Transcript of Lawler Second Hearing

8/10/2019 Transcript of Lawler Second Hearing

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UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF GEORGIA

ATLANTA DIVISION

SECURITIES AND EXCHANGE )COMMISSION, ) ) PLAINTIFF, ) ) DOCKET NO. 1:14-CV-2468-AT -VS- ) )THOMAS J. LAWLER, ET AL., ) ) DEFENDANTS. )

TRANSCRIPT OF TEMPORARY RESTRAINING ORDER PROCEEDINGSBEFORE THE HONORABLE AMY TOTENBERGUNITED STATES DISTRICT COURT JUDGE

FRIDAY, AUGUST 8, 2014

APPEARANCES:

ON BEHALF OF THE PLAINTIFF:

PAT HUDDLESTON, II, ESQ. GREGORY F. SMOLAR, ESQ.

ON BEHALF OF THE DEFENDANT THOMAS J. LAWLER

PRO SE (BY TELEPHONE)

ON BEHALF OF JUDITH HARRIS:

W. CARL LEITZ, III, ESQ.

ELISE SMITH EVANS, RMR, CRROFFICIAL COURT REPORTERUNITED STATES DISTRICT COURTATLANTA, GEORGIA

Case 1:14-cv-02468-AT Document 24 Filed 08/20/14 Page 1 of 60


2/61ELISE SMITH EVANS, RMR, CRR

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INDEX

WITNESSES ON BEHALF OF THE PLAINTIFF:

MATTHEW MCNARAMA Direct Examination by Mr. Huddleston 18

KARAZ S. ZAKI Direct Examination by Mr. Huddleston 28




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1 (Friday, August 8, 2014; Atlanta, Georgia.)

2 THE COURT: Please be seated.

3 We're here in the matter of the Securities and Exchange

4 Commission versus Thomas Lawler and Freedom Foundation, USA, LLC,

5 doing business as Freedom Club USA, and relief defendants are

6 Divine Spirit, LLC, Order Processing, LLC, Prosperity Solutions,

7 LLC, and Violet Blessings, LLC, civil action file number

8 1:14-CV-2468.

9 Good afternoon, Mr. Huddleston.

10 MR. HUDDLESTON: Good afternoon, Your Honor.

11 THE COURT: I understand, Mr. Leitz, you're here on

12 behalf of Ms. Harris?

13 MR. LEITZ: That's correct, Your Honor.

14 THE COURT: And I don't see Ms. Harris as a named

15 defendant. Is she here on behalf of one of the relief

16 defendants?

17 MR. LEITZ: If I may, just for a moment, Judge.

18 THE COURT: Yes.

19 MR. LEITZ: As the Court noted, Prosperity Solutions,

20 LLC, is a relief defendant in this case. Prosperity Solutions

21 has one member in that LLC, and that one member is Ms. Judy

22 Harris, who is with me in court here today.

23 THE COURT: Okay.

24 MR. LEITZ: Other than a bank account with less than a

25 hundred dollars in it, Prosperity Solutions has no assets.




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1 Prosperity Solutions has no money to hire a lawyer, no assets to

2 retain counsel. I'm handling another matter on Ms. Harris'

3 behalf that relates to this.

4 THE COURT: All right.

5 MR. LEITZ: And I thought out of an abundance of

6 caution I wanted to show up and make that announcement to the

7 Court. Of course, if you have any questions, I'd be happy to

8 answer it, but I wanted to --

9 THE COURT: Well, I appreciate Ms. Harris' appearing

10 and your appearing.

11 MR. LEITZ: Absolutely, Judge.

12 THE COURT: All right. Mr. Lawler has called my office

13 multiple times and has spoken with Ms. McConochie. He didn't

14 want to appear. He wanted me to consider this matter, per his

15 communication with Ms. McConochie, the Deputy Courtroom Clerk

16 here, that -- based on his submissions, but then he would ask --

17 he asked a number of different questions about the proceedings.

18 So, my intent at this point is to phone him and give

19 him an opportunity to be present by phone, or not, or to just

20 simply ask him does he want us to consider his position solely

21 based on his submission. I'm not going to give him an

22 opportunity to cross-examine witnesses since he's been given an

23 opportunity to be here, but if he wants to be present in this way

24 or ask me any questions before we begin, I will allow him to do

25 that. It became impossible for Ms. McConochie, though, to ask




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1 further questions, answer further questions, so --

2 (An off-the-record discussion was had.)

3 THE COURT: All right. So, I understand that the SEC

4 wishes to call two witnesses; is that right?

5 MR. HUDDLESTON: Yes, Your Honor. We intended to call

6 Mr. Lawler and Mrs. Lawler, but in their absence --

7 THE COURT: Anyone else besides the Lawlers?

8 MR. HUDDLESTON: We have two additional witnesses.

9 THE COURT: All right. Ms. Harris is the registered

10 agent for service -- is that right -- for Prosperity Solutions?

11 MR. LEITZ: That's correct, Judge.

12 THE COURT: All right. Well, Mr. Leitz, I will give

13 you an opportunity, if at any point you wish to make a point or

14 ask questions, then -- I realize that the registered agent for

15 service is not exactly the representative, merely a registered

16 agent for service. But particularly in that the Lawlers are not

17 here, I will give you that opportunity. And we're glad to have

18 an attorney at all.

19 MR. LEITZ: I probably won't have anything, but I --

20 THE COURT: I assume that's so.

21 MR. LEITZ: Yeah.

22 THE COURT: All right. All right. Well, I don't know

23 how -- how Ms. -- you know, this will come as a surprise to Mr.

24 Lawler that we're calling him from the courtroom, but I didn't

25 want Ms. McConochie to have to engage in further phone




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1 conversations that were not on the record.

2 (The Courtroom Deputy Clerk called Mr. Lawler and he

3 appeared by teleconference, after which the following proceedings

4 were had.)

5 THE COURTROOM DEPUTY CLERK: Good afternoon, Mr.

6 Lawler. This is Amy McConochie, Judge Totenberg's Courtroom

7 Deputy Clerk. I'm calling you from the courtroom pursuant to

8 Judge Totenberg's direction. And you are now on speaker phone in

9 the courtroom.

10 MR. LAWLER: Okay. Greetings.

11 THE COURT: Mr. Lawler, I know that you had been in

12 touch with Ms. McConochie, and I have directed her that -- at

13 this juncture that any further communication as to this hearing

14 should occur here.

15 So, I am the recipient of some of the information that

16 you have provided her, but I wanted to be sure this was on the

17 record. There is a court reporter here. Also here today are the

18 counsel for the Securities Exchange Commission. And I understand

19 Mr. Huddleston plans to call two witnesses. He had planned to

20 call you as a witness and your wife as a witness, too, but

21 obviously you're not here.

22 MR. LAWLER: I'm sorry, Your Honor. I'm having a

23 difficult time catching about every other word on the speaker

24 phone.





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1 MR. LAWLER: If you could get closer to it or --

2 THE COURT: All right. Well, I'm going to -- this may

3 not be feasible, and I just wanted to -- I will come down closer

4 to the phone right now.

5 MR. LAWLER: Thank you so much.

6 THE COURT: What I said, Mr. Lawler, is that as you

7 know, you were directed to be here, but my understanding is is

8 that you wished not to come today, but for me to consider instead

9 your Motion to Dismiss as your response.

10 MR. LAWLER: That was one option. I had sent an e-mail

11 (unintelligible) trying to get a court-appointed attorney and

12 Harry Martin filed our request today, but it had never been filed

13 earlier yesterday. He did file it timely. So, our true intent

14 was to have representation there today, so that was our primary

15 incentive. That having failed, we went to a backup plan as of

16 today, realizing that had not happened.

17 THE COURT: Well, I don't know what happened with the

18 motion, but obviously it was filed just yesterday. So, I don't

19 think that we could have considered it, in any event, in that

20 time period. But let me just say, with respect to the

21 appointment of counsel, in a civil case you have no

22 constitutional right to appointment of counsel. That's in

23 contrast to your right to have appointment of counsel in a

24 criminal case if you are indigent and are not able to afford an

25 attorney.




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1 In considering whether to appoint counsel in a civil

2 action, the Court weighs a number of factors, including the merit

3 of your claim, whether the claim is factually or legally so

4 complex as to warrant the assistance of counsel. Here there's

5 not really a claim. There -- you're really asking for counsel to

6 represent you in a case in which you are a defendant.

