Court filing
Information — United States v. Shibley (Dkt. 131, W.D. Wash. No. 2:20-cr-00174)
Filed November 22, 2021 in Shibley; one of 140 filings from this case.
Record facts
| Court | U.S. District Court for the Western District of Washington |
|---|---|
| Filed | 2021-11-22 |
U.S. District Court for the Western District of Washington · No. 2:20-cr-00174-JCC · Doc. 131 · 2021-11-22 · Docket on CourtListener
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
Proceedings stenographically reported and transcript produced with computer-aided technology
November 16, 2021 - 172
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON AT SEATTLE
________________________________________________________________
)
UNITED STATES OF AMERICA,
Plaintiff,
v.
ERIC SHIBLEY,
Defendant.
)
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CR20-00174
SEATTLE, WASHINGTON
November 16, 2021 -
9:00 A.M.
TRIAL - DAY 2
________________________________________________________________
VERBATIM REPORT OF PROCEEDINGS
BEFORE THE HONORABLE JOHN C. COUGHENOUR
UNITED STATES DISTRICT JUDGE
________________________________________________________________
APPEARANCES:
For the Plaintiff:
Brian Werner
Assistant United States Attorney
700 Stewart Street, Suite 5220
Seattle, WA 98101
Laura Connelly
U.S. Department of Justice
Criminal Division
1400 New York Avenue N.W., RM 10100
Washington, D.C. 20530
For the Defendant:
Michael Nance
Attorney at Law
P.O. Box 11278
Bainbridge Island, WA 98110
Case 2:20-cr-00174-JCC Document 131 Filed 11/22/21 Page 1 of 211
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
Proceedings stenographically reported and transcript produced with computer-aided technology
November 16, 2021 - 173
EXAMINATION INDEX
EXAMINATION OF
PAGE
KATHLEEN MORAN
DIRECT EXAMINATION
BY MS. CONNELLY
175
CROSS-EXAMINATION
BY MR. NANCE
252
ROMAN HERNANDEZ
DIRECT EXAMINATION
BY MS. CONNELLY
265
CROSS-EXAMINATION
BY MR. NANCE
279
GEOFFREY HILLERS
DIRECT EXAMINATION
BY MR. WERNER
285
CROSS-EXAMINATION
BY MR. NANCE
302
CYNTHIA COLE
DIRECT EXAMINATION
BY MR. WERNER
306
CROSS-EXAMINATION
BY MR. NANCE
324
JOHN MOSHIER
DIRECT EXAMINATION
BY MS. CONNELLY
326
CROSS-EXAMINATION
BY MR. NANCE
339
ADAM SEERY
DIRECT EXAMINATION
BY MR. WERNER
351
CROSS-EXAMINATION
BY MR. NANCE:
358
NISSEN LIDDIARD
DIRECT EXAMINATION
BY MS. CONNELLY
362
CROSS-EXAMINATION
BY MR. NANCE
369
DAVE HAAGSMA
DIRECT EXAMINATION
BY MR. WERNER
372
CROSS-EXAMINATION
BY DEFENSE COUNSEL
378
Case 2:20-cr-00174-JCC Document 131 Filed 11/22/21 Page 2 of 211
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
Proceedings stenographically reported and transcript produced with computer-aided technology
November 16, 2021 - 174
EXHIBIT INDEX
EXHIBITS ADMITTED
PAGE
1 - 26
190
46
217
47
220
48
239
50
238
62
188
63 - 67
189
68
186
69
187
70 - 75
179
77
289
78
296
79
294
80
311
81
309
82 - 86
312
87
319
88 - 97
314
Exhibit 100
178
103
246
104
202
105
203
106
213
107
218
117, 120, 130, 136,
143, 172, 178, 187, 199 and 206
233
205
192
211 - 213
237
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 175
THE CLERK: The next matter on the calendar is
CR20-174-JCC United States of America v. Eric Shibley.
THE COURT: Counsel, are you ready for the jury?
MS. CONNELLY: Yes, Your Honor.
THE COURT: All right. Let's bring them in.
(The following occurred in the presence of the jury.)
THE COURT: Please be seated, folks. All right.
MS. CONNELLY: The government calls Kathleen Moran.
KATHLEEN MORAN,
having been sworn under oath, testified as follows:
THE COURT: You can take your mask off.
DIRECT EXAMINATION
BY MS. CONNELLY:
Q
Good morning, Special Agent Moran, can you please state your
name and spell your last name for the record?
A
My name is Kathleen Moran, M-O-R-A-N.
Q
And where do you work?
A
I work for the FBI.
Q
And what is your position at the FBI?
A
I'm a special agent.
Q
How long have you been employed at an FBI special agent?
A
For 16 years.
Q
And what are your duties as a special agent with the FBI?
A
I investigate allegations of criminal activity.
Q
And what types of cases do you investigate, in particular?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 176
A
I'm assigned to our white-collar squad here in Seattle. So I
investigate different types of fraud cases.
Q
And how long have you been investigating white-collar cases?
A
Sixteen years.
Q
Did there come a time when you began investigating cases that
involved the Paycheck Protection Program and the Economic Injury
Disaster Loan program?
A
Yes.
Q
And when was that?
A
In April of 2020.
Q
And as part of those investigations, did you learn about the
programs?
A
Yes.
Q
And as part of those investigations, did you investigate the
defendant, Eric Shibley?
A
Yes.
Q
What did you find during your investigation of Eric Shibley?
A
We learned that Mr. Shibley had applied for a number of PPP
and EIDL loan applications. And those applications contained
false and untrue statements.
Q
And what types of investigative steps did you undertake?
A
We conducted surveillance. We interviewed witnesses. We
obtained bank records, Secretary of State records, other sort of
documentation.
Q
Okay. And as part of your investigation, did you look into
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 177
where the defendant lived between March 2020 and June 2020?
A
Yes.
Q
And what investigative steps did you take to determine where
the defendant was living?
A
We conducted database checks to confirm the address, we also
obtained a number of records, such as bank account statements,
that showed the address for Mr. Shibley and his businesses. And
we conducted surveillance on that address. And we determined
that it was a medical office building. It had the name of Eric
Shibley MD on the outside of the building.
And further surveillance determined that Mr. Shibley was also
living in his office building.
Q
And do you know the address of that building?
A
It's 4700 36th Avenue Southwest, in Seattle.
Q
And so I'm showing the witness what's been marked as
Government's Exhibit 100.
Do you recognize this photo?
A
Yes. That is 4700 36th Avenue Southwest.
Q
And is it a fair and accurate representation of 4700 36th
Avenue Southwest?
A
Yes.
MS. CONNELLY: At this time, I would move Government's
Exhibit 100 into evidence.
MR. NANCE: No objection.
THE COURT: Admitted.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 178
(Exhibit 100 was admitted.)
MS. CONNELLY: May I publish, Your Honor?
Q
Approximately how many times did you visit this address in
person?
A
Approximately five or six times.
Q
And approximately what dates did you visit?
A
In May and June of 2020.
Q
Did you see the defendant at this address?
A
Yes.
Q
And what sort of activity did you find happening at the
address?
A
Over the hours that we were watching this address, we saw
probably about one or two patients arrive and depart. And then
we saw Mr. Shibley come and go from this address.
Q
And how could you tell that Mr. Shibley was living at the
address?
A
We conducted surveillance late at night and early in the
morning, and it was pretty clear that, from pattern of life
activity, that he was living there.
Q
And as part of the investigation, did you also review the
bank records related to Mr. Shibley?
A
Yes.
Q
And what did you find as a result of that review?
A
We found that this address was on all of the bank records.
Q
Great.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 179
As part of your investigation, did you learn that Mr. Shibley
was the registered agent of certain businesses in the state of
Washington?
A
Yes.
Q
And did you collect evidence related to those businesses from
the Washington Secretary of State?
A
Yes.
MS. CONNELLY: At this time, I would move into evidence
Government's Exhibits 70 through 75, pursuant to a business
records certification.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit Nos. 70 - 75 admitted.)
MS. CONNELLY: And may I publish those, Your Honor?
THE COURT: Yes.
Q
Thank you.
So we're looking at Government's Exhibit 70. What is this
exhibit?
A
This exhibit are records received from Washington State
Secretary of State for Dituri Construction LLC.
Q
And the first page, what is this document?
A
This is the certificate of formation for Dituri Construction.
Q
What does it show?
A
It shows that it was filed on January 2nd, 2020.
Q
And does that mean that Dituri Construction was formed on
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 180
January 2nd, 2020?
A
Yes.
Q
And if we could look at page 4 of Government's Exhibit 70,
please. What is this document?
A
This is an initial report for Dituri Construction.
Q
And if we could look at page 5 of Government's Exhibit 70.
Who was the governor who was listed on the original initial
report?
A
Thomas Dituri.
Q
And turning to page 6 of Government's Exhibit 70, please,
what is this document?
A
This is a statement of change for Dituri Construction.
Q
When was it filed?
A
April 30th, 2020.
Q
And who was listed as the registered agent on April 30th,
2020?
A
Eric Shibley.
Q
And turning to page 10 of the exhibit, what is this document?
A
This is an amended certificate of formation for Dituri
Construction.
Q
What date was it filed?
A
May 5th, 2020.
Q
And what is an amended certificate of formation? What is
that doing?
A
It is amending the initial certificate of formation.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 181
Q
And turning to the attachment, to the amended certificate of
formation, which is found on page 13 of Government's Exhibit 70;
what is this document?
A
The operating agreement for Dituri Construction.
Q
And if we look at the signature page, which is found on the
last page of the exhibit, what does the signature page of the
operating agreement show?
A
It's signed by Eric Shibley and Thomas Dituri, and it shows
that Eric Shibley owns 90 percent of the LLC, and Thomas Dituri
owns 10 percent.
Q
What was the date?
A
It was May 5th, 2020.
Q
I'm sorry, what's the date on the operating agreement,
Special Agent?
A
I'm sorry, it was January 7th, 2020.
Q
Thank you. And if we could turn to Government's Exhibit 72,
which are the documents from the Secretary of State for SS1 LLC.
On page 1 of this exhibit, what is this document?
A
This is the certificate of formation for SS1 LLC.
Q
When was this filed?
A
October 3rd, 2017.
Q
And moving to page 4 of this exhibit, if we could, what is
this document?
A
This is a letter from the Secretary of State that's regarding
administrative dissolution of SS1.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 182
Q
And what is date of this document?
A
March 3rd, 2020.
Q
What does it mean to be administratively dissolved?
A
If the entity is not complying with the annual filing
requirements, then they can be administratively dissolved.
Q
Does that mean that they're basically no longer in good
standing with the state?
A
Yes.
Q
And looking at page 5 of Government's Exhibit 72, what is
this document?
A
This is a statement of reinstatement for SS1 LLC.
Q
And what date was SS1 LLC reinstated?
A
April 6th, 2020.
Q
And who was the registered agent?
A
Eric Shibley.
Q
Turning to Government's Exhibit 75, what is this exhibit?
A
This is a certificate of formation for the A Team Holdings
LLC.
Q
Does Government's Exhibit 75 contain all the documents
related to the A Team Holdings, for the Secretary of State?
A
Yes, it does.
Q
And when was A Team Holdings formed?
A
This was filed on December 10th, 2018.
Q
And looking at page 6 of this exhibit, what is this document?
A
This is a notice from the Secretary of State of a delinquent
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 183
annual report.
Q
And what date was that filed?
A
January 1st, 2020.
Q
What is this document informing the A Team Holdings of?
A
That they had not filed their annual report for the year
2019, and if they continued to fail to file, and if they don't
file it by April 30th, 2020, that the LLC will be dissolved or
terminated.
Q
Okay. And turning to page 7 of this exhibit. What is this
document?
A
The annual report for the A Team Holdings.
Q
What date was this document filed?
A
March 31st, 2020.
Q
And what was the nature of the business listed?
A
It's real property investment.
Q
And turning to the next page of this document, who was the
registered agent?
A
Eric Shibley.
Q
And looking under controlling interest, Question No. 1 asked:
Does your entity own real property, such as land or buildings?
And what is answered for that?
A
The answer to that question was, "No."
Q
Moving to Government's Exhibit 74, what is this exhibit?
A
These are records provided by the Secretary of State for
Seattle's Finest Cannabis LLC.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 184
Q
And on page 1, what do we have?
A
And this is the certificate of formation for Seattle's Finest
Cannabis.
Q
What is date of formation for Seattle's Finest Cannabis?
A
November 3rd, 2017.
Q
And turning to page 7 of the exhibit, if we could. What is
this document?
A
This is an amended certificate of formation.
Q
And what date is this filed?
A
May 13th, 2020.
Q
And what does it say?
A
It's for SFC LLC.
Q
And so is it updating the name to SFC LLC?
A
Correct.
Q
How can you tell that?
A
Seattle's Finest Cannabis and SFC LLC, both have the same UBI
number.
Q
What is a UBI number?
A
It's a number issued by the state of Washington for
businesses.
Q
And turning to the second page of the amended certificate,
who was the registered agent?
A
Eric Shibley.
Q
And, finally -- or, not finally, I'm sorry, looking at
Government's Exhibit 73, what is this exhibit?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 185
A
These are documents received from the Secretary of State for
ES1 LLC.
Q
And on page 1, what is this document?
A
This is the certificate of formation for ES1 LLC.
Q
When was it filed?
A
It was filed October 25th, 2012.
Q
Looking at page 5 of this exhibit, what is this document?
A
This is the annual report for ES1 LLC.
Q
And what is the date of this annual report?
A
February 4th, 2020.
Q
And who was the registered agent?
A
Eric Shibley.
Q
And moving on to Government's Exhibit 71, if we could, Mr.
Arnold, what is this exhibit?
A
These are records received from the Secretary of State for
Eric R. Shibley MD, PLLC.
Q
And what is page 1?
A
It's the certificate of formation.
Q
And when was the company formed?
A
December 12th, 2012.
Q
And turning to page 4 of the exhibit. What is this document?
A
This is the annual report for Eric R. Shibley MD, PLLC.
Q
When was it filed?
A
March 31st, 2020.
Q
Who was the registered agent as of March 31, 2020?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 186
A
Eric Shibley.
Q
Great. I'm going to unpublish.
As part of your investigation, did you collect and review
phone records?
A
Yes, we did.
Q
So I'm going to show the witness Government's Exhibit 68, if
we can. Where did this record come from?
A
This record was provided by T-Mobile.
Q
What phone number is it for?
A
It's for 206-771-7868.
MS. CONNELLY: At this time, I would move Government's
Exhibit 68 into evidence as a business record.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 68 admitted.)
MS. CONNELLY: If we can publish, Your Honor.
Q
Whose phone number was this phone number?
A
Mr. Shibley's phone number.
Q
How can you tell that?
A
The billing information. It says ES1 LLC, and the address is
Mr. Shibley's address.
Q
Thank you.
And now I will take that down. If we could show the witness
Government's Exhibit 69. Where did this record come from?
A
This record was provided by Comcast.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 187
Q
And is this a record for one of the phone numbers that you
collected?
A
Correct.
Q
Whose, or what phone number is this?
A
It's -- the subscriber is Shibley Medical.
Q
What phone number is it?
A
I'm sorry, it's 206-938-4291.
MS. CONNELLY: If we could move into evidence as a
business record Government's Exhibit 69.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 69 admitted.)
MS. CONNELLY: Permission to publish, Your Honor.
Q
And so whose number was this number?
A
The subscriber is Shibley Medical.
Q
So is that Eric Shibley's phone number?
A
Correct. And his address.
Q
Okay. I will take that down.
As part of your investigation, did you also collect and
review IP address information related to the defendant?
A
Yes.
Q
What is an IP address?
A
An IP address is an address that identifies a device on an
internet. The address is assigned to the device by the
internet-service provider.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 188
Q
So I'm showing you Government's Exhibit 62. What is this
document?
A
Records provided by Comcast.
Q
Are they IP address records from Comcast?
A
Correct.
MS. CONNELLY: And so at this time, I would move
Government's Exhibit 62 in as a business record.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 62 admitted.)
MS. CONNELLY: Permission to publish, Your Honor.
Q
So looking at this letter, the bold bulleted points in the
middle. Are those the IP addresses that you sought subscriber
information for?
A
Yes.
Q
And who was the subscriber for these two IP addresses?
A
Shibley Medical.
Q
What was the subscriber's address?
A
It's 4700 36th Avenue Southwest, Seattle, Washington.
Q
Is that Mr. Shibley's address?
A
Correct.
Q
Is that within Washington State?
A
Yes.
Q
I will take that down.
As part of your investigation, did you also collect and
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 189
review e-mail subscriber records?
A
Yes, we did.
Q
And have you reviewed Government's Exhibits 63 through 67
before your testimony today?
A
Yes.
Q
Are those the e-mail subscriber records that you collected?
A
Correct.
Q
What do those exhibits show?
A
They showed Mr. Shibley's e-mail addresses.
MS. CONNELLY: Okay. At this time, I would move in
Government's Exhibit 63 through 67 as business records.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit Nos. 63 - 67 admitted.)
Q
And so again, what are Government's Exhibits 63 through 67?
A
They're records we obtained from internet service providers
for e-mail addresses belonging to Mr. Shibley.
Q
And did Mr. Shibley have five e-mail addresses that he
controlled?
A
Correct.
Q
So now we're going to start talking about the PPP and EIDL
applications that were submitted in this case.
Have you reviewed Government's Exhibits 1 through 26 before
your testimony today?
A
Yes.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 190
Q
And what are they?
A
Those are the PPP applications, and the supporting documents
for those applications.
MS. CONNELLY: At this time, I would move in
Government's Exhibits 1 through 26 as business records.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit Nos. 1 - 26 admitted.)
MS. CONNELLY: And, Your Honor, may I publish them now
that they're admitted?
Q
So I'm going to show the court and the witness and the jury
what's been marked -- or, actually, I apologize. I'm going to
show the witness what's been marked as Government's Exhibit 205.
Do you recognize this document?
A
Yes.
Q
What is it?
A
It's a summary of all of Mr. Shibley's PPP applications.
Q
And how many pages is the document of Government's
Exhibit 205?
A
It's two pages.
Q
Can we scroll through it for the witness?
Do you remember reviewing Government's Exhibit 205?
A
Yes.
Q
Do you remember how many pages it contains?
A
I'm sorry, I don't recall the total number of pages. But
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 191
it's a little more than two.
Q
Okay. Did you assist in the preparation of Government's
Exhibit 205?
A
Yes.
Q
And how did you assist in the preparation of Government's
Exhibit 205?
A
I reviewed and confirmed all of the information that's
included in the exhibit.
Q
And what exhibits are Government's Exhibit 205 based off of?
A
The PPP applications.
Q
Are they based on other applications as well?
A
The EIDL applications as well.
Q
Have you reviewed Government's Exhibits 1 through 39 as part
of your investigation?
A
Yes.
Q
And so is the information found in Government's Exhibit 205
accurate?
A
Yes.
Q
Does Government's Exhibit 205 fairly and accurately summarize
the documents in Government's Exhibits 1 through 39?
A
Yes.
MS. CONNELLY: At this time, I would move to admit
Government's Exhibit 205, pursuant to Rule 1006.
MR. NANCE: Yeah. Unless the summary contains
duplications, if the witness could clarify that, whether there's
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 192
anything duplicative about the summary.
MS. CONNELLY: Of what?
THE COURT: Counsel, address your comments to me.
MS. CONNELLY: Yes. I apologize.
THE COURT: Do you understand what he's asking?
MS. CONNELLY: Well, some of the applications themselves
were duplicative. The information was similar, on separate
applications. Is that the question?
MR. NANCE: Well, I'm concerned that the summary might
overstate the number of applications.
MS. CONNELLY: No, it does not.
MR. NANCE: Okay. Thank you.
THE COURT: It will be admitted.
(Exhibit No. 205 admitted.)
MS. CONNELLY: Your Honor, may we move to publish?
THE COURT: Yes.
Q
So we're looking at Slide 1 of Government's Exhibit 205.
What is this chart?
A
This chart is a summary of the PPP applications, by entity.
Q
And how many pages is it?
A
It's two pages.
Q
Can you walk us through the information that's represented on
this slide?
And, Mr. Arnold, if we could just blow up the top part.
Thank you.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 193
A
It shows the lender, the entity that applied for the PPP
loan, the EIN number, the manager, the monthly payroll that was
listed, the loan amount that was applied for, the number of
employees that was listed, the answer to question No. 5, the
application date, and the grand jury exhibit number.
Q
By grand jury exhibit number, do you mean government's
exhibit number?
A
Yes.
Q
And just so -- remind the jury what is Question 5 on the PPP
application?
A
Question 5 asked, among other things, whether the applicant
was on probation or parole.
Q
Where did the information on this chart come from?
A
It came from the PPP applications themselves.
Q
So if we could zoom back out, Mr. Arnold.
How is this chart organized?
A
This chart is organized by entity.
Q
And what do the rows in bold red text signify?
A
Those are the counts that were charged in indictment.
Q
And who is the manager that's listed on every single PPP
application?
A
Eric Shibley.
Q
So we're going to turn back from Government's Exhibit 205 and
take some time to focus on certain of these loans, and look at
the underlying documents. If that's okay, Special Agent Moran,
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 194
let's focus on line 1 of this chart.
What loan is this for?
A
This is for a loan in the name of A Team Holdings LLC.
Q
During your investigation -- and who was the loan submitted
to?
A
ReadyCap Customer's Bank.
Q
During your investigation, did you learn that Ready Capital
and Customer's Bank had a relationship with respect to the PPP?
A
Yes.
Q
And what was it?
A
Ready Capital accepted and processed the PPP applications.
And then at some point Customer's Bank took over the actual
funding of the loans.
Q
And so who was the manager listed on this application?
A
Eric Shibley.
Q
What was the average monthly payroll listed?
A
$384,000.
Q
And what was the loan request?
A
For $960,000.
