discovery - Page 18

1

MICHAEL J. YAMAGUCHI United states Attorney

2 3 41 5

JOEL R. LEVIN C~ief, Criminal Division RONALD D. SMETANA Special Assistant U.S. Attorney GEORGE D. HARDY Assistant U.S. Attorney

6

7

450 Golden Gate Avenue San Francisco, CA 94102 Telephone: (415) 436-6851

II

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

10

UNITED STATES OF AKBRlCA,

) ) ) ) ) )

11

Plaintiff, 12

v. CONNIE C. ARHSTRONG,

JR.,

Iilnd

No. OR 94-0276 CAL All!'lI!'IDAVIT Oll!' WILLARD L. HATCHER, JR. Illi SUPPORT

OF GQVBRmU!JIIT'S EX-PARTE SUBHXSSION

) )

14

RICHARD A.FOlllrLES,

15

Dllfondanta. ) ---------------)

)

16

17

I, Willard L. Hatcher, Jr., state that: I have been a Special Agent with the Federal Bureau of

18 19

Investigation ("FBI") for 6 years, and am currently the case

20

agent for the prosecution in United States v. Connie C.

21

Armstrong. Jr .. et al,

22

investigation of Hamilton Taft and Company since March of 1991.

23

Prior to his retirement on January 1, 1997, FBI special Agent

24

Patrick K. Murphy was the case agent.

25

26

2.

I have been involved with the

I first learned of the government's possession of

recorded conversations of Connie C. Armstrong, Jr., on the night AFFIDAVITOP WILLARD L HATCHIJIl, lR IN SUPPORT OF GOYllRNMENT'S EX-PARTE SUBMISSION

Exhibits to Motion for Discovery - Page 19

11

of January 12, 1997, after witness Terri Robins informed

22

Assistant United states Attorney George Hardy of their existence.

33

3.

I telephoned Patrick K. Murphy on January 13, 1997, and

44

asked his knowledge of such recordings.

55

he understood that Ms. Robins had made some recordings for the

66

government on an unrelated investigation.

77

did not know that Ms. Robins had ever recorded conversations with

88

Armstrong. 4.

Mr. Murphy stated that that

Mr. Murphy stated he

Mr. Murphy and I knew of the existence of the Dallas

10 10

FBI's investigation of Armstrong's activity at Comp-U-Check.

11 11

understood that this investigation related to conduct that

12 12

occurred well after the bankruptcy of Hamilton Taft.

13 13

knowledge this investigation was unrelated to Hamilton Taft

14 14

except for the common involvement of Armstrong.

15 15

5.

We

To our

Since January 12, 1997, I have contacted Special Agent

16 16

Peter A. Galbraith, the Dallas FBI case agent for the Comp-U-

17 17

Check investigation, and requested all taped conversations with

18 18

Armstrong.

19

special Agent Galbraith has assured me that these constitute all

20 20

of the tape recordings of Armstrong in the possession of the

21 21

Dallas FBI.

22 22

6.

I have received thirty-six (36) audio tapes and

In addition, Special Agent Galbraith provided to me

23 23

copies of 302 reports prepared relating to the tapes and

24 24

documents provided to the Dallas FBI by Terri Robins.

25 25

me that all of the reports and documents have also been forwarded

26 26

to San Francisco.

He assured

AFFIDAVIT OF OF WILLAIlD WILLAIlD L L HATCIlEll, HATCIlEll, JR JR AFFIDAVIT IN SUPPORT SUPPORT OF OF GOVERNMENT'S GOVERNMENT'S EX~PAR.TE EX~PAR.TE IN SUBMISSION SUBMISSION

2

Exhibits to Motion for Discovery - Page 20

11

7.

Agent Galbraith expressed concern about the disclosure disclosure

22

the tapes, reports and documents to Armstrong because the Comp-UComp-U-

33

Check investigation and other related investigations are on-going on-going

44

and he is concerned that disclosure of the materials may

55

jeopardize these investigations.

66

the tapes, written materials and reports may have to be turned

77

over to Armstrong, but requested that the materials be

aa

scrutinized carefully and that those ultimately turned over be

99

limited to those necessary to protect Armstrong's rights without without

10 10 11 11

He understood that certain of

harming the investigations. 8.

Agent Galbraith said that all of the conversations were were

12 12

recorded and documents were received in late 1993 and early 1994, 1994,

13 13

SUbsequent to the Hamilton Taft bankruptcy and before the

14 14

indictment of Armstrong.

15 15

9.

After review of the tapes and documents by myself,

16 16

Special Agent Laura Nielson, Assistant United States Attorney

17 17

George Hardy and special Assistant United states Attorney Ronald Ronald

18 18

Smetana, we determined that Hamilton Taft is mentioned in five

19 19

(5) tapes; copies of the relevant portions of those tapes have

20 20

been reproduced for review by the Court for a determination of

21 21

whether they should be turned Over to Armstrong.

22 22

there is one document, a "novella" about Hamilton Taft, that has has

23 23

statements attributed to Armstrong; since I do not know its

24 24

authorship, that document has been copied for the Court's review. review.

25 25 26 26

10.

In addition,

All of the reports, tapes and documents received from

the Dallas FBI are being made available for the Court's in camera camera AFFIDAvrrOF wn.LARD wn.LARD L L HATCHER, HATCHER, JR JR AFFIDAvrrOF IN SUPPORT SUPPORT OF OF GOVEIlNMIlNl"S GOVEIlNMIlNl"S !lX-FARTE !lX-FARTE IN SUBMISSION SUBMISSION

3

Exhibits to Motion for Discovery - Page 21

1

review.

2

I declare under penalty of perjury that the foregoing is

3

Executed

4

true and correct.

55

California. Francisco, Ca1ifornia.

Ii

7 8

COUNTY OF SAN FRANCISCO

) )

STATE OF CALIFORNIA

)

9

SS. 53.

10

Sworn to and subscribed in my presence on January 24, 1997,

11

12 13

14

in San Francisco, California.

~z •

15

16

@,. co:":~=73

e.eeeeceee.eeeJ ,~.. ' ,

d"

0

•

.. ' \;,~;,\~ \ \, ". \ ') "-~-:G('~,~\('.

1 i~om:':r:::u~eW: Notory N:>IIc - Co1IlomlrJ

!

. Notary publIc

Son FrancIDCO CounIV

0

My Commission Expires

/'

I

t

~\~,\ )C. on '-j: ,OJ; :Ie )+-" i.\" ""'\ ie,' .--}-\ cli.'