7 Typically counsel are appointed in civil rights cases

8 where the individual is attempting to mitigate a right and it is

9 an exceptional remedy and already -- counsel's only appointed

10 in -- at least by me, and I think I probably more liberally

11 appoint than maybe other judges, but after there have been a

12 substantial showing, usually when the case has gone on for some

13 time, that the plaintiff's claim is supported by mitigating

14 evidence. We're just not in that position in this case, so I

15 cannot grant your motion.

16 MR. LAWLER: Well, may I comment, please?

17 THE COURT: You can comment briefly.

18 MR. LAWLER: Yes. I spent Monday, Tuesday, and

19 Wednesday trying to secure counsel, and the best I got offered

20 cost wise, the attorney wanted $25,000. You awarded $10,000, as

21 you recall, in your TRO. No one would even touch the case for

22 less than that, so my options were zero. Thus -- and, thus, I

23 spent two days trying. But on that grounds, therefore, I was

24 forced into a court remedy and that was what I did on Thursday.

25 So, that was my process.




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1 THE COURT: All right. All right. Well, you know, we

2 certainly can consider whether you have sufficient funds in order

3 to hire counsel. I'm surprised that anyone wanted $25,000

4 necessarily just to begin a case, but that's neither here nor

5 there. And I don't know all of your financial circumstances, of

6 course. But I do know that in -- at least in the records of the

7 case that's with the Court, that you haven't responded to many of

8 the requests or directives in my order so that we could even be

9 able to begin to assess this case more fully.

10 MR. LAWLER: Which directives have not been

11 accomplished?

12 THE COURT: Well, I'm going to go through this

13 systematically --

14 MR. LAWLER: All right.

15 THE COURT: -- but I think that one of the things that

16 you could have done is be here yourself so that you could have

17 gained more information. I am standing right next to a

18 telephone, and I will tell you I think that it was perfectly

19 within my discretion and authority simply not to call you at this

20 juncture, but because you have been in communication with the

21 Court, I did not feel that I wanted to do that. But this is not

22 going to be probably a completely viable process to have you

23 participate by phone, and you don't have any right to participate

24 by phone. So, I have to consider what in fact I'm going to do.

25 I'm going to allow the SEC to begin to present its case




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1 and I will go over the order. And to the extent you can hear,

2 that's great, and to the extent you can't hear, there's really

3 nothing more that I could do about that at this point, because

4 the -- I put a phone from my office that is a phone we have

5 available here so that you could hear. And I am perfectly

6 willing to move closer to the phone and get another chair so that

7 I can do that, but that's about as much as I can do at this

8 moment.

9 I'll consider your representation that you have

10 attempted to find counsel and in the mix as we're proceeding here

11 today. And if -- your having decided not to appear and having

12 just now indicated you want me to proceed based on hearing

13 your -- or reviewing your Motion to Dismiss, you -- you know,

14 that is your choice at this juncture since you haven't -- you're

15 not here for me. I mean, I will not require you to sit and

16 listen to this and hear every other word, but I'm having

17 basically to view this as a -- your failure to appear as a waiver

18 of your right to be here at this moment.

19 MR. LAWLER: Well, there is in fact a (unintelligible)

20 because I could only represent myself and not the LLC according

21 to your dictate a week ago. So, therefore, I wanted this to be

22 complete and resolve all the issues on the table, and I needed an

23 attorney, according to you, to do that. So, I thought it was

24 wiser to find another alternative. And I had suggested, you

25 know, if we could get a court-appointed attorney, we could




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1 reschedule it on a Monday or a day that's workable for you,

2 but -- so that was my attempt today that the attorney would in

3 fact be there to represent all the LLCs. So that is the reason I

4 had called, essentially.

5 THE COURT: All right. Well, I don't think you

6 basically had the legal right not to respond to a direct order of

7 this Court to appear here, and I take note of that. I understand

8 what your -- your concern about not having your other -- the

9 other entities represented, but of course I did indicate in the

10 prior conference on the TRO that you could represent yourself.

11 And you are a defendant in this case. And I have now bent over

12 backwards to include you in one way or the other. The other

13 entities are not here, obviously, and are not represented by

14 counsel, but you could be here and you are aware of that.

15 So, without further ado, let's now start the hearing

16 itself. And I would ask counsel for the Securities Exchange

17 Commission to come up and tell me what the status of the response

18 to the order is -- as to each element in the order.

19 MR. HUDDLESTON: May it please the Court, Your Honor,

20 Pat Huddleston for the SEC.

21 With regard to your questions regarding the status, we

22 have received back communications from the banks who were served

23 with the order. And through Karaz Zaki, one of my witnesses, we

24 will go through what the balances are, what they're indicated to

25 be at least as of the time of the service of the order on those




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1 entities.

2 We are in a position to put forward evidence to meet

3 our prima facie case showing past violations of the securities

4 laws as well as a likelihood of future violations, which are the

5 only two elements we need in order to sustain our burden for a

6 preliminary injunction.

7 We have not received an accounting from either of the

8 defendants or any of the relief defendants. We have not seen any

9 evidence that they have complied with in order to repatriate

10 funds that were sent overseas. I have asked that -- in

11 compliance with this Court's directive that I keep things as

12 informal and as manageable for the defendant as possible, I have

13 communicated to him by e-mail asking him to produce QuickBooks

14 files and a list of all the AR purchasers. He has failed to

15 produce any such information, claiming that the QuickBooks file

16 is held by an employee who lives out of state. I asked him for

17 the contact information for that person. He's refused to --

18 THE COURT: Speak as loud and clearly as possible so --

19 MR. HUDDLESTON: Thank you. Should I repeat any of

20 that?

21 THE COURT: Just -- just start out with your

22 conversations with Mr. Lawler so he can hear what --

23 MR. HUDDLESTON: Very good. Yes. I have been

24 e-mailing Mr. Lawler.

25 Would you like me to come stand by the phone, Your




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1 Honor?

2 THE COURT: Yes. If you wouldn't mind.

3 MR. HUDDLESTON: Not at all.

4 Mr. Lawler and I, once I got access to his e-mail, have

5 been communicating by e-mail. I asked him to produce the

6 QuickBooks file so that we could determine how much of the money

7 taken in was from AR, how much from other sources. He

8 communicated, first of all, not at all, no response to that. I

9 kept reminding him that I needed that and that it might even

10 behoove him for the Court to be able to review that evidence.

11 Finally, he told me that the QuickBooks file is

12 maintained by an employee of his who is out of state. I asked

13 him to identify that employee, give me contact information so

14 that I could straight to that employee, and he simply refused to

15 respond.

16 I also asked him to produce a list of all the AR

17 purchasers, since I judge there must be such a thing, so that

18 when this payout comes, everyone can get paid the appropriate

19 amount. He tells me that he -- you know, first of all, did not

20 respond to that at all, and then finally told me that for some

21 reason he cannot -- cannot produce it. So, that is the status of

22 things. No accounting, although we have received the

23 communication from the banks indicating current balances. We're

24 still --

25 THE COURT: Well, what are the current balances?




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1 MR. HUDDLESTON: I can -- I don't have those memorized

2 I can put those on through my accountant.

3 THE COURT: All right. All right.

4 MR. HUDDLESTON: Violet Blessings has the highest

5 balance. The rest of them are nominal.


7 MR. HUDDLESTON: Yes. I was, as I mentioned, expecting

8 to be able to examine the Lawlers. Since I can't, though, I am

9 prepared to put on Matthew McNamara who is an Assistant Director

10 of Enforcement at the Commission, and also Karen Zaki who is an

11 enforcement accountant who investigated this case. They will be

12 able to talk to us about the representations that are made to

13 folks on the web site and also about the flow of funds between

14 the defendants and the relief defendants.

15 THE COURT: All right. I looked at the docket in this

16 case to see whether any of the defendants had responded to

17 paragraph II, Roman Numeral II, of the order I had entered, and I

18 saw no information filed in conformity with that directive that

19 identified all names by which every person with authority to

20 exercise control of the defendants or relief defendants is known

21 and a variety of other things, about the contact information.

22 And the next one -- section was a requirement that the defendant

23 identify each account with any financial institution or brokerage

24 firm maintained in either of the defendant's or any relief

25 defendants' name. And I saw nothing about that.




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1 MR. HUDDLESTON: And we've received nothing.