Q
How many employees did he claim on the A Team Holdings?
A
Forty-eight.
Q
And what was the date of this application?
A
It was April 12th, 2020.
Q
And what exhibit is the paperwork for the loan found at?
A
No. 1.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 195
Q
And so if we could turn to Government's Exhibit 1, which has
already been entered into evidence. What is Government's
Exhibit 1?
A
This is the application form for A Team Holdings LLC.
Q
And if we could look at certain portions, what starts on
page 1 of Government's Exhibit 1?
A
This is the actual application page.
Q
And at some point did Dr. Shibley send an updated version of
this application to Ready Capital?
A
Yes.
Q
And if we could turn to page 9 of Government's Exhibit 1.
What starts on page 9 of Government's Exhibit 1?
A
This is the 941 that Mr. Shibley submitted, along with the
application.
Q
And just generally speaking, what are 941s?
A
They're quarterly forms that the employer files with the IRS
that reports wages and payroll taxes.
Q
And so why would a business submit them?
A
To report to the IRS what they had paid in wages and the
payroll taxes.
Q
And how often are they filed?
A
On a quarterly basis.
Q
So does that mean they're filed four times a year?
A
Correct.
Q
And so if we could look at the top part of this 941, I know
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 196
it's small, what quarter is this 941 for?
A
This is the fourth quarter of 2019.
Q
And looking at line 1, how many employees did the 941 claim
that A Team Holdings had?
A
Forty-eight.
Q
And on line 2, how much in wages did it claim to pay those
employees?
A
$975,000.
Q
And how much federal income tax was withheld on those wages,
according to the 941, on line 3?
A
Zero dollars.
Q
And at lines 5A through 5D, towards the bottom. What does
that represent?
A
It shows the taxable social security and Medicare that's
withheld and what the employer contributes.
Q
Are federal income taxes and the social security and Medicare
taxes different?
A
Yes.
Q
If we could pull back out, Mr. Arnold.
Looking at line 14. What is the balance due?
A
$149,175.
Q
And what does a balance on a 941 represent?
A
It represents what the business owes the IRS.
Q
Turning to the second page of the 941, if we could look at
part two, Mr. Arnold, at the top.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 197
What is part two on a 941 about?
A
This shows whether the business is a monthly depositor or a
semiweekly depositor.
Q
What does it mean to a monthly versus a semiweekly depositor?
A
It's how often the business deposits what they owe with the
IRS, whether it's monthly or semiweekly.
Q
Do businesses pay taxes as they go along?
A
Correct.
Q
And what does Mr. Shibley claim to be on this 941?
A
He claims to be a monthly depositor.
Q
Okay. And moving to page 12 of this exhibit. What is this
document?
We can zoom in on the top part.
A
This is a 941 for A Team Holdings, for the first quarter of
2020.
Q
And was this also submitted to Ready Capital as part of the A
Team Holdings loan?
A
Yes.
Q
And how much in wages for the first quarter of 2020 is the
company claiming? Yeah, if we could. Thank you, Mr. Arnold.
A
$768,000.
Q
And so in Government's Exhibit 1, are there other documents
in Government's Exhibit 1 that Mr. Shibley submitted as
supporting documentation?
A
Yes.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 198
Q
What sorts of things did he submit?
A
He submitted Secretary of State records, copy of his driver's
license, a copy of a voided check, sometimes W-3s. I'm not sure
if it's in this exhibit or not.
Q
So is that the type of supporting documentation that's found
with most of the loan applications in Government's Exhibits 1
through 26?
A
Yes.
Q
Turning to page 31 of Government's Exhibit 1. What is this
document?
A
This is the loan note.
Q
And who was it with?
A
A Team Holdings LLC.
Q
Who is the lender?
A
ReadyCap Lending.
Q
And so can you just explain for the jury, what is a loan
note?
A
It lays out the terms of the loan. And it's the borrower's
promise to repay, as well. And it's signed by the borrower.
Q
And what is the date of this loan note?
A
April 23rd, 2020.
Q
And how much was the loan for?
A
$960,000.
Q
And was that the amount that was applied for?
A
Correct.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 199
Q
Looking at page 3 of the loan note, which is page 33 of
Government's Exhibit 1. If we could look at these certifications
under paragraph 11. What are these?
A
These are items that -- or things that the borrower certifies
or agrees are true and correct when they sign the note.
Q
So what sorts of things was Mr. Shibley certifying to?
A
That the information -- what the proceeds of the loan are
going to be used for, what they aren't going to be used for, that
they will correct any errors.
Q
Was he also certifying that everything in the application
form was true and accurate and remained true and accurate?
A
Yes.
Q
Turning to page 4 of the loan note. Did Mr. Shibley sign
this loan note?
A
Yes.
Q
And if we could come back out, Mr. Arnold.
And looking at the DocuSign envelope ID that's in corner,
what is the DocuSign ID?
A
It's a unique identifier for the digital signature.
Q
Okay. And looking at page 37 of this exhibit, what is this
document?
A
This is the DocuSign document that records the digital
signature for which the note was signed.
Q
And how can you tell when a DocuSign certificate relates to a
document?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 200
A
The identifier that is at the top of the document, is also on
the certificate of completion here.
Q
And where is it on this the certificate of completion, if you
can just --
A
It's at the top of the envelope ID.
Q
And does this envelope ID match the envelope ID we saw on the
loan note?
A
Yes.
Q
If we can come back out, Mr. Arnold, and look into the signer
events in the middle.
What does this section of the certificate tell you?
A
This shows who signed the loan note.
Q
And who signed the loan note in this case?
A
Eric Shibley.
Q
Is shibleymedical@outlook.com one of the e-mail addresses you
found was controlled by Mr. Shibley?
A
Yes.
Q
Does the IP address that you see here correspond with the IP
addresses of Mr. Shibley that we looked at earlier?
A
Yes.
Q
When was this signed?
A
April 23rd, 2020.
Q
Turning to page 41 of the exhibit, if we could. What is this
document?
A
This is a loan note between A Team Holdings and Customer's
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 201
Bank.
Q
So why was there a second loan note for this loan?
A
As I mentioned earlier, Customer's Bank took over the funding
of the PPP application to Ready Capital. So they required a
second note with them.
Q
And so when was the date of this loan note?
A
April 30th, 2020.
Q
And, again, how much was the loan for?
A
$960,000.
Q
Was that the same as the ReadyCap loan note?
A
Correct.
Q
It was the same amount as the loan applied for?
A
Correct.
Q
Does it have the same SBA loan number?
A
Yes.
Q
And is that how you can tell they're related loan notes?
A
Yes.
Q
And looking at page 3 of the Customer's Bank loan note, and
looking at paragraph 11, does this loan note also contain
certifications?
A
Yes.
Q
And are they the same certifications as for the ReadyCap loan
note?
A
Yes.
Q
Turning to page 4 of the loan note. Did Mr. Shibley also
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 202
sign the Customer's Bank loan note?
A
Yes.
Q
And moving on to page 45 of the exhibit. What is this
document?
A
This is the DocuSign document that recorded the digital
signature for that loan note.
Q
And looking at the signer events. What does this tell you?
A
That Eric Shibley signed this loan note.
Q
When was it signed?
A
April 30th, 2020.
Q
Okay. We can come back out. I'm going to publish.
Was this loan funded?
A
Yes.
Q
I'm going to show the witness Government's Exhibit 104, if we
can. What is this document?
A
This is a bank account statement for the A Team Holdings LLC
from Wells Fargo.
MS. CONNELLY: And so at this time, I would move in
Government's Exhibit 104 as a business record.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 104 admitted.)
MS. CONNELLY: May I publish, Your Honor?
THE COURT: Yes.
Q
If we could turn to the next page of Government's
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 203
Exhibit 104, Mr. Arnold, and look in this table.
Can you tell, from this bank statement, what date the
Customer's Bank loan was funded?
A
It was funded May 4th, 2020.
Q
And where is that on this? Is that the third line on this?
A
The third line down, correct.
Q
And how much was sent to Mr. Shibley's A Team Holdings
account?
A
$960,000.
Q
And what happened to the money after this?
A
It was transferred to another account.
Q
I am going to unpublish. And if we could show the witness
Government's Exhibit 105.
What is this?
A
This is a savings bank account statement from Wells Fargo for
the A Team Holdings LLC.
Q
Is this the bank account that the $960,000 was transferred
into?
A
Correct.
MS. CONNELLY: I would move to admit Government's
Exhibit 105 as a business record.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 105 admitted.)
MS. CONNELLY: May I publish, Your Honor?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 204
THE COURT: Yes.
Q
If we could turn to page 2 of Government's Exhibit 105, and
look at the transactions table.
What date was the $960,000 moved into this account?
A
May 4th, 2020.
Q
And did Mr. Shibley use any of the funds, after he
transferred the money?
A
Yes. He withdrew $150,000 in cash.
Q
And what date did he do that?
A
On May 26th, 2020.
Q
And looking at the May 27th line. What happened to the rest
of the money?
A
We seized the remaining funds.
Q
And how did you seize the remaining funds?
A
With a seizure warrant.
Q
If we could turn back to Government's Exhibit 205, the
summary chart that we started with. If we would move to page 2
of the summary chart, and look at line 19 of the chart.
What loan is this?
A
This is an application by Seattle's Finest Cannabis LLC.
Q
And who did the application go to?
A
To TCF.
Q
And, again, who was the manager?
A
Eric Shibley.
Q
And what was the average monthly payroll listed?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 205
A
$40,000.
Q
And what was the loan amount requested?
A
$100,000.
Q
And how many employees did he claim?
A
Six.
Q
And what was the answer for Question No. 5?
A
It was, "No."
Q
What was the date of this application?
A
April 25th, 2020.
Q
And what exhibit is the paperwork for the loan found at?
A
Exhibit 2.
Q
And if we could pull up Government's Exhibit 2, which has
already been offered into evidence.
THE COURT: Let's take a moment and let the jury stand
up and stretch.
MS. CONNELLY: Okay.
THE COURT: All right. That was as much for me as it
was for you.
Q
And so if we could pull up Government's Exhibit 2. What is
contained in Government's Exhibit 2?
A
This is the loan application and the supporting documents.
Q
For the Seattle's Finest Cannabis loan?
A
Correct.
Q
And so what's on page 1 of this exhibit?
A
This is the application form.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 206
Q
And does that contain all the same information we just went
over in the summary chart?
A
Correct.
Q
Turning to page 3 of the application. Did Mr. Shibley sign
this application?
A
Yes.
Q
And what is the date that he signed the application?
A
April 25th, 2020.
Q
And looking at page 6 of this exhibit. What is found here?
A
This is the 941 that Mr. Shibley submitted with the
application.
Q
If we could turn to the last page of this exhibit, which is
page 30. What is this document?
A
This is a letter from TCF Bank, denying the loan application.
Q
And what's the date that this loan application for Seattle's
Finest Cannabis was denied?
A
May 4th, 2020.
Q
And what does that mean?
A
It means the loan was not funded.
Q
And just looking at the top two logos, do you know why TCF
Bank and Chemical Bank are listed at the top?
A
Chemical Bank is a division of TCF Bank.
Q
And so turning back to the summary chart, at Government's
Exhibit 205, if we could look at line 3 of this chart.
What loan does this represent?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 207
A
This is an application to Ready Capital, Customer's Bank, by
Dituri Construction LLC.
Q
And what was the average monthly payroll that was listed?
A
$392,000.
Q
And what was the loan amount requested?
A
$980,000.
Q
And how many employees did he claim on this loan?
A
Forty-nine.
Q
And what was the answer for Question No. 5?
A
It was, "No."
Q
What was the date of the application?
A
May 2nd, 2020.
Q
And what exhibit is the paperwork for this loan found at?
A
Exhibit 3.
Q
If we could look at Government's Exhibit 3, please.
If we could start at page 1. What's on page 1 of this
exhibit?
A
This is the application form.
Q
And looking at page 2 of this exhibit, if we could zoom in on
the bottom portion, Mr. Arnold. Did Mr. Shibley sign this
exhibit, or sign this application?
A
Yes, he did.
Q
And looking at page 5 of the exhibit. What is this?
A
This is the DocuSign document that records the digital
signature.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 208
Q
And if we could just look at the signer events, quickly.
What does this show?
A
This shows that Mr. Shibley was the one who signed it.
Q
And was shibley98126@gmail.com one of the e-mail addresses
that you found was associated with Mr. Shibley?
A
Yes.
Q
Was this IP address one of his e-mail addresses?
A
Yes.
Q
And what is the date that this document was DocuSigned?
A
May 2nd, 2020.
Q
If we could turn to page 10 of the exhibit. What's found at
-- what is this document?
A
This is the Form 941 for Dituri Construction that was
submitted with the application.
Q
And if we could move back to the summary chart at
Government's Exhibit 205, and focus on line 2. What loan does
this represent?
A
This is a loan application from Dituri Construction LLC to
Celtic Bank.
Q
And what was the average monthly payroll listed on this
Dituri Construction application?
A
$225,400.
Q
And what was the loan request?
A
$563,500.
Q
And how many employees did he claim?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 209
A
Forty-nine.
Q
And what was the answer for Question 5?
A
It was, "No."
Q
And what was the date of this application?
A
April 30th, 2020.
Q
And if we could just briefly, Mr. Arnold, zoom in on both
lines two and three of Government's Exhibit 205.
Do lines two and three both represent loans submitted by Mr.
Shibley for Dituri Construction?
A
Yes.
Q
And how do they compare?
A
The monthly payroll amount is different.
Q
How much is it different by?
A
Over $100,000, at least.
Q
And how long passed between these two explanations being
submitted?
A
It was a couple of days.
Q
And so turning back to focus on the Celtic Bank Dituri
Construction loan, found at line 3, what exhibit is the paperwork
for the loan found at?
A
Exhibit 4.
Q
And so I'm going to show you what's already been entered into
evidence as Government's Exhibit 4. And what is on page 1 of
this exhibit?
A
This is the application form, for Dituri Construction LLC.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 210
Q
And does it have all the same information that was on the
summary chart?
A
Yes.
Q
And if we could turn to page 3 of this application, did Mr.
Shibley sign the application?
A
Yes.
Q
And turning to page 17 of the exhibit, what is found here?
A
This is the 941 for Dituri Construction that was submitted
with the application.
Q
And what quarter is it for?
A
The first quarter of 2020.
Q
Do you remember that we just looked at a 941 submitted with
the Ready Capital application?
A
Yes.
Q
Do the 941s match?
A
No.
Q
If we could publish both Government's Exhibit 3, page 10, and
Government's Exhibit 4, page 10, or page 17, simultaneously, the
two 941s.
If we could look at the top portions of both of them, Mr.
Arnold, if that's possible.
So are these purportedly for the same time period?
A
Yes, they're both for the first quarter of 2020.
Q
And are they for the same company?
A
Yes.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 211
Q
Do the companies have the same employer identification
number?
A
Yes.
Q
What's different about them?
A
The amount of wages is different.
Q
Have they been cut in half?
A
Yes.
Q
And, again, are these both supposed to be the 941s submitted
to the IRS for Dituri Construction in the first quarter of 2020?
A
Yes.
Q
So if we could just turn back to Government's Exhibit 4 and
the Dituri Construction loan submitted to Celtic Bank, Mr.
Arnold, and in particular turning to page 6 of this exhibit.
What is this document?
A
This is the loan note for the loan with Dituri Construction
LLC.
Q
And what's the date of this loan note?
A
May 4th, 2020.
Q
Who's the lender on this loan note?
A
Celtic Bank.
Q
And how much is the loan for?
A
$563,500.
Q
And if we could look at page 5 of the loan note, which is
page 10 of the exhibit. If we could look at the zoomed text or
the bolded text through the signature, please, Mr. Arnold.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 212
Did Mr. Shibley sign this note?
A
Yes, he did.
Q
And does this certify that the information provided to get
the loan was accurate?
A
Yes.
Q
And where is that statement on the --
A
Right above the signatures. "By signing, the borrower agrees
that all the information provided in this application, and all
supporting documents and forms to obtain the loan, are true and
accurate in all material respects, and that any known false
statements are punishable by fine, imprisonment, or both."
Q
And looking at page 11 of Government's Exhibit 4. What is
this document?
A
This is the DocuSign record that recorded the digital
signature for the note and the application.
Q
And looking at the signer events, if we can. Did Eric
Shibley also sign this note?
A
Yes, he did.
Q
And how can you tell?
A
It has his e-mail address and IP address.
Q
What was the date that the application and the loan note
package were DocuSigned and submitted to Celtic Bank?
A
May 4th, 2020.
Q
And was this loan funded?
A
Yes.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 213
Q
I am going to unpublish.
I'm showing the witness what's been marked as Government's
Exhibit 106. What is this document?
A
This is a bank statement from BECU for Dituri Construction
LLC.
MS. CONNELLY: And at this time, I would move in
Government's Exhibit 106 as a business record.
MR. NANCE: No objection.
THE COURT: It's admitted.
(Exhibit No. 106 admitted.)
MS. CONNELLY: Permission to publish, Your Honor.
Q
If we could look at the bottom portion, Mr. Arnold.
What was the date that this loan was funded?
A
May 6th, 2020.
Q
And what did Mr. Shibley do with those funds?
A
He transferred them from the checking account to the savings
account.
Q
What date did he do that?
A
May 7th, 2020.
Q
And what eventually happened to the money, after Mr.
Shibley's transfers?
A
It was returned to Celtic Bank.
Q
Turning back to Government's Exhibit 205, the summary chart.
If we could look at the second page, and look at line 23. What
loan does this represent?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 214
A
This is a loan from -- to Harvest Bank from SS1 LLC.
Q
And what was the average monthly payroll listed on this loan?
A
$328,000.
Q
And what was the loan request?
A
$820,000.
Q
And how many employees did he claim?
A
Forty-one.
Q
What was the answer for Question 5 on the Harvest loan?
A
It was, "No."
Q
What was the date of this application?
A
April 20th, 2020.
Q
What exhibit is the paperwork for the loan found at?
A
Five.
Q
And if we could show Government's Exhibit 5, which has
already been entered into evidence, what's on page 1 of
Government's Exhibit 5?
A
This is the application form for SS1 LLC.
Q
And turning to page 2 of the application, if we could look at
the signature, is the application signed?
A
Yes. By Eric Shibley.
Q
And if we could look at page 5 of the exhibit, what's found
at page 5 of Government's Exhibit 5?
A
This is the 941 for SS1 LLC for the first quarter of 2020,
and it was submitted with the application.
Q
Turning to page 7 of the exhibit, what is this document?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 215
A
This is a W-3 form that was submitted with the application.
Q
Can you just explain, at a high level, what a W-3 is?
A
It summarizes all of the W-2 information, the wages paid to
employees, and it's submitted by the employer by an annual basis
to Social Security Administration.
Q
If we could turn to page 25 of Government's Exhibit 5.
Great. What is this document?
A
This is the loan note between SS1 LLC and Harvest Small
Business Finance.
Q
What was the date of this loan note?
A
May 4th, 2020.
Q
Who's the lender on the note?
A
Harvest Small Business Finance.
Q
And how much was the loan for?
A
$820,000.
Q
Was that the amount that was applied for?
A
Yes.
Q
If we could just turn to page 7 of the loan note, Mr. Arnold.
Apologies, page 32 of the exhibit. Thank you, Mr. Arnold.
If we could look at paragraph 12 and zoom in on that. Did
the loan note contain certifications?
A
Yes.
Q
What are those certifications?
A
These are things that the borrower represents are true and
accurate, when they sign the note.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 216
Q
And so in this case, did he represent that he was in
operation on February 15th, and had employees for whom he paid
salaries and payroll taxes?
A
Correct.
Q
Looking at page 9 of the loan note, which is page 34 of the
exhibit. Did Mr. Shibley sign this loan note?
A
Yes, he did.
Q
I'm going to unpublish.
If we could show the witness Government's Exhibit 46.
How is the loan note transmitted to Harvest?
A
By e-mail from Mr. Shibley.
Q
And what is Government's Exhibit 46?
A
It's the e-mail exchange with Harvest, attaching the loan
note.
MS. CONNELLY: At this time, I would move Government's
Exhibit 46 into evidence, pursuant to 902(11), 803(6) and
881(d)(2).
MR. NANCE: I'm sorry, what is the connection, if I
could ask? I mean, I think there's a foundation problem.
Objection, foundation.
THE COURT: Lay additional foundation.
MS. CONNELLY: Okay.
Q
Did Harvest provide business records, as part of your
investigation?
A
Yes.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 217
Q
Was one of those business records provided in Government's
Exhibit 46?
A
Yes.
Q
Did Harvest provide a business records certification, along
with Government's Exhibit 46?
A
Yes.
Q
And does Government's Exhibit 46 contain an attachment?
A
Yes.
Q
If we could turn to page 2 of Government's Exhibit 46, and
show the witness the attachment. What was attached to
Government's Exhibit 46?
A
It's the signed loan note.
Q
Was it the same signed loan note that we saw in Government's
Exhibit 5?
A
Yes.
MS. CONNELLY: Move to admit.
THE COURT: Have you supplied the certification to
counsel?
MS. CONNELLY: Yes, Your Honor.
THE COURT: Any objection, Mr. Nance?
MR. NANCE: No, Your Honor.
THE COURT: It will be admitted.
(Exhibit No. 46 admitted.)
Q
If we could turn back to page 1 of the e-mail.
MS. CONNELLY: Permission to publish, Your Honor.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 218
THE COURT: Yes.
Q
What is the date of this e-mail?
A
It's May 5th, 2020.
Q
And, again, what was attached to this e-mail?
A
The signed loan note.
Q
Was it the same loan note that we looked at in Government's
Exhibit 5?
A
Yes.
Q
And who sent this e-mail?
A
The e-mail address is Shibley Medical, and it's one of
Mr. Shibley's e-mail addresses.
Q
And was this phone -- or, was this loan funded?