\\

1Cl1l [CYll

17 18 19

20 21 22 23 24 2S 25

26 HATCHER, JR AFFIDAVIT OF WILLAIID WD..LARD L HATCHER. IN SUPPORT OF GOVERNMENT'S EX-PART!! GOVIlRNMENT'S EX-PARTE SUBMLSSION SUBMISSION

4

Exhibits to Motion for Discovery - Page 22

FD-36 (Rev 11-17-88)

FBI TRANSMIT VIA: D Teletype Facsimile (K] AIRTEL lKl

CLASSIFICATION: TOP SECRET SECRET CONFIDENTIAL UNCLAS EFT 0 UNCLAS

PRECEDENCE: Immediate [] [J Priority Routine

o o

o o

oD o o o o

TO

SAC, SAN FRANCISCO

FROM

SAC,

SUBJECT

CONNIE C. ARMST DBA HAMILTON T T AND COMPANY, ET ALi SAN FRANCISC , CALIFORNIA; FBW (B) FRAUD; BANKRUPTCY FRAUD (A); (B);i MA 00: SAN F CISCO ARMED AND DANGEROUS

-93255) (SQD 15) (P)

RE: Teletype from San Francisco to Dallas dated April 3, 1992.

b'7C

b7D

Enclosed for San Francisco are two copies of insert regarding witness I inal and one copy co I ori original of FD-302 regarding meeting between betweenlL... with original interview notes. .... with original interview notes. ~------------------------------~

For informa~·~-s~~~~~CQ-lla~~agents informa~·~~~ __.a~ ~__~ agents observed ~th~e__~m~e~e~~ing m~e~e~~ing between and debriefed ~t_h_e Jimmediately a

I

cp: <9>: Dallas

(encl 5)~ San Francisco (enci Dallas - .

tARCH

--

IKOOO-

i~ . Approved: Approved:

_

Transmitted

..

_--

" I

,

,

)

·'&)1~ (Ti~~"";':~"':':";~--riJ&(Ti

<. Exhibits to Motion for Discovery - Page 23 fa

(Number)

~

LEADS:

DALLAS AT DALLAS:

Will obtain co ies of

and forward them to San b7D

2

Exhibits to Motion for Discovery - Page 24

FD-36 (Rev 11-11-88)

FBI

CLASSIFICATION: D TOP SECRET SECRET CONFIDENTIAL UNCLAS EFT 0 UNCLAS

PRECEDENCE: Immediate D Priority Routine

TRANSMIT VIA: Teletype Facsimile IX] AIRTEL:

o o o

o o

o

o o o o

Date

5 5/92 5/5/92

TO

SAC, SAN FRANCISCO (196A-SF-93255)

FROM

(RUe) SAC, DALLAS (196A-SF-93255) (SDQ 15) (RUC)

SUBJECT

:

ALi CONNIE C. ARMSTRONG, ET AL; ALi DBA HAMILTON TAFT AND COMPANY, ET AL; SAN FRANCISCO, CALIFORNIA; (B) i MAIL FRAUD FRAUDji BANKRUPTCY FRAUD (A); FBW (B); 00: SAN FRANCISCO ARMED AND DANGEROUS

RE: Teletype from San Francisco to Dallas dated April 3, 1992 and Airtel from Dallas to San Francisco dated 5/1/92.

Enclosed for enclosed in a envelope.

San

Francisco

are

nine

documents

information, San Francisco. Francisco, 1 For information. , sent copies copies of of documentsl~ documentsl~ -------__ sent :__-----------------follows~ Ir These documents are as follows:

b7C b7D

..:I

'"IS pertal.n to I......

IS r ------------..... I..... I'nL

__

L.-

--Ir1

..... perta~n to 1

..1

Inasmuch as all investigation has been conducted by the Dallas Division in this matter, this case is being considered RUC. Rue. l)~ San Francisco (encl 1)P? Dallas JM/jm

(2)-

Y Y

,EARCH,fD .... 1l111'~ .....- - 1 ERIAUZED,......... ( ~_ _

An/If ~I Approved:

5

_

Transmitted

Exhibits(Time) to Motion for Discovery - Page 25

(Number)

A A .__ _

"-' " ,

"_

.~

APAGE 2 196A-SF-93255

UNCLAS

WILLARD L. HATCHER, JR. AND

SAI

~WERE IN

DALLAS LAST WEEK (4/22/92-4/24/92) INTERVIEWING WITNESSES IN THE DALLAS AREA.

I

IWAS

ONE OF THE WITNESSES

I

INTERVIEWED.

I

" ' - - - - - - - -

1

b7e b7D

OR(~NFLUENCED ~

BY THE SAN FRANCISCO OFFICE) ~ ?

I~-----------I SAl

BE AWARE THAT

I

DALLAS

DIVISION. LEAD:

DALLAS DIVISION AT DALLAS] TEXAS DEBRIEF

I PRIOR

TOI...

I

~AS SOON AS POSSIBLE

I

I

CONTACT . I IF FEASIBLE AND PRACTICAL,~-Ir=======il

.....,j1

Exhibits to Motion for Discovery - Page 26

APAGE 3 196A-SF-93255 BY THE MEETING

PLACE~

UNCLAS

ITO

b7D

WITNESS THE MEETING AND/OR OVER HEAR THE CONVERSATION. BT

Exhibits to Motion for Discovery - Page 27

11

should not be used to justify making a ruling on an issue that is

2

nothing but a red herring. It is clear what the defendant is attempting to do.

33

4

wants the jury not to hear relevant evidence.

55

jury to hear about the Ranch acquisition, or the limousine rides,

66

or the luxury jet purchase.

7

what his lawyers and senior management were telling him--that he

88

couldn't use client tax money for long-term personal investments.

99

He also doesn't want the jury to hear about the lies he told his

10 10

employees regarding the source of funds for his ranch and other

11 11

purchases.

12 12

the victim companies in order to lull them into a false sense of

13 13

security.

14 14

charges in the Indictment.

He doesn't want the

He also doesn't want the jury to hear

He doesn't want the jury to hear about the lies he told

But all of this evidence is relevant to prove the

15 15

To his credit, the defendant spells out the remarkable

16 16

ramifications of a decision to declare that In re Hamilton Taft & &

17 17

Co. represents the "law of the case".

18 18

Defense counsel to be able to refer to monies at issue, in both opening and closing statements as the property of Hamilton Taft or Hamilton Taft cash flow;

2.

The government not to refer to those monies as "client monies" or "client funds" and not to state or imply that Hamilton Taft held those monies in trust;

3.

The government not to present evidence of any advice which Mr. Armstrong received from lawyers or other experts, to the extent that such advice was inconsistent with the "law of the case";

4.

The court delivered

20 20

21 21

22 23 23 24 24

25 25 26 26

He wants:

1.