2 THE COURT: All right. And I gather you have received

3 no responses to -- in connection with any discovery that you

4 served, or have you served any discovery?

5 MR. HUDDLESTON: Your Honor, I did not serve him

6 formally. I communicated by e-mail, trying to keep things simple

7 for the pro se defendant.

8 THE COURT: Okay. I also directed in paragraph VIII

9 that each defendant prepare and present to the Court and the

10 Commission a sworn accounting of all funds received by the

11 defendants pursuant to the scheme described in the Commission's

12 complaint and of the disposition and use of said proceeds. And

13 this is again in paragraph VIII. And I didn't require that to be

14 filed for 20 days.

15 Did you have any discussion with Mr. Lawler about that?

16 MR. HUDDLESTON: Only the aforementioned conversation

17 about the QuickBooks, yes.

18 THE COURT: All right. All right. Why don't you tell

19 me what you have received from the banks, what information you

20 have -- you said you needed to go check?

21 MR. HUDDLESTON: Right. Let me -- Your Honor, I can

22 mark these, if you like, and move them into evidence. I have

23 received response --

24 THE COURT: Speak up.

25 MR. HUDDLESTON: I'm sorry. I've received response




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1 from Embassy Bank indicating that they have an account in the

2 name of Order Processing. It was opened on September 9th --

3 THE COURT: Speak up.

4 MR. HUDDLESTON: -- 2013, and closed on November 1st,

5 2013. Everybody else, if they had nothing, they did not indicate

6 a balance since there's not a currently opened account.


8 MR. HUDDLESTON: PNC Bank responded that they had no

9 accounts.

10 First Citizens Bank responded that they have an account

11 in the name of Divine Spirit, LLC, with a balance on August 1,

12 2014, of $11,396.

13 THE COURT: And that was for which group?

14 MR. HUDDLESTON: That was for Divine Spirit, LLC.

15 THE COURT: Divine Spirit?

16 MR. HUDDLESTON: The same bank, First Citizens Bank,

17 indicated that a balance as of close of business on August 5,

18 2014, for Violet Blessings, LLC, was $123,699.

19 They responded that they did not have any accounts in

20 the name of Mr. Lawler, Freedom Foundation, Order Processing, or

21 Prosperity Solutions.

22 Wells Fargo did have an account in the name of

23 Prosperity Solutions with a zero balance. Another one with a

24 balance of $99.40, also Prosperity Solutions. And a third

25 account in the name of Violet Blessings, LLC, in the amount of




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1 $410.84.

2 Embassy Bank -- I'm sorry. We've already -- and then

3 finally, Guaranty Bank responded just today that they have an

4 account in the name of Order Processing, LLC, which was opened

5 just in March 2014 by Mr. Lawler and that the current balance is

6 $2.77.

7 That's all we've received from the banks on current

8 balances.

9 THE COURT: All right. And just relative to what money

10 and funds might be available to the Lawlers, do you have any

11 information as to the amount of funds from Mrs. Lawler's

12 retirement account she gets on a regular basis?

13 MR. HUDDLESTON: We do. We do. And our accountant

14 will be in a position to give that.

15 THE COURT: All right. Very good. Is there any other

16 information you want to provide the Court? We'll let you do

17 those as exhibits once Ms. McConochie comes back.

18 MR. HUDDLESTON: Very good. Well, there will be

19 exhibits that we want to introduce through Mr. McNamara.

20 THE COURT: All right. All right.

21 MR. HUDDLESTON: Shall I call him now?

22 THE COURT: Go ahead.

23 MR. HUDDLESTON: Okay. Call Matt McNamara.

24 MATTHEW MCNAMARA,

25 having been duly sworn, was examined and testified as follows:




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1 DIRECT EXAMINATION

2 BY MR. HUDDLESTON:

3 Q. State your full name for the record, please.

4 A. Matthew Folds McNamara.

5 Q. You work for the SEC, Mr. McNamara?

6 A. Yes, I do.

7 Q. What is your title there?

8 A. I'm an Assistant Regional Director in the Atlanta regional

9 office of the Securities and Exchange Commission.

10 Q. That's in the Division of Enforcement?

11 A. Correct.

12 THE COURT REPORTER: I need you to speak up a little

13 bit.

14 Q. (BY MR. HUDDLESTON): What are your job duties, sir?

15 A. I supervise a professional -- seven attorneys and one staff

16 accountant, as well as some administrative staff, in

17 investigating potential violations of the federal securities

18 laws.

19 Q. All right. And what is your involvement with this case?

20 A. I supervise the primary staff attorney and staff accountant

21 that conducted the investigation. It took place roughly between

22 February and the present of this year.

23 Q. All right. And supervising those personnel, can you break --

24 THE COURT REPORTER: I still can't hear you, Mr.

25 Huddleston.




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1 MR. HUDDLESTON: I'm very sorry.

2 Q. (BY MR. HUDDLESTON): You said supervise the staff. Can you

3 tell me what else was involved in that?

4 A. Assisted in putting together investigative plan, reviewing

5 the investigative testimony in this case, going over analysis of

6 bank records that were produced pursuant to subpoenas that we

7 issued to various banks, and reviewing exhibits to the

8 investigative transcripts, as well as various iterations of Mr.

9 Lawler's and Freedom Foundation's web site.

10 Q. Very good. I'm going to step over and get an exhibit.

11 THE COURT: All right. That's fine. And while you're

12 doing that, I'm just going to note for the record that the -- I

13 am sitting next to the court reporter rather than my usual

14 position on the bench, and we have a microphone on this same desk

15 in front of the court reporter which Mr. -- counsel is speaking

16 into and then the witness is standing next to him with an extra

17 portable microphone.

18 Q. (BY MR. HUDDLESTON): All right, Mr. McNamara. I am handing

19 you what we have marked as Plaintiff's Exhibit No. 1 for

20 identification. If you would take a look at that and tell me

21 what it is, if you know.

22 A. This is a printout of one iteration of the Freedom Club USA

23 web site.

24 Q. And take a look at the lower right-hand corner and tell me

25 what the date is that that web site copy was printed out?




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1 A. 6/24/2014.

2 Q. All right. Now, it's got a black and white exhibit sticker

3 on it, 5. Does that indicate that it was Exhibit 5 to Mr.

4 Lawler's investigative testimony?

5 A. That's correct.

6 Q. And did you review this web site as part of your job duties?

7 A. Yes, I did. And in particular, reviewed this definitively

8 before we filed our emergency action, so I'm familiar with this

9 document.

10 Q. Very good. I'm going to hand you now what we've marked as

11 Plaintiff's Exhibit No. 2 for identification and ask you if you

12 recognize that.

13 A. This also is another iteration of the Freedom Club USA web

14 site.

15 Q. Thank you. I'm now handing you what we have marked as

16 Plaintiff's Exhibit 3 for identification. Tell me what that is,

17 please.

18 A. This is a copy of the investigative testimony of Thomas

19 Lawler in this investigation. It was taken in late June of this

20 year.

21 Q. Did you review this testimony?

22 A. I reviewed this testimony at various times during the

23 investigation. And, again, before we filed the emergency action,

24 I read it -- or we read it in its entirety.

25 Q. All right. Now handing you what we've marked as Plaintiff's




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1 Exhibit 4 for identification. If you would, tell me what

2 Plaintiff's Exhibit 4 is, please.

3 A. This is a copy of the investigative testimony -- the

4 transcript of the investigative testimony of Diane Lawler. It

5 was taken in June of this year.

6 Q. Did you reserve -- did you review this as well?

7 A. I reviewed it during the course of the investigation in

8 advance of our filing of our emergency action.

9 Q. Okay.

10 MR. HUDDLESTON: One moment, please.

11 (A pause in the proceeding was had.)

12 Q. (BY MR. HUDDLESTON): And, finally, sir, I'm going to hand

13 you what we've marked as Plaintiff's Exhibit 5 for

14 identification. Can you tell me what Exhibit 5 is, please?

15 A. This is a somewhat unique filing that I saw for the first

16 time, I believe, yesterday afternoon. It's filed by Mr. Lawler

17 in the Common Law International World Court. It purports to be a

18 statement of claim. It names the Commission, various members of

19 the Commission, and other government officials as defendants in

20 an action in a jurisdiction with which I am unfamiliar.

