Transcript of Lawler Second Hearing

Case 1:14-cv-02468-AT Document 24 Filed 08/20/14 Page 1 of 60
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UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SECURITIES AND EXCHANGE

COMMISSION,
PLAINTIFF,
-VSTHOMAS J. LAWLER, ET AL.,
DEFENDANTS.
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)
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) DOCKET NO. 1:14-CV-2468-AT
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)
TRANSCRIPT OF TEMPORARY RESTRAINING ORDER PROCEEDINGS

BEFORE THE HONORABLE AMY TOTENBERG
UNITED 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, CRR

OFFICIAL COURT REPORTER
ATLANTA, GEORGIA

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INDEX
WITNESSES ON BEHALF OF THE PLAINTIFF:

MATTHEW MCNARAMA
Direct Examination by Mr. Huddleston
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KARAZ S. ZAKI
Direct Examination by Mr. Huddleston
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(Friday, August 8, 2014; Atlanta, Georgia.)
THE COURT:
We're here in the matter of the Securities and Exchange
Commission versus Thomas Lawler and Freedom Foundation, USA, LLC,
doing business as Freedom Club USA, and relief defendants are
Divine Spirit, LLC, Order Processing, LLC, Prosperity Solutions,
LLC, and Violet Blessings, LLC, civil action file number
1:14-CV-2468.
Please be seated.
Good afternoon, Mr. Huddleston.
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MR. HUDDLESTON:
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THE COURT:
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Good afternoon, Your Honor.
I understand, Mr. Leitz, you're here on
behalf of Ms. Harris?
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MR. LEITZ:
That's correct, Your Honor.
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THE COURT:
And I don't see Ms. Harris as a named
15
defendant.
Is she here on behalf of one of the relief
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defendants?
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MR. LEITZ:
If I may, just for a moment, Judge.
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THE COURT:
Yes.
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MR. LEITZ:
As the Court noted, Prosperity Solutions,
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LLC, is a relief defendant in this case.
Prosperity Solutions
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has one member in that LLC, and that one member is Ms. Judy
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Harris, who is with me in court here today.
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THE COURT:
Okay.
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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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Prosperity Solutions has no money to hire a lawyer, no assets to
retain counsel.
behalf that relates to this.
I'm handling another matter on Ms. Harris'
THE COURT:
All right.
MR. LEITZ:
And I thought out of an abundance of
caution I wanted to show up and make that announcement to the
Court.
answer it, but I wanted to --
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Of course, if you have any questions, I'd be happy to
THE COURT:
Well, I appreciate Ms. Harris' appearing
and your appearing.
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MR. LEITZ:
Absolutely, Judge.
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THE COURT:
All right.
Mr. Lawler has called my office
13
multiple times and has spoken with Ms. McConochie.
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want to appear.
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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.
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He didn't
He wanted me to consider this matter, per his
So, my intent at this point is to phone him and give
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him an opportunity to be present by phone, or not, or to just
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simply ask him does he want us to consider his position solely
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based on his submission.
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opportunity to cross-examine witnesses since he's been given an
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opportunity to be here, but if he wants to be present in this way
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or ask me any questions before we begin, I will allow him to do
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that.
I'm not going to give him an
It became impossible for Ms. McConochie, though, to ask


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further questions, answer further questions, so --
(An off-the-record discussion was had.)
THE COURT:
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All right.
wishes to call two witnesses; is that right?

MR. HUDDLESTON:
Yes, Your Honor.
We intended to call
Mr. Lawler and Mrs. Lawler, but in their absence --
THE COURT:
MR. HUDDLESTON:
THE COURT:
10
So, I understand that the SEC
Anyone else besides the Lawlers?

We have two additional witnesses.
All right.
Ms. Harris is the registered
agent for service -- is that right -- for Prosperity Solutions?
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MR. LEITZ:
That's correct, Judge.
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THE COURT:
All right.
Well, Mr. Leitz, I will give
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you an opportunity, if at any point you wish to make a point or
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ask questions, then -- I realize that the registered agent for
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service is not exactly the representative, merely a registered
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agent for service.
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here, I will give you that opportunity.
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an attorney at all.
But particularly in that the Lawlers are not

And we're glad to have
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MR. LEITZ:
I probably won't have anything, but I --
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THE COURT:
I assume that's so.
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MR. LEITZ:
Yeah.
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THE COURT:
All right.
All right.
Well, I don't know
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how -- how Ms. -- you know, this will come as a surprise to Mr.
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Lawler that we're calling him from the courtroom, but I didn't
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want Ms. McConochie to have to engage in further phone


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conversations that were not on the record.
(The Courtroom Deputy Clerk called Mr. Lawler and he
appeared by teleconference, after which the following proceedings
were had.)
THE COURTROOM DEPUTY CLERK:
Lawler.
Deputy Clerk.
Judge Totenberg's direction.
the courtroom.
Good afternoon, Mr.
This is Amy McConochie, Judge Totenberg's Courtroom

I'm calling you from the courtroom pursuant to
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MR. LAWLER:
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THE COURT:
Okay.
And you are now on speaker phone in
Greetings.
Mr. Lawler, I know that you had been in
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touch with Ms. McConochie, and I have directed her that -- at
13
this juncture that any further communication as to this hearing
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should occur here.
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So, I am the recipient of some of the information that
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you have provided her, but I wanted to be sure this was on the
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record.
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counsel for the Securities Exchange Commission.
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Mr. Huddleston plans to call two witnesses.
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call you as a witness and your wife as a witness, too, but
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obviously you're not here.
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There is a court reporter here.
MR. LAWLER:
Also here today are the

And I understand
He had planned to
I'm sorry, Your Honor.
I'm having a
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difficult time catching about every other word on the speaker
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phone.
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THE COURT:
All right.

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MR. LAWLER:
THE COURT:
If you could get closer to it or -All right.
Well, I'm going to -- this may
not be feasible, and I just wanted to -- I will come down closer
to the phone right now.
MR. LAWLER:
THE COURT:
Thank you so much.

What I said, Mr. Lawler, is that as you
know, you were directed to be here, but my understanding is is
that you wished not to come today, but for me to consider instead
your Motion to Dismiss as your response.
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MR. LAWLER:
That was one option.
I had sent an e-mail
11
(unintelligible) trying to get a court-appointed attorney and
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Harry Martin filed our request today, but it had never been filed
13
earlier yesterday.
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was to have representation there today, so that was our primary
15
incentive.
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today, realizing that had not happened.
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He did file it timely.
So, our true intent
That having failed, we went to a backup plan as of
THE COURT:
Well, I don't know what happened with the
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motion, but obviously it was filed just yesterday.
So, I don't
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think that we could have considered it, in any event, in that
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time period.
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appointment of counsel, in a civil case you have no
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constitutional right to appointment of counsel.
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contrast to your right to have appointment of counsel in a
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criminal case if you are indigent and are not able to afford an
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attorney.
But let me just say, with respect to the
That's in

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In considering whether to appoint counsel in a civil
action, the Court weighs a number of factors, including the merit
of your claim, whether the claim is factually or legally so
complex as to warrant the assistance of counsel.
not really a claim.
represent you in a case in which you are a defendant.
Here there's
There -- you're really asking for counsel to
Typically counsel are appointed in civil rights cases
where the individual is attempting to mitigate a right and it is
an exceptional remedy and already -- counsel's only appointed
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in -- at least by me, and I think I probably more liberally
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appoint than maybe other judges, but after there have been a
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substantial showing, usually when the case has gone on for some
13
time, that the plaintiff's claim is supported by mitigating
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evidence.
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cannot grant your motion.
We're just not in that position in this case, so I
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MR. LAWLER:
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THE COURT:
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MR. LAWLER:
Well, may I comment, please?