19 19

to to

GOVERNMENT'S OPPOSITION OPPOSITION TO TO ARMSTRONG'S ARMSTRONG'S GOVERNMENT'S MOTION TO TO DISMISS DISMISS AND/OR AND/OR REQUEST REQUEST FOR FOR MOTION PRETRIAL INSTRUCTION INSTRUCTION PRETRIAL

J

He

instruct the Hamilton Taft,

10

jury that monies, once became the property of

000165.

Exhibits to Motion for Discovery - Page 28

.. Hamilton Taft;

1 2

5.

The court to instruct that Hamilton Taft was free to use its cash flow to cover its operating expense or to invest those monies for its own benefit and in anyway it wished;

6.

The court to instruct the jury that Hamilton Taft's sole duties to its clients were those duties stated contractually but that clients were free to sue for breach, if Hamilton Taft ever failed to live up to those duties.

3

4

5 6 7

8 9 10

Nothing in the language, logic, or holding of the vacated opinion in In re Hamilton Taft & Co. comes close to justifying such a gutting of the government's case.

11

The defendant's motion to characterize, as a matter of law,

12

the nature of the relationship between Hamilton Taft and the victim

13

clients, in the form of a pretrial ruling should not be granted.

14

The characterization has not been settled as a matter of law.

15

characterization, even if accepted as "debtor-creditor", does not

16

negate the presence of a fraudulent scheme or support in any way

17

the six conclusions cited above.

18

confuse

19

technicalities of the law.

20

II II II II II II II

21

22

23 24 25 26

the

jury,

J

The characterization would only

leaving them to wonder

GOVERNMENT'S OPPOSITION TO ARMSTRONG'S MOTION TO DISMISS AND/OR REQUEST FOR PRETRIAL INSTRUCTION

The

about

the

illogical

11

000166

Exhibits to Motion for Discovery - Page 29

•

1

III. Conclusion

2

For the foregoing reasons, the government respectfully

3

submits that the motion to dismiss be denied and that the Court

4

deny the request to make In re Hamilton Taft & Co. the law of the

5

case.

6

DATED:

November 5, 1996

7

Respectfully submitted, MICH~~J.

YAMAGUCHI

unite~ ta~~s i~~/rn:;,

. __

By~I{)~

8 9 10

RONALD D. SMETANA Special Assistant U.S. Attorney

11

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 GOVERNMENT'S OPPOSITION TO ARMSTRONG'S MOTION TO DISMISS AND/OR REQUEST FOR PRETRIAL INSTRUCTION

J

12

HOnlG1 Exhibits to Motion for Discovery - Page 30

Memorandum lVIemorandum

To

SAC, San Francisco ((C'f(,I}-SF-Q'rJ..s5)(P) ((Q(,J}-SF-Cf1}S"5)(P) Dole DQt~ SAel

From

s~

Subject

712

3/8/92

I b7C

Connie Chip Armstrong, et al dba, Hamilton Taft and Company, et al Francisco,l Ca. San Francisco FBW (B); Mail Fraud, Bankruptcy Fraud, OO:SF

(A);

On the afternoon of March 5, 1992 a meeting was held at prosecru~t~i~o_n __ the office of AUSA Michael Yamaguchi to discuss prosecru~t~i~o~n~ ~ were~I====~~==~= strategy in the above referenced matter. Present were~I====~~==~~ ESQ. representing the bankruptcy trustee. truste~. Also present was Mr. Ronald Smetana, Deputy Attorney General, Major Fraud unit of the california state Attorney General's office. SA's will Hatcher and I represented re resented the FBI. _-J.-:-.,,1,',.' ~!},<. ,'", " ,"""', -

>.

rf,)(;)0/:.

.

1 '

i u.J

J·r....

'.~

-, iJ{'!

.

i.e.·

J

>,tV] •

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(I) {q, {q~ Pr-SF-'1Yd.S, It-SF-cr)aS,

JJ., ~

~

/t~ ~w;/v r. ~~~~~/vr'

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;oAf'h(

I

- -") ~a I Oa -J Exhibits to Motion for Discovery - Page 31 b/C b7C /C) IlL1l (.! /C7 L1 l 1 / e-::t:-::: ?h r,-- ?rl

I

~",rr' ~"'

2

On February 27, 1992 the accountant for the trustee finished his second interim report for the bankruptcy which includes among other thing a tracing of over $4,000,000 directly into the pockets of Armstrong himself. The report cites payments by Armstrong using Hamilton Taft funds to a stripper' and the use of over $225,000 to purchase Dallas Cowboy "skyboxes lt • The next investigative step is to apply for an ex parte order for Armstrong's personal tax returns for 1988, 1989, and 1990. Also several interviews of former Armstrong associates will be conducted in Texas. Finally due to the continuing effort being expended by SA Will Hatcher and his anticipated involvement in this matter it is requested that he be designated co-case agent for the remainder of the investigation of this case.

2

Exhibits to Motion for Discovery - Page 32

FD-302 (REV. 3-10-82)

-

1 -

FEDERAL BUREAU OF INVESTIGATION

2/18'/92

Date of transcription

On the afternoon of January 13, 1992, a conference was held at thelPffices gf Feldman. Waldman and Kline, bankruptcy counsel for. trustee in the bankruptcy of Hamilton Taft Corporation (HTC). The law firm's offices are located at 235 Montgomery street, suite 2700, San Francisco, California, 94104. Present at this meeting werel Esw1;re, representing Feldman, Waldman and Kline, at cetera. Mr . . CPA, t~~ accQuntant the bankruptcy trustee, and the trustee himsel~,L These individuals thereafter

1

I

fOr

I

provided the following information:

I

b7C

'stated that he has recently received certain

accounting reports from representatives of CHIP ARMSTRONG in Dallas, Te~as, which begin reporting on the period from November 1, 1990 through June 15, -1991. This accounting work was generated using the Quicken Software and chronicles CHIP ARMSTRONG's personal finances.

I ~ stated that in July, three reports became available to him. Wated that only copies CberkS were duplicated by per a restriction put on_ _ . and

Of!Som:

apparently agreed

y the

0

coun~~

L pub11C

for the frus ee

Mr. ARMSTRONG's representatives.

y

advised that the record and that, in

Quicken summary was in fact a addition, the law firm had filed a motion for conternpt·against CHIP ARMSTRONG for his having allegedly violated a temporary restraining order issued by the bankruptcy court.