21 Q. Very good. Now, tell us, if you will, having -- having

22 testified that you reviewed Exhibits 1 through 4, can you tell us

23 what conclusions, if any, you came to, what you did with what you

24 saw in those document?

25 A. Well, in the documents concluded, primarily with this and




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1 other information gathered during the course of the

2 investigation, that securities were involved. That those

3 securities had not been registered. That Mr. Lawler had made

4 misrepresentations as to the use of investor funds.

5 Q. Now, the determination of securities gives the Commission

6 jurisdiction; right?

7 A. That's correct.

8 Q. Okay. Tell us your knowledge of the securities.

9 A. Okay. And not to sound didactic here, but the statutes --

10 there are two federal securities statutes primarily that we

11 enforce, the '33 Act and '34 Act. Each contain a statutory

12 definition of the term "security."

13 Included in each is the term investment contract and

14 that term has been interpreted by the Supreme Court in a case

15 called Howey that everybody refers to. So, under Howey there's

16 several elements, and those elements are defined in the Eleventh

17 Circuit, but the first is that there's money.

18 And in this case, based on the review of the bank

19 records and the documents before me, we determined that investors

20 had provided Mr. Lawler or Freedom Foundation with money. That's

21 element one.

22 The second element is a common enterprise. In the

23 Eleventh Circuit where we are, the common enterprise is basically

24 a reliance on the expertise of a promoter. And the way the ARs

25 were represented in Mr. Lawler's testimony on the web site, he




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1 and Freedom Foundation and potentially affiliates have exclusive

2 control over a unique proprietary process by which they can turn

3 an administrative remedy amount from 1,000 to 10,000 into returns

4 ranging from $325,000 to $1,000,000. They -- what -- Mr. Lawler

5 purports to have connections with various international finance

6 organizations that allow for this return on that investment.

7 So, that gets us to the second prong, through the

8 second prong of the Howey analysis as modified and interpreted in

9 the Eleventh Circuit.

10 Q. All right. And the third?

11 A. And the third is an expectation of profits, based on the

12 efforts of others, typically the promotor. And here that

13 overlaps significantly with that second prong we just went

14 through. But, again, the investors have nothing to do with the

15 filing of the claims. They have nothing to do with the process

16 that's not articulated clearly as far as I can tell.

17 And we have tried to understand the representations,

18 and they appear to be largely nonsensical. But giving them every

19 bit of credence, the process as represented is -- is opaque. And

20 Freedom Foundation engages in that process without any assistance

21 or involvement of investors. So, that's the fundamental

22 securities analysis we did in this case.

23 Q. All right. And having concluded that the securities were

24 involved, what implications did those have regarding possible

25 charges?




24

1 A. Well, jurisdictionally, then, that would serve as the basis

2 for violations of our fraud statutes, Section 10(b) of the

3 Exchange Act and 17(a) of the Securities Act, the '33 Act.

4 And, then, I also personally and I think initially

5 directed staff to confirm -- or investigate whether any

6 registration statements had been filed with the Commission or any

7 Reg D filings. And confirmed through the Edgar database that

8 there were no such filings in this case.

9 So, there are apparent registration violations on top

10 of fraud violations, all premised on the, you know,

11 jurisdictional hook of a security.

12 Q. Very good.

13 MR. HUDDLESTON: That's all I have for Mr. McNamara.

14 Does Your Honor have any questions?

15 THE COURT: So, you're saying they were fraud because

16 of their not having been registered or because of the substantive

17 representations or both?

18 THE WITNESS: The registration would not go to fraud,

19 but the misrepresentations as to the use of funds, the existence

20 of a -- of a -- of a process to generate these fantastic returns,

21 those misrepresentations with the threshold of having a security

22 put them within the ambit of Section 10(b), so --

23 THE COURT: Well, just so we have a very clear record

24 and -- in essence, you had to summarize what was -- what that

25 fan -- what you find as fantastic or not opaque method of




25

1 obtaining returns, what was the -- what was it that you

2 determined was -- looked at the testimony and the evidence or the

3 web page as the --

4 THE WITNESS: Well, if it had said black box, that if

5 you input a certain amount of money, you'll get a certain amount

6 of money back. And when you look at that with the way the funds

7 were used, which was essentially to pay personal expenses and

8 operating expenses that were essentially simply associated with

9 collecting funds, that's a misrepresentation and a misuse of

10 investor funds.

11 And, you know, trying to give every -- every benefit to

12 this proprietary method, there appears to be no way to generate

13 those returns. And, again, in -- well, the first time in

14 testimony, Mr. Lawler indicated that there never has been a

15 payout. And I believe this has been in operation since 2004.

16 THE COURT: All right. And were you able to identify

17 the total number of amount of funds taken in?

18 THE WITNESS: Well, we know the -- the AR amounts, and

19 they range from 1,000 up to 10,000. And per Mr. Lawler's

20 testimony, he testified I believe that there were 2,000

21 purchasers over the years. And I think that's from 2004 to the

22 present.

23 So -- and also having reviewed bank records and gone

24 over them with the staff accountant who had primary

25 responsibility for this case, many millions, at least in the




26

1 2011, '12 time frame, I think we saw millions of dollars coming

2 in and going out. And that is supported by his testimony that

3 there were about 2,000 purchasers. But we do not have it -- a

4 definitive number.

5 THE COURT: So, as I understand it, you were able to

6 look at financial records separate and apart from the record that

7 Mr. Huddleston just spoke about?

8 THE WITNESS: I don't -- the -- the records you were

9 speaking about?

10 THE COURT: Were --

11 THE WITNESS: Bank accounts.

12 THE COURT: Bank accounts. What are -- what are the

13 financial records you all obtained?

14 THE WITNESS: I'm referencing specifically bank account

15 records that were obtained from various financial institutions

16 pursuant to RFPA subpoenas that we issued once we had subpoena

17 authority in this case.

18 THE COURT: And when was that that these subpoenas were

19 issued or when did you get those records?

20 THE WITNESS: Over the course of the investigation. It

21 took several months. I couldn't give you specific dates, but I

22 know that we quickly moved, upon obtaining subpoena authority, to

23 issue the first wave. Many accounts had been closed and the

24 funds migrated to other accounts. The Staff Accountant Karaz

25 Zaki could speak with specificity as to that --




27


2 THE WITNESS: -- but tracing those funds over time

3 allowed us to see -- with the known accounts that we had -- and I

4 can't represent that that's the entire universe. But with

5 those -- with those funds, with those accounts, significant funds

6 coming through over that period.

7 THE COURT: All right. Well, I assume I'm going to be

8 able to get a better fix on this millions of dollars from the

9 staff accountant?

10 THE WITNESS: Yes.

11 THE COURT: All right. Very good. All right. Well,

12 I'm going to allow the opportunity for the one counsel who is

13 here for the registered agent of service to ask any questions, if

14 you have any.

15 MR. LEITZ: Thank you, Judge. I don't have any

16 questions.

17 THE COURT: All right. Ms. McConochie, we had exhibits

18 provided, 1 through 5.

19 MR. HUDDLESTON: Tender those.

20 THE COURT: And, again, if counsel who happens to be

21 here, if you have any objection --

22 MR. LEITZ: No objection, Judge.

23 THE COURT: All right. All right. They are admitted.

24 MR. HUDDLESTON: Thank you, Mr. McNamara.

25 We'll call Karaz Zaki, please.




28

1 KARAZ S. ZAKI,

2 having been duly sworn, was examined and testified as follows:

3 THE COURTROOM DEPUTY CLERK: Thank you. Please state

4 your name for the record, and please spell your name for the

5 record.

6 THE WITNESS: Karaz Saleh Zaki. It's K-a-r-a-z.

7 Middle name is S-a-l-e-h. Last name is Zaki, Z-a-k-i.

8 DIRECT EXAMINATION

9 BY MR. HUDDLESTON:

10 Q. What do you do for a living, Ms. Zaki?

11 A. I'm a staff accountant for the Securities and Exchange

12 Commission in the Enforcement Division.

13 Q. How long have you done that work?

14 A. Just over 14 years.

15 Q. Can you tell us what your job duties are?

16 A. We -- I work with the Enforcement Division looking and

17 investigating violations of the securities laws. And as an

18 accountant, I'll look specifically at all the money, more

19 forensic accounting type of situation, and then also I look at

20 financial fraud and the generally accepted accounting principle

21 violations.