A
Yes.
Q
If we can unpublish.
I'm showing the witness what's been marked as Government's
Exhibit 107, please. What is this document?
A
This is a bank statement from BECU, for a bank account in the
name of SS1 LLC.
MS. CONNELLY: At this time, I would move in
Government's Exhibit 107 as a business record.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 107 admitted.)
MS. CONNELLY: Permission to publish, Your Honor.
Q
If we could look at the bottom-portion tables, please. What
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 219
was the date that this loan was funded?
A
May 19th, 2020.
Q
And what was the amount that the loan was funded?
A
$820,000.
Q
And what did Mr. Shibley do with these funds?
A
He transferred it from the checking account, to the savings
account.
Q
What is the date that he transferred the money?
A
May 19th, 2020.
Q
And what happened to the money after these transfers?
A
It was returned to Harvest.
Q
Did Mr. Shibley communicate with Harvest, after the money was
returned to Harvest?
A
Yes.
Q
We can unpublish and take that down.
Showing the witness what's been marked as Government's
Exhibit 47. What is Government's Exhibit 47?
A
These are e-mails exchanged between Harvest and Mr. Shibley.
Q
And was this e-mail provided by Harvest, during your
investigation?
A
Yes.
MS. CONNELLY: I'd move Government's Exhibit 47 into
evidence. Again, as a business record.
MR. NANCE: Hearsay, Your Honor. Just because it's a
business record, it's still someone else, someone else sending an
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 220
e-mail.
THE COURT: Overruled. It will be admitted.
(Exhibit No. 47 admitted.)
MS. CONNELLY: Thank you, Your Honor. May I publish?
THE COURT: Yes.
Q
If we could look at page 2 of this thread, to start. And if
we could look at the top portion, Mr. Arnold.
What is the date of this portion of the thread?
A
May 27th, 2020.
Q
And what is Mr. Shibley stating has happened?
A
He is talking about the money being returned to Harvest.
He's asking them to send it to another bank instead.
Q
Is shibleymedical@outlook.com one of Mr. Shibley's e-mail
addresses that you found?
A
Yes.
Q
If we would move back to page 1, Mr. Arnold. And if we could
look at the top portion of this thread.
What does Mr. Shibley tell the Harvest representative?
A
He provides a cell phone number. And then he says they
started a federal case. And he provides a number. It says,
"That's crazy. I am dumbfounded."
Q
What was the date of this e-mail?
A
May 27th, 2020.
Q
Was that the day that you seized PPP money in Dr. Shibley's
accounts?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 221
A
Yes.
Q
Was 20SZ33, the number of your seizure case?
A
Correct.
Q
So with both the Celtic Bank and the Harvest loans that were
returned to the bank, did Mr. Shibley return that money himself?
A
No.
Q
Did the bank actually recall the money?
A
Yes.
Q
So if we could turn back to the summary exhibit found at
Government's Exhibit 205.
How many PPP loans were submitted by Mr. Shibley that are
found on this slide?
A
There's 26.
Q
And we have looked through Exhibits 1 through 5, and are not
going to look through all of the PPP loan documents that are the
basis for this slide, but have you reviewed Government's
Exhibits 6 through 26?
A
Yes.
Q
And can you just describe for the jury what is contained in
them?
A
They contain the information that is summarized here in this
chart.
Q
And do they all have paperwork supporting that information?
A
Yes.
Q
Do they all have a 941?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 222
A
I'm not sure if they all have the 941.
Q
Is there a binder in front of you that contains those?
A
Yes.
Q
Do you want to look through that real quickly --
MS. CONNELLY: If that's okay, Your Honor.
A
Yes, I see 941s for these applications in here.
Q
Okay. And do all of the exhibits also contain a loan
application?
A
Yes.
Q
Do all of the exhibits contain a loan note or a declination
letter?
A
No.
Q
And why wouldn't -- why isn't that?
A
Not all of the applications were processed to the point where
they received that.
Q
If we could turn to Slide 3 of the summary chart. What is
found on Slide 3?
A
These are the EIDL applications, by entity.
Q
How many pages is it?
A
It's one page.
Q
And if you could just walk us through the information that's
represented on this slide.
A
It shows the entity that applied for the EIDL loan, the EIN,
or social security number, the manager, the loan amount that was
approved, the advance amount, the number of employees, the gross
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 223
revenues, the application number, the application date, and the
exhibit number.
Q
And why is there no lender listed on this chart?
A
Because the lender is the Small Business Administration.
Q
Why is there not a loan amount approved for every loan on
this chart?
A
Because the SBA is the one that calculates the loan amount
approved.
Q
Where did the information on this chart come from?
A
The information came from the applications and supporting
documents.
Q
And if we could zoom back out, Mr. Arnold.
What do the lines in bold red text signify?
A
Those are the counts that were charged in the indictment.
Q
If we could just briefly look at line one of this chart.
What application does this represent?
A
An application in the name of Dituri Construction LLC.
Q
And what was the date of this application?
A
June 7th, 2020.
Q
What exhibit is the paperwork for the loan found at?
A
Twenty-seven.
Q
If we could show what's already been entered into evidence as
Government's Exhibit 27.
Looking at page one of the exhibit. What is this?
A
This is the application form.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 224
Q
And just looking at the top, what IP address was used to
submit this application?
A
It's the IP address that starts with 2603.
Q
Was that one of the IP addresses associated with Mr. Shibley?
A
Correct.
Q
And was this loan funded?
A
Yes.
Q
If we could look at page 27 of the exhibit. What is page 27
of the exhibit?
A
This shows the loan being funded, the funds being sent to the
Dituri Construction bank account at Verity Credit Union.
Q
Once it was funded, did Mr. Shibley try to withdraw money?
A
Yes.
Q
If we could turn back to the summary chart on the EIDL loans,
at page 3 of Government's Exhibit 205, please.
Looking at line 11 of this chart, what application does this
represent?
A
This is an EIDL application in the name of SS1 LLC.
Q
And what was the date of this application?
A
June 7th, 2020.
Q
And if we could just briefly look at both line 11 and line 1,
Mr. Arnold.
Looking at these together, how do they compare?
A
The gross revenues are exactly the same. And they were
applied for on the same date.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 225
Q
Did they also receive the same loan amount?
A
They received the same loan amount, yes.
Q
Turning back to government's -- or line 11. What exhibit,
for the paperwork, is the paperwork for the SS1 loan found at?
A
Exhibit 28.
Q
If you could pull up what's already been entered into
evidence as Government's Exhibit 28, please.
What is page 1 of the Government's Exhibit 28?
A
This is the loan application for SS1 LLC.
Q
And just looking at the top portion, what IP address was used
to submit this application?
A
The same IP address starting with 2603, that comes back to
Mr. Shibley.
Q
And was this loan funded?
A
Yes.
Q
Looking at page 27 of Exhibit 28. What is this document?
A
This document shows the funds being sent to a Verity Credit
Union account, in the name of SS1 LLC.
Q
And once the loan was funded, did Mr. Shibley try to withdraw
money?
A
Yes.
Q
If we could turn back to Government's Exhibit 205 and look at
Slide 4 now, please.
What is shown on Slide 4 of Government's Exhibit 205?
A
This shows the PPP and EIDL applications for Dituri
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 226
Construction LLC.
Q
And how many pages is it?
A
It's one page.
Q
Can you walk us through the information that's represented on
this slide?
A
At the top it shows the applications, the PPP applications.
And at the bottom are the EIDL applications.
Q
Are there differences in the PPP loans that were submitted?
A
Yes.
Q
What are those differences?
A
The loan amount applied for is different among the PPP loans,
and the monthly payroll amount is different.
Q
And looking at the EIDL applications, what was the gross
revenues for each of these?
A
One of them had gross revenues of $850,000, and one had gross
revenues of zero.
Q
If we could turn to Slide 5 of Government's Exhibit 205.
What is this chart?
A
These are the PPP and EIDL applications for SS1 LLC.
Q
And can you walk us through the information that's
represented on this slide?
A
Again, at the top are the PPP applications for SS1 LLC, and
at the bottom are the EIDL applications.
Q
And looking at the EIDL applications at the bottom, what are
the differences?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 227
A
The gross revenues are different between the two
applications.
Q
And how far apart in time were these two applications
submitted?
A
About a week apart.
Q
Do the PPP and EIDL applications also contain some different
information?
A
Yes.
Q
What is the difference? Can you just explain for the jury,
what is the difference between monthly payroll and gross
revenues?
A
The gross revenues are calculated from the -- it's the twelve
months' worth of revenues, prior to January 31st. And monthly
payroll is obviously what you are paying to your employees
monthly. So if you annualize that monthly payroll, you are
looking at about over $3 million worth of payroll. And gross
revenues of $850,000 would not be sufficient to cover payroll of
over $3 million.
Q
If we could turn to slide six of the summary chart. What is
this chart?
A
These are the PPP and EIDL applications for Seattle's Finest
Cannabis LLC, SFC LLC.
Q
Can you walk us through the information, again, that's
represented?
A
At the top are the PPP applications, and at the bottom are
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 228
the EIDL applications.
Q
And what changes with the PPP loans for Seattle's Finest
Cannabis and SFC LLC?
A
The monthly payroll amount changes.
Q
And what about the EIDL applications?
A
The gross revenue changes.
Q
How much does it change by?
A
It's doubled from the first one to the second on. It more
than doubled.
Q
And what about how many employees -- how do the employees
change between the PPP applications and the EIDL applications?
A
The PPP applications are six employees. And then the EIDL
applications, there's either ten or twelve employees listed.
Q
And just to remind us, how are EIDL advances calculated?
A
It's a thousand dollars per employee, up to $10,000.
Q
So if you have more employees when you submit an EIDL
advance, would you get -- when you submit for an EIDL advance,
would you get more money on an EIDL advance?
A
Yes.
Q
If we could look at Slide 7 of the summary chart. What is
this chart?
A
These are the PPP and EIDL applications for the A Team
Holdings LLC.
Q
And can you walk us through the information that's
represented?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 229
A
At the top is the PPP application, and at the bottom is the
EIDL application.
Q
And so does Dr. Shibley's EIDL application have the same
number of employees as his PPP application?
A
No. On the PPP application, he lists 48 employees. And on
the EIDL, he lists four.
Q
Which of these applications was filed first?
A
The EIDL application was filed first.
Q
And, again, can you just walk the jury through how his gross
revenue listed on the EIDL application compares with the monthly
payroll?
A
So if you had a monthly payroll of $384,000, again, you are
paying over $4 million a year in payroll. A gross revenue of
$180,000 for the that same year, would just not be sufficient to
make your payroll.
Q
If we could turn to Slide 8 of the summary chart. What is
this chart?
A
These are the PPP and EIDL applications for Eric R. Shibley
MD, PLLC.
Q
On this chart, does Mr. Shibley's EIDL application list the
same number of employees as his PPP application?
A
No. He lists four employees for his EIDL application, and on
his PPP, it's five or six employees.
Q
And which application was submitted earliest?
A
The EIDL application.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 230
Q
So did the employee numbers increase with time?
A
Yes.
Q
And how does his gross revenues listed on the EIDL
application compare with the monthly payroll?
A
Again, you would not be able to make a monthly payroll of
that amount, with gross revenues that are listed there.
MR. NANCE: Objection. I think she's testifying
beyond -- she's speculating on this.
THE COURT: Overruled.
Q
If we could turn to Slide 9 of the summary charts. What is
this chart?
A
These are the PPP and EIDL applications for ES1 LLC.
Q
And if we could look at the EIDL applications, in particular,
for ES1 LLC. And, Mr. Arnold, if we could maybe zoom in on
those.
How do the two EIDL applications compare?
A
The amount listed for gross revenue is different. And the
number of employees is different.
Q
How much is the difference in the gross revenues?
A
It's more than doubled.
Q
And just to remind the jury, was the time period for the
gross revenues the same throughout the EIDL application period?
A
Yes. It's the twelve months prior to January 31st, 2020.
Q
If we zoom back out, Mr. Arnold.
Do Mr. Shibley's EIDL applications list the same number of
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 231
employees as are in his PPP?
A
No. In his EIDL, he lists four or 15 employees. In his PPP,
it's five or six employees.
Q
If we could look at Slide 10 of the summary charts. What's
found on Slide 10?
A
These are EIDL applications made in the name of Eric Shibley.
Q
And I note it says "sole proprietorship" on the top. What
does it mean to have applied in the name of a sole
proprietorship?
A
If you have a sole proprietorship, one difference is you
don't have to have an EIN number, you can use a social security
number.
Q
What does this chart show?
A
This chart shows the EIDL applications.
Q
Okay. How many many employees did he claim that his sole
proprietorship had?
A
Five employees.
Q
And how much revenue did each claim to have?
A
$180,000.
Q
If we can unpublish, please.
I'm showing the witness what's been marked as Government's
Exhibit 206. Do you recognize Government's Exhibit 206?
A
Yes.
Q
And what is it?
A
It's a summary of all of the PPP loans, EIDL loans and
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 232
advances, that Mr. Shibley received.
Q
How many pages is it?
A
It's one page.
Q
Did you assist in the preparation of Government's
Exhibit 206?
A
Yes.
Q
How did you do so?
A
I confirmed and verified all of the information that's on
here.
Q
And what types of exhibits is Government's Exhibit 206 based
on?
A
It's based on the loan application documents and the bank
statement documents.
Q
And have you reviewed the exhibits listed in the chart, as
part of your investigation?
A
Yes.
Q
Do they include bank records that were provided by various
financial institutions during your investigation?
A
Yes.
Q
Is the information found on the chart accurate?
A
Yes.
Q
And does Government's Exhibit 206 fairly and accurately
summarize the documents in the listed exhibits?
A
Yes.
MS. CONNELLY: At this time, I would move to admit
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 233
Government's Exhibit 206. And I would also move into evidence
certain bank records that it's based off of. I can give a list.
That would be 117, 120, 130, 136, 143, 172, 178, 187, and 199,
pursuant to a business records certification.
THE COURT: Any objections, Mr. Nance?
MR. NANCE: No objection.
THE COURT: They will be admitted.
(Exhibit Nos. 117, 120, 130, 136,
143, 172, 178, 187, 199 and 206 admitted.)
MS. CONNELLY: Thank you.
Permission to publish Government's Exhibit 206.
THE COURT: Yes.
MS. CONNELLY: Thank you.
Q
So what is the information that is summarized in Government's
Exhibit 206?
A
This shows all of the PPP loans, EIDL loans and advances that
Mr. Shibley received.
Q
So did you look at both the bank accounts and the loan
documents to confirm where loans were funded?
A
Yes.
Q
How many loans received some form of funding for Mr. Shibley?
A
Twelve.
Q
And how much total money did Mr. Shibley receive in PPP and
EIDL funds?
A
Approximately $2.8 million.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 234
Q
Is that seen at the bottom, on line 13?
A
Yes.
Q
I would like to briefly return to Government's Exhibit 47,
which has previously been entered into evidence and we were
looking at earlier.
What was the date that Mr. Shibley became aware of the
federal case referenced in his e-mail?
A
May 27th, 2020.
Q
And after that date, did Mr. Shibley take out any of the PPP
and EIDL funds that he received in cash?
A
Yes.
Q
If we could look at Government's Exhibit 130, which has
previously been admitted. And if we could look at page 80 of the
exhibit.
What is this document?
A
This is a bank statement from Navy Federal Credit Union for
Eric R. Shibley MD, PLLC.
Q
What period does this statement cover?
A
It covers the month of May 2020.
Q
If we could look at the next page of this statement, Mr.
Arnold, and if we could zoom in. Thank you.
Looking at the 5/12 deposit line, the first 5/12 deposit line
-- maybe if we could zoom in on that, Mr. Arnold. Great.
What is this?
A
It shows the funds being deposited into the account from
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 235
Chemical Bank.
Q
And what is Chemical Bank?
A
It's one of the lenders, the PPP lenders.
Q
Is it associated with TCF Bank?
A
Correct.
Q
And how much was funded?
A
$100,000.
Q
If we could just look a couple -- if you could expand that,
Mr. Arnold, a couple of lines down.
What happens to the money?
A
It gets transferred to another account.
Q
And what date was it transferred to another account?
A
Also on May 12th, 2020.
Q
If we could turn to the next page of the May 2020 statement,
found at Government's Exhibit 130. If we could look in at the
bottom under "savings," please.
On 5/12, what happens in this account?
A
This shows the account -- the funds being transferred into
this account.
Q
And what happens after that with the money?
A
Mr. Shibley withdrew $50,000 on May 28th, 2020. And the
remaining $49,500 was seized by the government on the 29th of
May.
Q
And so as of May 28th, 2020, had Mr. Shibley become aware of
the seizure warrant?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 236
A
Yes.
Q
And at that time, was the investigative team following
Mr. Shibley, as part of the investigation?
A
Yes.
Q
What did you observe Mr. Shibley doing?
A
We observed Mr. Shibley traveling around to various banks to
try and withdraw cash. Also to try and get some further PPP
loans.
Q
And did Mr. Shibley continue applying for PPP and EIDL funds,
after he became aware of the federal case?
A
Yes.
Q
I'm going to unpublish.
I'm showing the witness what's been marked Government's
Exhibit 211. And, actually, if we could show her Government's
Exhibits 211, 212 and 213.
What are Government's Exhibits 211, 212, and 213?
A
These are certificates showing that the deposits at those
banks are insured by the FDIC.
Q
Which banks are they for? We can scroll back through, again.
A
Celtic Bank, Customer's Bank, and TCF National Bank.
Q
Are Government's Exhibits 211 through 213 fair and accurate
replications of the FDIC deposit insurance certificates that you
obtained during your investigation?
A
Yes.
MS. CONNELLY: I move to admit Government's Exhibits 211
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 237
through 213, pursuant to 902(2) and 803(8).
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit Nos. 211 - 213 admitted.)
Q
I'm showing you what's been admitted as Government's
Exhibit 211. We can publish.
What is this document?
A
This document is a certificate showing that the deposits at
Celtic Bank are FDIC insured.
Q
Does this mean they were insured in April and May of 2020?
A
Yes.
Q
I'm showing you Government's Exhibit 212, which has been
admitted. What is this document?
A
The certificate showing that the deposits at Customer's Bank
are FDIC insured.
Q
And, again, does that remain for April and May of 2020?
A
Correct.
Q
Finally, I'm showing you Government's Exhibit 213. What is
this document?
A
This document is showing that the deposits at TCF National
Bank are FDIC insured.
Q
And were they insured in April and May of 2020?
A
Yes.
Q
So we're now going to turn to a few e-mails that Mr. Shibley
sent to the lenders. I'm showing the witness Government's
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 238
Exhibit 50.
Do you recognize this document?
A
Yes.
Q
What is it?
A
E-mails exchanged between Celtic Bank and Mr. Shibley.
Q
And was this provided to you as a business record from Celtic
Bank during your investigation?
A
Yes.
MS. CONNELLY: I would move to admit Government's
Exhibit 50.
MR. NANCE: No objection.
THE COURT: It's admitted.
(Exhibit No. 50 admitted.)
MS. CONNELLY: Permission to publish, Your Honor.
THE COURT: Yes.
Q
And if we could, Mr. Arnold, if we could scroll between two
pages of this, to the e-mail starting on May 28th. What does
Mr. Shibley write to Celtic Bank on May 28th?
A
He writes to the Celtic Bank employee that, "Your boss called
earlier and asked for five to ten names to verify that they were
working on-site."
Q
Does he provide five to ten names?
A
He provides seven names.
Q
And what else did he provide about these seven individuals?
A
He provided the last four digits of their social security
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 239
number, and a phone number for them.
Q
And I note, as you have said, Mr. Shibley writes that the
Celtic Bank employee's boss called him earlier and asked for five
to ten names. What really happened to prompt Mr. Shibley's
e-mail?
A
It was actually an undercover agent who called Mr. Shibley,
posing as a representative of the bank, and asked for that
information.
Q
I'm going to unpublish.
I'm showing the witness Government's Exhibit 48. Do you
recognize this e-mail?
A
Yes.
Q
If we could look at page 2 -- or 3, I apologize. What is
this e-mail?
A
This e-mail is an e-mail from Mr. Shibley to Harvest Small
Business.
MS. CONNELLY: I would introduce it also as a business
record.
THE COURT: You offer it?
MS. CONNELLY: Yes. I offer it.
MR. NANCE: No objection.
THE COURT: It will be admitted.
(Exhibit No. 48 admitted.)
THE COURT: Let's take a 15-minute recess.
THE CLERK: Please rise. Court is in recess.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 240
(Recessed.)
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 241
THE COURT: Ready for the jury?
MR. NANCE: Yes.
MS. CONNELLY: Yes, Your Honor. We have provided you
with stipulations that Agent Moran will likely get into. I don't
know if you want to handle them before we start back up, or just
let her handle them.
THE COURT: Any problem with me just reading them to the
jury?
MR. NANCE: No problem.
MS. CONNELLY: No problem.
THE COURT: Okay. Let's bring in the jury.
All right. Please be seated.
(The following occurred in the presence of the jury.)
THE COURT: Ladies and gentlemen, the parties have
entered into the following stipulations:
The United States of America and the defendant Eric Shibley
hereby stipulate and agree to the following facts:
One, on June 10, 2020, the defendant, Eric Shibley, was
served with subpoenas for documents, from a federal grand jury
sitting in the District of Columbia. The subpoenas requested
documents related to the business operations of ESI LLC, SS1 LLC,
the A Team Holdings LLC, Dituri Construction LLC, and Eric R.
Shibley MD, PLLC;
Second, working through his attorney, Eric Shibley provided
the following documents in response to the subpoena, via e-mail.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 242
(A) Certificates of formation for ESI LLC, SS1 LLC, the A Team
Holdings LLC, and Eric R. Shibley MD, PLLC. Operating agreements
for -- and, counsel, I'm just going to enter these as a long list
of documents. I don't think we need to read all of them.