I

I stated

that his preliminary report indicates

that approximately four million dollars of Hamilton Taft funds have been traced· directly to CHIP ARMSTRONG, that is, four million dollars of HTC funds have been traced to going directly to Mr. ARMSTRONG. I Istated that ARMSTRONG had or has five bank accounts. Any payment that was made to CHIP from either

Hamilton Taft or one of the subsidiaries controlled by ARMSTRONG are accounted for, that is, they are covered by explanations. These explanations are usually in the form of a note receivable or an account receivable notation. These entries to the books and records of Hamilton Taft or anyone of these subsidiaries

-.]ID Invesligationon

~I

by

~M

2/10/~:J

at

I

SA f,YNN HATCHER

Sa);} :P'];a1=lci~co,

Caloi.;fornil ile

11

J96A-SF-93255 Sub C

b7C

PKM la /a an

Dale dictated

I

2 11 /1 0 192 /92 ;

I

If This document conta.in~ neither recommendations nor conclusions of the FBI. It Is the property of the FBr and is loaned to your agtncy;

-

ils contents are not to be c1btrlbuted c1blrlbuted outside your aaency. 1\ and its

----------------'------'--_._-

... _-- ...

_---

Exhibits to Motion for Discovery - Page 33

..

FD-302a (B:ev. 1l-lS-83)

f:>A-SF-93255 }:>A-SF-93255

Con tlnua tion ofFD-302 of FD-302 01 Continuation

Sub C

-J -Jl-

I ' On .J--------------,

2/10/92

,P age _~2",,--__ Page _----2"---

controlled by ARMSTRONG were to pay for clothing for Mr. ARMSTRONG or for a truck for his personal use. Succinctly stated, these documents provided a paper trail for a trloan" or "advance ll to ARMSTRONG to account for the payments to him.

I ~ndicated that an enormous portion of ARMSTRONG's standard of living was booked by the various comptrollers as advances to CHIP ARMSTRONG.

I

Istated that during the period March 20th through April 4th, 1991, CHIP ARMSTRONG liquidated three assets which were not in Hamilton Taft's name. The first asset to be liquidated was a helicopter, apparently owned and/or leased by Winthrup Corporation for 1.1 million dollars. The second asset and/or payment was a $700,000 payment to CHIP ARMSTRONG's criminal. lawyer in Dallas. Finally,1 lindicated that $300,000 went to Rem~~Companies wh~ch was possibly in turn repaid to a law firm of Long and Leavitt in San Francisco.

b7C

Wlth h:se~~t . With h:se~lt to the helicopter transaction and liquidation indicated l~l million dollars was liquidation! jindicated transferred to W~nthrup on the same day and on the same day, CHIP ARMSTRONG wired transferred $700,000 to his Dallas based criminal lawyer,C:: IWith respect to this $700,000 'wire lawyer,~ transfer, Istated that $400,000 of the lawyers' fees were transfe~ toJthe trUSjee~ Again, with respect to the helicopter returned tOfhe transaction transaction~ _ indicated that three million dollars had originally been wire transferred to another one of~Knights Bridge companies and then in turn to winthrup Realty. I I stated that ARMSTRONG has few sources of income other than the sale of. assets purchased with Hamilton Taft funds. Among the assets that ARMSTRONG purchased, apparently with Hamilton Taft funds, are two stadium boxes for the Dallas Cowboys football team and these apparently were purchased for $140,000 and $125,000, respectively. A third box is still owned by ARMSTRONG. Approximately 1.1 million to 1.3 million went to various lawyers. Seven hundred and thirty-five thousand dollars went to criminal lawyers and one hundred seventy-five thousand, two hundred thousand and eighty thousand dollars, respectively, went to civil attorneys.

---_ ... _-- " -----' -' -'.;-~::"":--

----------~

Exhibits to Motion for Discovery - Page 34

FD-301a

(~cv.

11-15-83)

~5A-SF-93255 Sub C

b7C Continuation of FD-302 of

-J

3"'---If--------------.·On _-'2...;.I 2/10/92 .....l~Q>4IL....9L2~-. · Pagc_..lI Page _~3:....-_

All records for Hamilton Taft and any of trmstrOnq/S ~rmstrong's

companies are currently domiciled in San Francisco. L ~ indicated that some records are missing and those records are for the company known as Winthrup Realty and CHIP ARMSTRONG's personal financial records. b7C

Additionally,l ~ndicated ~ndicated that her law firm is in b7C possession of winthrup's ledgers· through May of 1991. b7D

- --- .'.. - -------" ''---------------

---_.-_.--"-----

Exhibits to Motion for Discovery - Page 35

"1-3028 (Rev. 11-15-83) "-302.

196A-SF-93255

_ _ _ _ _ _ _ ,On --------

4/15/91

,,page __ 2_ Pa llC _ _2

cash account for that day. If an overage, the money would go to Hamilton Management for investing. If short, he would ask Hamilton Management to wt~re money into the account to cover lassumed all the trouble was checks written that day. _ started when ARMSTRONG instructed one of these guys to send money to somewhere else or he had the money from Kansas go to one of his companies in Dallas for investment. "No, I don't consider ll investment". his ranch a real investment •

la

After the interviewing agents gavel la copy of 'said Isaid "I have been down a yours. lI • He thought a chunk of client similar shopping list as yours.". money was taken out and used for investments. Probably a verbal order by ARMSTRONG. This money replaced later. HT replaced Federal Express money with Federal Express payments. HT did not use "Joe Blow's" money to pay Federal Express's taxes and penalties. Every tax that is owed in last quarter has been paid. b """ I Istated that HT is about 90 million short this quarter . because the clients are not putting money into the company. 4 the sUbpoena for HT records, II

""1n

. !J .... '.-

I lexpressed that everything the trustee is IIHe's doing your work. I am doing will help your investigation. "He's concerned that you guys will come in here and take all the away.. We will not see them for years. years."1I He had that records away. happen before in another case dealing with meat inspectors getting kickbacks. I Idiscussed he had worked for his family/s family's company which had filed bankruptcy. He had successfully reorganized the company. He had went on to work for other companies in trouble. He decided to start consulting on his own. That is when he answered the HT ad. When questioned again about his contact with ARMSTRONG he explained most of his contact was in bUdget meetings. He said ARMSTRONG was planning to double the volume of business. There was a summary of the meeting minutes kept by a secretary but he was not sure which secretary. When asked what was ARMSTRONG's long term plans I~--------~replied he did not know much about ARMSTRONG/s I--------~Ireplied ARMSTRONG's goals. doing. If I "I've been trying to do what you guys are doing." I stated "I know a lot of peripheral facts, but not any detail". Idid say that ARMSTRONG went overseas to establish

I

Exhibits to Motion for Discovery - Page 36

r::D-301a (Rev. 11-15-83)

196A-SF-93255

Continuation ofFD-302 of

~l...