You can comment briefly.
Yes.
I spent Monday, Tuesday, and
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Wednesday trying to secure counsel, and the best I got offered
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cost wise, the attorney wanted $25,000.
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you recall, in your TRO.
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less than that, so my options were zero.
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spent two days trying.
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forced into a court remedy and that was what I did on Thursday.
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So, that was my process.
You awarded $10,000, as
No one would even touch the case for

Thus -- and, thus, I
But on that grounds, therefore, I was

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THE COURT:
All right.
All right.
Well, you know, we
certainly can consider whether you have sufficient funds in order
to hire counsel.
necessarily just to begin a case, but that's neither here nor
there.
course.
case that's with the Court, that you haven't responded to many of
the requests or directives in my order so that we could even be
able to begin to assess this case more fully.
And I don't know all of your financial circumstances, of

But I do know that in -- at least in the records of the
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MR. LAWLER:
Which directives have not been
accomplished?
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I'm surprised that anyone wanted $25,000
THE COURT:
Well, I'm going to go through this
systematically --
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MR. LAWLER:
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THE COURT:
All right.
-- but I think that one of the things that
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you could have done is be here yourself so that you could have
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gained more information.
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telephone, and I will tell you I think that it was perfectly
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within my discretion and authority simply not to call you at this
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juncture, but because you have been in communication with the
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Court, I did not feel that I wanted to do that.
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going to be probably a completely viable process to have you
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participate by phone, and you don't have any right to participate
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by phone.
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I am standing right next to a
But this is not
So, I have to consider what in fact I'm going to do.

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

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and I will go over the order.
that's great, and to the extent you can't hear, there's really
nothing more that I could do about that at this point, because
the -- I put a phone from my office that is a phone we have
available here so that you could hear.
willing to move closer to the phone and get another chair so that
I can do that, but that's about as much as I can do at this
moment.
And to the extent you can hear,
And I am perfectly
I'll consider your representation that you have
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attempted to find counsel and in the mix as we're proceeding here
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today.
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just now indicated you want me to proceed based on hearing
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your -- or reviewing your Motion to Dismiss, you -- you know,
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that is your choice at this juncture since you haven't -- you're
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not here for me.
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listen to this and hear every other word, but I'm having
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basically to view this as a -- your failure to appear as a waiver
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of your right to be here at this moment.
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And if -- your having decided not to appear and having
I mean, I will not require you to sit and
MR. LAWLER:
Well, there is in fact a (unintelligible)
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because I could only represent myself and not the LLC according
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to your dictate a week ago.
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complete and resolve all the issues on the table, and I needed an
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attorney, according to you, to do that.
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wiser to find another alternative.
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know, if we could get a court-appointed attorney, we could
So, therefore, I wanted this to be
So, I thought it was
And I had suggested, you

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reschedule it on a Monday or a day that's workable for you,
but -- so that was my attempt today that the attorney would in
fact be there to represent all the LLCs.
had called, essentially.
THE COURT:
All right.
So that is the reason I
Well, I don't think you
basically had the legal right not to respond to a direct order of
this Court to appear here, and I take note of that.
what your -- your concern about not having your other -- the
other entities represented, but of course I did indicate in the
I understand
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prior conference on the TRO that you could represent yourself.
11
And you are a defendant in this case.
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backwards to include you in one way or the other.
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entities are not here, obviously, and are not represented by
14
counsel, but you could be here and you are aware of that.
15
And I have now bent over

The other
So, without further ado, let's now start the hearing
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itself.
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Commission to come up and tell me what the status of the response
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to the order is -- as to each element in the order.
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And I would ask counsel for the Securities Exchange
MR. HUDDLESTON:
May it please the Court, Your Honor,
Pat Huddleston for the SEC.
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With regard to your questions regarding the status, we
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have received back communications from the banks who were served
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with the order.
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will go through what the balances are, what they're indicated to
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be at least as of the time of the service of the order on those
And through Karaz Zaki, one of my witnesses, we

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entities.
We are in a position to put forward evidence to meet
our prima facie case showing past violations of the securities
laws as well as a likelihood of future violations, which are the
only two elements we need in order to sustain our burden for a
preliminary injunction.
We have not received an accounting from either of the
defendants or any of the relief defendants.
We have not seen any
evidence that they have complied with in order to repatriate
10
funds that were sent overseas.
11
compliance with this Court's directive that I keep things as
12
informal and as manageable for the defendant as possible, I have
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communicated to him by e-mail asking him to produce QuickBooks
14
files and a list of all the AR purchasers.
15
produce any such information, claiming that the QuickBooks file
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is held by an employee who lives out of state.
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the contact information for that person.
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THE COURT:
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MR. HUDDLESTON:
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I have asked that -- in
He has failed to
I asked him for
He's refused to --
Speak as loud and clearly as possible so -Thank you.
Should I repeat any of
that?
THE COURT:
Just -- just start out with your
conversations with Mr. Lawler so he can hear what -MR. HUDDLESTON:
Very good.
Yes.
I have been
e-mailing Mr. Lawler.

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

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Honor?
THE COURT:
Yes.
If you wouldn't mind.
MR. HUDDLESTON:
Mr. Lawler and I, once I got access to his e-mail, have
Not at all.
been communicating by e-mail.
QuickBooks file so that we could determine how much of the money
taken in was from AR, how much from other sources.
communicated, first of all, not at all, no response to that.
kept reminding him that I needed that and that it might even
10
I asked him to produce the
He
I
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.
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.
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I asked
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.
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respond to that at all, and then finally told me that for some
21
reason he cannot -- cannot produce it.
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things.
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communication from the banks indicating current balances.
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still --
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He tells me that he -- you know, first of all, did not
So, that is the status of
No accounting, although we have received the
THE COURT:
Well, what are the current balances?
We're

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MR. HUDDLESTON:
I can put those on through my accountant.
THE COURT:
MR. HUDDLESTON:
I can -- I don't have those memorized
balance.
All right.
All right.
Violet Blessings has the highest
The rest of them are nominal.
THE COURT:
All right.
MR. HUDDLESTON:
Yes.
I was, as I mentioned, expecting
to be able to examine the Lawlers.
Since I can't, though, I am
prepared to put on Matthew McNamara who is an Assistant Director
10
of Enforcement at the Commission, and also Karen Zaki who is an
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enforcement accountant who investigated this case.
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able to talk to us about the representations that are made to
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folks on the web site and also about the flow of funds between
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the defendants and the relief defendants.
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THE COURT:
All right.
They will be
I looked at the docket in this
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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
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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
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and a variety of other things, about the contact information.
22
And the next one -- section was a requirement that the defendant
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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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MR. HUDDLESTON:
THE COURT:
And we've received nothing.
All right.
And I gather you have received
no responses to -- in connection with any discovery that you
served, or have you served any discovery?
MR. HUDDLESTON:
formally.
for the pro se defendant.
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Your Honor, I did not serve him
I communicated by e-mail, trying to keep things simple
THE COURT:
Okay.
I also directed in paragraph VIII
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.
13
this is again in paragraph VIII.
14
filed for 20 days.
And
And I didn't require that to be
15
Did you have any discussion with Mr. Lawler about that?
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MR. HUDDLESTON:
17
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Only the aforementioned conversation
about the QuickBooks, yes.