22 Q. Do you have any licenses or designations?

23 A. I'm a CPA in the state of Georgia.

24 Q. Very good. What did you do in this investigation?

25 A. I reviewed multiple bank accounts, a detail of those bank




29

1 account records, and identified -- tried to summarize the mass

2 amount of activity that occurred in these accounts.

3 Q. You may have heard Mr. McNamara talk about accounts being

4 closed and migrating elsewhere. Can you tell us what you were

5 able to observe about that?

6 A. Yeah. I brought some notes because it was a significant --

7 Q. If you don't have the things memorized, feel free to refer to

8 those notes to refresh your recollection ?

9 THE COURT: And would you just also clarify for me the

10 period of time of the financial records?

11 THE WITNESS: Sure. The first bank accounts that we

12 received were -- our subpoenas were sent out as of January.

13 THE COURT: January?

14 THE WITNESS: 1, 2012.

15 THE COURT: Okay.

16 Q. (BY MR. HUDDLESTON): Let me clarify. That's not when they

17 were sent. That was the information requested?

18 A. Correct.

19 Q. Got you.

20 THE COURT: They were sent earlier and the request that

21 they be -- provide the information started as of January of 2012?

22 THE WITNESS: That's right.


24 THE WITNESS: Okay. And there were bank accounts at

25 SunTrust in the February 2012 time frame and Wells Fargo in the




30

1 early 2012 time frame. The bank accounts at SunTrust were closed

2 in August 2013.

3 After we received -- so that was the first bank account

4 we received. After we received those bank accounts, I noticed

5 that the SunTrust account was closed, so we were trying to

6 find -- looked like the accounts migrated to a bank called PNC

7 Bank. And we are still waiting on information from PNC, the

8 details. I do not have that detail. But that bank account was

9 closed the next month in September 2013.

10 Then there was an account at Embassy Bank from

11 September 9, 2013, and that was closed in November 29th, 2013.

12 And, then, there was an account opened at Citizens Bank

13 in October 20 -- October 9th, excuse me, 2013, and it was closed

14 sometime in April 2014.

15 In March 2015 -- 2014, there was an account opened at

16 Guaranty Bank, and that was the most recent information we had.

17 So, every time an account closed, we've sent out a subpoena to

18 the subsequent bank.

19 Q. (BY MR. HUDDLESTON): Okay. And let me ask you, did you find

20 any accounts in the name of Mr. Lawler personally?

21 A. I did not.

22 Q. How about Defendant Freedom Foundation?

23 A. Yes. There was one account for Freedom Foundation at

24 SunTrust Bank.

25 Q. All right. Let's talk about the relief defendants now. Did




31

1 you find accounts in the name of all of them? Order Processing?

2 A. Oh, yes. Order Processing. There were four accounts in the

3 name of Order Processing, one at First Citizens, one at Embassy

4 National, one at Guaranty Bank, and then there was a PNC, but we

5 still are waiting for that information.

6 Q. What about Prosperity Solutions?

7 A. Prosperity Solutions, there were four different accounts at

8 Wells Fargo Bank that we looked at.

9 Q. And Divine Spirit?

10 A. One account at First Citizens Bank.

11 Q. All right. And how about Violet Blessings?

12 A. There was also one account at First Citizens Bank for that

13 entity.

14 Q. All right. Let me ask you. You've seen the pleadings in

15 this matter. We've alleged those sales of ARs all the way back

16 in 2004. Why is it that we're just taking a look at information

17 2012 to current?

18 A. I believe we're trying to get a fair sense of what is the

19 most recent activity and not bogged down in the complete

20 historical information, because it was going to take a long time

21 to do this.

22 Q. Got you. If we could, let's go through money in and money

23 out for each entity. If we could start with Freedom Foundation.

24 Can you tell me where the sources of money into the Freedom

25 Foundation accounts were?




32

1 A. Okay. I'm going to get some other notes.

2 Q. Okay.

3 A. The majority of the funds that went in from Freedom

4 Foundation was at the SunTrust account from February 3rd, 2012,

5 through August 31st, 2013. There was about 4.38 million dollars

6 that came in from -- significantly, it was a lot of individual

7 checks and money orders, mostly money orders I would say, in

8 smaller dollar amounts that ranged from 300 to a few thousand.

9 Q. Okay. And any other significant sources of money into that

10 account that you could tell?

11 A. And there was some deposits, transfers from other accounts,

12 from Biorenew, about $215,000. Other than that, there are some

13 items that I never received from the bank, but all of that is

14 probably under $10,000 in the --

15 Q. All right. Now, that's money into Freedom Foundation. How

16 about money out? Where did the money go?

17 A. Most of the money that came in of the four point -- let's

18 say, three eight, 4.4 million, went to a Prosperity Solutions

19 account at Wells Fargo. One -- there were various accounts of

20 Prosperity Solutions at Wells Fargo. One was transfers, about

21 3.2 million and then 560,000.

22 THE COURT: I'm sorry. 3.2 million went into the

23 Prosperity Solutions account?

24 THE WITNESS: Correct.

25 THE COURT: And what was the 5,000,000?




33

1 THE WITNESS: The 550,000 also went into another

2 Prosperity Solutions account.

3 Also, there was -- from the Freedom Foundation account

4 at SunTrust, 55,000 went to the Violet Blessings account and

5 110,000 went to Divine Spirit. There were also some various what

6 I -- may be payroll commission type of things, but all less than

7 $100,000 on those.

8 Q. (BY MR. HUDDLESTON): Let's move on now to relief defendant

9 Order Processing. Again, the same drill, money in and money out.

10 If you would, tell us what the sources --

11 THE COURT: Could I just --

12 MR. HUDDLESTON: Certainly.

13 THE WITNESS: Of course.

14 THE COURT: -- get a picture from -- of what's going to

15 happen next in this testimony? Then -- would you have then gone

16 and looked at the Prosperity Solutions account to see what

17 happened with the same money to identify that they deposited

18 that?

19 THE WITNESS: I do have that.

20 THE COURT: All right. I don't want to interrupt your

21 flow, but if --

22 MR. HUDDLESTON: That's okay. We'll go there next.

23 THE COURT: But it might be helpful, since that's a

24 large sum of money, for me to understand what happened to that,

25 because I might just put a --




34

1 THE WITNESS: I think, though, there were various other

2 accounts other than the SunTrust account that were opened

3 subsequently to the SunTrust account being closed.


5 THE WITNESS: In those accounts, such as Order

6 Processing, funds also went to the account Prosperity Solutions.

7 THE COURT: All right. Going in that order and then --

8 THE WITNESS: And then we total everything up and see

9 where the money went.

10 THE COURT: All right. We'll put a pin in it, then.

11 Go ahead.

12 Q. (BY MR. HUDDLESTON): That's fine. Order Processing.

13 A. Yes.

14 Q. Talk about money in to Order Processing.

15 A. Excuse me. Okay. I guess let's start the next time period.

16 I just want to make sure I'm going with the following time

17 period. Thank you.

18 Okay. Subsequent to that SunTrust Bank being closed,

19 there was an account opened at PNC. I said we didn't have those

20 records.

21 After that account, there was an Order Processing

22 account at Embassy National Bank in the same company under

23 multiple individual checks, small dollars, money orders --

24 things.

25 THE COURT: These are all Order Processing?




35



3 THE WITNESS: There was about $290,000 that came in in

4 those various checks, and about $78,000 that came in from an

5 entity called Biorenew.

6 THE COURT: That came in from what?

7 THE WITNESS: An entity called Biorenew.

8 THE COURT: Buyer renew?


10 THE COURT: Is that bio or --

11 THE WITNESS: B-i-o-r-e-n-e-w, one word, LLC.

12 THE COURT: Okay.

13 Q. (BY MR. HUDDLESTON): All right. So, go ahead. Any other

14 money on Order Processing?

15 A. Yes. Then there was an Order Processing account at First

16 Citizens Bank.

17 Q. Speak up just a little bit.

18 A. I'm sorry. That was opened in October 2013. There was about

19 $740,000 deposited in that account from these various small

20 dollar -- significant item numbers, but small dollars, 300 to

21 multiple thousands.

22 Q. Any other sources of deposit in Order Processing?

23 A. There were some other transactions deposited, less than

24 $50,000, that I have not been able to identify what they are.