...J----------' On

Hamilton gaft International

4/15/91

. Page

_3_

ae

d make SOme sorf of deal. Jsaw the bUdget that_ . prepared for ARMSTRONG. The bUdget indicated that some $50 million dollars of

I

capital was to be introduced back into HT this month and

eventually catch up all the delinquent taxes due by October of this year. b7C

I

Ibelieves what'

Istated in his written actions of the client response unit is a lie.

statement about the He was managin; tn~! unit.

r

_

The intent was not to mislead

clients. ~hO was the supervisor in that department weu d verIfy the unit's intent.

~

~

I Ilast contact with ARMSTRONG was last friday at the HT office in San Francisco. l Istated,IIWe all met

here. It; The trustee with three others and ARMSTRONG with his

attorneys. He explained that he was trying to salvage the A sort business. He had another meeting later with employees. of pep talk asking them not to believe the newspapers.

I

Iproduced a list of all current employees to

the interviewing agents upon the agents request.

Since the

produced copy was missing the last digit of the employee's telephone numbers another copy was sent vis facsimile to Federal Bureau of Investigation office later the same day.

Exhibits to Motion for Discovery - Page 37

,

..

IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT No. 93-15455 IN RE:

HAMILTON TAFT & COMPANY,

,

Debtor FREDERICK S. WYLE, TRUSTEE, Appellant

v. S & S CREDIT COMPANY, Appellee

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA BRIEF OF THE UNITED STATES AS AMICUS CURIAE ON PETITION FOR REHEARING

On May 23, 1995, this Court invited the Government to file an amicus amicus brief "addressing whether the opinion filed in this an case, In re Hamilton Taft & Co., No. 93-15355 [sic], slip op. case, filed May 2, 1995, adversely affects in any way the interests of filed the IRS in collecting federal taxes." the

The following brief is

sUbmitted in response to that invitation. sUbmitted STATEMENT The case is an appeal from a District Court judgment ~ffirming ~ffirming

a Bankruptcy Court's refusal to treat a payment of

federal taxes as a voidable preference under Bankruptcy Code (11 federal

000154 Exhibits to Motion for Discovery - Page 38

,

- 15 CONCLUSION

For the above stated reasons, this Court should grant the petition petition for rehearing and affirm the jUdgment of the District Court Court affirming the Bankruptcy Court's jUdgment insofar as it refuses refuses to treat payments made by debtor for S & S's trust fund tax tax liabilities as voidable preferences. Respectfully submitted, LORETTA C. ARGRETT Assistant Attorne L

c:::c..

<1.

(oJ

I)

General

(L[LLtLA',c,J

GARY R~ ALLEN 1 (202) 514-3361 GARY D. GRAY 514~3005 (202) 514~3005 (202) 514-4329 PAULA K. SPECK Attorneys Tax Division Department of Justice Post Office Box 502 20044 Washington, D.C.

Of Counsel: Of MICHAEL JOSEPH YAMAGUCHI MICHAEL United States Attorney United AUGUST 1995 AUGUST

000155 J

Exhibits to Motion for Discovery - Page 39

93-15455 Summary

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General Docket United States Court of Appeals for the Ninth Circuit Court of Appeals Docket #: 93-15455 Wyle, et al v. S & S Credit Co. Appeal From: US District Court for Northern California, San Francisco

Docketed: 03/18/1993 Termed: 10/12/1995

Case Type Information: 1) bkd 2) district court 3) null Originating Court Information: District: 0971-3 : CV-92-02996-CAL Trial Judge: Charles A. Legge, U.S. District Judge Date Filed: 08/03/1992 Date Order/Judgment: Date NOA Filed: 02/23/1993 03/01/1993

Lead: 92-3-0057-LK

Exhibits to Motion for Discovery - Page 40 https://ecf.ca9.uscourts.gov/cmecf/servlet/TransportRoom?servlet=CaseSummary.jsp?caseN... 8/7/2009

93-15455 Summary

Page 2 of 2

08/24/1995 56 Filed original and 40 copies IRS's brief as amicus curiae on petition for rehearing and suggestion for rehearing en banc., of 15 pages; served on 8/21/95. (Per court request, PANEL AND ALL ACTIVE JUDGES.) [93-15455] (RG) 09/08/1995 57 Filed Appellant Frederick S. Wyle's response to petition for enbanc rehearing by defendant-appellee S&S Credit Company, Inc., (PANEL AND ALL ACTIVE JUDGES.) [2790529-1] served on 9/8/95 [93-15455] (RG) 09/12/1995 58 Rec'd notice of appearance of George M. Borkowski (Withdrew as counsel: attorney Richard R. Mainland for All American Gourmet, attorney John Tate for All American Gourmet, attorney Karl E. Block for All American Gourmet [93-15455] (RG) 09/19/1995 59 Received csl Patricia S. Mar for Appellant Frederick S. Wyle letter dated 9/19/95 re: ....we request that the court take no action on the petition for rehearing or sugg for rehearing en banc pending the filing of any pleadings necessary to withdraw the petition for rehearing (PANEL & ALL ACTIVE JUDGES); served 9/19/95 [93-15455] (SA) 09/21/1995 60 Received csl Robert D. Crockett for Appellee S & S Credit Co. letter dated 9/20/95 re: ...the above case has settled. S&S Credit withdraws its petition for rehearing and suggestion for en banc review (PANEL & ALL ACTIVE JUDGES); served 9/20/95 [9315455] (SA) 10/12/1995 62 Order filed (FOR PUBLICATION) The court is advised that the case has been settled. Accordingly, the appeal is dismissed as moot and the decision filed May 02, 1995, appearing @ 53 F.3d 285, is vacated. ( Procedurally Terminated After Other Judicial Action; Dismissed. William A. NORRIS, author; David R. THOMPSON; Stephen S. TROTT. ) [93-15455] (DL) 10/17/1995 63 MANDATE ISSUED [93-15455] (XX) 04/15/1996 64 RECORD RETURNED. (See control card for details.) (BL) 02/11/2005 65 Received Movant Connie C. Armstrong's motion to recall the mandate. ;no service. Party is not listed on docket. PANEL [5325953] [93-15455] (GR) 03/07/2005 67 Filed order ( David R. THOMPSON, ): The " mtn to recall Mandate" submitted by pro se Connie C. Armstrong, and received by this court on 2/11/05 is ordered filed. The mandate in this case was issued 10/17/95. the movant Armstrong's mtn to recall the mandate is denied. No further filings of any kind will be accepted in this closed case. [93-15455] (KKW)

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Exhibits to Motion for Discovery - Page 41 https://ecf.ca9.uscourts.gov/cmecf/servlet/TransportRoom?servlet=CaseSummary.jsp?caseN... 8/7/2009

"

"

,.