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.
23
received response --
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THE COURT:
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MR. HUDDLESTON:
I have
Speak up.
I'm sorry.
I've received response

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from Embassy Bank indicating that they have an account in the
name of Order Processing.
THE COURT:
MR. HUDDLESTON:
It was opened on September 9th --
Speak up.
-- 2013, and closed on November 1st,
2013.
Everybody else, if they had nothing, they did not indicate
a balance since there's not a currently opened account.
THE COURT:
MR. HUDDLESTON:
9
10
All right.
PNC Bank responded that they had no
accounts.
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:
15
THE COURT:
16
MR. HUDDLESTON:
That was for Divine Spirit, LLC.
Divine Spirit?
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
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Prosperity Solutions.
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Wells Fargo did have an account in the name of
23
Prosperity Solutions with a zero balance.
24
balance of $99.40, also Prosperity Solutions.
25
account in the name of Violet Blessings, LLC, in the amount of

Another one with a

And a third

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$410.84.
Embassy Bank -- I'm sorry.
We've already -- and then
finally, Guaranty Bank responded just today that they have an
account in the name of Order Processing, LLC, which was opened
just in March 2014 by Mr. Lawler and that the current balance is
$2.77.
7
8
9
That's all we've received from the banks on current

balances.
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:
14
will be in a position to give that.
15
THE COURT:
We do.
All right.
We do.
And our accountant
Very good.
Is there any other
16
information you want to provide the Court?
17
those as exhibits once Ms. McConochie comes back.
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19
MR. HUDDLESTON:
THE COURT:
21
MR. HUDDLESTON:
22
THE COURT:
23
MR. HUDDLESTON:
25
Well, there will be
exhibits that we want to introduce through Mr. McNamara.
20
24
Very good.
We'll let you do
All right.
All right.
Shall I call him now?
Go ahead.
Okay.
Call Matt McNamara.
MATTHEW MCNAMARA,
having been duly sworn, was examined and testified as follows:

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DIRECT EXAMINATION
BY MR. HUDDLESTON:
Q.
State your full name for the record, please.
A.
Matthew Folds McNamara.
Q.
You work for the SEC, Mr. McNamara?
A.
Yes, I do.
Q.
What is your title there?
A.
I'm an Assistant Regional Director in the Atlanta regional
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):
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.
20
A.
I supervise the primary staff attorney and staff accountant
21
that conducted the investigation.
22
February and the present of this year.
23
Q.
24
25
All right.
What are your job duties, sir?
And what is your involvement with this case?
It took place roughly between
And supervising those personnel, can you break --
THE COURT REPORTER:
I still can't hear you, Mr.
Huddleston.

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MR. HUDDLESTON:
Q.
tell me what else was involved in that?
A.
the investigative testimony in this case, going over analysis of
bank records that were produced pursuant to subpoenas that we
issued to various banks, and reviewing exhibits to the
investigative transcripts, as well as various iterations of Mr.
Lawler's and Freedom Foundation's web site.
10
Q.
I'm very sorry.

You said supervise the staff.
Can you
Assisted in putting together investigative plan, reviewing
Very good.
11
I'm going to step over and get an exhibit.
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.
19
you what we have marked as Plaintiff's Exhibit No. 1 for
20
identification.
21
what it is, if you know.
22
A.
23
web site.
24
Q.
25
what the date is that that web site copy was printed out?
All right, Mr. McNamara.
I am handing
If you would take a look at that and tell me
This is a printout of one iteration of the Freedom Club USA
And take a look at the lower right-hand corner and tell me

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A.
6/24/2014.
Q.
All right.
on it, 5.
Lawler's investigative testimony?
A.
That's correct.
Q.
And did you review this web site as part of your job duties?
A.
Yes, I did.
before we filed our emergency action, so I'm familiar with this
document.
Now, it's got a black and white exhibit sticker
Does that indicate that it was Exhibit 5 to Mr.
Very good.
And in particular, reviewed this definitively
10
Q.
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.
14
site.
15
Q.
16
Plaintiff's Exhibit 3 for identification.
17
please.
18
A.
19
Lawler in this investigation.
20
year.
21
Q.
Did you review this testimony?
22
A.
I reviewed this testimony at various times during the
23
investigation.
24
I read it -- or we read it in its entirety.
25
Q.
This also is another iteration of the Freedom Club USA web
Thank you.
I'm now handing you what we have marked as

Tell me what that is,
This is a copy of the investigative testimony of Thomas
All right.
It was taken in late June of this
And, again, before we filed the emergency action,
Now handing you what we've marked as Plaintiff's


21
1
Exhibit 4 for identification.
If you would, tell me what
Plaintiff's Exhibit 4 is, please.
A.
transcript of the investigative testimony of Diane Lawler.
was taken in June of this year.
Q.
Did you reserve -- did you review this as well?
A.
I reviewed it during the course of the investigation in
advance of our filing of our emergency action.
Q.
This is a copy of the investigative testimony -- the

It
Okay.
10
MR. HUDDLESTON:
11
(A pause in the proceeding was had.)

One moment, please.
12
Q.
And, finally, sir, I'm going to hand
13
you what we've marked as Plaintiff's Exhibit 5 for
14
identification.
15
A.
16
time, I believe, yesterday afternoon.
17
in the Common Law International World Court.
18
statement of claim.
19
the Commission, and other government officials as defendants in
20
an action in a jurisdiction with which I am unfamiliar.
21
Q.
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.
Can you tell me what Exhibit 5 is, please?
This is a somewhat unique filing that I saw for the first
Very good.
It's filed by Mr. Lawler

It purports to be a
It names the Commission, various members of
Now, tell us, if you will, having -- having
Well, in the documents concluded, primarily with this and


22
1
other information gathered during the course of the
investigation, that securities were involved.
securities had not been registered.
misrepresentations as to the use of investor funds.
Q.
jurisdiction; right?
A.
That's correct.
Q.
Okay.
Tell us your knowledge of the securities.
A.
Okay.
And not to sound didactic here, but the statutes --
That those
That Mr. Lawler had made
Now, the determination of securities gives the Commission
10
there are two federal securities statutes primarily that we
11
enforce, the '33 Act and '34 Act.
12
definition of the term "security."
13
Each contain a statutory
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.
16
several elements, and those elements are defined in the Eleventh
17
Circuit, but the first is that there's money.
18
So, under Howey there's
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.
21
element one.
22
The second element is a common enterprise.
That's
In the
23
Eleventh Circuit where we are, the common enterprise is basically
24
a reliance on the expertise of a promoter.
25
were represented in Mr. Lawler's testimony on the web site, he

And the way the ARs

23
1
and Freedom Foundation and potentially affiliates have exclusive
control over a unique proprietary process by which they can turn
an administrative remedy amount from 1,000 to 10,000 into returns
ranging from $325,000 to $1,000,000.
purports to have connections with various international finance
organizations that allow for this return on that investment.
They -- what -- Mr. Lawler
So, that gets us to the second prong, through the
second prong of the Howey analysis as modified and interpreted in
the Eleventh Circuit.
10
Q.
All right.
11
A.
And the third is an expectation of profits, based on the
12
efforts of others, typically the promotor.
13
overlaps significantly with that second prong we just went
14
through.
15
filing of the claims.
16
that's not articulated clearly as far as I can tell.
17
And the third?
And here that
But, again, the investors have nothing to do with the

They have nothing to do with the process
And we have tried to understand the representations,
18
and they appear to be largely nonsensical.
19
bit of credence, the process as represented is -- is opaque.
20
Freedom Foundation engages in that process without any assistance
21
or involvement of investors.
22
securities analysis we did in this case.
23
Q.
24
involved, what implications did those have regarding possible
25
charges?
All right.
But giving them every
So, that's the fundamental
And having concluded that the securities were
And

24
1
A.
for violations of our fraud statutes, Section 10(b) of the
Exchange Act and 17(a) of the Securities Act, the '33 Act.
Well, jurisdictionally, then, that would serve as the basis
And, then, I also personally and I think initially
directed staff to confirm -- or investigate whether any
registration statements had been filed with the Commission or any
Reg D filings.
there were no such filings in this case.
And confirmed through the Edgar database that
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:
14
Does Your Honor have any questions?
15
THE COURT:
That's all I have for Mr. McNamara.
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
determined was -- looked at the testimony and the evidence or the
web page as the --
THE WITNESS:
Well, if it had said black box, that if
you input a certain amount of money, you'll get a certain amount
of money back.
were used, which was essentially to pay personal expenses and
operating expenses that were essentially simply associated with
collecting funds, that's a misrepresentation and a misuse of
10
And when you look at that with the way the funds
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.
14
testimony, Mr. Lawler indicated that there never has been a
15
payout.
16
17
And, again, in -- well, the first time in
And I believe this has been in operation since 2004.