MS. CONNELLY: That's fine by the government, Your
Honor.
THE COURT: And we will just file this as an exhibit,
which will go back to the jury.
Secondly, the stipulation of the parties regarding the City
of Anacortes v. Eric Shibley. The United States of America, by
and through Laura Connelly, trial attorney for the United States
Department of Justice, and Brian Werner, Assistant United States
Attorney for the Western District of Washington, and defendant,
Eric Shibley, and his counsel, Michael Nance, hereby stipulate to
the following:
On December 13, 2018, the defendant, Eric Shibley, signed a
sentence order that he was sentenced to a 24-month term of
probation in Skagit County District Court for a misdemeanor
offense. Mr. Shibley's term of supervision expired in
December 2020.
The jury may accept the above statement of facts as if they
had been proven beyond a reasonable doubt at trial. Nothing in
this stipulation restricts the ability of either party to present
additional evidence regarding the transaction described above.
These exhibits, then, will be -- or these stipulations will
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 243
be marked as exhibits and will be given to the jury with the
other exhibits at the end of the trial. All right?
MS. CONNELLY: Thank you, Your Honor.
Q
Special Agent Moran, I believe we ended when you were looking
at Government's Exhibit 48. And if we could pull that up, again.
And, Mr. Arnold, if we could again get the top header from the
previous page. With apologies, Mr. Arnold. If we scroll back
down to page 3, and then just include the header information
from -- if you could scroll back out, please. If you scroll up
to page 2, and look at the bottom portion.
What was the date that this portion of the e-mail thread was
sent?
A
May 29th, 2020.
Q
Who was it sent by?
A
Mr. Shibley.
Q
If we could scroll back down to page 3, Mr. Arnold. What is
this? What does this e-mail say?
A
This e-mail is from Mr. Shibley to Harvest Small Business.
He writes, "Your boss called earlier and asked for a couple of
names to verify that they are working on-site. They know me by
my name and A Team. They are..." and he provides a list of
names.
Q
And what loan had Mr. Shibley applied for at Harvest? What
company had he applied for?
If we look at the subject line. What is the subject line?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 244
A
Thank you. It's SS1 LLC.
Q
And how many employee names did he provide to Harvest for SS1
LLC?
A
He provided ten names.
Q
And, again, I note that it says, "Jeremy's boss called this
time." What really happened to prompt Mr. Shibley's e-mail to
Harvest?
THE COURT: She's already testified to that, counsel.
MS. CONNELLY: This is a separate e-mail, Your Honor. I
apologize.
THE COURT: All right.
A
Again, this was an uncover agent calling Mr. Shibley and
asking for this information, posing as a representative of
Harvest this time.
Q
So was it a second undercover call?
A
Yes.
Q
If we can now pull up Government's Exhibits 48 and 40
together, Mr. Arnold. If we could scroll down on Government's
Exhibit 50. Thank you.
How do the employee names compare between the Celtic and
Harvest e-mails?
A
They're the same names. One has a few additional names added
to it.
Q
And were the Celtic Bank loan and the Harvest loan for the
same company?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 245
A
No.
Q
And were either of them for the A Team Holdings?
A
No.
Q
During your investigation, did you attempt to find the people
listed by Mr. Shibley as his employees in these two e-mails?
A
We did.
Q
And just looking at the fifth person that's identified on
both of these e-mails, Sam Morgan. Were you able to identify an
individual with the name Sam Morgan, with the identifier -- with
the social security number ending in 3218?
A
Yes.
Q
Was there anyone -- were there multiple Sam Morgans with that
name and identifier?
A
There was only one Sam Morgan, with those last four social
security digits.
Q
And during your investigation, did you attempt to reach out
to that Sam Morgan?
A
Yes.
Q
And were you able to do so?
A
No.
Q
Why not?
A
Mr. Morgan died in 1987.
Q
And so if we can unpublish.
I'm showing the witness what's been marked as Government's
Exhibit 103. Do you recognize this document?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 246
A
Yes.
Q
What is it?
A
It's the death certificate for Sam Morgan.
Q
And did you receive this death certificate from the
Pennsylvania Department of Health, as part of your investigation?
A
Yes.
MS. CONNELLY: I would move to admit Government's
Exhibit 103.
MR. NANCE: Objection, relevance, Your Honor.
THE COURT: Overruled. It will be admitted.
(Exhibit No. 103 admitted.)
MS. CONNELLY: Permission to publish, Your Honor.
THE COURT: Yes.
Q
Based on your review of the death certificate, when did Sam
Morgan, with the last four digits 3218 of his social security
number, pass away?
A
In 1987.
Q
Is that seen as the date of death, on the top right-hand
portion?
A
Yes.
Q
If we could turn back to Government's Exhibit 50, just one
more time. If you could scroll down. When was Sam Morgan's name
used by Eric Shibley, as one of his purported employees to
Celtic?
A
On May 28th, 2020.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 247
Q
And looking back at Government's Exhibit 48, if we can look
at page 2, when was Sam Morgan's name used by Eric Shibley as one
of his purported employees, to Harvest?
A
On May 29th, 2020.
Q
As part of the investigation, did A Team Holdings, Dituri
Construction, ES1, SS1, Shibley MD, PLLC and SFC, or Seattle's
Finest Cannabis LLC, receive grand jury subpoenas for documents?
A
Yes.
Q
And who was served with those grand jury subpoenas?
A
Mr. Shibley was served.
Q
What date were those subpoenas served?
A
June 10th, 2020.
Q
What did those subpoenas ask for?
A
We asked for employee information, to include names of
employees, payroll records, personnel files, any payments,
payroll ledgers. I think I'm repeating myself. We asked for
W-2s, W-3s, W-4s, 1099s. I-9 employment eligibility forms. We
asked for communications with certain employees, the employees
that he had provided, the names that he had provided. We asked
for bank account information. We asked for any records related
to loans applied for, to include the PPP and EIDL loans. And we
also asked for books and records of any expenditures and receipts
for those businesses.
Q
So I'm showing the witness Government's Exhibit 225, which is
the stipulation that was just read into evidence by the Court.
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 248
And it includes the documents that the Shibley entities provided
in response to the grand jury subpoena.
Are all the documents attached to grand jury -- or to
Government's Exhibit 225, the documents that the Shibley entities
provided in response to the grand jury subpoena?
A
Yes.
MS. CONNELLY: And I would move this into evidence now,
Your Honor.
THE COURT: It's already in.
MS. CONNELLY: Okay.
Q
Did the production contain any --
MS. CONNELLY: Permission to publish. I'm sorry.
THE COURT: Yes.
Q
Did the production from the Shibley entities contain any
payroll journals?
A
No.
Q
Did it contain any payroll ledgers?
A
No.
Q
Did it contain any employee identification?
A
No.
Q
Did it contain any employment contracts?
A
No.
Q
Did it contain any employee files?
A
No.
Q
Did it contain any records of employee benefits?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 249
A
No.
Q
Did it contain any issued W-2s?
A
No.
Q
Did it contain any I-9s, or employment eligibility forms?
A
No.
Q
Did it contain any books and records of receipts and
expenditures?
A
No.
Q
Did it contain any lists of employees?
A
No.
Q
Did it contain any records of payments to employees?
A
No.
Q
Did it contain W-3s and 941s?
A
No.
I'm sorry, it did. As part of the loan.
Q
Were the --
THE COURT REPORTER: I'm sorry. Could you repeat your
question, please?
THE COURT: One at a time, please.
MS. CONNELLY: I apologize.
Q
Go ahead.
A
I'm sorry, it did include W-3s and 941s that had been
submitted as part of the loan-application process.
Q
Did it contain anything that supported the numbers shown in
those 941s and W-3s?
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 250
A
No.
Q
If we could just take a moment to look at a few of the items
that were produced. I'm showing you what's at page 110 of
Government's Exhibit 225, which is a purchase agreement.
What is this document?
A
This is a purchase agreement between Thomas Dituri and Eric
Shibley, for the sale of Dituri Construction LLC.
Q
And what is the effective date of the agreement?
A
May 5th, 2020.
Q
Who was the buyer?
A
Eric Shibley.
Q
Who was the seller?
A
Thomas Dituri.
Q
And just looking at paragraph 1, under "terms." If we could
just get a little bit more of that, Mr. Arnold. Thank you.
What is being sold?
A
Dituri Construction LLC.
Q
The ownership interest in Dituri Construction LLC?
A
Correct.
Q
And looking at paragraph 3, which is the purchase price, how
much did Mr. Shibley buy ownership interest in Dituri
Construction for?
A
$10.
Q
And I'm showing you the e-mail that's the last record
contained in the stipulation, which is at page 273, Government's
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KATHLEEN MORAN - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 251
Exhibit 225. What is this e-mail?
A
This is an e-mail from Eric Shibley to Mario Davis.
Q
Who is Mario Davis?
A
Mario Davis is an accountant that Mr. Shibley hired.
Q
And looking at the header information, what's the date of
this e-mail?
A
June 25th, 2020.
Q
Is that after these loans had been applied for?
A
Yes.
Q
And just looking at the first paragraph, if we could zoom in,
Mr. Arnold.
What is Mr. Shibley telling Mr. Davis he's paying his
employees annually?
A
He says he's paying them between $8,000 to $12,000 per year,
in 2019 and 2020.
Q
And do those numbers match the loan applications that we have
been through?
A
No.
Q
Tell us why not.
A
Based on the monthly payroll numbers and the amount of
employees that were listed on the applications, that would equal
an annual salary of about $75,000 to $96,000 per employee, which
is inconsistent with the $8,000 to $12,000 that's listed here.
Q
So is he claiming in this e-mail to his accountant that he
pays each employee between $8,000 and $12,000 annually?
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 252
A
Yes.
THE COURT: Wait a moment.
MR. NANCE: Your Honor, objection. The e-mail speaks
for itself.
THE COURT: Sustained.
Q
Did Mr. Shibley continue applying for COVID relief loans,
after the receipt of the subpoena on June 10th of 2020?
A
Yes.
Q
And did he receive COVID relief funds after the receipt of
the subpoena?
A
Yes.
Q
And did he try to withdraw COVID relief money, after the
receipt of the subpoena?
A
Yes.
Q
Thank you.
MR. CONNELLY: No further questions.
THE COURT: All right. Cross.
CROSS-EXAMINATION
BY MR. NANCE:
Q
Good morning, Agent Moran.
A
Good morning.
Q
You are one of the case agents in this investigation?
A
Correct.
Q
Who were the other case agents?
A
We had agents from a number of agencies: Small Business
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 253
Administration; Office of Inspector General; the IRS; Department
of Homeland Security; FDIC OIG; TIGTA; and HHS OIG.
Q
Each agency has a case agent, the main agent assigned to the
case; is that the way it works?
A
Correct.
Q
Agent Eric Hunter would have been one of them, with the
Office of Inspector General?
A
That's correct.
Q
Yeah. And Glen Weisman would be another agent with
Department of --
A
Correct.
Q
-- Homeland Security?
A
Yes.
Q
So among other things, you've established certainly that
Mr. Shibley resided at and had property at 4700 36th Avenue
Southwest?
A
Yes.
Q
Right. And that he also owned other real estate in the area?
A
Yes.
Q
In the West Seattle area?
A
Correct.
Q
At least three different properties, in addition to the 36th
Avenue address?
A
Yes.
Q
Obviously he has a working internet, working phone number.
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 254
He's easy to find.
A
Yes.
Q
He was easy to find during this period. And that he had
several LLCs for which he served as the manager?
A
Yes.
Q
And those were, in fact, registered with the Washington
Secretary of State?
A
Yes.
Q
At least two of them, maybe it was three of them, if I heard
your testimony correctly, were registered much earlier, 2017,
2018?
A
Yes.
Q
Is that right? SS1 was in 2017. Seattle's Finest Cannabis,
2017. And A Team Holdings, 2018?
A
Yes. Some of them were registered earlier, correct.
Q
There was some testimony early on about there being a
dissolution of one or more of these by the Secretary of State,
and that they were much more recently reinstated?
A
Yes.
Q
Now, an LLC, that's a limited liability corporation that's
created?
A
Correct.
Q
There's a -- isn't there an annual fee, might be the word, or
annual -- there may be another word for it, but there's a fee, a
cost that is imposed by the state each year. A license fee,
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 255
perhaps?
A
I don't know. I'm assuming.
Q
Well, if you are dissolved and then you reinstate with the
Secretary of State, wouldn't it normally reflect just bringing
your back fee up to par, getting it paid?
A
I don't -- I'm not familiar with everything you have to do.
I know you have to make sure you get your filings up to date. I
don't know if it also involves a fee as well.
Q
Well, it's not unlike anyone just being in business in the
state. They are required to stay current with -- to register
with the state authorities and to pay their business, their
license fee?
A
Yes.
Q
Okay. There was extensive testimony about these PPP
applications and the inclusion of a Form 941 with the
applications.
A
Yes.
Q
If we could just take a look at a couple of those. If I can
get the number right here. Exhibit No. 1, I think page 5. Could
we call that up?
MS. CONNELLY: It would be page 9.
Q
Okay. So this is previously admitted. 941 was part of the A
Team Holdings PPP application --
A
Yes.
Q
-- was that your testimony?
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 256
This was for -- reflects -- it's a quarterly tax return for
the fourth quarter of 2019 for A Team Holdings --
A
Yes.
Q
-- is that correct?
Where it indicates certain number of employees. I think it
says 48 employees and a payroll of around $975,000?
A
Correct.
Q
Right. And then if we could come down to the latter half of
that. It indicates that the total taxes -- it's a fairly large
amount -- of $149,000?
A
Yes.
Q
And then if you look at line 13, total deposits for this
quarter. And it's blank.
A
Yes.
Q
Yes.
Presumably, that means zero. Nothing?
A
Yes.
Q
Nothing has been paid and/or deposited.
Then if you look at 14, there's the balance due for taxes, of
$149,175?
A
Yes.
Q
Correct?
And then I will pull up another couple of examples. But if
we could go later into the same exhibit, I think it's several
pages down. Or same company. It's part of the same exhibit.
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 257
First quarter of 2020. Again, 48 -- if you look at line 1, 48
employees, wages of $768,000.
Then if we could come down to the latter half of that, total
taxes $117,504 is owed?
A
Yes.
Q
It's reflected as that being owed. Again, line 13 is blank.
So nothing has been paid toward this. And 14 reflects that
amount $117,504 is owed, is currently owing to the IRS?
A
Yes.
Q
Okay.
A
Balance due.
Q
And then one -- just one more example of this.
Exhibit No. 3, page 10. This is Dituri Construction.
There's employees listed, there's wages listed. Then the latter
half, again, of that. Again, $119,952 is the tax that is
reflected as owing. Nothing has been paid and/or deposited, and
it's still outstanding, according to this?
A
Yes.
Q
Okay.
Agent, I'm sure you have gone through all of -- you can take
it down -- you have gone through all of the applications. And
for the PPP loans, were 941s generally submitted in connection
with those?
A
Yes.
Q
Did you find any examples of a 941 that reflected that
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 258
something had actually been paid toward the tax?
A
Yes.
Q
What was that?
A
As we showed earlier, at least one of the 941s showed that
monthly deposits were being paid to the IRS.
Q
Was there an amount?
A
Yes.
Q
What was that?
A
I would have to see the form again.
Q
You would have to look. It's okay.
You testified at some length about the employees, there was
testimony about an undercover call made, and Mr. Shibley
volunteering a number of names of folks that worked for him.
A
Yes.
Q
Yeah. And you did follow-up on some of that, right?
A
Correct.
Q
In fact, you spoke to several employees, didn't you?
A
Yes.
Q
You and Agent Hunter actually spoke to an individual named
Ronald Reel, who was one of the folks listed?
A
Mr. Reel actually chose not to speak to us.
Q
I'm sorry?
A
He chose not to speak to us. We did give him a subpoena, but
he said Mr. Shibley just wanted him to give the subpoena to
Mr. Shibley's attorney.
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 259
Q
Okay. But he was identified as an employee of Mr. Shibley,
and you approached him and found him?
A
We found him. It was difficult, because he's homeless. He
lives in his van. So it took some time, but we did find him.
Q
Okay. And you met him in a McDonald's parking lot?
A
Correct, yes.
Q
You and Agent Hunter and Agent Weisman, I believe?
A
Yes.
Q
Yes.
THE COURT: Let me see counsel at sidebar.
(Sidebar held between court and counsel as follows:)
THE COURT: Did I rule on a missing witness motion in
limine?
MS. CONNELLY: You did not.
THE COURT: The law is that if the witnesses are equally
available to both sides, you cannot refer to them as missing
witnesses, or bring up the fact that the government didn't call
them. It's not appropriate.
MR. NANCE: My --
THE COURT: That's my ruling.
MR. NANCE: I understand that. My intent was to ask
this witness about her interviews or attempts to interview these
folks.
THE COURT: Well, let's see how it goes. Okay.
MR. NANCE: Okay.
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 260
MS. CONNELLY: Your Honor, I would also note we'd object
under hearsay rules. Obviously, the attempts to interview --
THE COURT: If it's objectionable, make an objection.
MS. CONNELLY: Okay. Thank you.
(Sidebar concluded.)
Q
Agent Moran, you and Agent Hunter and Agent Weisman actually
approached and spoke with several people in the McDonald's
parking lot that day, that had been identified as employees of
Mr. Shibley?
A
Yes.
Q
You talked to David Sandoval, who had previously been
identified as an employee of Mr. Shibley?
A
Correct.
Q
Did you confirm with him that he worked for Mr. Shibley
during the relevant time period?
MS. CONNELLY: Objection, hearsay.
THE COURT: Sustained.
Q
Did Mr. Sandoval appear to be homeless?
A
I believe he told us that he couch surfed.
Q
Okay. Did you determine where he received his mail?
A
Because --
MS. CONNELLY: Objection, hearsay.
THE COURT: Sustained.
Q
Wasn't another individual, Mataese Tela, also identified as
an employee of Mr. Shibley?
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 261
A
Yes.
Q
Did you or Agent Hunter speak with him --
A
Yes.
Q
-- that day, at that place?
A
Yes.
Q
Did you learn anything from him that furthered your
investigation?
MS. CONNELLY: Objection. Hearsay.
THE COURT: Sustained.
Q
Did your investigation team also speak with Ronisha Smith?
A
Yes.
Q
She had been identified as an employee of Mr. Shibley, during
the relevant period?
A
Yes.
Q
Did you record statements with these folks?
A
Yes.
Q
Did you speak with Eric Pula, who Mr. Shibley had identified
as an employee?
A
No. We tried to.
Q
Did you speak with Jerome Muna, who had been identified has
an employee?
A
No. We also attempted to interview him.
Q
How about Sarieck Butler-Hem?
A
No. We couldn't locate him.
Q
How about Carlita Lopez?
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 262
A
No. We also had difficulty locating her.
Q
Did you get leads, during this time, that you were able to
pursue toward locating other employees?
A
I believe we followed every lead that we had to try and find
the people that he had said were his employees.
Q
Did you go to any of the work sites where work had been
performed by employees?
A
We went to -- I went to one of the houses that Mr. Shibley
owns.
Q
Were you able to determine that there had been some
renovation work done at the house?
A
I did not go inside the house. I noticed that one of the
doors was missing to the house.
Q
You have indicated that he had at least three properties, in
addition to the place that he lived. Did you go to each of
those?
A
No. I only went to one of the properties.
Q
Just the one.
Did you do any other follow-up, following this meeting with
these employees in the parking lot?
A
What type of follow-up? The investigation continued after
that.
Q
Okay. Anything that was a direct consequence of meeting in
the parking lot with these witnesses, or with these employees?
A
I believe we continued, after that date, to try and track
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 263
down the employees we haven't been able to find.
Q
You referred to this Sam Morgan person, right?
A
Yes.
Q
Actually, could we call up that Exhibit No. 103? I'm going
to ask you to take a look at the date of birth that's reflected
on this death certificate.
A
Yes.
Q
What date is that?
A
It's December 13th, '21.
Q
That would be 1921?
A
Yes. 1921.
Q
So this person, if they were still alive, would be almost
100 years old?
A
Yes.
Q
And the only connection -- well, you found this by trying to
match the name with the last four digits of a -- what was
tendered as the social security number?
A
Correct.
Q
Okay. You don't really know the ultimate source of that, do
you?
A
The source of the social security number?
Q
Right.
A
Mr. Shibley provided those.
Q
That was given to you, but you don't know where he got it?
A
I don't know where he got it.
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KATHLEEN MORAN - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 264
Q
Okay. You would agree that the name Sam Morgan is a fairly
common American name?
A
Sam Morgan is common. Sam Morgan with the last four social
security digits, is this Sam Morgan.
Q
Was there an ID, that you're aware of, associated with this
person, that was used at any point?
A
Are you referring to the Sam Morgan that died?
Q
Yeah.
A
I don't know.
Q
Okay. Usually you think of construction workers as being a
little a bit younger than that?
A
Yes, you would think.
Q
He was probably born after 1921?
A
You would think, yes.
Q
Yes. You can take it down. Just one moment.
Agent, just to clarify, you're testifying that you did not
have contact with Eric Pula?
A
I did not, no.
Q
You don't -- you have never gone to his -- met with him, or
gone to his apartment, anything of that nature?
A
I believe I went to several addresses trying to find him.
Q
How about any of your fellow investigators in this case? Are
you aware of any contact they might have had with Eric Pula?
A
I think there was an undercover call with Mr. Pula.
Q
Oh, who was that? Who did that?
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 265
A
One of -- an undercover agent did that, posing as a bank
representative. As a federal agent, none of us spoke to --
interviewed him as a federal agent.
Q
Okay. Anything about that call that would refute the notion
that he was an employee of Mr. Shibley?
MS. CONNELLY: Objection, hearsay.
THE COURT: Sustained.
MR. NANCE: Nothing further.
THE COURT: Any redirect?