Ncr. 93-15455

IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT In re HAMILTON TAFT & Co., Debtor, Frederick S. WYLE, Trustee in Bankruptcy of Hamilton Taft & Co., Plaintiff-Appellant v.

S & S CREDIT CO.,

Defendant-Appellee.

MOTION TO RECALL MANDATE

Movant Connie C. Armstrong, Jr. respectfully requests that this Court recall its mandate issued on October 12, 1995.

On

that date, this Court dismissed a pending en bane appeal due to mootness by reason of settlement and then vacated the panel decision appearing at 53 F.3d 285.

For the reasons that follow,

vacatur was not appropriate, and Armstrong seeks the remedy of a recalled mandate to prevent injustice. 1.

The instant civil litigation parallels criminal

litigation originating in the same district court and reviewed. by this Circuit.

Specifically, the criminal litigation was

addressed by this Court in United States of America v. Connie C.

Motion to Recall Mandate

Page 1

Exhibits to Motion for Discovery - Page 42

Armstrong,

~r.,

216 F.3d 1084, No. 97-10392, WL 425007 (9th Cir.

2000) (Table Opinion).

In that criminal appeal of a fraud

conviction arising from his ownership of Hamilton Taft, Armstrong challenged the district court's refusal to give a theory-of-the-defense instruction.

Armstrong pointed to this

Court's opinion in In re Hamilton Taft & Co., 53 F.3d 285 (9th Cir. 1995) and requested that the district court instruct the jury in accordance with that opinion.

To counter arguments by

the government during the criminal trial concerning breach of trust, Armstrong wanted the jury informed that

~

.

. under

ordinary principles of trust, Taft did not hold the funds in trust. 288.

Thus, the funds were property of [Taft]

1/ 1/

Id. at

The requested ,instruction was pivotal as it underscored

Armstrong's legal authority to invest the subject monies for his own account.

In reliance on this Court's improper vacatur of

its opinion in In re Hamilton Taft, the district court refused the instruction.

2.

This Court upheld the district court's refusal.

In

doing so, this Court also relied upon the vacatur of In re Hamilton Taft & Co. as the basis for affirming the district court.

~We

reject Armstrong's assertion that this Court's

decision in In re Hamilton Taft & Co., 53 F.3d 285 (9th Cir.1995), opinion vacated, 68 F.3d 337 (9th Cir.1995), required Motion to Recall Mandate

Page 2

Exhibits to Motion for Discovery - Page 43

the district court to use his proposed instruction. In re Hamilton Taft has been vacated as moot, and thus is no longer binding precedent."1

U.S. v. Armstrong at *1. Because the

vacatur challenged in this instant motion is both intertwined with and materially impacting the review of Armstrong's criminal conviction, Armstrong asserts the vacatur actually invades a concrete and particularized legal interest, thereby giving him standing to challenge the vacatur. Wildlife, 504 U.S. 555 the outcome." 3.

1

560 (1992).

See Lujan v. Defenders of He has a "direct stake in

Diamond v. Charles, 476 U.S. 54 1 56 (1986)

Armstrong is still incarcerated from the convictions

challenged in his ongoing criminal appeal.

On May 28, 2002,

Armstrong filed a PETITION FOR PANEL REHEARING WITH SUGGESTION

FOR REHEARING EN BANC of the panel opinion released as U.S. v. Armstrong, No. 00-10399, WL 554373

(9th Cir. Apr 15, 2002).

This Court has not released its response to Armstrong's Petition.

For these reasons, this motion concerns an actual

I The quoted passage continues as follows: "Furthermore, its holding--that Hamilton Taft does not hold client funds in trust for the IRS--is inapplicable to the issue of what obligations existed between the company and its clients." U.S. v. Armstrong at *1 (emphasis in original). Thi p statement contradicts the clear language of the opinion, which held that the subject funds were the property of Hamilton Taft. Contractual obligations were of no moment in either the civil or the criminal litigation.

Motion to Recall Mandate

Page 3

Exhibits to Motion for Discovery - Page 44

case or controversy under Article III of the United StatesConstitution. 4. 565

This Court held in Zipfel v. Halliburton Co., 861 F.2d

(9th Cir.), that "the authority of a Court of Appeals to

recall its mandate is clear.

While the authority is not

conferred by statute, it exists as part of the court's power to protect the integrity of its own processes." Id. at 567 (citations omitted).

The decision whether to exercise the power

"falls within the discretion of the court, but such discretion should be employed to recall a mandate only when good cause or unusual circumstances exist sufficient to justify modification or recall of a prior judgment." rd.

As a general rule, this

Court will recall a mandate only when animated by "an overpowering sense of fairness and a firm belief that this is the exceptional case requiring recall of the mandate in order to prevent an injustice. u

Verrilli v. City of Concord, 557 F.2d

664, 665

i

1f

(9th Cir. 1977)

see also Zipfel, 861 F.2d at 567.

Specifically, this Court has recalled its mandate when a "decision of the Supreme Court \departs in some pivotal aspects' from a decision of u this court. Zipfel, 861 F.2d at 567 (quoting lf

American Iron and Steel lnst. v. EPA, 560 F.2d 589, 596 (3d Cir. 1977)

I

cert. denied, 435 U.S. 914 (1978)).

This is the

situation in the case at bar. Motion to Recall Mandate

Page 4

Exhibits to Motion for Discovery - Page 45

5.

The mandate for which recall is sought reads, in its

entirety, as follows:

"The Court is advised that the case has

been settled. Accordingly, the appeal is dismissed as moot and the decision filed May 2, 1995, appearing at 53 F.3d 285, is vacated." 1995).

In re Hamilton Taft & Co., 68 F.3d 337, 337 (9th Cir.

As discussed below, automatic vacatur of an appeal

mooted by settlement is not authorized by the Supreme Court. Moreover, 'this case presents a uniquely harmful twist.

Unlike

the typical situation where a district-court ruling is under review by a panel, the parties settle, and the inquiry then becomes whether or not to vacate the district court ruling, here, the panel had already released an opinion reversing the lower court.

By vacating the panel opinion, this Court has let

stand a district court opinion that was held erroneous following de novo appellate review. 6.

The

u.s. Supreme Court has spoken on this issue and has

instructed that "mootness by reason of settlement does not justify vacatur of a judgment under review." Bonner Mall, 513 U.S. 18, 29 (1994).

u.s. Bancorp v.

This Court has interpreted

Bonner Mall to hold that when the mootness is caused by actions of the parties, rather than happenstance, automatic vacatur is

not appropriate.