25 Q. Okay. Now, we've got -- now we're up to money out of Order




36

1 Processing. Where did the money go?

2 A. We haven't gone to Guaranty. There was another Order

3 Processing account --

4 Q. Okay. Go ahead.

5 A. -- at Guaranty Bank. And there was about $100,000 in these

6 small dollar, multiple item checks.

7 Q. Okay. What I've written down is 290K, 740K, and --

8 THE COURT REPORTER: I need you to repeat that.

9 MR. HUDDLESTON: I'm very sorry, Elise.

10 Q. (BY MR. HUDDLESTON): I've written down 290K, 740K, and 100K.

11 Is that roughly the numbers you mentioned?

12 A. In the Order Processing, yes.

13 Q. In the Order Processing. Okay. Any other --

14 A. And the same type of checks and deposits were made at

15 SunTrust for about the 4.4 million.

16 Q. Okay. Very good. And what became of that money into the

17 Order Processing accounts?

18 A. Sorry. There are a lot of accounts. All right. Thanks.

19 Of the about -- 740,000 went into the First Citizens

20 Bank. I have about 670,000 went to Prosperity Solutions, and

21 47,000 went to Divine Spirit. And then there was also various,

22 what I would consider, business expenses, leases, rent payments,

23 Internet things, about $40,000.

24 For the Order Processing at Guaranty Bank, there was

25 60,000 that went to Prosperity Solutions, 13.5 thousand went --




37

1 THE COURT: I'm sorry. Just start again with bank two.

2 THE WITNESS: Was Guaranty Bank, or I could go to --

3 THE COURT: Is that First Citizens?

4 THE WITNESS: The first one I talked about --

5 THE COURT: Was --

6 THE WITNESS: -- the money out was First Citizens.

7 THE COURT: First Citizens?

8 THE WITNESS: Right. That was about the 670,000 that

9 went to Prosperity.


11 THE WITNESS: Then the Guaranty Bank had 60,000 went to

12 Prosperity Solutions, and 13.5 that went to Divine Spirit.

13 THE COURT: But just remember that Ms. Evans has to

14 take down everything you say, so when you get very -- muttering,

15 it's --

16 THE WITNESS: I tend to keep -- inside voice.

17 THE COURT: -- hard even right next to you.

18 THE WITNESS: Okay.

19 THE COURT: So 60,000 went out to Prosperity Solutions

20 and after that?

21 THE WITNESS: 13.5 thousand went to Divine Spirit.

22 THE COURT: Okay.

23 THE WITNESS: From the Order Processing and Embassy

24 National, about 344,000 went to Prosperity Solutions, and then

25 there was a -- maybe 11,000 of what I would consider business




38

1 expenses.

2 Q. (BY MR. HUDDLESTON): All right. So we've covered Freedom

3 Foundation and Order Processing. Let's go ahead and move on to

4 Prosperity Solutions. You have testified about the deposits into

5 that. Did you see any certificate of deposits into the

6 Prosperity Solutions account aside from what you've already told

7 us about from Freedom Foundation or Order Processing?

8 A. All right. Probably about $100,000 of other deposits into

9 Prosperity Solutions that I am not sure what they are that the

10 bank has not sent me.

11 Q. Okay. All right. So that's money in. Tell us what became

12 of the -- tell us about the money out. What became of the funds

13 that went into Prosperity Solutions, LLC?

14 A. Thanks. The maturity of those funds would be about 4.1

15 million that went out in what's called automated clearinghouse

16 transactions that looked like they are commissions and payroll

17 and other automated payments to individuals and companies.

18 Q. Very good. Any other large categories of payments out, aside

19 from the payroll?

20 THE COURT: So you're saying 4.1 million dollars is

21 payroll?

22 THE WITNESS: That's about what I've got, if that's all

23 payroll.

24 THE COURT: You said it was also to companies?

25 THE WITNESS: There were various companies that I




39

1 believe may be commissions, but I could not identify that as I

2 didn't have any internal records from the company.

3 THE COURT: Well, how many individuals are we talking

4 about?

5 THE WITNESS: There were thousands of these -- these

6 transactions.

7 MR. HUDDLESTON: The Judge may be asking about

8 commission payments, how many --

9 THE COURT: No. I'm -- you're saying that they had

10 thousands of individuals on their payroll?

11 THE WITNESS: No. There were thousands of transactions

12 over the -- the period. The individuals, there were probably --

13 I mean, it could be hundreds. I don't have that specific number

14 right now. I'm sorry.

15 THE COURT: I guess what I'm trying to determine, was

16 there -- did you attempt in any way to verify that this was

17 really payroll or were these just other sorts of payments --

18 THE WITNESS: Well --

19 THE COURT: -- masquerading as payroll?

20 THE WITNESS: They could be both. I have no --


22 THE WITNESS: We're still trying to get information

23 from the banks for where -- if the money went to an entity or an

24 individual, where that money went. As it shows on the bank

25 records, it has very limited information in the person's name and




40

1 maybe a listing of ambassador or the beneficiary ID, those type

2 of things.


4 THE WITNESS: And I believe Mr. Lawler testified that

5 the money that he sent there was for payroll and commissions.

6 THE COURT: All right. But is it -- when you describe

7 it as payroll and commissions, is that based on Mr. Lawler's

8 having provided that descriptor as opposed to anything you

9 yourself have verified?

10 THE WITNESS: It was that and just the consistency of

11 the payments. You'll see various $100 payments to individuals

12 which are consistent with the commissions paid on the

13 memberships. There were also even dollar small amounts of $200

14 multiple times, $500 multiple times, but I did not verify the --

15 if they were specific commissions or payroll.

16 THE COURT: All right. Well --

17 THE WITNESS: If that's what you're asking.

18 THE COURT: -- what percentage of the 4.1 million went

19 for commissions, except in that descriptor, and what percentage

20 do you think went for payroll, even just, again, accepting that

21 description?

22 THE WITNESS: I do not have an idea on that because I

23 do not have any internal documents from the company.


25 Q. (BY MR. HUDDLESTON): Did you receive the QuickBooks file?




41

1 A. No. We did receive a listing of what was considered payroll

2 from Mr. Lawler middle of this week, but the descriptions on

3 there don't show who they're payment to. It's more about -- it

4 will say AR and $500 and that's all it is. But that was his

5 payroll file per se was about $4,000,000 over the time period.

6 Q. Very good.

7 MR. HUDDLESTON: Judge, I would just note that the

8 investigative testimony is in evidence now and there is testimony

9 about the payroll with the employees and that kind of thing.


11 Q. (BY MR. HUDDLESTON): Divine Spirit, let's go there next.

12 You testified about some deposits into Divine --

13 THE COURT: I'm still troubled by this, though. I

14 mean, were you able to verify that taxes were paid on this and

15 withheld on it or had some discussion about that with Mr. Lawler?

16 MR. HUDDLESTON: There has been.

17 THE COURT: All right. And is there any evidence that

18 it was in fact payroll, other than the amount of the funds?

19 THE WITNESS: I did not receive any 1099s because these

20 were, from my understanding, consultants. I didn't receive --

21 THE COURT: Right. So this was not supposed to be

22 regular employees, then?

23 THE WITNESS: Right. My understanding is they're 1099

24 issue -- issuance, possible issuance, to these individuals or

25 their entities. We did not get any of that type of documentation




42

1 or any payroll information from the company.


3 MR. HUDDLESTON: And I should say at this point, Mr.

4 Leitz' client is not in a position to speak to us yet. It could

5 be very illuminating on these questions.


7 MR. HUDDLESTON: Anything else on Prosperity Solutions,

8 Your Honor?

9 THE COURT: Not unless I cut you off.

10 MR. HUDDLESTON: All right. Okay. Here we go.

11 Q. (BY MR. HUDDLESTON): Divine Spirit next. You testified

12 about some deposits into Divine Spirit. Can you tell us where

13 those came from?

14 A. Most of the funds that came into Divine Spirit over the time

15 period I looked at, which was January 23rd, 2012, was the opening

16 of the account through the end of April 2014. There was $110,000

17 from Freedom Foundation, $52,000 from Order Processing accounts,

18 and a thousand dollars from Violet Blessings. There was also

19 about $46,000 that I could not identify from the bank.

20 Q. How about money out of Divine Spirit, where did that money

21 go?

22 A. There was -- of that money that came in, 35,000 went to

23 Prosperity Solutions. I've identified what I would consider

24 possible business expenses, but I could not verify that because I

25 don't have any of their documents, their company documents.