MS. CONNELLY: Nothing, Your Honor.
THE COURT: You may step down.
THE WITNESS: Thank you.
THE COURT: Put your mask back on, please.
MS. CONNELLY: The government calls Roman Hernandez.
ROMAN HERNANDEZ,
having been sworn under oath, testified as follows:
THE WITNESS: I do.
THE COURT: Take your mask off.
DIRECT EXAMINATION
BY MS. CONNELLY:
Q
Good morning.
A
Good morning.
Q
Can you please state your name and spell your last name for
the record?
A
Yes. Roman Hernandez.
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 266
Q
There's, I think, some water next to you. If --
A
Thank you.
H-E-R-N-A-N-D-E-Z.
Q
I will give you one moment. And where do you work,
Mr. Hernandez?
A
I work for the Internal Revenue Service.
Q
Is that also known as the IRS?
A
It is, yes.
Q
What do you do for the IRS?
A
I'm a court-witness coordinator for the IRS.
Q
What does a court-witness coordinator do?
A
I review income tax returns and other IRS records. I prepare
them to be used as exhibits at trial. And when I appear at
trial, I represent the Commissioner of IRS, in his role as
custodian of records.
Q
And how long have you been doing that job?
A
For ten years now.
Q
And how long have you been with the IRS?
A
Twenty years.
Q
Altogether, what other jobs have you held with the IRS?
A
My first job was called a contact representative. It was one
of the people -- you could call into the IRS and speak with them
on the phone. My next job was as an examiner, conducting audits
by phone and by correspondence. And my last job, my job prior to
this, was with the taxpayer advocate service. They're a separate
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 267
part of the IRS that helps people deal with the IRS, if they're
in an economic-hardship situation.
Q
And in your time with the IRS, have you become familiar with
how taxes are filed?
A
I have, yes.
Q
Can you just tell the jury, what is an IRS Form 941?
A
Sure.
A Form 941 -- sorry -- it's a business form. It's used to
file employment taxes. It's used to compute the amount of
employment taxes that are due with the form, and helps you know
what to pay for those taxes.
Q
And who files a Form 941?
A
The employer. The business does.
Q
And why would a business file a Form 941?
A
They're required to file it if they have employees.
Q
How often does a business file a Form 941?
A
It's filed on a quarterly basis.
Q
And what does a Form 941 document?
A
It documents the number of employees they had that quarter,
the amount of wages they paid. It helps them figure the amount
of tax that they need to withhold from the employee's pay.
Including FICA tax, which is social security tax, and Medicare
tax.
Q
And why does the company withhold money from their employees?
A
They're required to. The employee -- they're required to
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 268
withhold for social security and Medicare tax. They withhold
half of that tax from the employer's pay, and they're required to
pay half, the other half of the tax, on the employer's behalf.
Q
Would a business, as an independent contractor, use a
Form 941, or would it use a different type of IRS form?
A
They would not use a 941.
Q
What taxes is a business required to pay for its employees?
A
They're required to pay or withhold and pay federal income
tax, social security tax, and Medicare tax.
Q
And what happens if an employer is withholding taxes from its
employees, but is not paying the IRS?
A
Well, that money really belongs to the employees, so they're,
in a sense, keeping the employees' money, when they should not
be.
Q
When is an employer required to pay the taxes that are noted
on a Form 941? If you want to take a moment, and -- yeah.
A
I'm sorry, yeah. Okay.
Q
So when is an employer required to pay the taxes noted on a
Form 941?
A
Well, there's a couple of different schedules for paying the
tax. It could be a semiweekly payment schedule, or a monthly
schedule.
Q
Should a business pay the employees' taxes, after filing a
Form 941?
A
No, they should not.
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 269
Q
And so turning to a different tax form entirely, can you tell
the jury what is a form W-3?
A
Yes. A form W-3 is a transmittal form. It's the form used
to send W-2s to the Social Security Administration.
Q
And how often is a W-3 filed?
A
It's filed annually.
Q
Why is a form W-3 filed?
A
Because employers are required to report that W-2 information
to the Social Security Administration.
Q
And can you just tell us, what is a Form W-2?
A
Form W-2 is a wage and -- wage and tax statement. It's given
to you by your employers every year, so you can file your taxes.
Q
And so do the employees file their W-2s with the Social
Security Administration, or with the IRS?
A
The employees?
Q
Uh-huh.
A
Well, they do when they file their forms 1040, yes.
Q
Is the Form 1040 a personal tax return?
A
It is yes.
Q
Do employers also file the forms W-2?
A
Yes, they do.
Q
Why is that?
A
Well, they're required to give that information over to the
Social Security Administration. But the IRS also receives that
same information. And what we do with it is we have the
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 270
dollar-matching program. So we look to see what the employers
say they paid their employees, as far as wages, and withholding
for taxes. We also look at the employee's Form 1040 to see what
they reported on their own return.
Q
So is it basically a way to link up the employer with the
employee?
A
Yes, it is.
Q
Does IRS have a recordkeeping system?
A
They do. Yes.
Q
Are you familiar with it?
A
I am.
Q
Do you work in that system, as a regular part of your job?
A
I do.
Q
What is that system called?
A
It's broadly called the Master File. But there's a couple
pieces to it. There's the Business Master File and the
Individual Master File.
Q
But altogether, it's known as the Master File?
A
Yes.
Q
What does it contain?
A
It contains the record of all, like, processed tax returns,
information from electronic records, and other sources. It's the
main repository for tax information for the IRS.
Q
Does it also contain payment records of payments filed with
the IRS?
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 271
A
It does, yes.
Q
And is it used in the regular course of business with the
IRS?
A
Yes.
Q
Are the records kept in the IRS Master File regularly made
and preserved as part of the public business of the IRS?
A
They are, yes.
Q
Can searches be run in the Master File?
A
Yes.
Q
Do you know how to conduct searches on that system?
A
I do, yes.
Q
Do you do that as a regular part of your job?
A
Yes.
Q
Were you asked by the Department of Justice to conduct
searches of IRS records related to certain entities in this case?
A
Yes, I was.
Q
And so did you run searches for the tax records of a company
called the A Team Holdings, with an EIN ending in 7088?
A
Yes.
Q
Did you find any Forms 941 filed for the A Team Holdings for
tax years 2019 or 2020?
A
I did not, no.
Q
Did you find any tax records, at all, filed for A Team
Holdings in tax years 2019 and 2020?
A
I didn't.
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 272
Q
And if we could pull up the 941 from Government's Exhibit 1,
which is at page 9.
MS. CONNELLY: May I publish, Your Honor?
THE COURT: Yes.
MS. CONNELLY: It has previously been admitted.
Q
Was this document filed with the IRS?
A
No, it was not.
Q
And if we can pull up the second 941 from Government's
Exhibit 1, which is the 941 for the A Team Holdings for the
second quarter -- or the first quarter of 2020. Was this
document filed with the IRS?
A
It was not, no.
Q
We can take that down. Thank you, Mr. Arnold.
Did you also run searches for the tax records of Dituri
Construction LLC with an EIN ending in 8508?
A
I did, yes.
Q
Did you find any Form 941 filed for Dituri Construction,
filed for tax years 2019 or 2020?
A
I did not.
Q
Did you find any tax records at all, for Dituri Construction,
for tax years 2019 and 2020?
A
No.
Q
And if we could pull up the 941 from Government's Exhibit 3,
which has previously been entered into evidence.
MS. CONNELLY: May I publish, Your Honor?
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 273
Q
And this is a 941 for the first quarter of 2020 for Dituri
Construction LLC. Was this document filed with the IRS?
A
No, it was not.
Q
And if we could pull up the second 941 for Dituri
Construction LLC, for the first quarter of 2020, and Government's
Exhibit 4, which has previously been entered into evidence.
MS. CONNELLY: May I publish, Your Honor?
Q
Is this a 941 for the same period?
A
Yes.
Q
And was this second 941 filed with the IRS?
A
No, it was not.
Q
I will take that down. Thank you, Mr. Arnold.
Did you run searches for the tax records for Eric R. Shibley
MD, PLLC with an EIN ending in 9052?
A
I did, yes.
Q
Did you find any Forms 941 filed for that business, for the
tax years 2019 and 2020?
A
I did not.
Q
Did you find any tax records at all, filed for that business
for the tax years 2019 and 2020?
A
I did not, no.
Q
If we could pull up the 941 from Government's Exhibit 23,
which has previously been entered into evidence, which is at
page 5.
MS. CONNELLY: Permission to publish, Your Honor.
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 274
THE COURT: Yes.
Q
This is a 941 for Eric R. Shibley MD, PLLC, for the first
quarter of 2020. Was this filed with the IRS?
A
No, it was not.
Q
We can take that down. Thank you.
Did you run searches for the tax records for ES1 LLC with an
EIN ending in 5849?
A
I did, yes.
Q
Did you find any Form 941 filed for ES1 LLC for the tax years
2019 and 2020?
A
I did not.
Q
Did you find any tax records at all for ES1 LLC for the tax
years 2019 and 2020?
A
No, I didn't.
Q
And if we could pull up the 941 from Government's Exhibit 22,
which has previously been entered into evidence, page 5.
MS. CONNELLY: Permission to publish, Your Honor?
THE COURT: Yes.
Q
This is a 941 for ES1 LLC for the first quarter of 2020. Was
this filed with the IRS?
A
No, it was not.
Q
We can take that down. Thank you.
Did you run searches for tax records for SFC, or Seattle's
Finest Cannibis LLC, with an EIN ending in 3580?
A
Yes, I did.
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 275
Q
And did you find any Forms 941 for Seattle's Finest Cannabis
for the tax years 2019 and 2020?
A
I did not, no.
Q
Did you find any tax records at all for Seattle's Finest
Cannabis for the tax years 2019 and 2020?
A
No, I didn't.
Q
And if we could pull up the 941 from Government's Exhibit 2,
which has previously been entered into evidence. That's at
page 6.
MS. CONNELLY: Permission to publish, Your Honor?
THE COURT: Yes.
Q
This is a 941 from the first quarter of 2020 for Seattle's
Finest Cannabis with an EIN of 3580. Was this filed with the
IRS?
A
No, it was not.
Q
You can take that down.
Did you run searches for the tax records for SS1 with an EIN
ending in 7509?
A
I did, yes.
Q
And did you also run searches for the tax records for SS1
with an EIN ending in 2134?
A
Yes.
Q
Did you find any Forms 941 filed for either of those SS1s for
the tax years 2019 and 2020?
A
I did not.
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 276
Q
Did you find any tax records filed for SS1 for the tax years
2019 or 2020?
A
No.
Q
If we could pull up the 941 from Government's Exhibit 5,
which has previously been entered into evidence.
MS. CONNELLY: Permission to publish, Your Honor?
THE COURT: Yes.
Q
And this is an SS1 941 for the first quarter of 2020, with an
EIN ending in 7509. Was this filed with the IRS?
A
No, it was not.
Q
We will take that down. Thank you, Mr. Arnold.
You mentioned before that W-3s are actually filed with the
Social Security Administration and not the IRS, but in its Master
File, is the IRS able to see whether a business has filed W-3s?
A
Yes. When we receive the W-2 information, it includes -- it
also includes the W-3 information.
Q
And did you run searches for W-3s for the businesses that we
have just covered?
A
I did, yes.
Q
And had any of them filed W-3s for the tax year 2019?
A
No.
Q
And so if we could pull up the W-3 from Government's
Exhibit 5, which has previously been entered into evidence,
Mr. Arnold.
Thank you.
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ROMAN HERNANDEZ - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 277
MS. CONNELLY: Permission to publish, Your Honor?
Q
This is a W-3 for the tax year 2019 for SS1 LLC with an EIN
ending in 7509. Was this document filed with the IRS?
A
No, it was not.
Q
We can take that down. Thank you.
Does the Master File also allow you to search whether a
business has made payments?
A
Yes.
Q
And did any of the companies that we have talked about pay
taxes in the tax years 2019 or 2020?
A
No, they did not.
Q
Thank you.
MS. CONNELLY: No further questions.
THE COURT: All right. Let's take the noon recess and
cross after lunch. We will be in recess until one o'clock.
THE CLERK: Please rise. Court is in recess.
(Recessed.)
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 278
AFTERNOON SESSION
THE COURT: Please be seated.
Counsel, I had a question. The documents that were listed on
the stipulation as having been produced by the defendant, are you
assuming they are now in evidence?
MS. CONNELLY: Yes, I was, Your Honor. We showed them
with Special Agent Moran, and I think I moved the Government's
Exhibit 225 in, which contains all of that.
THE COURT: Which contains all of those exhibits?
MS. CONNELLY: Yes.
THE COURT: Is that agreed?
MR. NANCE: Yeah.
THE COURT: All right.
MR. NANCE: Just one point. I just want to alert the
court, I'm having a little bit of difficulty being able to
consult with Mr. Shibley at any time other than the actual trial
itself. I come in before court and he's not available. After
court, he's whisked away on lunch break. I finally got in today
for a few minutes, after waiting for 20 minutes.
And all I'm saying is, at the conclusion of the government's
case, we need to make an informed decision or an eloquent
decision on whether he testifies or not. And so I'm -- I would
very much appreciate having a little time to consult with him.
THE COURT: Yes. I'm directing the Marshals now, make
it happen. Okay?
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ROMAN HERNANDEZ - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 279
THE MARSHAL: Yes, Your Honor.
THE COURT: All right. Bring in the jury.
(The following occurred in the presence of the jury.)
THE COURT: Please be seated.
All right. Mr. Nance.
CROSS-EXAMINATION
BY MR. NANCE:
Q
Good afternoon, Mr. Hernandez.
A
Good afternoon.
Q
I believe you have been with the IRS, did you say, 20 years?
A
Yes, I did.
Q
Did you work as a revenue agent at all?
A
No. I worked as what is called a "correspondence examiner."
Q
Okay. One of the jobs you have described is checking --
pulling records, checking records. It wasn't framed very well.
Being able to go back into the IRS databases and pull up the past
filings of records or the absence of filings?
A
Yes. In each of my roles I have done that.
Q
Okay. And you testified to doing that in Mr. Shibley's case?
A
Yes.
Q
How far back did you go? You went back beyond early to
200 -- or did you, earlier than 2008?
A
Well, by function I had to. When I pull up a filing record,
it pulls up everything that's still active on our database.
Q
Okay. Did you determine that Mr. Shibley had, in fact, filed
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ROMAN HERNANDEZ - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 280
tax returns at an earlier time?
A
I did, for one of the entities. Eric Shibley MD. I can't
remember the full proper entity name.
Q
PLCC, maybe?
A
Yes.
Q
He had filed in that entity's name?
A
I did see returns filed prior to 2019 for those -- for that
entity, yes.
Q
Okay. Let me ask you a little bit about Form 941. In fact,
maybe to help us through it, if we could call up exhibit, I think
it's Exhibit 1, page 5, or so. And if you could maybe -- yeah,
highlight or blow up the top half of it.
So if a person is preparing a 941, is there enough
information on what you see in front of you here, the top half,
to be able to automatically fill in the bottom half?
A
I'm going to answer no. I'm not sure I understand your
question. But if all I had -- if I were the preparer and all I
had was, like, a business name, address, and EIN, and the tax
period, I wouldn't be able to guess at what would go in part one
or part two of the form, no.
Q
Maybe I didn't ask it very well.
If you put in -- plug in the numbers to Question No. 1,
number of employees, and you plug in No. 2, wages, tips and other
compensation, what necessarily follows from that? Can you
complete the full form? Could a computer be programmed to
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ROMAN HERNANDEZ - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 281
automatically fill in the blanks thereafter, or do you need more
information?
A
No. I believe those two bits of information, lines one and
two, are needed to complete the rest of the form. Except for, I
think, there's a payment section.
Q
Okay. I was asking -- I was going to ask you that next.
If we could come down to the second half. And actually if
you can include 5e above that?
MR. ARNOLD: Sure.
MR. NANCE: Yeah.
Q
It looks to me like 5e is the sum of the lines above it, and
that everything kind of follows from there. It's identical
entries, less any amounts that had been paid or deposited toward
paying the obligation.
A
Correct. It's basically a spreadsheet, or a worksheet, like
most tax forms.
Q
Okay. And if we could -- maybe I'm asking this awkwardly.
But the lines above 5e, if we can get all of 5 in, Section 5.
MR. ARNOLD: And below?
MR. NANCE: Yeah. Yes. Try that.
Q
So it appears that this 5a and 5c are added to give you 5e,
the sum of those two?
A
Right. Column two of 5a and 5c.
Q
Maybe one more request, to include all of the numbers, the
ones -- lines one through the end of it. There you go.
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ROMAN HERNANDEZ - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 282
So it appears to me that the answer on 5a is a function of
the amount on line 2. You take the wages depicted on line 2, and
there's a set formula to multiply them by .124, to give you the
amount in Column 2.
A
Correct.
Q
Okay. And same thing -- not the same thing, but a similar
thing in 5c. It takes the same gross wage amount, and multiples
it by a different factor, relating to Medicare wages and tips.
And then 5a and 5c are added to give you 5e, which becomes the
taxable amount.
A
Correct.
Q
And then it's that, less any credits or any payments that
have been actually made?
A
Yes.
Q
So to go back to the first part of the question, if you plug
in the number of employees and the wages, you basically get the
bottom-line number, the balance due, unless there are payments
being made in?
A
Correct. Notwithstanding any payments or credits that might
be available.
Q
Okay. And this is a quarterly return -- you can take it
off -- this being a quarterly return, it should be filed every
quarter, if you are doing it the right way?
A
Correct.
Q
And ideally, or maybe presumptively, the money should be paid
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ROMAN HERNANDEZ - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 283
in at the same time. You should pay the money if you owe it?
A
Correct.
Q
The IRS kind of expects that it would be paid?
A
Yes.
Q
Now, wouldn't the IRS still accept a 941 filing, without the
money?
A
They would, yes.
Q
Then they would take their own steps to try and collect it?
A
Correct.
Q
Because it would be immediately due, wouldn't it?
A
Right. It's due upon the due date of the return.
Q
Okay. And if the business is late in making payroll tax
deposits, there's a provision in the IRS code for a penalty?
A
Correct.
Q
To come clean with the IRS?
A
Yes.
Q
And that penalty is a percentage of the amount that's not
properly paid in?
A
Yes.
Q
It increases over time?
A
I believe so, yes.
Q
Yeah. So, it sounds like the tax law contemplates the
situation where people are late, or people don't pay when they
are supposed to. And they have got steps in place to deal with
it, or a procedure in place to deal with it?
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ROMAN HERNANDEZ - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 284
A
Right. It's discouraged. It should be paid on time and
filed on time.
Q
You have indicated that the W-3 form and the W-2 forms are
both things that are filed annually?
A
Yes.
Q
And they are retrospective. They report what has been
paid --
A
Right.
Q
-- and withheld.
You would agree that the details of the tax law can sometimes
seem complicated and confusing to the layperson?
A
I have heard that, yes.
Q
You have heard that?
A
Yeah.
Q
A lot of us have.
MR. NANCE: Thank you.
THE WITNESS: You are welcome.
THE COURT: Redirect?
MS. CONNELLY: Nothing, Your Honor.
THE COURT: You may step down. Put your mask back on,
please.
THE WITNESS: Thank you.
MR. NANCE: Your Honor, I apologize. There's -- before
he leaves, there was one additional question I would like to have
been able to ask.
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ROMAN HERNANDEZ - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 285
THE COURT: Sure.
MR. NANCE: If I would be permitted to do so.
THE COURT: Sure.
Q
(By Mr. Nance) I'm sorry, Mr. Hernandez. Are you familiar
with the Form 7200?
A
I don't have any experience with that form. I've heard it
mentioned, but I have never introduced it in court. And I have
never seen the form during my work in the previous jobs.
Q
Okay. Would the name of it be familiar to you, the advance
payment of employer credits due to COVID-19?
A
To be honest, no.
Q
No?
A
It's such a new law, it hasn't come up in my work before.
Q
Okay. It obviously would have come up since the pandemic, to
have that kind of name?
A
I expect to see it, yes.
Q
Okay. All right. Thank you.
THE COURT: Okay.
MR. WERNER: Government calls Geoffrey Hillers.
GEOFFREY HILLERS,
having been sworn under oath, testified as follows:
THE WITNESS: Yes.
THE COURT: Have a seat. And take off your mask,
please.
///
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 286
DIRECT EXAMINATION
BY MR. WERNER:
Q
Good afternoon.
Please state your name and spell your last name.
A
My name is Geoffrey Hillers. My last name is H-I-L-L-E-R-S.
Q
Mr. Hillers, where do you work?
A
I work for the Washington State Department of Revenue.
Q
What is your position with the State Department of Revenue?
A
I am a special agent.
Q
How long have you been an agent with the Department of
Revenue?
A
For approximately six years.
THE COURT: You can pull that mic back, if it's easier
for you.
THE WITNESS: Thank you.
Q
What does a special agent for the Department of Revenue do
for a job?
A
A special agent at the Washington State Department of Revenue
typically works complex or sensitive tax-collection cases. And
they may serve as a subject-matter expert at a certain area of
tax law.
Q
And are those your duties, Mr. Hillers?
A
Yes, they are.
Q
And as part of your job for the Department of Revenue, are
you familiar with the records maintained by the Department of
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 287
Revenue?
A
Yes, I am.
Q
Are you able to search those records?
A
Yes, I can.
Q
And generally how are those records kept?
A
They're generally kept in an electronic database.
Q
Are you familiar with the functions of the Department of --
the Washington State Department of Revenue?
A
Yes, I am.
Q
What are they?
A
The Washington State Department of Revenue is the primary
state taxing agency for Washington. It administers the State's
tax code, and it works to educate the public regarding the tax
code, as well as different registration or licensing
requirements.
Q
What is a business license in the state of Washington? What
does that mean?
A
A business receives a license that's issued by the Department
of Revenue for them to engage in different business activities.