See American Garnes Inc. v. Trade Prod., 142

F.3d 1164, 1169 (9th Cir. 1998); Mayfield v. Dalton, 109 F.3d Motion to Recall Mandate

Page 5

Exhibits to Motion for Discovery - Page 46

1423, 1427 (9th Cir. 1997); Cammermeyer v. Perry, 97 F.3d 1235, 1239 (9th Cir. 1996).

Despite the Supreme Court's clear

instructions, this Court nonetheless automatically vacated an opinion under review when that opinion was mooted by settlement between the parties. 7.

Such vacatur was not lawful and has had a direct and

adverse impact on the review of Armstrong's criminal conviction. ACCORDINGLY, Armstrong requests that this Court recall the mandate issued on October 12, 1995 and thereby reinstate its opinion in In re Hamilton Taft.

Armstrong further requests that

this Court, in the interest of justice, ameliorate the harm caused by the improper vacatur by recalling its opinion in U.S. v. Armstrong,2 which opinion relied upon the improper vacatur,

and remand that criminal case for a new trial. Respectfully submitted,

Connie C. Armstrong r Jr. Reg. No. 88762-011 r Unit B-5 Federal Correction Institution P.O. Box 9000 Seagoville r Texas 75159-9000

2 216 F.3d 1084, No. 97-10392, WL 425007 2000) (Table Opinion) .

Motion to Recall Mandate

(9th Cir.

Page 6

Exhibits to Motion for Discovery - Page 47

Memorandum

. SAN FRANCISCO (196A-SF-93255) (P)

To

From

Subject

s~ sAJ

__

(SQ' 5)

Data Date

3/8/91

b7C

dba CHIP ARMSTRONG, Jr., elba Hamilton Taft and Company 1 Market Plaza Spear street Tower San Francisco, California FBW; MFi Tax Fraud; Fraudj 00: SAN FRANCISCO

The purpose of this memo is to'document tO'document events that 9 ~~;;;:"":~~Io6..JII'oIIIel...,e since 6bruary 13 I 1 whi,?h is the date that ~~~~~",,-w.-.lrl.IiII:ie ~bruary 13, 19~ which On that ~~~~ ~was last interviewed by the writer. __________~provided numbs ocuments to provided a numbe iter which ~A or the IRS have been disse ~na e y he writer to qA C~here in San Francisco, telephone number 556-6850. It should: C~ere

9

summ~ry also be noted. that a copy of these documents along with a sumrn~ry of the writer's review of San Francisco file 196A-2868 has been prepared and disseminated to AUSA MICHAEL YAMAGUCHI at 556-1328. A copy of this summary is a matter of record under a separate communication which is a part of this file.

Due to the fact that AUSA YAMAGUCHI was on annual leave

I

and did not return to his office until March 4, and/or 5, 1991 no overt investigation was undertaken. This matter was referred to Mr. Y GUCHI because of his revious referral w' he handled re ardin Haml on Taft in which he subse entl f rlJlck prosecution.. This matter was investigated by S

0]_it was

~

~_

- -7

handled under--SF 196A-2868 and was closed

August, 1988.

byl

I

with regard to information supplied writer was reluctant to initiate any overt investigation for fear thatthere would~ Eotential liability attached wherein the governm~nt £.QB1dJ2e accused.Qf initiatipg the downfall ,of captioned company bvl'the mere fact that it was making overt inquiries. [ . ' ,has provided detailed information which, ~ of this date, has'been unable to be thoroughly corroborated. Progress is being made to effect such corroDorat2on. .

I.

~ expressed apprehension in his mind regarding the "extensive n time-it was taking for the government to decide Whether or not to initiate an investigation and to effect some criminal process. He was told that the government ha_g._:t.Q.........@~_ victim before any process would be forthcoming. He was further

Exhibits to Motion for Discovery - Page 48

196A-SF-93255 PKM/sgc PKM:/sgc

advised on more than one occasion by the writer of the potential civil liability which miggt attach to the revelation to the general public that the FBI was conducting or maybe conducting an investigation into certain alleged criminal activities on the part of Hamil ton Taft. .. Hamilton Nonetheless, on February 1-1, ~1, 1991~r= Isaw lsaw fit to contact the Corigressional congressional offices here in San Francisco of Congress persons NANCY PELOSI and BARBARA BOXER. ~ ~presentat' xep~esentat' on resswoman PELOSI's office to whom spoke ave arne of an investi ative re orter e rter infOrmat.iQD. On Fel?ruary~'; Fel;>ruar~,'; ~hould consider consi~er contacting.. with b~s infdt:mat·ipn. ~1, the wrlter w~it~r as well as ~gentl ~gentl Cln reported repo~ed ~1, lof the eIn - receiving telephone calls from an attorney at the Department of Justice making inquiry as to the FBI and/or IRS' connection if any with Hamilton Taft.

b7C

On February 13, 1991 1991,r during the interview ofl~ __ -.... conducted by the writer, he was again questioned as to the reason for making calls to the aforementioned conaressional offices. He stated that be he was concerned about II Ifollowing his resignation from Hamilton It should be noted that fact.during this interview on February 13, 1991 re-iterated that fact. that I thatlI J---1 I He was J~' again reminded of potential civil liability problems that might ~ gn?ue from the pyblicatign publicatiQD of Qf the possibl~nterest of the FBI gDpue with r~~9t . res~9t to-llamilton to-Jiamilton Iaf~. £af~.

I

~'1~·a~,r~~~o~n~~~·e~~~~:r=u~a~r~y~~11-,~1~9~9~1~. ~T-a-Y-~t--o-n--F-le-~b--'r-u-a-r-Y~1~1~,~1~9~9~1~.