THE COURT:
All right.
And were you able to identify
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.
20
testimony, he testified I believe that there were 2,000
21
purchasers over the years.
22
present.
23
And per Mr. Lawler's
And I think that's from 2004 to the
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
in and going out.
there were about 2,000 purchasers.
definitive number.
And that is supported by his testimony that
THE COURT:
But we do not have it -- a
So, as I understand it, you were able to
look at financial records separate and apart from the record that
Mr. Huddleston just spoke about?
THE WITNESS:
I don't -- the -- the records you were
speaking about?
10
THE COURT:
11
THE WITNESS:
12
THE COURT:
13
14
Were -Bank accounts.

Bank accounts.
What are -- what are the
financial records you all obtained?

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
19
20
THE COURT:
And when was that that these subpoenas were
issued or when did you get those records?

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.
24
funds migrated to other accounts.
25
Zaki could speak with specificity as to that --
Many accounts had been closed and the

The Staff Accountant Karaz

27
1
THE COURT:
THE WITNESS:
All right.
-- but tracing those funds over time
allowed us to see -- with the known accounts that we had -- and I
can't represent that that's the entire universe.
those -- with those funds, with those accounts, significant funds
coming through over that period.
THE COURT:
All right.
But with
Well, I assume I'm going to be
able to get a better fix on this millions of dollars from the
staff accountant?
10
THE WITNESS:
11
THE COURT:
Yes.
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
16
17
18
MR. LEITZ:
Thank you, Judge.
THE COURT:
All right.
questions.
Ms. McConochie, we had exhibits
provided, 1 through 5.
19
MR. HUDDLESTON:
20
THE COURT:
21
I don't have any
Tender those.
And, again, if counsel who happens to be
here, if you have any objection --
22
MR. LEITZ:
No objection, Judge.
23
THE COURT:
All right.
24
MR. HUDDLESTON:
25
We'll call Karaz Zaki, please.
All right.
They are admitted.
Thank you, Mr. McNamara.

28
1
2
KARAZ S. ZAKI,
having been duly sworn, was examined and testified as follows:
THE COURTROOM DEPUTY CLERK:
Thank you.
Please state
your name for the record, and please spell your name for the
record.
6
7
THE WITNESS:
Middle name is S-a-l-e-h.
8
9
Karaz Saleh Zaki.
It's K-a-r-a-z.
Last name is Zaki, Z-a-k-i.
DIRECT EXAMINATION
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.
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.
25
A.
I reviewed multiple bank accounts, a detail of those bank
And as an
What did you do in this investigation?

29
1
account records, and identified -- tried to summarize the mass
amount of activity that occurred in these accounts.
Q.
closed and migrating elsewhere.
able to observe about that?
A.
Yeah.
Q.
If you don't have the things memorized, feel free to refer to
those notes to refresh your recollection ?
You may have heard Mr. McNamara talk about accounts being
9
10
I brought some notes because it was a significant --
THE COURT:
And would you just also clarify for me the
period of time of the financial records?
11
12
THE WITNESS:
Sure.
THE COURT:
14
THE WITNESS:
15
THE COURT:
16
Q.
17
were sent.
18
A.
Correct.
19
Q.
Got you.
21
January?
1, 2012.
Okay.
Let me clarify.
That's not when they
That was the information requested?
THE COURT:
They were sent earlier and the request that
they be -- provide the information started as of January of 2012?
22
THE WITNESS:
23
THE COURT:
24
THE WITNESS:
25
The first bank accounts that we
received were -- our subpoenas were sent out as of January.
13
20
Can you tell us what you were
That's right.
All right.
Okay.
And there were bank accounts at
SunTrust in the February 2012 time frame and Wells Fargo in the

30
1
early 2012 time frame.
in August 2013.
The bank accounts at SunTrust were closed
After we received -- so that was the first bank account
we received.
that the SunTrust account was closed, so we were trying to
find -- looked like the accounts migrated to a bank called PNC
Bank.
details.
closed the next month in September 2013.
And we are still waiting on information from PNC, the
10
11
After we received those bank accounts, I noticed
I do not have that detail.
But that bank account was
Then there was an account at Embassy Bank from

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.
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.
24
SunTrust Bank.
25
Q.
Okay.
And let me ask you, did you find
There was one account for Freedom Foundation at
All right.
Let's talk about the relief defendants now.

Did

31
1
you find accounts in the name of all of them?
A.
name of Order Processing, one at First Citizens, one at Embassy
National, one at Guaranty Bank, and then there was a PNC, but we
still are waiting for that information.
Q.
What about Prosperity Solutions?
A.
Prosperity Solutions, there were four different accounts at
Wells Fargo Bank that we looked at.
Q.
And Divine Spirit?
10
A.
One account at First Citizens Bank.
11
Q.
All right.
12
A.
There was also one account at First Citizens Bank for that
13
entity.
14
Q.
15
this matter.
16
in 2004.
17
2012 to current?
18
A.
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.
23
out for each entity.
24
Can you tell me where the sources of money into the Freedom
25
Foundation accounts were?
Oh, yes.
Order Processing.
Order Processing?
There were four accounts in the
And how about Violet Blessings?
All right.
Let me ask you.
You've seen the pleadings in
We've alleged those sales of ARs all the way back
Why is it that we're just taking a look at information
I believe we're trying to get a fair sense of what is the
Got you.
If we could, let's go through money in and money

If we could start with Freedom Foundation.

32
1
A.
Okay.
Q.
Okay.
A.
The majority of the funds that went in from Freedom
Foundation was at the SunTrust account from February 3rd, 2012,
through August 31st, 2013.
that came in from -- significantly, it was a lot of individual
checks and money orders, mostly money orders I would say, in
smaller dollar amounts that ranged from 300 to a few thousand.
Q.
Okay.
I'm going to get some other notes.
There was about 4.38 million dollars
And any other significant sources of money into that
10
account that you could tell?
11
A.
12
from Biorenew, about $215,000.
13
items that I never received from the bank, but all of that is
14
probably under $10,000 in the --
15
Q.
16
about money out?
17
A.
18
say, three eight, 4.4 million, went to a Prosperity Solutions
19
account at Wells Fargo.
20
Prosperity Solutions at Wells Fargo.
21
3.2 million and then 560,000.
22
23
And there was some deposits, transfers from other accounts,
All right.
Other than that, there are some
Now, that's money into Freedom Foundation.
How
Where did the money go?
Most of the money that came in of the four point -- let's
THE COURT:
One -- there were various accounts of
I'm sorry.
One was transfers, about
3.2 million went into the
Prosperity Solutions account?
24
THE WITNESS:
25
THE COURT:
Correct.
And what was the 5,000,000?