It also registers that organization with the Department for the
purposes of filing tax returns.
Q
When is a business required to get a license with the
Department of Revenue?
A
A business would be required to obtain a license if they deal
with any sort of retail activity or retail transactions, or if
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 288
they have gross annual revenues that are beyond $12,000.
Q
You also mentioned state taxes, as part of the function of
the Department of Revenue, correct?
A
That's right.
Q
And what does -- what are the responsibilities of a
Washington State business as it relates to reporting, as it
relates to revenue -- as it relates to reporting to the
Department of Revenue?
A
So when a business is registered with the Department of
Revenue, typically it has a filing requirement for excise-tax
returns, or other types of tax returns. And, for instance, if
they're engaging in business, then they're going to be filing
these tax returns on either a monthly, quarterly, or annual
basis.
Q
And is there a threshold at which the business has to report
its revenue?
A
So as I mentioned prior, if there's any sort of retail
activity, they would have to report that activity immediately.
If they're engaged in activity that is not retail-related, then
they aren't required to have a license until they reach $12,000
in annual revenues. So at that point they would be required to
register and to report their tax information.
Q
I'm going to show you on the screen, Mr. Hillers, what's been
previously marked as Exhibit 77. And, Mr. Arnold, could you
scroll through the first few pages of Exhibit 77? The next
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 289
couple of pages, all the way. And could you go to the last page?
Mr. Hillers, do you recognize -- prior to coming to court did
you view --
THE COURT: Counsel, this is not in evidence.
MR. WERNER: That's correct. Is it published?
THE COURT: Yes.
MR. WERNER: Oh, thank you.
Q
Did you review Government's Exhibit 77?
A
Yes, I did.
Q
What is that, generally?
A
That exhibit is the Department of Revenue's records for Eric
R. Shibley MD, PLLC.
Q
What time period does it cover?
A
I believe that it covers the periods of Quarter 3, 2017,
through 2020. I would have to double-check the record.
Q
Could we go back to the first page, please, Mr. Arnold?
Again, are these the records that are maintained for Eric
Shibley MD, PLLC, by the Department of Revenue?
A
That's correct.
Q
Are they maintained in the normal course of business?
A
Yes, they are.
MR. WERNER: Offer Exhibit 77.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 77 admitted.)
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GEOFFREY HILLERS - Direct (Werner)
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November 16, 2021 - 290
Q
And let's let the jury see the first page, please. Thank
you.
Is Eric Shibley MD, PLLC, was that registered with the
Department of Revenue?
A
Yes, it was.
Q
And I'm going to show page 17. What is page 17 of
Exhibit 77?
A
Page 17 of that exhibit is a copy of the business license as
it's displayed within our records.
Q
Why is there the word "Preview" on it?
A
It shows "Preview," as a watermark, essentially, when it's
maintained in the electronic system. If you view it from within
the system, it will have a watermark. However, when it's
printed, that's removed.
Q
Let's look at the next page, please, page 18.
What is page 18 of Exhibit 77?
A
Page 18 is a combined excise tax return, for the quarterly
period of quarter one, 2017.
Q
Can you describe -- what does this record show? What quarter
does this show, and what does this record show for Shibley MD?
A
So this would shows business revenues over that quarterly
period. Essentially that's January, February, and March of 2017.
Q
And is this a -- does this indicate that this excise tax
return was filed with the Department of Revenue?
A
Yes, it does.
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 291
Q
And could we blow out the bottom, additional information,
please, Mr. Arnold?
And who completed this excise tax return?
A
That excise tax return was completed by Eric Shibley.
Q
How are these excise tax returns -- how are they filed with
the State Department of Revenue?
A
They're filed electronically through the state's My-ID web
portal.
Q
If we can -- And how much was paid for excise taxes on this
particular page, this form?
A
On that particular tax return, the amount of $160.32 was
remitted.
Q
Have you reviewed the rest of the exhibit, pages 19
through 31?
A
Yes, I have.
Q
Does that indicate that, for at least a time period, Eric
Shibley MD continued to file state tax returns?
A
It does.
Q
And could we show the last page of the exhibit, page 31? You
can blow up just the top half.
What is this page 31?
A
Page 31 is a combined excise tax return for the period of
Quarter 3, 2019.
Q
And what is the business?
A
It's for the businesses Eric R. Shibley MD, PLLC.
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 292
Q
And what does the -- this looks different than the previous
page we saw. Why is that?
A
The Department transitioned from an antiquated filing system
to a more modern system during this time period. So that
resulted in a change to the filing portal.
Q
For the third quarter of 2019, did Eric Shibley MD report
revenue?
A
Yes, it did.
Q
How much?
A
$13,000.
Q
And did it pay taxes to the state?
A
For that period, no.
Q
And the previous pages in this exhibit, are they tax returns
from 2018 and the earlier quarters of 2019?
A
They are.
Q
During that timeframe, 2018 and 2019, did Shibley MD pay
state excise taxes?
A
During that time period, no.
Q
And why not?
A
The business, during that time period, received a small
business credit. It's a tax credit. If revenues are below a
certain threshold, an organization or a taxpayer wouldn't have to
remit excise taxes.
Q
So let's just look at page 30, please, to look at the revenue
amount.
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 293
So what is the revenue amount reported for the second quarter
of 2019?
A
The gross revenue for that quarter was $13,500.
Q
And were taxes due?
A
There was no tax due, due to the small business credit.
Q
And let's go back to page 29, please, Mr. Arnold.
Is page 29 the first quarter tax return?
A
That's correct.
Q
And how much gross revenue was reported?
A
The gross revenue of $12,350 was reported.
Q
And are taxes due on this amount?
A
No, they are not.
Q
Why not?
A
That's due to the small business credit that was received.
Q
All right. Let's take that down. Thank you, Mr. Arnold.
I'm going to show you now what's been marked as Exhibit 79.
And I'm going to ask Mr. Arnold to scan through this document to
the last document.
Is Exhibit 79 records of the Department of Revenue?
A
Yes, they are.
Q
What is the -- let's go back to the first page, please.
What is the business name?
A
The legal entity on this exhibit, or for these records, is
SFC LLC.
Q
Before we go on, Mr. Hillers, I neglected to ask you a
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 294
question about Eric Shibley MD, PLLC. The last filing we saw
reporting revenue was the third quarter of 2019, correct?
A
That's correct.
Q
Did you check the records to see if Eric Shibley MD filed
state tax returns after the third quarter of 2019?
A
I did, approximately three weeks ago.
Q
What did you find?
A
I found that there were no further records.
Q
Thank you, Mr. Hillers.
Back to Exhibit 79. Are these the business records
maintained in the Department of Revenue for a business SFC LLC?
A
Yes, they are.
MR. WERNER: Offer Exhibit 79.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 79 admitted.)
Q
So we're going to now publish the first page of Exhibit 79.
Can we go to the page -- to page 4 of Exhibit 79, please? Did
this business change its name?
A
The business did not change its name.
Q
What is -- what does this indicate? What does this page
indicate?
A
This page would indicate that they registered a tradename or
are doing business as Seattle's Finest Cannabis.
Q
Okay. So what is the legal name?
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 295
A
The legal name is SFC LLC.
Q
Okay. And let's go to page 10, please.
Did this business, SFC LLC, file state excise tax returns?
A
Yes, it did.
Q
And what was the period that it filed state excise tax
returns?
A
It filed state excise tax periods for the period of July 2018
through September of 2019.
Q
There are entries here indicating time periods in 2019 and
2020, what does that indicate?
A
For those periods of 2019 and 2019 -- excuse me, 2019 and
2020, they would show that no tax return was filed.
Q
So the last tax return was filed approximately -- through the
period September 2019?
A
That is correct.
Q
And did you check the records of the Department of Revenue
recently?
A
I did, approximately three weeks ago.
Q
Any further state excise tax returns for this business?
A
No, there were not.
Q
Let's go to page 9, please.
What does page 9 indicate?
A
Page 9 indicates that there were no tax penalties or interest
debits which occurred during the filing period range.
Q
And did this business ever make payments, SFC LLC?
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 296
A
No, it did not.
Q
So can a business be required to file a return, even if money
is not owed?
A
That is correct.
Q
Why would that be?
A
If a business maintains a license and tax registration, it
has a requirement to file and pay excise taxes. Even if there's
no activity during a taxable period, it has to report that to the
Department.
Q
Let's take that down. Thank you.
Showing you now what's been marked as Exhibit 78. And have
you reviewed Exhibit 78 prior to coming to court?
A
I have.
Q
And what is Exhibit 78?
A
Exhibit 78 are the Department of Revenue's records for ES1
LLC.
Q
Were these records maintained in the regular course of the
Department of Revenue's business?
A
They were.
MR. WERNER: Offer Exhibit 78.
THE COURT: Any objection, Mr. Nance?
MR. NANCE: No objection.
THE COURT: It will be admitted.
(Exhibit No. 78 admitted.)
Q
So a business with the name ES1 LLC was registered with the
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 297
State Department of Revenue?
A
Yes, it was.
Q
Let's look at page 10, again, please, Mr. Arnold.
Did ES1 LLC file state excise tax returns?
A
Yes, it did.
Q
Let's go to page 9, please.
Did ES1 LLC pay state excise taxes?
A
No, it did not.
Q
What is the time period that it filed returns?
A
It filed returns for the time period of annual 2017 through
annual 2019.
Q
Did it pay state excise taxes during that time?
A
It did not.
Q
Why not?
A
Those periods were reported as no activity.
Q
Let's look at page 15, please.
Mr. Hillers, do you recognize page 15?
A
I do.
Q
What is this?
A
This is a copy of correspondence mailed to the taxpayer by
the Department, concerning a reseller permit application.
Q
Who, according to this letter, who applied for a reseller
permit application?
A
That application was applied for by ES1 LLC.
Q
And where was the letter sent?
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 298
A
That was sent to 4700 36th Avenue Southwest, in Seattle,
Washington.
Q
And what is a reseller permit application?
A
A reseller permit application allows the business to be
considered for reseller permit. A reseller permit allows a
business to purchase goods, without paying sales taxes on those
goods, to be resold to the end customer.
Q
What types of businesses would want a reseller permit?
A
Generally any type of retail establishment or retail
business.
Q
Why was the reseller permit application denied?
A
According to the correspondence, the business was not
qualified for a reseller permit application.
Q
Are there other notes in the Department of Revenue's file
that indicate why this letter was issued and why the permit was
denied?
A
Yes, there are.
Q
Let's look at page 12, please. Could we call out that top
section, please? What are we seeing here on page 12?
A
We are seeing notes that are affiliated with the business.
These notes are made by Department of Revenue personnel.
Q
And do these notes discuss this reseller permit application?
A
Yes, they do.
Q
According to these notes, why was the reseller permit
application denied for ES1 LLC?
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 299
A
According to the notes, the application was denied as the
business had indicated that they were a speculative builder, and
they did not have a contractor's license with the Department of
Labor and Industries.
Q
And L&I is an abbreviation in these records. What does that
stand for?
A
That stands for the Department of Labor and Industries.
Q
And so do you need a license with L&I to be a contractor?
A
Generally, yes.
Q
Why?
A
That agency regulates different industries. One regulated
industry that they monitor is the contracting industry. They
have certain licensing, insurance and bonding requirements.
Q
For contractors?
A
That's correct.
Q
In order to get a license, a contractor's license with L&I,
must a business first be registered with the Department of
Revenue?
A
Yes.
Q
So if a business doesn't have a business license with the
Department of Revenue, it necessarily doesn't have a contractor's
license with L&I?
A
I would say that's correct.
Q
Let's take this down. Thank you.
Did you check Department of Revenue records for registration
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 300
records for some other businesses?
A
Yes, I did.
Q
When did you last do that check?
A
That check occurred last on October 18th of this year.
Q
Did you check the Department of Revenue's records for a
business named A Team Holdings LLC, with an employer
identification number ending in 7088?
A
Yes, I did.
Q
What did you find?
A
The Department of Revenue had no records for that entity.
Q
So there was no business license for A Team Holdings?
A
Right.
Q
If a business isn't registered with the Department of
Revenue, that business wouldn't have a contractor's license with
L&I?
A
That's correct.
Q
What triggers the requirement that a business be registered
with the Department of Revenue?
A
The triggering requirement for registration with the
Department of Revenue would be either a business that's engaged
in any sort of retail transaction, or for businesses that are
non-retail, annual activity beyond $12,000.
Q
So annual revenue. Does that mean annual revenue beyond
$12,000?
A
That's correct.
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GEOFFREY HILLERS - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 301
Q
If a business had employees, would that business need to be
registered with the Department of Revenue?
A
Generally, yes.
Q
Why?
A
If a business is registered with the Employment Security
Department, as part of that registration process, the Department
of Revenue receives the corresponding application. The
Department of Revenue would register that business as well. And
likely, if they're registering for employee-reporting purposes,
they're generating some sort of revenue.
Q
So if a business has employees, it's likely generating
revenue; is that your testimony?
A
Yes.
Q
Did you check the Department of Revenue records for a
business named Dituri Construction, with an EIN ending in 8508?
A
I did.
Q
What did you find?
A
The Department of Revenue had no records for that entity.
Q
No licenses?
A
No.
Q
No reports of revenue?
A
No.
Q
Did you check the Department of Revenue records for a
business named SS1 LLC with an EIN ending both in 7509 and 2134?
A
I did.
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GEOFFREY HILLERS - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 302
Q
What did you find?
A
The Department of Revenue had no records for that entity as
well.
Q
And, again, if Dituri Construction and SS1 LLC are not
registered with the Department of Revenue, they do not have that
business license, they do not have a contractor's license with
L&I, correct?
A
I think that would generally be correct. I don't have
information concerning L&I.
Q
Did SS1 LLC have a business license with the Department of
Revenue?
A
No, it did not.
Q
Did Dituri Construction have a business license with the
Department of Revenue?
A
No, it did not.
Q
Did either entity report revenue to the Department of Revenue
at any time?
A
No, they did not.
MR. WERNER: Thank you. Nothing further, Mr. Hillers.
THE COURT: Cross?
CROSS-EXAMINATION
BY MR. NANCE:
Q
Good afternoon, Mr. Hillers.
A
Good afternoon.
Q
So is there generally open communication and sharing of
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GEOFFREY HILLERS - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 303
information between state departments?
A
Yes. There are data-sharing agreements.
Q
The Department of Revenue shares information; it gets
information from, say, its Secretary of State?
A
Generally, yes.
Q
Okay. So if a business wants to register as an LLC with the
Secretary of State, they are assigned a number, right, a UBI
number?
A
That's correct.
Q
Is that the same number that the Department of Revenue uses
to identify businesses?
A
Yes. We use the UBI number.
Q
That comes from the Secretary of State, then?
A
Yes.
Q
Okay. So if a business registers or certifies with the
Secretary of State, and they're issued a UBI number, wouldn't the
Department of Revenue generally know about it?
A
The Department of Revenue system would show that there had
been a registration with that entity, and that it's been assigned
a UBI number.
Q
Okay. So it's on your radar, at least?
A
It would appear, yes.
Q
Okay. Whether or not a formal license is obtained from the
Department of Revenue?
A
That's correct.
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GEOFFREY HILLERS - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 304
Q
So it's very possible, it sounds like, and may even have
happened in this case, that there were LLCs out there that had
been created and registered with the Secretary of State and
issued a UBI number, that Department of Revenue had on its radar,
knew about?
A
Correct.
Q
At least one of them, ES1 LLC, was, in fact, registered with
the Revenue Department?
A
That's right.
Q
And was -- was it licensed? Would that make it licensed, the
fact that it's registered?
A
The fact that it was registered, generally applies to a
business license. So, yes, that entity did have a business
license.
Q
So ES1 is registered and licensed with the Department of
Revenue?
A
Correct.
Q
And it's filing returns?
A
That's correct.
Q
Now, isn't it accurate that Washington State does not have a
state income tax?
A
That is true.
Q
Is it also correct that there is no corporate income tax?
A
That is true as well.
Q
The B&O, or business and occupation tax, is a sort of excise
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GEOFFREY HILLERS - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 305
tax?
A
Yes.
Q
Right?
A
Yes, it is.
Q
It's typically levied on personal service?
A
It can be, yes.
Q
Are construction services categorized differently?
A
Construction services are categorized differently, depending
on the type of activity that the entity is performing.
Q
Well, are construction services necessarily subject to the
B&O tax?
A
Yes.
Q
And that's not because they're retail, right? Retail
businesses are automatically subject to excise tax; is that
right?
A
Correct. And with construction activities, if a contractor
is performing activities directly for the consumer -- so, for
instance, you hire a contractor to come to your home and complete
a repair, it's categorized as a retail transaction.
Q
Where do you draw the line? Where does -- does it have to be
something bigger than just a homeowner having someone come out
and do renovation work?
A
Where that would differentiate is whether or not a contractor
is performing activities for the end customer, or if they're
working for another contractor as a subcontractor. Then it would
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 306
differentiate the excise-tax classification.
Q
And if they're working with a different contractor, is there
still an excise tax, or not?
A
Yes.
Q
Thank you.
THE COURT: Any redirect?
MR. WERNER: No, Your Honor.
THE COURT: You may step down.
THE WITNESS: Thank you, Your Honor.
THE COURT: Put your mask back on, please.
MR. WERNER: The government calls Cynthia Cole.
THE COURT: You folks can stand up and stretch, if you
would like.
CYNTHIA COLE,
having been sworn under oath, testified as follows:
THE COURT: You can take your mask off.
THE WITNESS: Thank you.
DIRECT EXAMINATION
BY MR. WERNER:
Q
Please state your name.
A
Cynthia Cole.
Q
Could you spell your last name?
A
C-O-L-E.
Q
You can take your mask off your ear, if you want. It's up to
you. Thank you.
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 307
Ms. Cole, where do you work?
A
Employment Security Department.
Q
Ms. Cole, could you maybe bring the microphone a little
closer to yourself, or yourself a little closer to the
microphone?
A
Employment Security Department.
Q
Great. What state Employment Security Department?
A
Washington state.
Q
How long have you worked at the Employment Security
Department?
A
Twenty-two years.
Q
What is your current position at Employment Security?
A
Unemployment insurance, customer services, and integrity
manager.
Q
What does that mean? What does that position entail?
A
I work with -- I do -- I work with a lot of the appeals,
gathering of information. I work on Employment Security
Department claims.
Q
And what positions did you hold, if any, prior to that
position?
A
I started at the Employment Security Department in 1999 as an
intake agent. I have been a trainer. I was an adjudicator. I
was a disabled veteran's outreach program specialist. So I
worked with veterans to help them get reemployed. And I was the
adjudication manager for about ten years.
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 308
Q
And in connection with your career at Employment Security,
are you familiar with the records maintained by the Employment
Security Department?
A
Yes. Employment Security Department has three major
branches. One is tax and wage, who works with mainly the
employers and them paying taxes, quarterly taxes. Then we have
the reemployment side of the house, which most people know as
Work Source. And it has a variety of different programs to help
the unemployed become reemployed. And then I have spent most of
my career in the unemployment insurance part of the business,
which determines eligibility for people to get unemployment
insurance.
Q
Thank you, Ms. Cole.
Let's talk about the first function, the tax-and-wage
function. What sort of information does the Employment Security
Department collect from employers in Washington State?
A
They collect -- all employers in the state of Washington are
required to pay taxes on all their employees that work for them.
So they pay quarterly taxes. They collect the quarterly taxes.
They collect wage information, employees' names, their social
security number. And those wages get attached to, you know, when
they're ready to file for a claim so that they have money and
hours to be able to file a claim.
Q
What's the name of the form that an employer files to report
this wage information?
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 309
A
The quarterly wage form.
Q
I will show you what's been marked as Exhibit 81. I'm going
to ask Mr. Arnold to go to the second page.
A
The quarterly tax report, 5208.
Q
And have you reviewed Exhibit 81 before coming to court
today, Ms. Cole?
A
Yes.
Q
Are these employer quarterly reports for a business called
Shibley MD?
A
Yes.
Q
Were they maintained in the records of Employment Security
Department?
A
Yes.
MR. WERNER: Offer Exhibit 81.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 81 admitted.)
Q
Let's look at page 8, please, if we can. If that's -- and
perhaps let's call out the top quarter, or top third of the page
first. Thanks, Mr. Arnold.
So, again, what is this form that we're looking at here?
A
It is a quarterly tax report from March 2017.
Q
Is it March 2017, or does that "3" mean the quarter?
A
Third quarter. Sorry, third quarter.
Q
And what is the business name that's being -- that this tax
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 310
report is for?
A
Shibley Medical Clinic.
Q
What is the address?
A
4700 36th Avenue Southwest, Seattle, Washington, 98126-2716.
Q
Thank you, Mr. Arnold. If we could go back and look at the
middle section there of the report.
Who is the preparer?
A
Eric Shibley.
Q
Thank you. If we could go to the next page, please?
What does this part of the report indicate?
A
He's reporting total gross wages of $2,000.
Q
And you indicated when a business reports wages, what does
ESD or Employment Security do with that information?
A
So every year Employment Security gives all of Washington
employers a tax rate. And so every year, they -- they do an
annual tax run. They get taxed based on how many employees they
have, their wages. And on a quarterly basis, businesses are
required to pay their quarterly taxes.
Q
And so based on those rates, what is the amount of tax due to
Employment Security for this particular business?
A
$36.
Q
And -- thank you. Let's go to Exhibit 81. Show Ms. Cole
Exhibit 81, please. I'm sorry, 80. Sorry.
Do you recognize Exhibit 80?
A
Yes.
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 311
Q
What is that?
A
It is a letter saying -- from Dituri Construction, with an
employer identification number that doesn't exist in our system,
from January 1st of 2017 through March 31st of 2020.
Q
Is this a certification of no records?
A
Correct.
Q
Offer Exhibit 80.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 80 admitted.)
