February 17, 2008 in City

Swindler’s number is coming up

By The Spokesman-Review
 

Super-salesman Michael Duane Smith sits alone in his nondescript house in northeast Spokane, an electronic monitoring bracelet around his ankle, wondering when he will appear before a federal judge in Denver.

If federal prosecutors get their way in the next few weeks, the judge will sentence Smith to 15 years in prison for his role in a high-yield investment scheme. The fraud led to the loss of more than $50 million by 1,000 investors in this region and elsewhere in the United States.

Where did the money go? It was used to buy foreign currency, eight high-performance NASCAR racing cars, and a $6.5 million castle in Colorado. It also paid for the lavish salaries of Smith and six co-conspirators, investigators say.

Redstone Castle, the race cars and more than $17 million from 60 bank accounts in four cities, including Spokane, were seized by FBI agents in 2004.

The cars and castle were sold at public auction. The proceeds, combined with the cash that was seized, provided victims partial compensation.

Even with the recovery of some assets, federal prosecutors in Denver are seeking a $24.9 million judgment against Smith for his part in the Ponzi swindle – a scheme in which some early investors are paid off with money put up by later ones.

While the U.S. Justice Department got criminal convictions in Colorado, the Washington state attorney general’s office filed a Consumer Protection Act civil suit against Smith and six members of his Spokane sales staff. The state lawsuit resulted in default judgments.

“These people preyed on dozens of citizens here in Washington – many of them senior citizens who lost their retirements, causing losses in the millions of dollars,” Assistant Attorney General Jack G. Zurlini Jr. said last week.

Those victims include a 68-year-old north Spokane man and his 64-year-old wife – the parents of six – who lost their life savings of $347,000 in the scheme. They got back $60,000 and now live on Social Security and a small military pension.

Embarrassed by his misfortune, the man, a retired maintenance engineer for a local hospital, asked that his name not be used. “They really ripped me off pretty bad, and we’re not the only ones,” he said. He is left with stress-related health issues, he said.

At least a dozen other victims in the Inland Northwest have similar stories about retirements ruined by the scheme.

The 44-year-old Smith, who was convicted of three counts of securities fraud but acquitted on other charges of conspiracy, wire and mail fraud and money laundering, initially blamed his troubles on the FBI’s use of the Patriot Act.

Smith’s anti-government bent goes back a decade, when he was chief financial officer for a militia-style group called the U.S. Constitution Rangers.

At least one of his business associates, John Schlabach, of Spokane, was involved in selling “pure trusts” to people, falsely claiming they could be used to avoid paying federal taxes, according to court documents. Schlabach was named as an unindicted co-conspirator in the Colorado case.

“I have no comment,” Smith said when reached last week at his Spokane home. Jurors “got it all wrong,” he said. “They’re not correct, and we’re going to appeal.”

Federal prosecutors Matthew Kirsch and Wyatt Angelo say the recommended 15-year sentence is justified because Smith obstructed justice by offering “materially false testimony during the trial” and because he led the “sophisticated criminal activity conducted out of Spokane.”

In court filings, Smith’s attorney, Richard Stuckey, of Denver, said a 15-year prison sentence “would be grossly unreasonable and unfair.”

Eleven character witnesses testified on Smith’s behalf at trial and described him “as a single man in his 40s, with no prior criminal record, who is a ‘work-aholic,’ a businessman with a fine reputation and a religious and caring man,” Stuckey said in the court document.

It makes no mention of Smith being indicted by a federal grand jury in New York in 1997 on charges of bilking 1,100 terminally ill people out of $100 million for discounted purchases of their life insurance policies.

In that case, Smith was arrested by FBI agents April 4, 1997, in Denver as he got into a limousine with two women from an escort service. Agents found a $1.3 million negotiable check on Smith, who was being taken to a chartered jet going to Maryland.

At the time, he was one of two national directors of Personal Choice Opportunities, based in California, that authorities said hauled in $100 million in just nine months from terminally ill people looking for quick cash.

Those charges were dismissed without public explanation by Justice Department prosecutors in New York shortly before Smith and the others were indicted in Colorado in 2004.

After his arrest in Spokane, Smith was released on electronic home monitoring. He has been allowed to leave to pursue employment and attend Crossover Church in Post Falls.

According to court documents, the high-yield investment scheme worked like this:

•Smith and his pitchmen promised investors returns of 2 percent to 400 percent a month by investing in seven companies through “non-depletion” trust accounts.

•Investors were told that there was little risk, and that their investments were insured by Lloyd’s of London or St. Paul Insurance.

Renowned for his sales ability, Smith enlisted a “widespread network of solicitors and insurance agents around the United States” to make the pitch, according to court records. But instead of high-yield returns, investors lost $50 million between 1999 and 2003 to Smith and six co-defendants, including ringleader Norman Schmidt, 72, of Denver, and his 69-year-old wife, Jannice McLain Schmidt. She pleaded guilty and was sentenced to nine years in prison.

Co-defendant George Beros struck a plea bargain and testified for the prosecution, later receiving a sentence of one year in prison. Others tried and convicted with Smith were Norman Schmidt, George Alan Weed and Charles Franklin Lewis. Prosecutors are recommending minimum sentences of life in prison for Schmidt, 19 1/2 years for Weed and almost 22 years for Lewis. The seventh defendant, Peter A.W. Moss, remains a fugitive.

Schmidt’s son, Scott, drove the race cars on the NASCAR circuit before the FBI grabbed the multimillion-dollar fleet, including support vehicles. Scott Schmidt wasn’t charged.

Court documents allege Smith and others involved in the scheme “used a welter of corporate shells for the purpose of lending legitimacy to their operations,” and opened offices in Spokane, Denver and Cleveland.

Companies identified in court records include Reserve Foundation Trust, Capital Holdings, Monarch Capital Holdings, Fast Track, Summit Ventures, Northwest Group, and National Marketing Solutions, which later became Senior Asset Preservation Services.

Smith operated his office in the basement of a $350,000 Gem Lane home on 4.5 acres in Colbert. The home, which he no longer owns, was decorated with mounted wild animals and birds that Smith said he shot on hunting trips.

Sales associates who worked for Smith included Schlabach, James Meyer, Jeffrey D. Mitchell, Scott D. Peckham, Justin E. Rhodes and Jennifer L. Wise, court documents say. Those sales supervisors weren’t charged criminally but were accused of violating Washington’s Consumer Protection Act in the 2004 civil suit.

Schlabach worked as an accountant for Capital Holdings and set up bank accounts and generated monthly statements for investors, said Zurlini.

As a side venture, Schlabach encouraged investors “to shield their investments from taxes” by setting up “pure trusts” sold by another company, Heritage America.

The insurance guarantee, which turned out to be false, helped convince the retired north Spokane man who invested $347,000 by cashing out a life insurance policy. He now realizes he knew nothing about financial investments and was the victim of a hustle. “These people show you numbers and charts, and it all sounds so good,” he said last week. “The salesman sat right here at my kitchen table, and he can write better upside down that I can right-side up.”


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email