33
1
2
THE WITNESS:
The 550,000 also went into another
Prosperity Solutions account.
Also, there was -- from the Freedom Foundation account
at SunTrust, 55,000 went to the Violet Blessings account and
110,000 went to Divine Spirit.
I -- may be payroll commission type of things, but all less than
$100,000 on those.
Q.
Order Processing.
10
There were also some various what
Let's move on now to relief defendant
Again, the same drill, money in and money out.
If you would, tell us what the sources --
11
THE COURT:
Could I just --
12
MR. HUDDLESTON:
13
THE WITNESS:
14
THE COURT:
15
happen next in this testimony?
16
and looked at the Prosperity Solutions account to see what
17
happened with the same money to identify that they deposited
18
that?
Of course.
THE WITNESS:
20
THE COURT:
-- get a picture from -- of what's going to
19
21
Certainly.
Then -- would you have then gone
I do have that.
All right.
I don't want to interrupt your
flow, but if --
22
MR. HUDDLESTON:
23
THE COURT:
That's okay.
We'll go there next.
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 -ELISE SMITH EVANS, RMR, CRR

34
1
THE WITNESS:
I think, though, there were various other
accounts other than the SunTrust account that were opened
subsequently to the SunTrust account being closed.
THE COURT:
THE WITNESS:
All right.
In those accounts, such as Order
Processing, funds also went to the account Prosperity Solutions.
THE COURT:
THE WITNESS:
All right.
Going in that order and then --
And then we total everything up and see
where the money went.
10
THE COURT:
All right.
We'll put a pin in it, then.
11
Go ahead.
12
Q.
13
A.
Yes.
14
Q.
Talk about money in to Order Processing.
15
A.
Excuse me.
16
I just want to make sure I'm going with the following time
17
period.
18
Okay.
That's fine.
I guess let's start the next time period.
Thank you.
Okay.
Subsequent to that SunTrust Bank being closed,
19
there was an account opened at PNC.
20
records.
21
Order Processing.
I said we didn't have those
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
1
THE WITNESS:
THE COURT:
THE WITNESS:
Correct.
All right.
There was about $290,000 that came in in
those various checks, and about $78,000 that came in from an
entity called Biorenew.
THE COURT:
THE WITNESS:
THE COURT:
THE WITNESS:
That came in from what?

An entity called Biorenew.
Buyer renew?
10
THE COURT:
11
THE WITNESS:
12
THE COURT:
Correct.
Is that bio or -B-i-o-r-e-n-e-w, one word, LLC.
Okay.
13
Q.
14
money on Order Processing?
15
A.
16
Citizens Bank.
17
Q.
Speak up just a little bit.
18
A.
I'm sorry.
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.
Yes.
Okay.
All right.
So, go ahead.
Any other
Then there was an Order Processing account at First
That was opened in October 2013.
There was about
Now, we've got -- now we're up to money out of Order


36
1
Processing.
Where did the money go?
A.
Processing account --
Q.
Okay.
A.
-- at Guaranty Bank.
small dollar, multiple item checks.
Q.
We haven't gone to Guaranty.
Okay.
There was another Order
Go ahead.
And there was about $100,000 in these
What I've written down is 290K, 740K, and --
THE COURT REPORTER:
MR. HUDDLESTON:
I need you to repeat that.
I'm very sorry, Elise.
10
Q.
11
Is that roughly the numbers you mentioned?
12
A.
In the Order Processing, yes.
13
Q.
In the Order Processing.
14
A.
And the same type of checks and deposits were made at
15
SunTrust for about the 4.4 million.
16
Q.
17
Order Processing accounts?
18
A.
Okay.
Sorry.
19
Very good.
I've written down 290K, 740K, and 100K.
Okay.
Any other --
And what became of that money into the
There are a lot of accounts.
All right.
Thanks.
Of the about -- 740,000 went into the First Citizens
20
Bank.
21
47,000 went to Divine Spirit.
22
what I would consider, business expenses, leases, rent payments,
23
Internet things, about $40,000.
24
25
I have about 670,000 went to Prosperity Solutions, and

And then there was also various,
For the Order Processing at Guaranty Bank, there was

60,000 that went to Prosperity Solutions, 13.5 thousand went -ELISE SMITH EVANS, RMR, CRR

37
1
THE COURT:
THE WITNESS:
THE COURT:
THE WITNESS:
THE COURT:
THE WITNESS:
THE COURT:
THE WITNESS:
I'm sorry.
Was Guaranty Bank, or I could go to -Is that First Citizens?

The first one I talked about -Was --- the money out was First Citizens.
First Citizens?
Right.
That was about the 670,000 that
went to Prosperity.
10
THE COURT:
11
THE WITNESS:
12
Just start again with bank two.
All right.
Then the Guaranty Bank had 60,000 went to
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:
17
THE COURT:
18
THE WITNESS:
19
THE COURT:
20
I tend to keep -- inside voice.

-- hard even right next to you.
Okay.
So 60,000 went out to Prosperity Solutions
and after that?
21
THE WITNESS:
22
THE COURT:
23
THE WITNESS:
13.5 thousand went to Divine Spirit.

Okay.
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.
Q.
Foundation and Order Processing.
that.
Prosperity Solutions account aside from what you've already told
us about from Freedom Foundation or Order Processing?
A.
Prosperity Solutions that I am not sure what they are that the
All right.
So we've covered Freedom
Let's go ahead and move on to
You have testified about the deposits into
Did you see any certificate of deposits into the
All right.
Probably about $100,000 of other deposits into
10
bank has not sent me.
11
Q.
12
of the -- tell us about the money out.
13
that went into Prosperity Solutions, LLC?
14
A.
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.
19
from the payroll?
Okay.
Thanks.
Tell us what became
What became of the funds
Any other large categories of payments out, aside
THE COURT:
So you're saying 4.1 million dollars is
payroll?
22
23
So that's money in.
The maturity of those funds would be about 4.1
Very good.
20
21
All right.
THE WITNESS:
That's about what I've got, if that's all
payroll.
24
THE COURT:
25
THE WITNESS:
You said it was also to companies?

There were various companies that I

39
1
believe may be commissions, but I could not identify that as I
didn't have any internal records from the company.
3
4
THE COURT:
about?
5
6
THE WITNESS:
MR. HUDDLESTON:
The Judge may be asking about
commission payments, how many --
9
10
There were thousands of these -- these
transactions.
7
8
Well, how many individuals are we talking
THE COURT:
No.
I'm -- you're saying that they had
thousands of individuals on their payroll?
11
THE WITNESS:
No.
12
over the -- the period.
13
I mean, it could be hundreds.
14
right now.
15
There were thousands of transactions
The individuals, there were probably -I don't have that specific number
I'm sorry.
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:
19
THE COURT:
20
THE WITNESS:
21
THE COURT:
22
THE WITNESS:
Well --- masquerading as payroll?

They could be both.
I have no --
All right.
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.
25
records, it has very limited information in the person's name and
As it shows on the bank

40
1
maybe a listing of ambassador or the beneficiary ID, those type
of things.
THE COURT:
THE WITNESS:
All right.
And I believe Mr. Lawler testified that
the money that he sent there was for payroll and commissions.
THE COURT:
All right.
But is it -- when you describe
it as payroll and commissions, is that based on Mr. Lawler's
having provided that descriptor as opposed to anything you
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.
14
multiple times, $500 multiple times, but I did not verify the --
15
if they were specific commissions or payroll.
There were also even dollar small amounts of $200
16
THE COURT:
17
THE WITNESS:
18
THE COURT:
All right.
Well --
If that's what you're asking.