43

1 About 130,000 I would consider possible business expenses of

2 those funds.

3 Q. Okay.

4 A. And the rest is small, smaller dollars, maybe some personal

5 items, chiropractor payments, things like that.

6 Q. Let's move on to Violet Blessings, LLC. Now, if I'm not

7 mistaken, there were two sources of deposit into Violet Blessings

8 that were unconnected to Freedom Foundation; is that right?

9 A. Yeah. There were a few sources of income.

10 Q. Tell us about those, please.

11 A. There were monthly payments that were Social Security, looks

12 like Social Security, and also employee trust annuity payments

13 that came in every month. And there was also -- the

14 establishment of the account appears to be from another bank

15 account that Mrs. Lawler had from SunTrust.

16 Q. Okay. Were you in Mrs. Lawler's testimony, investigative

17 testimony?

18 A. I was.

19 Q. All right. Do you recall her testimony about those sources

20 of income?

21 A. Right. She said that she was getting her retirement funds,

22 and she basically paid their personal expenses from her account,

23 the Lawlers' personal expenses.

24 Q. All right. And aside from those, the teachers pension plan

25 and her Social Security, what other sources of deposit in Violet




44

1 Blessings did you see?

2 A. There was about $55,000 in -- of a handful of transactions

3 from Freedom Foundation that went into that account.

4 Q. 55,000 you said?

5 A. Correct.

6 Q. Do you recall Mrs. Lawler's testimony about having received

7 that money?

8 A. Yes. She said she got it. She didn't want to spend it, so

9 she maintained the money in the account. She kept it in there.

10 And I believe as of the funds -- I wasn't sure, because

11 we had looked at the account through April, the end of April

12 2014, if the funds were still in there. But we did get some bank

13 confirmation that appears to be maybe those funds are still

14 there.

15 Q. All right.

16 MR. HUDDLESTON: Your Honor, what we've been trying to

17 do is determine how many ARs were sold and how much raised.

18 Q. (BY MR. HUDDLESTON): Can you enlighten us further on that?

19 What does your analysis show?

20 A. So, what I did to estimate the amount of ARs as compared to

21 the amount of membership fees that were collected -- because

22 everything was commingled in the deposit accounts of Freedom

23 Foundation and then subsequently Order Processing. So, I looked

24 through each individual item that was deposited. And on a daily

25 basis, there -- you know, a deposit ticket holds 20 items. There




45

1 were sometimes three various deposit tickets, so there was

2 multiple items to look through.

3 So, to do this estimate in the most reasonable manner

4 that I could come up with is any item, individual item, that was

5 a thousand dollars or more, I anticipated that as an AR, payment

6 for an AR.

7 Q. All right.

8 A. And in doing that, I calculated, of the approximately 5.5

9 million that was deposited in the four bank accounts that we

10 talked about that I looked at with Order Processing and Freedom

11 Foundation, that about 3.5 million over that was the amount of

12 the ARs that were taken in.

13 Q. And minus the time period for that 3.5 million?

14 A. January 2012 through May 2014.

15 Q. Very good.

16 A. And I also calculated there was about 1,500 individual items

17 of the ARs that were deposited.

18 Q. Okay.

19 MR. HUDDLESTON: Your Honor, anything else for this

20 witness?

21 THE COURT: Just one moment.

22 (A pause in the proceeding was had.)

23 THE COURT: Were you able to verify a salary for any of

24 the Lawlers?

25 THE WITNESS: No. As far as I could identify, there




46

1 was no salary paid to either of the Lawlers from these accounts.

2 THE COURT: Were you able to identify anything that's

3 made to them specifically?

4 THE WITNESS: To them individually or through their

5 entities?

6 THE COURT: No, just to them individually.

7 THE WITNESS: I did not identify anything to them.

8 THE COURT: Now, to the entities I know you've talked

9 about one -- money from one entity to the other being made.

10 All right. Thank you.

11 THE WITNESS: Thank you.

12 MR. HUDDLESTON: Judge, aside from the Lawlers, those

13 are the witnesses we were going to call, the documents we were

14 going to introduce. I'm perfectly willing to answer your

15 questions based on having been through the Lawlers' testimony, be

16 happy to direct you to the portions of those transcripts. I'm

17 happy to do it. Otherwise, I could summarize.

18 THE COURT: Well, I would like you to summarize what

19 you thought you were going to elicit from the Lawlers in their

20 testimony, which I assume will be related to what they've already

21 testified to in the exhibits you provided, but if you would tell

22 me what that is. It can't be affirmative testimony, but you can

23 tell me if it has a basis in the actual transcripts that you've

24 provided.

25 MR. HUDDLESTON: It does, Your Honor. I was telling




47

1 you that I've got it annotated with the coding so that I could --

2 I could take them to it and remind them of it if they --


4 MR. HUDDLESTON: -- on what I intended to show.

5 The essence of Mrs. Lawler's testimony was that her

6 pension payments and her Social Security are sufficient to cover

7 all of their household expenses. She pays the mortgage, she pays

8 the light bills, she pays all of their monthly expenses. They

9 are not hurting for money. She is not involved with the

10 business, aside from running to the post office, running to the

11 bank.

12 She does take -- make regular runs to the bank. Every

13 time something comes in with a check inside, she fills out a

14 sheet of paper with -- that she received them, indicating how

15 much the check is for, who it's from and what's it for. ARs

16 perhaps. But if it's for an AR, it's written down there. We

17 haven't received those. She testified about filling those out

18 and taking those to the bank. She testified that her husband

19 does not get Social Security.

20 With regard to the 55,000 -- you asked about payments

21 to the Lawlers versus their entities. On the web site, and

22 that's in the record now as well, Mr. Lawler advises everybody

23 not to operate in their personal name, but rather to have an

24 entity through which they operate. So, Mrs. Lawler operates

25 through Violet Blessings, LLC. That is her. There's no one else




48

1 with authority over that. And it received $55,000 from Freedom

2 Foundation, Order Processing.

3 Interestingly, Mrs. Lawler testified that she didn't

4 ask for that money, didn't feel like she earned it, didn't feel

5 like it was hers, didn't even add it to her checkbook balance.

6 That's been sitting there the whole time, and she doesn't know

7 why she got it, so it's still there. And, so, one of the things

8 that we're going to ask you for at the end is an order requiring

9 that money be paid over into the registry of the Court.

10 That's basically what we were going to get from Mrs.

11 Lawler, aside from acknowledgment that when Mr. Lawler did pay

12 for something, it came out of the Freedom Foundation, Order

13 Processing accounts.

14 Among the things he paid for were a beach vacation in

15 Hilton Head. They rented a house down there. Payments for

16 rejuvenation powder from this highly oxygenated water company,

17 and chiropractic visits. Mr. Lawler also testified and admitted

18 in his testimony that he spent investor money on those personal

19 expenses. He considered it a loan against the eventual payout.

20 And Mrs. Lawler confirmed that.

21 I'll go into what we expected to get from Mr. Lawler.

22 It is all from either the web site or from his sworn testimony.

23 That he is the founder of the business and no one else has

24 authority to control it. He began selling these ARs in 2004.

25 He is the author of the web site, aside from some guest




49

1 articles that people write at his invitation. They are

2 identified by the signature of the person who wrote them. So,

3 aside from that, Mr. Lawler's responsible for every

4 representation on the web site, excuse me, that's now in the

5 record.

6 He provides this education. He testified that he spent

7 years doing the research that underpins the representations that

8 he makes. He -- we intended to elicit testimony that he expects

9 people to believe what he says on the web site. He doesn't

10 expect every prospective AR purchaser to go out and do their own

11 years-long research. In other words, he's telling them things

12 that he expects them to believe, and they do believe it and base

13 their AR purchases on that.

14 Now, with regard to how they're sold, Mr. Lawler has

15 recently -- and this is in the web site -- gone looking for more

16 account executives, more people to go out and sell these things.

17 And it's -- the detail is in there. What he says he's looking

18 for are people with sales experience with large accounts and

19 people with exceptional telemarketing skills. This goes to the

20 need for injunctive relief.

21 With regard to the relief defendants, Ms. Zaki

22 testified about the movement of the money. In came the money to

23 Order Processing and Freedom Foundation. And the amounts and

24 millions that she's talked about is for the limited period that

25 we talked about so far.




50

1 They do keep QuickBooks. He's refused to let us take a

2 look at that.