Q
Could we call out the middle section, please, again? Just
the text, not the "sincerely," just the text. Thank you.
So, again, now that we all can see this document, what does
this document indicate about the records maintained for ESD for
Dituri Construction?
A
There wasn't any.
Q
So were any employer quarterly reports filed for Dituri
Construction?
A
No.
Q
Any wages reported for employees?
A
No.
Q
Let's look at -- actually, if you look in your binder, have
you reviewed documents Exhibits 82 through 86?
A
Yes.
Q
Are Exhibits 82 through 86 more certifications of no records?
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 312
A
Correct.
Q
And is Exhibit 82 for a business called SS1 LLC?
A
SS1 and SS1 LLC.
Q
Is Exhibit 83 ES1, a business named ES1?
A
ES1 LLC.
Q
And 84 is SFC LLC?
A
84 I have as Seattle's Finest Cannabis.
Q
And what is the business for Exhibit 85?
A
The A Team Holdings.
Q
Is Exhibit 86 an EIN ending in 8805?
A
Yes.
MR. WERNER: Offer Exhibits 82 through 86.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit Nos. 82 - 86 admitted.)
Q
Just look at 82, please. Call out the text of the letter.
Ms. Cole, Exhibit 82 is on the screen now. What does this
indicate? What is the first page of Exhibit 82?
A
That this employer identification number does not exist.
There were no wages reported, and no quarterly taxes paid on it,
from January 1st of 2017 through March 31st of 2020.
Q
Is that true for the other businesses that we just mentioned?
Is that true for the ES1?
A
Yes.
Q
Exhibit 83?
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 313
A
Uh-huh, correct.
Q
Is that true for Seattle's Finest Cannabis, Exhibit 84?
A
Yes.
Q
Is that true for A Team Holdings, Exhibit 85?
A
Yes.
Q
And for the EIN ending in 8805, Exhibit 86?
A
Yes.
Q
Now, we have talked a little bit about -- you can take that
down, thank you.
We talked a little bit about what an employer reports. Is
information also maintained in the records of Employment Security
Department by employee?
A
Yes.
Q
How is that information maintained?
A
Social security number.
Q
And if you were provided a social security number, are you
able to search for reported wages for that employee for that
social security number?
A
Yes.
Q
Did Employment Security Department prepare some records as to
wages paid to certain Washington residents in this case?
A
Yes.
Q
Again, in the binder in front of you, are you familiar with
Exhibits 88 through 97?
A
Yes.
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 314
Q
And, generally, what is contained in Exhibits 88 through 97?
A
A person's name, their social security number. That we were
not able to find wages for that individual. Yes, we were.
Sorry. So like, 88, we had -- they had wages from different
employers.
Q
Let me just ask you, generally, Ms. Cole, are they all
searches run by the Employment Security Department for particular
names by particular social security numbers?
A
Yes.
Q
Do they all cover the time period of 2017 through first
quarter of 2020?
A
Yes.
Q
I'm going to show you now what's been admitted as Exhibit 48.
Could we go to page 3, please, Mr. Arnold?
Do you see the ten names listed on Exhibit 48, page 3?
A
Yes.
Q
Are those the same names that are in Exhibits 88 through 97?
A
Yes.
MR. WERNER: Offer Exhibits 88 through 97.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit Nos. 88 - 97 admitted.)
Q
Mr. Arnold, could we put Exhibit 91 on the screen, please?
Let's look at the second page of Exhibit 91. What are we
looking at with Exhibit 91, Ms. Cole?
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 315
A
So it's saying first quarter of 2020, this individual worked
for Toyko Japanese Steakhouse.
Q
And so this page covers multiple quarters, correct?
A
Yes.
Q
What is the individual's name?
A
Muna, Jerome.
Q
And, again, what business did Mr. Muna work for in this
period time?
A
Tokyo Japanese Steakhouse.
Q
What does this report indicate about the wages? Were they
reported to ESD?
A
Yes. Let's see. First quarter of 2017. Second quarter,
third quarter, of 2017 again. And third and fourth quarter of
2018. And then for the full year of 2019.
Q
Let's look at the next page. What is this page of
Exhibit 91?
A
This is where the claimant -- well, Mr. Muna, filed for an
unemployment claim.
Q
Was that claim granted?
A
Yes.
Q
And what would that claim be based on? In part -- would it
be based, in part, on the wages we saw on the second page?
A
Yes.
Q
And, again, explain to the jury the connection between wages
reported and unemployment compensation?
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 316
A
Sure. Any time somebody becomes unemployed, they call us, we
ask for their social security number. So any wages that are
attached to that social security number, we have a formula that
we look at. They have to have at least 680 hours for a base
year, which is four quarters. And then we look at their wages to
determine their weekly benefit amount. It's the two highest
quarters added together, divided in half, multiplied by .04.
That's how they get their weekly benefit amount.
Q
For Exhibit 91, did a business named SS1 LLC or Dituri
Construction report wages for this individual, Mr. Muna?
A
No.
Q
Let's look at Exhibit 92, please. This individual's name is
Eric Pula, correct?
A
Yes.
Q
Did the SS1 LLC or Dituri Construction report wages for Mr.
Pula?
A
No.
Q
Did you review -- what about the business name A Team
Holdings, did that business report?
A
No.
Q
Let's look at Exhibit 97. Go to the second page of 97,
please.
What is Exhibit 97, Ms. Cole?
A
Reported wages for a Lisa Velotta.
THE COURT: Keep your voice up, if you will, please.
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 317
A
Sure. Wages for a Lisa Velotta.
Q
Are there wages reported by SS1 LLC or Dituri Construction?
A
No.
Q
What about the A Team Holdings?
A
No.
Q
What businesses are reported?
A
Pacific Medical Centers in Puyallup, Steeb versus Overlake
Hospital Medical, and Pacific Medical Centers of Puyallup.
Q
Ms. Cole, did you review all of these records 88 through 97
to see if any of these individuals had wages reported from Dituri
Construction?
A
They do not.
Q
I'm sorry. My question is, did you review them to see if
Dituri Construction is contained there?
A
Could you say that again?
Q
I could. I will.
Is Dituri Construction listed anywhere on Exhibits 88
through 97?
A
No.
Q
SS1 LLC?
A
No.
Q
A Team Holdings?
A
No.
Q
Seattle's Finest Cannabis?
A
No.
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 318
Q
ES1 LLC?
A
No.
Q
So for these individuals, none of them had wages reported by
those companies to ESD, correct?
A
Correct.
Q
So, again, you advised the jury about the second function of
Employment Security, and that's the unemployment insurance,
correct?
A
Yes.
Q
How are unemployment insurance payments in the state of
Washington, how are they funded?
A
Employers only.
Q
And could you be a little more specific? How do employers
pay in?
A
They send in quarterly reports on all the employees that they
have, and their wages.
Q
And are they required to pay unemployment taxes?
A
Quarterly.
Q
Did you review Exhibit 87?
A
Yes.
Q
And are these records of the Employment Security Department?
A
Yes.
Q
And did you review Exhibit 98?
A
Yes.
Q
Is Exhibit 98 also records of the Employment Security
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 319
Department?
A
It is. This is where --
THE COURT: No, he's going to ask another question.
Q
Again, let's go back to Exhibit 87. Who does Exhibit 87
relate to?
A
Eric Shibley.
MR. WERNER: Offer Exhibit 87.
MR. NANCE: No objection.
THE COURT: Admitted.
(Exhibit No. 87 admitted.)
Q
So we're looking at the first page of Exhibit 87. What does
this show?
A
That there were wages reported, third quarter of 2017, for
$2,000, and 180 hours.
Q
And who is the reported employee?
A
Eric Shibley.
Q
And the last four of the social security number are listed on
this document as well?
A
Yes.
Q
Does that tie to a document we saw earlier in your testimony?
A
Yes. That's on -- let's see, 98. We didn't originally have
any wages or hours. And so he -- so he was able to let us know
that he did actually report some hours and wages. And this is
what -- this is the form that he did that with.
Q
So thank you, Ms. Cole. Let's take it one step at a time.
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 320
Did Mr. Shibley apply for unemployment payments with the
Employment Security Department?
A
Yes.
Q
And approximately -- well, what does the first thing the
Employment Security Department does when it gets an unemployment
insurance request, a claim?
A
We look for wages.
Q
And what wages did you find for Mr. Shibley?
A
We originally didn't find any.
Q
And are these wages in the Employment Security Department
system?
A
They are now. From 2017, third quarter.
Q
Thank you. And explain why -- was the unemployment claim
made in 2020?
A
Yes.
Q
So why wouldn't 2017 wages show up when you were processing
an unemployment claim for 2020?
A
So we look at -- everybody's unemployment claim is based on a
base year. So if I file today, it would be current quarter.
Then the next four -- three months, next quarter is lag quarter,
which all the employers are paying their taxes on. And then your
base year is based on those next four quarters. And so we look
for wages on those four quarters. If you don't have the
680 hours, the person has the opportunity to file an alternate
base year, which includes the lag quarter. And then we would
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 321
have to request those wages from the employer to report early.
Q
Let's look at page 2 of Exhibit 87. Did Washington State
make unemployment payments to Mr. Shibley in 2020?
A
Not through a regular unemployment claim.
Q
Okay. Why not through the regular -- why didn't Washington
State make regular unemployment payments to Mr. Shibley?
A
He didn't have hours or wages.
Q
And was there a different type of unemployment that Mr.
Shibley applied for in 2020?
A
Yes. In 2020 the federal government -- Employment
Security -- I can't even think of the word. Based on the federal
government, we created -- we didn't create it, we just
implemented the pandemic unemployment assistance program. And so
the pandemic unemployment assistance program was for a lot of
people who didn't meet the 680 hours for regular employment.
They were considered underemployed. Self-employment. I mean,
the pandemic unemployment assistance really opened the doors for
many other people who are not normally considered eligible for
regular unemployment, to receive this pandemic unemployment
assistance.
Q
Let's look at page 3, if we could, Mr. Arnold.
What does page 3 indicate?
A
That he was paid pandemic unemployment assistance.
Q
From what time? And what benefit weeks were covered?
A
5/9/2020, through -- oh, it started March 7th of 2020,
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 322
through May 9th of 2020.
Q
What dates were these payments made?
A
Let's see. Some were made -- well, most were made on
4/22/20. Then a couple were made on 4/30/2020. A couple on
5/4. And then the last two payments were made on 5/12.
Q
Can we look at page 4, please, Mr. Arnold? Can we actually
go to page -- let's go to page 6, please.
Just closing the loop on this. What does page 6 indicate,
Ms. Cole?
A
This is his original determination letter dated April 2nd of
2020, stating you may receive up to zero each week. You are
eligible for unemployment benefits. Your total amount -- I mean,
it's telling him he's not eligible for a regular unemployment
claim.
Q
And so -- but he did receive pandemic unemployment
assistance, correct?
A
Right.
Q
And you indicated that the state Employment Security
Department administered the pandemic unemployment assistance?
A
Yes.
Q
Were applicants required to answer questions with the
Employment Security Department in order to get the pandemic
unemployment assistance?
A
Yes.
Q
Could we look at page 12, please? Is page 12 part of the
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CYNTHIA COLE - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 323
questions that an applicant -- that Mr. Shibley, as an applicant,
was required to answer to obtain pandemic unemployment
assistance?
A
Yes.
Q
Let's go down to page 11, please. I'm sorry, page 13.
Are these more questions?
A
Yes.
Q
And to the question: Are you getting paid for any period
after you last worked, such as severance pay, pay in lieu of
notice, or termination pay? What's Mr. Shibley's answer?
A
No.
Q
The question: Did you work for any employers whether you
have been paid or not? What's Mr. Shibley's answer?
A
No.
Q
And is that the answers Mr. Shibley gave to qualify for
Pandemic Unemployment Assistance, covering the March and April
and May time period that we looked at?
A
Yes. We asked them these same questions every single week.
Q
Let's look at page 14, please. What is reported -- Can we
call out the top section there?
What is reported here in response to the Employment Security
Department's questions?
A
There's two employers, Eric Shibley MD and ES1 LLC. No hours
worked and no gross earnings.
Q
When does he report the last day he worked for those
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CYNTHIA COLE - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 324
entities?
A
2/29/2020.
Q
And does Mr. Shibley report working for any other entities?
A
No.
MR. WERNER: Nothing further. Thank you, Ms. Cole.
THE COURT: Cross.
CROSS-EXAMINATION
BY MR. NANCE:
Q
Hi, Ms. Cole.
A
Hello.
Q
I don't want to spend a lot of time on it, but I want to make
clear. This payment that you were just talking about was part of
the CARES package, wasn't it, CARES Act package that the state
was helping implement?
A
Yes.
Q
To help --
A
The CARES Act.
Q
To help self-employed people that were in trouble because of
the pandemic?
A
Correct.
Q
Let me call up Exhibit No. 48, page 3.
You were questioned at length about this list of individuals.
A
Yes.
Q
You were asked to run checks on each of them through your
system?
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CYNTHIA COLE - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 325
A
Correct.
Q
And as I understand your testimony, there was -- you found no
record of wages being reported, paid to any of these people?
MR. WERNER: Objection. It's mischaracterizes the
testimony.
THE COURT: Overruled.
A
Could you say that again?
Q
Well, I'm not trying to put words in your mouth.
A
Yeah. I understand.
Q
You looked at this, you ran a check through your system. And
if you could, just what did you find, and just, you know, ten
words or less, did you find there were no -- there was no record
of payments or of wages being reported?
A
They had wages reported from employers.
Q
They did?
A
Some of them did, yes.
Q
Was it your -- they had wages reported, but none through
these various entities?
A
Correct.
Q
Is that accurate? I'm not trying to mischaracterize it.
A
Yes. Yes.
Q
So you ran through the checklist of LLCs -- ES1, SS1, A Team,
et cetera -- and there was no record of these people receiving
any money, any wages, from those entities?
A
Correct.
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 326
Q
Okay.
Did any of these people apply for unemployment during this
period?
A
I didn't look for that.
Q
Okay. If these people, any of them, or all of them, had been
paid by these LLCs associated with Mr. Shibley, if they had been
paid in cash, it would not be surprising that you wouldn't have a
record of it, would it?
A
Correct.
Q
All right. Thank you.
THE COURT: Any redirect?
MR. WERNER: No, Your Honor.
THE COURT: You may step down.
MS. CONNELLY: The plaintiff calls John Moshier.
JOHN MOSHIER,
having been sworn under oath, testified as follows:
THE COURT: Go easy on my chair.
THE WITNESS: Yes, sir.
DIRECT EXAMINATION
BY MS. CONNELLY:
Q
Good afternoon. Can you please state your name and spell
your last name for the record?
A
John Moshier. M-O-S-H-I-E-R.
Q
And where do you currently live, Mr. Moshier?
A
I live in Westfield, New Jersey.
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 327
Q
Where do you work?
A
Ready Capital.
Q
What is Ready Capital?
A
Ready Capital is a nonbank lender, commercial lender.
Q
And can you describe your role and responsibilities at Ready
Capital?
A
I am the president and CEO of ReadyCap Lending, which is a
division of Ready Capital.
Q
How long have you worked as the president and CEO of ReadyCap
Lending?
A
Six and a half years.
Q
And so in your role are you familiar with the customers of
ReadyCap?
A
Yes.
Q
And who are they?
A
They're small business owners that are defined by the Small
Business Administration.
Q
What types of services does ReadyCap offer those small
businesses?
A
We provide access to capital through the 7(a) loan program.
Q
What is the 7(a) loan program?
A
The 7(a) loan program is a term loan program that is
administered by the Small Business Administration. So businesses
can, you know, borrow money to expand their businesses, buy
businesses, buy out partners, buy real estate. Things like that.
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 328
Q
And so you have mentioned the Small Business Administration.
Are you familiar with the term "SBA lender" or "SBA-approved
lender"?
A
Yes.
Q
And what does that mean?
A
That you, as an SBA-preferred lender, you're -- you have the
ability to interpret the regulations and make determinations on
eligibility on behalf of the Small Business Administration.
Q
And so is ReadyCap an SBA-approved lender?
A
Yes, we are.
Q
And so, Mr. Moshier, are you familiar with the Paycheck
Protection Program, or the PPP?
A
Yes.
Q
And what is your understanding of the purpose of that
program?
A
The PPP program was, you know, obviously passed in law by
Congress and the President at the time, and it was for the
purpose for employers to, you know, provide a paycheck or, you
know, payroll to employees to avoid layoffs.
Q
And was that in response to the COVID-19 pandemic?
A
Yes.
Q
And what role did ReadyCap play, if any, with respect to the
PPP?
A
Well, we were one of the, you know, preferred lenders in the
PPP program.
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 329
Q
So if a prospective applicant was interested in applying for
a PPP loan, could they apply directly with ReadyCap?
A
Yes, they could.
Q
Did you need to be an existing ReadyCap customer to apply for
a PPP loan through ReadyCap?
A
No, you did not.
Q
So how would a prospective applicant apply for a PPP loan
with ReadyCap?
A
We did have an online application at the time. We also
worked with some other -- through other sources to refer business
our way.
THE COURT REPORTER: Can you repeat the last part of
your answer?
THE WITNESS: Other referral sources that would use the
online application.
THE COURT REPORTER: Thank you.
Q
And so was ReadyCap funding PPP loans?
A
Yes, they were.
Q
Did there come a time where Ready Capital entered into an
agreement with Customer's Bank, related to the PPP?
A
Yes, we did.
Q
And can you just describe that agreement to the jury?
A
We entered into an agreement with Customer's Bank to acquire
some of the authorizations that we had acquired for the PPP
program. And they essentially became the funding source for
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 330
these PPP loans, and we became the lender service provider. So
we processed all the loans.
Q
Okay. So, essentially, Ready Capital would receive the
applications on behalf of Customer's Bank?
A
Yes.
Q
Would Ready Capital approve the applications on behalf of
Customer's Bank?
A
Yes.
Q
And then would Customer's Bank fund the PPP loan?
A
Yes.
Q
And so at the time that agreement was struck, did
Customer's -- I think you have somewhat alluded to this, but I
just want to unpack it a little bit -- did Customers also buy PPP
loan numbers that Ready Capital had already gotten approved by
the SBA?
A
Yes.
Q
And can you just explain a little bit what it meant that
Customer's Bank bought PPP loan numbers?
A
So the loan numbers were the authorizations that approved the
access to the PPP program for the small businesses. So we then
became the agent for those loans, and processed them on behalf of
Customer's Bank. So Customer's Bank then was the funding source,
and the owner of the customer at that point.
Q
And so when was this agreement between Ready Capital and
Customer's Bank struck?
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 331
A
That was April 28th of 2020.
Q
Okay. And so on April 28th, had some applicants who ReadyCap
had already approved for PPP loans, but had not funded those
loans, already signed loan notes with Ready Capital?
A
Yes, they did.
Q
And so what happened to those applicants when Customer's Bank
bought their loan numbers?
A
We issued a loan note in Customer's Bank name, and then
funded them through Customer's Bank.
Q
Where are ReadyCap servers?
A
In Berkeley Heights, New Jersey.
Q
Is that where a signed ReadyCap PPP note would go?
A
Yes.
Q
Does ReadyCap have any servers in Washington State?
A
No.
Q
So where are ReadyCap servers?
A
In Berkeley Heights, New Jersey.
Q
Is that where a signed ReadyCap PPP note would go?
A
Yes.
Q
Does ReadyCap have any servers in Washington State?
A
No.
Q
So turning a little bit to the process, how would a
prospective applicant apply for a ReadyCap loan, or a
ReadyCap-approved but Customer's-funded loan?
A
I'm sorry. Can you ask --
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 332
Q
Yes. I'm sorry. That was a terrible question.
Turning to just the process, how would a prospective
applicant apply for a ReadyCap/Customer's Bank loan?
A
It would apply through the website.
Q
And that's the Ready Capital website?
A
Yes. The ReadyCap website.
Q
Once ReadyCap approves the loan, what happens then?
A
Then we did the -- we do the due diligence on that and make
sure that it meets all the criteria.
Q
And what does due diligence entail?
A
Making sure that the applicant answered all the questions and
they certified the information as accurate, and true and
accurate.
Q
And so -- and then after the due diligence is done, what
would the next step be?
A
Funding. Signing of the note, and then funding.
Q
Okay. And so would the Customer's Bank note, would ReadyCap
send the notes out to applicants, or did Customer's do that
themselves?
A
No. Ready Capital sent the notes out to customers -- or,
yes, to customers on behalf of the Customer's Bank.
Q
It's confusing with "customers" versus Customer's." Yes. So
would applicants ultimately sign a loan note with Customer's
Bank?
A
Yes.
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 333
Q
Can you just tell us, generally speaking, what type of
information ReadyCap asked applicants to submit in connection
with their PPP applications?
A
Depending on the type of business, how they were structured,
we filed the guidance that was put out by the Small Business
Administration, and the Treasury. So depending on what type of
business it was -- and, actually, can you ask that question
again?
Q
Yeah. Can you just tell us, generally speaking, what type of
information ReadyCap asked applicants to submit in connection
with their PPP applications?
A
Yeah. All the necessary documents were put out in guidance
from the Small Business Administration, you know, driver's
license, photo.
Q
And so who determined what type of information ReadyCap asked
for?
A
Who determined?
Q
Uh-huh.
A
Well, we followed the guidance that the SBA put out to us.
So the determination was what was put out in guidance.
Q
So the SBA was telling you what to ask for?
A
Correct.
Q
So I'm showing you Government's Exhibit 40, that's already
been entered into evidence. Do you recognize this form?
A
Yes.
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 334
Q
Okay. And who created this form?
A
The Small Business Administration.
Q
And so are the questions on this form the types of or the
questions that Ready Capital would ask prospective applicants?
A
Yes.
Q
In the Ready Capital/Customer's Bank relationship, who made
the determination to fund a PPP loan?
A
Ready Capital did.