-- 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
23
THE WITNESS:
do not have any internal documents from the company.
24
25
I do not have an idea on that because I
THE COURT:
Q.
All right.
Did you receive the QuickBooks file?

41
1
A.
from Mr. Lawler middle of this week, but the descriptions on
there don't show who they're payment to.
will say AR and $500 and that's all it is.
payroll file per se was about $4,000,000 over the time period.
Q.
No.
We did receive a listing of what was considered payroll
It's more about -- it

But that was his
Very good.
MR. HUDDLESTON:
Judge, I would just note that the
investigative testimony is in evidence now and there is testimony
about the payroll with the employees and that kind of thing.
10
THE COURT:
All right.
11
Q.
12
You testified about some deposits into Divine --
13
THE COURT:
Divine Spirit, let's go there next.
I'm still troubled by this, though.
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:
17
THE COURT:
18
19
20
21
22
23
There has been.
All right.
And is there any evidence that
it was in fact payroll, other than the amount of the funds?

THE WITNESS:
I did not receive any 1099s because these
were, from my understanding, consultants.

THE COURT:
Right.
I didn't receive --
So this was not supposed to be
regular employees, then?

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.
THE COURT:
All right.
MR. HUDDLESTON:
And I should say at this point, Mr.
Leitz' client is not in a position to speak to us yet.
be very illuminating on these questions.
THE COURT:
MR. HUDDLESTON:
It could
All right.
Anything else on Prosperity Solutions,
Your Honor?
THE COURT:
10
Not unless I cut you off.
MR. HUDDLESTON:
All right.
Okay.
Divine Spirit next.
Here we go.
11
Q.
You testified
12
about some deposits into Divine Spirit.
13
those came from?
14
A.
15
period I looked at, which was January 23rd, 2012, was the opening
16
of the account through the end of April 2014.
17
from Freedom Foundation, $52,000 from Order Processing accounts,
18
and a thousand dollars from Violet Blessings.
19
about $46,000 that I could not identify from the bank.
20
Q.
21
go?
22
A.
23
24
possible business expenses, but I could not verify that because I
25
don't have any of their documents, their company documents.
Can you tell us where
Most of the funds that came into Divine Spirit over the time
There was $110,000
There was also
How about money out of Divine Spirit, where did that money
There was -- of that money that came in, 35,000 went to

I've identified what I would consider

43
1
About 130,000 I would consider possible business expenses of
those funds.
Q.
Okay.
A.
And the rest is small, smaller dollars, maybe some personal
items, chiropractor payments, things like that.
Q.
mistaken, there were two sources of deposit into Violet Blessings
that were unconnected to Freedom Foundation; is that right?
A.
Yeah.
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.
14
establishment of the account appears to be from another bank
15
account that Mrs. Lawler had from SunTrust.
16
Q.
17
testimony?
18
A.
I was.
19
Q.
All right.
20
of income?
21
A.
22
and she basically paid their personal expenses from her account,
23
the Lawlers' personal expenses.
24
Q.
25
and her Social Security, what other sources of deposit in Violet
Let's move on to Violet Blessings, LLC.
Okay.
Right.
Now, if I'm not
There were a few sources of income.
And there was also -- the
Were you in Mrs. Lawler's testimony, investigative
Do you recall her testimony about those sources
She said that she was getting her retirement funds,
All right.
And aside from those, the teachers pension plan

44
1
Blessings did you see?
A.
from Freedom Foundation that went into that account.
Q.
55,000 you said?
A.
Correct.
Q.
Do you recall Mrs. Lawler's testimony about having received
that money?
A.
she maintained the money in the account.
There was about $55,000 in -- of a handful of transactions
Yes.
10
She said she got it.
She didn't want to spend it, so

She kept it in there.
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.
13
confirmation that appears to be maybe those funds are still
14
there.
15
Q.
16
But we did get some bank
All right.
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.
19
What does your analysis show?
20
A.
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.
24
through each individual item that was deposited.
25
basis, there -- you know, a deposit ticket holds 20 items.
Can you enlighten us further on that?
So, what I did to estimate the amount of ARs as compared to
So, I looked
And on a daily
There

45
1
were sometimes three various deposit tickets, so there was
multiple items to look through.
So, to do this estimate in the most reasonable manner
that I could come up with is any item, individual item, that was
a thousand dollars or more, I anticipated that as an AR, payment
for an AR.
Q.
All right.
A.
And in doing that, I calculated, of the approximately 5.5
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
20
MR. HUDDLESTON:
Your Honor, anything else for this
witness?
21
THE COURT:
22
(A pause in the proceeding was had.)
23
THE COURT:
24
25
Just one moment.
Were you able to verify a salary for any of
the Lawlers?
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
3
THE COURT:
made to them specifically?
4
5
Were you able to identify anything that's
THE WITNESS:
To them individually or through their
entities?
THE COURT:
THE WITNESS:
THE COURT:
No, just to them individually.

I did not identify anything to them.
Now, to the entities I know you've talked
about one -- money from one entity to the other being made.
10
All right.
Thank you.
11
THE WITNESS:
12
MR. HUDDLESTON:
Thank you.
Judge, aside from the Lawlers, those
13
are the witnesses we were going to call, the documents we were
14
going to introduce.
15
questions based on having been through the Lawlers' testimony, be
16
happy to direct you to the portions of those transcripts.
17
happy to do it.
18
I'm perfectly willing to answer your
I'm
Otherwise, I could summarize.
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.
23
tell me if it has a basis in the actual transcripts that you've
24
provided.
25
It can't be affirmative testimony, but you can
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 --
I could take them to it and remind them of it if they --
THE COURT:
All right.
MR. HUDDLESTON:
The essence of Mrs. Lawler's testimony was that her
-- on what I intended to show.
pension payments and her Social Security are sufficient to cover
all of their household expenses.
the light bills, she pays all of their monthly expenses.
are not hurting for money.
She pays the mortgage, she pays

They
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.
16
perhaps.
17
haven't received those.
18
and taking those to the bank.
19
does not get Social Security.
20
ARs
But if it's for an AR, it's written down there.
We
She testified about filling those out

She testified that her husband
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.
25
through Violet Blessings, LLC.
So, Mrs. Lawler operates
That is her.
There's no one else

48
1
with authority over that.
Foundation, Order Processing.
And it received $55,000 from Freedom
Interestingly, Mrs. Lawler testified that she didn't
ask for that money, didn't feel like she earned it, didn't feel
like it was hers, didn't even add it to her checkbook balance.
That's been sitting there the whole time, and she doesn't know
why she got it, so it's still there.
that we're going to ask you for at the end is an order requiring
that money be paid over into the registry of the Court.
And, so, one of the things
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.
18
in his testimony that he spent investor money on those personal
19
expenses.
20
And Mrs. Lawler confirmed that.
Mr. Lawler also testified and admitted
He considered it a loan against the eventual payout.
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.
25
He began selling these ARs in 2004.
He is the author of the web site, aside from some guest


49
1
articles that people write at his invitation.
identified by the signature of the person who wrote them.
aside from that, Mr. Lawler's responsible for every
representation on the web site, excuse me, that's now in the
record.
He provides this education.
They are
So,
He testified that he spent
years doing the research that underpins the representations that
he makes.
people to believe what he says on the web site.
He -- we intended to elicit testimony that he expects

He doesn't
10
expect every prospective AR purchaser to go out and do their own
11
years-long research.
12
that he expects them to believe, and they do believe it and base
13
their AR purchases on that.
14
In other words, he's telling them things
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.
18
for are people with sales experience with large accounts and
19
people with exceptional telemarketing skills.
20
need for injunctive relief.
21
What he says he's looking
This goes to the
With regard to the relief defendants, Ms. Zaki
22
testified about the movement of the money.
23
Order Processing and Freedom Foundation.
24
millions that she's talked about is for the limited period that
25
we talked about so far.