3 THE COURT: So, before you -- back up a step or two.

4 You said that Mr. Lawler indicated he was looking for more

5 account executives to engage in commission sales.

6 MR. HUDDLESTON: Yes, ma'am.

7 THE COURT: So, your understanding, then, is that there

8 is -- there are these sales representatives who will be reaching

9 out through telemarketing to come up -- to sell the AR accounts?

10 MR. HUDDLESTON: Yes, ma'am. I'm showing you Exhibit

11 1.


13 MR. HUDDLESTON: Page 6, Account Executives-WANTED.

14 That's where we would have gone had Mr. Lawler been here. You

15 can see among -- in those two paragraphs, he says he needs people

16 with strong telemarketing skills, mentions ARs in there, and also

17 who have successful strong sales history with large accounts.

18 So, yes, we do believe that he would have -- I think

19 that people just sort of on their own decide they want these

20 things and call them up and inquire. The truth is that he sells

21 them and he motivates folks with 25 percent commissions.

22 Now, getting to the Section 5 violation, Mr. Lawler

23 says --

24 THE COURT: And is there anything that speaks to 25

25 percent commission or is that his testimony?




51

1 MR. HUDDLESTON: No. Well, he testified to it, but I

2 will show you that portion as well. That is in his testimony,

3 page 46, line 21.

4 THE COURT: Thank you.

5 MR. HUDDLESTON: It's about 25 percent he says. And I

6 believe in the exhibit we were looking at that -- the commission

7 chart is -- that is the AR chart, what you get for each amount

8 that you invest, and then --

9 THE COURT: That's on page 2 --

10 MR. HUDDLESTON: Page 2.

11 THE COURT: -- of Exhibit 1?

12 MR. HUDDLESTON: Yes.


14 MR. HUDDLESTON: And, then, the commission chart is in

15 here as well. I'll find it for you. Commission chart is on page

16 14.


18 MR. HUDDLESTON: So regarding the Section 5 violations,

19 Mr. McNamara talked about that, there's no scienter requirement

20 there. He didn't register these things. I believe he's told us

21 he didn't think they were securities, so that's what --

22 THE COURT REPORTER: I'm sorry. Slow down and repeat

23 that.

24 MR. HUDDLESTON: I'm very sorry. Mr. McNamara

25 testified that there was no registration filing. That's not




52

1 surprising given that Mr. Lawler I believe told us already he

2 didn't believe these were securities. So, there's no scienter

3 requirement for a Section 5 violation.

4 Now, getting to the fraud, we talked about the specific

5 misrepresentations. All of those are in the web site copy that

6 you have, and I can cite you to the page numbers.

7 He represented to prospective AR purchasers that this

8 payout, the funds, makes everybody rich was imminent. That's a

9 quote from the web site. And you can see even on page 1, when he

10 says imminent, you might buck at that a little bit, but you see

11 he's got this funding week guesstimator and people get to vote on

12 when they think this is going to happen. You can see the date of

13 this document is the 24th of June, and the only choices are all

14 within six weeks. Right? So, when he asked -- when he says this

15 is imminent and he says, well, let's guess, when do you think it

16 will be, there is no choice that they can make that's longer than

17 six weeks out. So, he's most definitely telling people put your

18 money in, this is going to happen very soon.

19 Second, he told prospective AR purchasers that three

20 influential international players will be assisting Freedom

21 Foundation to expedite AR claims. That's on page 16 of Exhibit

22 1.

23 He also told people that at their birth, their future

24 earnings were assessed and credits deposited into a world trust

25 with each person as beneficiary and the Pope as trustee. That's




53

1 at the bottom of page 28 of Exhibit 1.

2 He represented to people that the U. S. -- that the

3 Freedom Foundation has an arrangement with the U. S. Treasury,

4 whereby Freedom Foundation will receive the payouts that are due

5 to AR purchasers. That is at his sworn testimony, page 63, line

6 1.

7 He represented that if anybody takes legal action

8 against a Freedom Foundation member, they are subject to severe

9 penalties, and they may be arrested by this worldwide enforcement

10 team working with the newly established common law world court.

11 Represented that people can trade their debt for new

12 cars, homes, and vacations. That is in Exhibit 2 on page 3.

13 He also tells people that they can earn the payouts

14 listed on the chart -- we've talked about that -- on page 2, what

15 they can earn.

16 And to Ms. Karaz' testimony, she considered anything a

17 thousand dollars or over to be indication of an AR purchase, but

18 the web site indicates at page 31 that he allows folks to buy a

19 layaway. So, even payments under a thousand dollar might be

20 payment for an AR on layaway. He also allows people to add to

21 ARs in amounts under a thousand dollars for ARs already

22 purchased. And, so, if anything, the estimates, I would argue,

23 are low.

24 Regarding omissions, he does not tell people that one

25 of the uses of investor funds will be individual use of them for




54

1 personal expenses.

2 Regarding the need for injunction, we've had testimony

3 about the New Zealand account before. At page 7 of Exhibit 1, he

4 says that they recently expanded to Europe. He says they have

5 recently expanded to Australia. He says they have recently

6 expanded to all world markets. Again, this goes to the need for

7 an injunction.

8 He also states that -- as of the date the web site was

9 printed out, that they were experiencing, the quote is, an

10 onslaught of orders are streaming in daily. That's at page 30 of

11 Exhibit No. 1. And, so, I think that's consistent with what the

12 investigative accountant testified to.

13 He would have you believe that everybody is happy with

14 this arrangement, but at page 18 of Exhibit 1, we see him

15 chastising people who call up and abuse his staff. There is

16 indication that people feel duped and that they are complaining

17 to him, and that he is complaining about the complainers.

18 There are -- there are other small points that I

19 probably would make in the testimony. It's in there. If the

20 Judge has any specific questions, I'd be happy to address it.

21 THE COURT: I don't have any. Thank you very much.

22 MR. HUDDLESTON: Yes, ma'am. With that I would

23 conclude. I do have -- I did prepare an order which I could

24 e-mail to Ms. McConochie by --





55

1 MR. HUDDLESTON: -- Blackberry before I leave today.

2 We --

3 THE COURT: All right. Thank you. So you're seeking a

4 preliminary injunction for -- until what date, what time?

5 MR. HUDDLESTON: Until the determination of whether a

6 permanent should issue.

7 THE COURT: All right. And what are you anticipating

8 will occur in connection with the determination of a permanent?

9 Are you preparing to present more evidence and have a full trial?

10 Is that the plan?

11 MR. HUDDLESTON: Well, we need to take further

12 discovery because, as you see, we have only a snapshot of the

13 financial records.


15 MR. HUDDLESTON: We need to determine and we need to

16 find out if these overseas bank accounts -- we had to do this

17 quickly because it was all going on, and so we needed to flesh

18 out that, all through discovery. And, so, we're also asking

19 continuation of the asset free.

20 If the Judge is inclined to unfreeze the Violet

21 Blessings account so that those folks can continue to live off

22 those two sources of income, we would ask the Court to first

23 order that the $55,000 we documented that came from Freedom

24 Foundation be paid into the registry of the Court. And we would

25 be comfortable thereafter as long as it's clear that they're not




56

1 allowed to use that account for business purposes, for that

2 account to remain unfrozen so that they could continue to live

3 off of that.

4 THE COURT: And what's the remainder of the money once

5 I -- if I were to freeze the $55,000 and get it put in the

6 registry of the Court?

7 MR. HUDDLESTON: The balance -- the last balance we

8 have, I think, was as off August 5. $55,000 will take it down to

9 roughly another $55,000. And then --

10 THE COURT: And, then, the Lawlers would have that or

11 the -- whoever is the owner of the Violet --

12 MR. HUDDLESTON: Violet Blessings.

13 THE COURT: Violet Blessings, which appears to be Mrs.

14 Lawler, she'd have full access to it?

15 MR. HUDDLESTON: Well, with the understanding, Your

16 Honor, that we're going to establish a disgorgement amount and

17 that more of that money -- once we get more bank records, it may

18 be indicated that more of that money came from the Freedom

19 Foundation.


21 MR. HUDDLESTON: And, so, no, we're not giving up a

22 claim to the rest of that. I'm just trying to --

23 THE COURT: I understand. All right.

24 MR. HUDDLESTON: Yes, ma'am. And, then, we would ask

25 him to comply with the accounting orders that the Judge has


Documents

Transcript of Lawler Second Hearing