1

l

I

On Wednesday, March 6 1991, the writer received a~ telephone call from SAJ ; JrRS JIRS CID who advised that he had been called by a M-. M • RALPH :IN IN W, an investigative reporter for the Wall street Journal here in San Francisco. The purpose of KING's call to SWAIN was to confirm that the IRS was conducting~nY§stigationregarding Hamilton Taft. conducting-an-ipy§stigation On the morning of March 6, 1991, the writer reviewed message slips that had arrived on Tuesday, March 5, 1991, the writer having been on sick leave that day and one of, them was from RALPH KING of the Wall street Journal. The writer did not return KING's phone calIon call, however, in res~g to a page, for a telephone call on ~h-_6J) 1991, the writer became connected the afternoon call of ~h-_6Jl street,Journal. to Mr. KING of the Wall street. Journal. The usual inquiries were made and the usual response, t~at, is we can neither confirm and/or deny the existence of any investigation was provided to thi§ ~eseon~. ~espon~. Mr. KING who seemed perturbed £y ~ :22

Exhibits to Motion for Discovery - Page 49

196A-SF-93255 PKMjsgc PKM/sgc

r head of corporate On March 6, 1991,1 security of Sun Micro Systems Inc. at 2550 Garcia Ave., Mountain View, California 94043, telephone number (415) 336-0496 was called by the writer in response to call that he had made to our office on March 5, 1991.

writer that his office had was been contacted by accompanied by an attorney attorneJ one (ph) who advised that the purpose ofl lcro Systems was to of I .. J_ contac advise Sun Micro Systems that it had been the victim of a fraud perpetrated by Hamilton Taft' on Sun -.Micro Micro Systems and numerous ~dvised other corporate clients of Hamilton Taft. I 'advised the writer that he would fax certain documents up to San 5uggestiqn. These documents· included a Francisco at the writer's suggestiqn. documents'included betw~en Sun .Mic1;"o copy of· of' the service agreement thal: thati,· exists exiErts....betV{~en Sun, }1,icJ;'o ... Hamil ton Taft dated (October 1, ._.1981 __.1987 as well as copies Systems and Hamilton of certain Federal tax forms whicn had been executed by employees of Hamilton Taft Company. I~ Ilalso also advised the writer writer. ad of his own volition convened a meeting of ""~~}:'~~ ;~ that I pad ,~~}:,~v ;'N"_.':~ .1~. " n; several of the corporate representatives who he had contacted .t~~('-_~,':;~'.'.J f~;(,·.~,,;~·,') "~"'7 .'r< presumably in the first week of March telling these corporations who are current and/or former clients of Hamilton Taft, that they had in fact been ,defrauded by Hamilton Taft. Sun Micro-Systems reluctantly agreed to "host" this meeting which was to take place .I"'" .1,' during the afternoon of March 8, 1991 at Sun Micro System's ,;'; ,; offices in Mountain View. nf

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Of the mornin: of Marcb March 7. 7, 1991, H91, I I,throtgh' l:throilgh . his associatel l, an investigator for the Co~porate security:.. Department of un o,f Securit~Department un Micro Systems, facsimiled 16/pages l~~ages oj documents to the writer. The most salient point of t~ese these "', ,'.' ' documents was a letter to Sun Micro Systems dated February 13, i~:;}··'; in-- Fresno. The letter refers to a particular ,/' 1991 from the ,.IRS in-' ./, ;) >')' tax identification number utilized by' Sun Micro Systems and .' '~: "s;";:,' 1990.'- The letter ~,l~:?,.,. references a tax period ending september 30 30,I 1990.' \,e':,. } t -.~, ';0 goes on to thank tax payer (Sun Micro Systems) for its reply I·, penaltyJ;'. , . dated January 25, 1991 and its payment of $260,784.25 in penaltyJ;'..... .. ' .... ' fees and for its late deposit of ($5,215, 684~86). The - .,~ signifipan:e Of of th~S tb~'5 ::mmunication is that Sun Micro Systems signifiri:lD:e .,',; .'.. t h r o u g h L J h a s represented, as of March 7, 1991, that lnac~ sen it did ~nac~ t e appropriate money that is $5,215,684.86 to Hamilton Taft via a wire transfer in order to pay employment tax obligations do and owing the IRS for the tax period ended September 30 r 1990. Per an agreement of which the writer is in receipt, that is, the service agreement between Hamilton Taft and Sun Micro System?, Hamilton Taft is responsible for the of~--L~e penalties. penalti~§4 payment af~--L~e It is an inference drawn by Sun

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Exhibits to Motion for Discovery - Page 50

196A-SF-93255

PKM/sgc Micro Systems personnel that this document tends to corroborate what I I was alleging in his representations to the government. '

On the afternoon of March 7, 1991, AUSA YAMAGUCHI was personally visited by the writer and a brief update was provided to him of events that have taken place. On March 8, 1991, copies

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of the aforementioned facsimiles were provided to AUSA YAMAGUCHI fore his review. On March 8, 1991, Mr. YAMAGUCHI suggested to the writer ,that efforts continue to accumulate enough probable cause to cause the issuance of a search warrant for the offices at Hamilton Taft at the earliest possible date.

The following corporations have been contacted by ] I land/or his attorney and ~d~~~ed that they' have been the victims of fraud perpetrated on them by Hamilton Taft. These corporations are Costal Savings Bank, Sun Micro Systems, American

West Airlines, and one or two chemical companies located at the east coast. In addition, I advised writer that he has been contacted by

representat~ves

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of Lloyds of London

Insurance company with respect to Hamilton Taft.

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me~t~ng_"",I:.o-;-oe,,··he~d_~,at,.Sun.,M~c_ro __ systems, ().f:!:~pes

at-March 8, 1991.

San Francisco at San Francisco, California: Investigation is continuing.

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Exhibits to Motion for Discovery - Page 51

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4/3/91

CONNIE/C. JR., AKA 9HIP~STRONG; DBAvHAMILTON TAFT AND COMPANY: 32ND FLOOR, SPEAR STREET TOWER, SAN FRANCISCO, CALIFORNIA; FRAUD BY WIRE ~ MAIL FRAUD; TAX FRAUD i 00: SAN FRANCISCO

San Francisco has initiated a Fraud By Wire investigation based on information received from the former Comptroller of Hamilton Taft and Company (HTC) that the SUbject, Armstrong, has embezzled over $100 million from the firm's clients over the last three years. These allegations continue to be front-page news in San Francisco and on 3/15/91, the Wall Street Journal ran a front7page article detailing the allegations (copy attached).

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HTC contracts ,with companies who owe taxes to numerous state and local taxing authorities. Client companies make a lump sum wire transfer of funds to the HTC account, and thereafter, HTC issues checks to whatever taxing authority is owed money. The former Comptroller, I I, has alleged that Armstrong diverted lump sum payments to his own use and thereafter, incurred penalties associated with late payments and passed these costs along to the client companies who were not notified of the late charges. In essence the allegation is that Armstrong is running a "Ponzi scheme" of considerable magnitude Which requires increasing amounts of cash to keep the operat'on going. &-l left HTC in Februar of 1991 and on 3

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You will be kept apprised of pertinent developments.

NOT APPROPRIATE FOR DISSEMINATION TO THE PUBLIC

L.~S Enclosure Mr. Jones Mr. Baker 1 - Mr. Potts 1 - Mr. Bryant 1 1 -

O'Hara Mr. Esposito 1 - Special Assistants, CID 1 - Mr. 1 -

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(Jv\~ Exhibits to Motion for Discovery - Page 52