In came the money to

And the amounts and

50
1
2
They do keep QuickBooks.
He's refused to let us take a
look at that.
THE COURT:
So, before you -- back up a step or two.
You said that Mr. Lawler indicated he was looking for more
account executives to engage in commission sales.
MR. HUDDLESTON:
THE COURT:
Yes, ma'am.
So, your understanding, then, is that there
is -- there are these sales representatives who will be reaching
out through telemarketing to come up -- to sell the AR accounts?
10
11
MR. HUDDLESTON:
Yes, ma'am.
I'm showing you Exhibit
1.
12
THE COURT:
All right.
13
MR. HUDDLESTON:
Page 6, Account Executives-WANTED.
14
That's where we would have gone had Mr. Lawler been here.
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
You
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.
21
them and he motivates folks with 25 percent commissions.
22
23
24
25
The truth is that he sells
Now, getting to the Section 5 violation, Mr. Lawler

says -THE COURT:
And is there anything that speaks to 25
percent commission or is that his testimony?


51
1
MR. HUDDLESTON:
will show you that portion as well.
page 46, line 21.
THE COURT:
MR. HUDDLESTON:
No.
Well, he testified to it, but I

That is in his testimony,
Thank you.
It's about 25 percent he says.
And I
believe in the exhibit we were looking at that -- the commission
chart is -- that is the AR chart, what you get for each amount
that you invest, and then --
THE COURT:
That's on page 2 --
10
MR. HUDDLESTON:
11
THE COURT:
12
MR. HUDDLESTON:
13
THE COURT:
14
MR. HUDDLESTON:
15
here as well.
16
14.
Page 2.
-- of Exhibit 1?
Yes.
All right.
And, then, the commission chart is in
I'll find it for you.
17
THE COURT:
18
MR. HUDDLESTON:
Commission chart is on page
All right.
So regarding the Section 5 violations,
19
Mr. McNamara talked about that, there's no scienter requirement
20
there.
21
he didn't think they were securities, so that's what --
22
23
24
25
He didn't register these things.
THE COURT REPORTER:
I believe he's told us
I'm sorry.
Slow down and repeat
that.
MR. HUDDLESTON:
I'm very sorry.
Mr. McNamara
testified that there was no registration filing.

That's not

52
1
surprising given that Mr. Lawler I believe told us already he
didn't believe these were securities.
requirement for a Section 5 violation.
So, there's no scienter
Now, getting to the fraud, we talked about the specific
misrepresentations.
you have, and I can cite you to the page numbers.
All of those are in the web site copy that
He represented to prospective AR purchasers that this
payout, the funds, makes everybody rich was imminent.
quote from the web site.
That's a
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.
13
this document is the 24th of June, and the only choices are all
14
within six weeks.
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.
18
money in, this is going to happen very soon.
19
Right?
You can see the date of
So, when he asked -- when he says this
So, he's most definitely telling people put your
Second, he told prospective AR purchasers that three
20
influential international players will be assisting Freedom
21
Foundation to expedite AR claims.
22
1.
That's on page 16 of Exhibit
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.
He represented to people that the U. S. -- that the
Freedom Foundation has an arrangement with the U. S. Treasury,
whereby Freedom Foundation will receive the payouts that are due
to AR purchasers.
1.
That is at his sworn testimony, page 63, line
He represented that if anybody takes legal action
against a Freedom Foundation member, they are subject to severe
penalties, and they may be arrested by this worldwide enforcement
10
team working with the newly established common law world court.
11
12
Represented that people can trade their debt for new

cars, homes, and vacations.
13
That is in Exhibit 2 on page 3.
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.
20
payment for an AR on layaway.
21
ARs in amounts under a thousand dollars for ARs already
22
purchased.
23
are low.
24
25
So, even payments under a thousand dollar might be

He also allows people to add to
And, so, if anything, the estimates, I would argue,
Regarding omissions, he does not tell people that one

of the uses of investor funds will be individual use of them for

54
1
personal expenses.
Regarding the need for injunction, we've had testimony
about the New Zealand account before.
says that they recently expanded to Europe.
recently expanded to Australia.
expanded to all world markets.
an injunction.
8
9
At page 7 of Exhibit 1, he
He says they have
He says they have recently

Again, this goes to the need for
He also states that -- as of the date the web site was

printed out, that they were experiencing, the quote is, an
10
onslaught of orders are streaming in daily.
11
Exhibit No. 1.
12
investigative accountant testified to.
13
That's at page 30 of
And, so, I think that's consistent with what the
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.
16
indication that people feel duped and that they are complaining
17
to him, and that he is complaining about the complainers.
18
There is
There are -- there are other small points that I
19
probably would make in the testimony.
20
Judge has any specific questions, I'd be happy to address it.
21
THE COURT:
22
MR. HUDDLESTON:
It's in there.
I don't have any.

Yes, ma'am.
23
conclude.
24
e-mail to Ms. McConochie by --
25
THE COURT:
If the
Thank you very much.

With that I would
I do have -- I did prepare an order which I could
All right.

55
1
2
3
4
5
6
7
MR. HUDDLESTON:
-- Blackberry before I leave today.
We -THE COURT:
All right.
Thank you.
So you're seeking a
preliminary injunction for -- until what date, what time?

MR. HUDDLESTON:
Until the determination of whether a
permanent should issue.

THE COURT:
All right.
And what are you anticipating
will occur in connection with the determination of a permanent?
Are you preparing to present more evidence and have a full trial?
10
11
Is that the plan?

MR. HUDDLESTON:
Well, we need to take further
12
discovery because, as you see, we have only a snapshot of the
13
financial records.
14
THE COURT:
All right.
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.
19
continuation of the asset free.
20
And, so, we're also asking
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.
25
be comfortable thereafter as long as it's clear that they're not

And we would

56
1
allowed to use that account for business purposes, for that
account to remain unfrozen so that they could continue to live
off of that.
THE COURT:
And what's the remainder of the money once
I -- if I were to freeze the $55,000 and get it put in the
registry of the Court?
MR. HUDDLESTON:
have, I think, was as off August 5.
roughly another $55,000.
10
11
THE COURT:
And then --
the -- whoever is the owner of the Violet -MR. HUDDLESTON:
13
THE COURT:
15
$55,000 will take it down to
And, then, the Lawlers would have that or
12
14
The balance -- the last balance we
Violet Blessings.
Violet Blessings, which appears to be Mrs.
Lawler, she'd have full access to it?

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.
20
THE COURT:
21
MR. HUDDLESTON:
22
All right.
claim to the rest of that.
23
THE COURT:
24
MR. HUDDLESTON:
25
And, so, no, we're not giving up a

I'm just trying to --
I understand.
All right.
Yes, ma'am.
And, then, we would ask
him to comply with the accounting orders that the Judge has

57
1
2
3
4
already given and the repatriation orders.

THE COURT:
Now, is the Violet account one where -- is
that separate and apart from Mrs. Lawler's retirement account?

MR. HUDDLESTON:
retirement funds go.
THE COURT:
MR. HUDDLESTON:
THE COURT:
9
10
I see.
And she didn't know that.
She knows it.
All right.
There was something that she
had no idea about that.

MR. HUDDLESTON:
11
ask for the $55,000.
12
THE COURT:
13
MR. HUDDLESTON:
14
That's the account into which her
didn't spend it.
Oh, no.
I see.
No.
She did not -- did not
I see.
Yes.
She did not consider it earned,
Just kept it there because he put it there.
15
THE COURT:
All right.
All right.
16
MR. HUDDLESTON:
17
THE COURT:
Anything else, counsel?
18
MR. LEITZ:
Just one point, Judge.
Thank you, Judge.
On page 5 of
19
document number 2, which is Securities and Exchange Commission's
20
memorandum in support of its application, they state at the
21
bottom of page 5, quote, within the past two months a former
22
Freedom Foundation employee, Judith Harris, walked out.
23
We wouldn't disagree with that, Judge.
24
THE COURT:
You would disagree?
25
MR. LEITZ:
Would not disagree.

58
1
THE COURT:
You would not disagree with that.
MR. LEITZ:
Yeah.
MR. HUDDLESTON:
All
right.
Your Honor, if I may, I would also
tender Exhibit No. 6, which is that confirmation of the current
balances that we went through earlier.
THE COURT:
All right.
MR. LEITZ:
No, Judge.
THE COURT:
It's admitted.
10
11
Any objection?
Well, I'm going to maintain the current injunction and

I will modify it as suggested as to the Violet --
12
MR. HUDDLESTON:
13
THE COURT:
Blessings.
-- Blessings fund.
But for simplicity's
14
sake, given the fact that it's 4:40, I'm going to issue the --
15
it's probably going to take me until Monday to issue the full
16
preliminary injunctive order, but for now I'm going to just
17
simply continue the order as it exists and then I'm going to
18
modify it consistent with the -- what I've just said as to the
19
Violet Blessings on Monday.
20
Are there any other provisions that you are seeking for
21
relief other than the fact obviously any more -- any longer
22
period of injunctive relief before a full trial?
23
MR. HUDDLESTON:
24
THE COURT:
25
No, Your Honor.
All right.
So, my order for today is just
to continue the injunction currently in place, and I will issue a


59
1
full order next week.
2
3
MR. HUDDLESTON:
Just to clarify, Judge, does the asset
freeze remain in place?
THE COURT:
The asset freeze remains in place.
All
provisions of that -- the existing order remain in place.
would ask you to submit the proposed order in Word or WordPerfect
format so we can look it over and modify it if necessary.
8
9
I'd like to look at the evidence that you have

submitted.
I think that there has been a substantial showing
10
that this Court, on an ongoing basis with the extraordinary
11
remedy of injunctive relief requested, that there is a likelihood
12
of irreparable injury and this is in the public interest.
13
the -- whatever the difficulties are inevitably for the
14
defendant, it's completely outweighed by the public interests at
15
this point.
16
And
I also find that the Commission has demonstrated
17
that -- the strong evidence of violations of securities laws and
18
the likelihood that the frauds are ongoing and will occur again
19
in the future absent the imposition of injunction.
20
Mr. Lawler, if you are still on the phone, let me just
21
say that in the event you do retain an attorney with the benefit
22
of access to the remainder of the Violet Blessings account, your
23
attorney of course is free to move to dissolve the injunction or
24
modify the injunction.
25
consider it.
If that is properly before me, I will
Otherwise, the case will basically proceed until we


60
1
have a full hearing, consider a permanent injunction after
discovery is conducted.
3
4
Is there anything else that we should address, counsel,

at this time?
MR. HUDDLESTON:
No, Your Honor.
MR. LEITZ:
No.
Thank you, Your Honor.
THE COURT:
Mr. Lawler, I'm not sure if you're with us
or not, but I'm going to conclude this hearing at this time.
Thank you very much.
10
(End of proceedings.)
11
*****
12
13
NORTHERN DISTRICT OF GEORGIA
14
CERTIFICATE OF REPORTER
15
16
17
I do hereby certify that the foregoing pages are a true
18
and correct transcript of the proceedings taken down by me in the
19
case aforesaid.
20
This the 19th day of August, 2014.
21
22
23
24
25
____________________________
OFFICIAL COURT REPORTER
Case 1:14-cv-02468-AT Document 24-1 Filed 08/20/14 Page 1 of 1
IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF GEORGIA
Securities and Exchange Commission
______________________________,
Plaintiff(s)
V.
Thomas J. Lawler, et al.
______________________________,
Defendant(s)
)
)
)
)
)
)
)
)
Case No. 1:14cv2468-AT
NOTICE OF FILING OF OFFICIAL TRANSCRIPT

Notice is hereby given that an official transcript of a proceeding has been filed by the
court reporter/transcriber in the above-captioned matter. Counsel/Parties have twenty-one (21)
days from the date of delivery of the transcript to the Clerk to file with the Court a Request for
Redaction of this transcript. If no Request for Redaction is filed, the transcript may be made
remotely electronically available to the public without redaction after 90 calendar days.
Any counsel or party needing a copy of the transcript to review for redaction purposes
may purchase a copy from the court reporter/transcriber or view the document at the Clerks
Office public terminal.
8/20/2014
______________
Date
Elise Evans
__________________________________
Court Reporter
VERIFICATION OF FINANCIAL ARRANGEMENTS

Proceeding Type:
Proceeding Date:
Volume Number:
Telephone Conference, Temporary Restraining Order hearing

______________________________________________
______________________________________________
7/31/2014, 8/8/2014
______________________________________________
______________________________________________
______________________________________________
______________________________________________
Notice is hereby given that financial arrangements for a copy of the transcript have been
made with the following individual(s): Pat Huddleston, II
_____________________________________________________________________________
as counsel/party in this case. He/She is to be provided with remote access to the transcript via
CM/ECF and PACER.
8/20/2014
______________
Date
Elise Evans
__________________________________
Court Reporter

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

SECURITIES AND EXCHANGE

TRANSCRIPT OF TEMPORARY RESTRAINING ORDER PROCEEDINGS

ELISE SMITH EVANS, RMR, CRR

Case 1:14-cv-02468-AT Document 24 Filed 08/20/14 Page 2 of 60

WITNESSES ON BEHALF OF THE PLAINTIFF:

ELISE SMITH EVANS, RMR, CRR

Case 1:14-cv-02468-AT Document 24 Filed 08/20/14 Page 3 of 60

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

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

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

doing business as Freedom Club USA, and relief defendants are

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

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

Good afternoon, Mr. Huddleston.

Good afternoon, Your Honor.

I understand, Mr. Leitz, you're here on

behalf of Ms. Harris?

That's correct, Your Honor.

And I don't see Ms. Harris as a named

Is she here on behalf of one of the relief

If I may, just for a moment, Judge.

As the Court noted, Prosperity Solutions,

LLC, is a relief defendant in this case.

Harris, who is with me in court here today.

Other than a bank account with less than a

hundred dollars in it, Prosperity Solutions has no assets.

Case 1:14-cv-02468-AT Document 24 Filed 08/20/14 Page 4 of 60

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

behalf that relates to this.

I'm handling another matter on Ms. Harris'

And I thought out of an abundance of

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

answer it, but I wanted to --

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

Well, I appreciate Ms. Harris' appearing

and your appearing.

Mr. Lawler has called my office

multiple times and has spoken with Ms. McConochie.

communication with Ms. McConochie, the Deputy Courtroom Clerk

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

he asked a number of different questions about the proceedings.

He wanted me to consider this matter, per his

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

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

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

based on his submission.

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

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

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

I'm not going to give him an

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

Case 1:14-cv-02468-AT Document 24 Filed 08/20/14 Page 5 of 60

further questions, answer further questions, so --

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

wishes to call two witnesses; is that right?

Yes, Your Honor.

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

So, I understand that the SEC

Anyone else besides the Lawlers?

Ms. Harris is the registered

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

That's correct, Judge.

Well, Mr. Leitz, I will give