Q
So was Customer's Bank relying on Ready Capital to do the
diligence required for each loan, as part of their agreement?
A
Yes.
Q
Did Customer's Bank do any of its own diligence?
A
No, not on individual loans.
Q
When you say "not on individual loans," would they do a
sampling of loans?
A
Yes. They did an array of samplings.
Q
Was it important to Ready Capital that applicants provide
truthful and accurate information in their applications?
A
Yes.
Q
And why is that important?
A
Because we were relying on the certifications that were true
and accurate for us, or -- for them to be eligible for the PPP
program.
Q
Was the program -- strike that. If we could just look at the
top portion of this, Mr. Arnold.
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 335
Would it matter to ReadyCap if a person applied for a PPP
loan using the name of a business that didn't actually exist?
A
Yes, it would matter.
Q
And why would that matter?
A
Because they would not be eligible if the business doesn't
exist.
Q
Right. And would it matter to ReadyCap if a business --
MR. NANCE: Those are leading questions, Your Honor.
Pardon me.
THE COURT: I'm sorry?
MR. NANCE: Leading questions.
THE COURT: Yes. Try to refrain from leading, counsel.
MS. CONNELLY: Okay. Sorry.
Q
Would ReadyCap have approved a loan claiming -- if a business
claimed to have more payroll expenses than it actually had?
A
Would a -- ask that again.
Q
Would Ready Capital have approved a PPP loan if a business
applied claiming to have more payroll expenses than it actually
had?
A
If they were certifying it and they provided the necessary
documentation, we had to rely on the certification by the
business owner.
Q
Okay. Would it have mattered to Ready Capital if a business
applied -- Strike that.
Would it matter to ReadyCap if a business applied for a PPP?
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 336
MR. NANCE: Objection. Leading.
THE COURT: I haven't heard the question.
Q
Would it matter to ReadyCap if a business applied for a PPP
loan, claiming to have more employees than it actually had?
A
Yes, it would matter.
MS. CONNELLY: Can I continue, Your Honor. Okay.
Q
And why would that have mattered?
A
Well, if they were applying -- if they were stating they had
more employees, that would be inaccurate information that they
were certifying.
Q
And was it a requirement of the PPP that a business have
employees, to get a PPP loan?
A
Yes.
Q
Would it matter to ReadyCap if a business applied for a PPP
loan, claiming to have more payroll expenses than it actually
had?
A
Yes.
Q
And why would that matter?
A
Because they wouldn't have been eligible, based on the
certification that they provided.
Q
And was the amount of the loan tied to the monthly payroll
amount?
A
Yes, it should.
Q
And so if someone applies claiming to have more monthly
payroll, what would that mean for the loan amount?
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 337
A
It would mean it would be larger than what they were eligible
for, based on their certification.
Q
If we could blow out, Mr. Arnold, and look on Question 5, in
the italics above it.
Would it matter to Ready Capital if a person who applied for
a PPP loan had lied on Question 5 about being on active
probation?
MR. NANCE: Objection, leading.
THE COURT: Overruled.
A
Well, yes.
Q
I'll answer -- or, I'll tell you the question once more.
But would it matter to ReadyCap if a person who applied for a
PPP loan had lied on Question 5 about being on active probation
at the time of the application?
A
Yes.
Q
And why would that matter?
A
Well, if they would be ineligible, we wouldn't have funded
the loan.
Q
And why was it ineligible?
A
Because they answered incorrectly -- or they answered, yes.
And it clearly states if the answer is yes, the loan will not be
approved.
Q
Would ReadyCap have approved a PPP loan if it learned that a
business that lied about its payroll numbers or employees or
probation status, had been funded a loan?
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JOHN MOSHIER - Direct (Connelly)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 338
A
No.
Q
What steps, if any, would ReadyCap take if it learned that a
business that lied about its payroll numbers or probation status
or employees, had been approved for a loan?
A
We would have tried to collect the money back, and then
notify the necessary authorities.
Q
And would it matter to ReadyCap if a person who applied for a
PPP loan provided fake tax forms as supporting documentation for
the loan?
A
Yeah. It would matter.
Q
And why would that matter?
A
If they were certifying that these are true and accurate, and
if they're not, then they were certifying falsified documents.
Q
And was there something in particular about the PPP program
that made relying on borrowers so important?
A
Yeah. Well, this -- well, when the program was put out, it
would put the onus of the small business owner to certify that
these are, you know, accurate and truthful statements.
Q
And was there something in particular about the nature of the
PPP that made the program have to rely on the borrower so
heavily?
A
Yeah. I mean, there was obviously -- and we all remember at
the start of the pandemic, there was just a lot of activity going
on. And this was a way for the government to get as much help to
small businesses, you know, during this time of shutdown.
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 339
Q
Would ReadyCap have approved a PPP loan, if it learned that a
business had provided fake tax forms as supporting documentation?
A
No.
Q
Would ReadyCap fund a PPP loan, if it learned that a business
had lied -- actually, strike that.
What steps, if any, would ReadyCap take if it learned that a
business made false statements on its loan application or
provided fake tax forms, and had actually been approved for a
loan?
A
We wouldn't have funded the loan.
MS. CONNELLY: Thank you. No further questions.
THE COURT: Cross.
CROSS-EXAMINATION
BY MR. NANCE:
Q
Good afternoon, Mr. Moshier.
A
Yes.
Q
So you are the CEO of Ready Capital?
A
ReadyCap Lending, which is a division of Ready Capital.
Q
Okay.
A
Uh-huh.
Q
You described yourself as a service provider to Customer's
Bank or Ready Capital?
A
A lender service provider, yes.
Q
Was this your -- was this how you would have described your
business before COVID?
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 340
A
Described my business before --
Q
Well, your business is described as a service provider to
Customer's Bank, was that the case before the COVID pandemic?
A
Well the PPP program didn't exist before COVID.
Q
Well, that's -- and so, what did Ready Capital do before
COVID?
A
We are a licensed SBA nonbank lender. We are regulated by
the Small Business Administration.
Q
Okay. So you are lending to small businesses?
A
Yes.
Q
You've described taking PPP loan applications online?
A
Yes.
Q
And it sounds like in April of 2020, right after -- not long
after the CARES Act actually passed, that your bank -- you don't
call yourself a bank -- but your business, your lending service,
ended up with more loan applications than it could fund; is that
accurate?
A
Correct.
Q
And so you made a deal with Customer's Bank to sell them the
right to fund the loans?
A
Yes.
Q
And you cleared this with the SBA?
A
Yes.
Q
I assume you cleared -- you worked out something on the
fee-sharing arrangement on the lending fee that you would get
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 341
from SBA?
A
Yes. Yes.
Q
Was the surplus of the loan applicants and your inability to
fully fund them, something that you anticipated?
A
No.
Q
Well, Ready Capital is not a non-profit, it's a for-profit
organization?
A
Yes.
Q
You're a business. You are looking to do business out there?
A
Yes.
Q
And this was an opportunity?
A
Yes.
Q
So Ready Capital, you didn't ultimately fund the loans, the
ones that you passed on. But you screened the applicants; is
that right?
A
Ask that question again.
Q
You took the loan applications from the PPP applicants, or
PPP loan applicants?
A
Yes.
Q
And if there was any due diligence, it would have been Ready
Capital doing it?
A
Correct.
Q
Did you require a -- well, what did you require, other than
that template that we've seen described, the SBA two-page form
that you have testified about. Was there anything else that you
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 342
-- that Ready Capital required from applicants for PPP loans?
A
Well, we required the documentation that was provided by the
Small Business Administration for the applicants to fill out, to
include any, you know, proof of payroll, in whatever form that
would be, based on the type of business. And a copy of a
driver's license with a picture. Is that what you're asking me?
Q
Yeah. What did you do to verify or to check on the
applicants, essentially?
A
Can you ask that question again?
Q
Did you contact references? Did you ask for references?
A
We did a Secretary of State's verification. We also did a
KYC KYB check on each customer.
Q
Did you visit the worksite of the business or the business
office?
A
No.
Q
Did you require a 941 form? Did you ask for that?
A
If the business was a certain, you know, type of filing yes,
we would.
Q
If a business were seriously delinquent in its taxes, would
that have been a factor in granting or declining the loan, under
the PPP program?
A
We didn't verify whether anybody was delinquent on their
taxes.
Q
What if it was obvious, in the material that they provided to
you?
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 343
A
If it were obvious?
Q
Yeah.
A
I mean, that's kind of a hypothetical question.
Q
Okay. Let's call up Exhibit No. 1, page 5.
MS. CONNELLY: Objection, Your Honor. I think this goes
into the negligence territory.
THE COURT: Overruled.
Q
Now, this is -- let me just tell you up front, this is not a
form that Ready Capital had anything to do with. It's a
representative sample, is all.
A
Correct. Okay.
Q
So page 5. Yeah, that's fine. If you could blow that up
just a little bit. So does -- Are you familiar with this form?
It's a Form 941?
A
Yes.
Q
And you'll notice -- and, again, this is just a sample. This
is not something you did. But if you will notice, lines 1 and 2
-- line 1 refers to the number of employees, and line 2 refers to
wages and tips within that particular quarter.
Is this the kind of document that Ready Capital would request
from an applicant and scrutinize when it came in with the
application?
A
Yes.
Q
Okay. Let me take you down to the lower part of this. In
fact, you could keep -- sort of just blow up the first -- from
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 344
lines 1 through the bottom there.
So if you look at line 2, which shows a wages and tips for
the quarter, paid by this particular business, and then you look
down at the line 10, total taxes due. You see that?
A
Yes.
Q
And wouldn't that appear to be simply derived by a formula?
You take the wages and multiply it by a couple of numbers in 5a
and 5c, and then subtract that to get the taxes that would be
normally due?
A
I'm not an accountant.
Q
I understand.
A
Yeah.
Q
I'm not holding you to that, to that standard.
A
Yeah. It appears that's what that --
Q
Well, if you look on it, at line 13, which indicates -- it's
a blank line referring to total deposits in payment toward that
obligation.
A
Uh-huh.
Q
Then you see line 14, a tax balance due of $149,175. Do you
see that?
A
Yes.
Q
Yeah. So if Ready Capital got a PPP loan application with
something roughly similar to this filing, with the application,
is that something that would trigger a rejection, or is it
something that you would just follow up on? Or it's something
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 345
that you wouldn't -- is there anything about this that you feel
would be a factor in evaluating a PPP loan applicant to Ready
Capital?
MS. CONNELLY: Objection, Your Honor.
THE COURT: I will permit a limited amount of this.
MR. NANCE: Okay.
A
This is a borrower's certification loan process. So if the
applicant submitted this 941 as proof of payroll, and certified
that this payroll matches what they are eligible for, they're
certifying this. And we would look at the fact that they had
verification, that they had payroll.
Q
Okay.
A
I don't know the authenticity of whether this is valid or
not.
Q
I understand that.
THE COURT: One at a time, please.
Q
I guess what I'm curious about is whether the fact that there
appears to be a significant tax delinquency on the face of this
document, right? They owe $149,000 in taxes that they haven't
paid yet. Would that be a factor in considering whether an
applicant was properly eligible for the funds?
A
I don't know.
Q
You don't know? Okay.
THE COURT: All right. Let's take 15 minutes.
THE CLERK: Please rise. Court is in recess.
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 346
(Recessed.)
THE COURT: So Mr. Moshier, I assume you have noted the
sunshine outside. When you go back to New Jersey, you tell them
that the sun always shines in Seattle.
THE WITNESS: Will do, sir.
THE COURT: Let's bring in the jury.
MR. WERNER: Your Honor, just briefly. We wanted to let
the court know, and we let Mr. Nance know, we're ahead of
schedule. And we believe, at this point we believe the
government will rest perhaps early Thursday, we could be done as
early as tomorrow afternoon. But I just want to make sure the
court knows. Hopefully I'm not speaking too soon.
THE COURT: We will get the instructions to you probably
first thing tomorrow morning.
MR. WERNER: Thank you, Your Honor.
THE COURT: All right. Let's bring in the jury.
(The following occurred in the presence of the jury.)
THE COURT: Please be seated. Any objection to
informing the jury of what we just discussed?
MR. WERNER: No, Your Honor.
MR. NANCE: No.
THE COURT: It appears the case is moving faster than we
had thought it might. And there's a real good shot at the case
being submitted to you before the end of this week.
All right, Mr. Nance.
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 347
MR. NANCE: Yes.
Q
(By Mr. Nance) Mr. Moshier, wouldn't it be that qualifying
for a PPP loan was easier than for a traditional loan, SBA-type
of loan?
A
Yes.
Q
And this is in large part because the PPP applicants make
their own representations on the applications?
A
Yes.
Q
A traditional loan would be subject to greater scrutiny by
the bank, wouldn't it?
A
Or the lender.
Q
Or the lender.
Verification procedures might be easier, or a little -- not
as strict, certainly for a PPP?
A
Yes.
Q
And the loan process would be considerably shorter than for a
traditional loan?
A
Yes.
Q
Of course, this surely mattered a little less to you, or to
your business -- I'm sorry, you are not a bank. What, you're a
service -- lending-service business, is that it?
A
We are a licensed SBA nonbank lender, which is regulated by
the Small Business Administration.
Q
Okay. Operative word is "lender."
A
Yes.
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 348
Q
These considerations, credit considerations that you would
normally apply toward a borrower, probably mattered less with the
PPP, because ultimately the loan is guaranteed, right?
MS. CONNELLY: Objection, Your Honor.
THE COURT: Overruled.
Q
This is a guaranteed loan. You, as the lender, cannot lose,
right?
A
The guarantee, that is full faith by the Small Business
Administration and the United States Government, yes.
Q
Your marketing, you know -- your marketing lending service
for the PPP, you know it's ultimately going to be, if it's
funded, it's going to be guaranteed. And you and Customer's Bank
share a lending fee, a funding fee?
A
Correct.
Q
Right.
This is a golden goose; isn't it?
A
A golden goose?
Q
This is a golden goose. You have got to pursue this one.
This is a lucrative situation, isn't it, for the bank, for the
lender?
A
It's not how I saw it at the time.
Q
You didn't see it that way?
A
Not at the time. We were in a pandemic.
Q
Sure. What percentage of your lending business was comprised
of PPP loans in 2000, would you estimate?
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 349
THE COURT: In 2000?
MR. NANCE: I'm sorry, in 2020.
A
In 2020?
Q
Yes.
A
I could point you to our annual review. I mean, we do -- we
are a publicly traded entity. You can take a look at that stuff.
Q
How many PPP loans did Ready Capital process?
A
100,000, give or take.
Q
Aren't you really largely earning a fee in the neighborhood
of three or four percent, right off the top?
A
In some cases, yes.
Q
Well, it sounds like a lot of money to me. It sounds like a
lot -- a lucrative business opportunity that you would pursue
with all diligence and energy.
A
Is that a question?
Q
Yes.
A
What's the question?
Q
Didn't you actively pursue this? Wasn't this something that
you were in enthusiastic pursuit of? You marketed these PPP
loans aggressively, right?
A
We marketed them, yes.
Q
Well, to the point where you ended up with a big surplus of
potential borrowers, beyond your ability to fund?
A
We processed over 100,000 PPP applications. We answered the
call that was put out by the United States Congress to get money
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JOHN MOSHIER - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 350
out the door, in the hands of small business owners, to keep
their employees employed.
Q
Well, it mattered to you what was on the applications,
because you believed it mattered to the SBA, right?
A
I'm not following.
Q
You were asked a string of questions about whether it
mattered -- would it matter if the person, you know, was on
misdemeanor probation. Would it matter if they overstated their
number of employees. And you agreed that it would have mattered?
A
Yes.
Q
Because it mattered to the SBA?
A
Not just the SBA, the United States Congress, Senate, the
President of the United States.
Q
Mr. Moshier, you have got a really good thing going through
the SBA, don't you? And you don't want to mess that up.
A
Excuse me?
Q
I will withdraw the question.
THE COURT: Any redirect?
MS. CONNELLY: Nothing, Your Honor.
THE COURT: You may step down. Put your mask on,
please.
MR. WERNER: The government calls Adam Seery.
ADAM SEERY,
having been sworn under oath, testified as follows:
MR. WERNER: You may remove your mask.
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ADAM SEERY - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 351
THE WITNESS: Thanks.
DIRECT EXAMINATION
BY MR. WERNER:
Q
Please state your name and spell your last name.
A
Adam Seery. S-E-E-R-Y.
Q
Mr. Seery, what city and state do you currently live in?
A
I live in Encinitas, California.
Q
Mr. Seery, have you spent any time in Seattle?
A
Yeah. I used to go to school at the University of
Washington.
Q
Mr. Seery, where do you currently work?
A
I work at Harvest Small Business Finance.
Q
How long have you worked at Harvest Small Business Finance?
A
Six years.
Q
What is your role there?
A
I'm a chief operating officer.
Q
And how long have you been the chief operating officer?
A
Three years now.
Q
What is your job duty? What is your job description as the
chief operating officer?
A
I oversee all of operations.
Q
Well, what are the operations of Harvest?
A
So Harvest is a nationwide nonbank SBA lender. So we hold --
there's 14 nonbank SB -- they're called SBLC licenses. What that
does is it affords us to lend on behalf of the government without
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ADAM SEERY - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 352
being a bank. So typically we make SBA 7(a) loans, mostly
commercial real estate driven.
Q
Okay. And what's an SBA 7(a) loan?
A
A SBA 7(a) loan is one of the two loans that are backed by
the federal government, in terms of the government-guaranteed
program.
Q
Again, what type -- who is your typical customer? Are we
going too fast? We're going way too fast. Sorry.
A
I can go fast. Sorry.
Q
And what is Harvest's typical customer?
A
Harvest's typical customer is mom-and-pop shops across the
country. Anywhere from one to couple of hundred employees. Loan
amounts up to $5 million.
Q
And what type of loans do you typically extend these
businesses?
A
For us, for Harvest -- you know, SBA is, you know, you can do
it for any various business purposes. Harvest focuses on
commercial real estate. So, you know, if a borrower wanted to,
you know, a restaurant owner want to buy or refinance their
building they currently occupy, that would be a loan that we
could consider for them.
Q
Does Harvest manage the loans that they make?
A
We do. We fund and service all of our loans that we book.
Q
Mr. Seery, are you familiar with the Paycheck Protection
Program?
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ADAM SEERY - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 353
A
Yes.
Q
And what was Harvest's involvement in the Paycheck Protection
Program or PPP?
A
Having one of the fourteen licenses that allows us to lend on
behalf of the government, we were instantly eligible to make
loans under the PPP program.
Q
And what was the purpose of the PPP, to your understanding?
A
The purpose of the PPP program was to get money out to
much-needed small business owners, as soon as possible, to help
them keep people employed, employees employed, through the
program.
Q
And did Harvest offer PPP loans in 2020?
A
Yes.
Q
Did they offer in the time period of April to June of 2020?
A
Yes.
Q
Did the PPP applicant need to be an existing Harvest
customer?
A
At the beginning, our biggest objective was to get money to
our existing customers, to help them. It was, as you could
imagine, everyone was drinking from the fire hose at the very
beginning of this program. As we were getting through our
existing clientele, we saw the need to help outside customers
obtain loans as well, just due to the overflow from the big
banks. Wells Fargo, B of A, Chase.
Q
So did there come a time where Harvest offered or accepted
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ADAM SEERY - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 354
PPP applications from non-Harvest customers?
A
Yes.
Q
And, Mr. Seery, how would an applicant apply for a PPP loan
with Harvest?
A
We had an online portal that you could get through our
website.
Q
And who reviewed the information, once it was input into the
website?
A
So once the required information was input into the website,
we transformed our team of, you know, credit officers and loan
closers to essentially PPP underwriters. And after a loan was
submitted, one of those individuals would take down the loan and
start to work on it.
Q
So did this become -- did this become a big part of Harvest's
business in the spring of 2020 timeframe?
A
We fully shut down all of our core operations to help get
these loans out as soon as possible.
Q
Where are the Harvest employees located that reviewed these
PPP applications?
A
Laguna Hills, California.
Q
And so would an application being sent from Washington be
reviewed by a Harvest employee in California?
A
Yes.
Q
And that would be sent by the internet?
A
Yes.
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ADAM SEERY - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 355
Q
What about e-mails. Did your loan team e-mail with
applicants?
A
Yes. So if the loan application was not complete or we
needed additional information, one of our PPP processors would
reach out directly to a borrower, either by e-mail or by phone.
Q
And, again, to the extent that there was an e-mail sent to a
Harvest employee or a loan processor, where would that e-mail be
received?
A
In Laguna Hills.
Q
And, again -- so that would create an interstate wire
transmission from the place of the borrower to California; is
that correct?
A
Yes.
Q
In general, what type of information was a PPP applicant
required to provide?
A
The information that was required was a 2483 application, the
PPP application is what it was called. You know, identification
verification. Payroll documentation, whether that be a 941 or
like an ADP statement, or some sort of payroll document.
Q
Who prepared -- you said that 2483, is that the form you
gave?
A
Yep. Yep.
Q
Whose form is a 2483?
A
That was the SBA PPP form that was created by Treasury and
the SBA.
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ADAM SEERY - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 356
Q
So who created the guidelines for the PPP program?
A
The Treasury Department in conjunction with the SBA.
Q
So again, you indicated that employee and payroll information
needed to be provided; is that correct?
A
Yes.
Q
And supporting documents. I think you described two
different types of supporting documentation. What were those?
A
The 941 form, which is a tax document, that basically showed
your employee, the employee payroll you had. Or the actual
historical payroll documents from a third-party payroll provider,
if you used one.
Q
What's an example of a third-party payroll provider?
A
Like an ADP, or someone of that nature.
Q
And who made the determination whether or not a loan, a PPP
loan, qualified?
A
Well, it was a borrower-certified program. So they would
fill out all the information. And then it was up to us to just
make sure that those mirrored one another, ie: the application
employee's loan amount mirrored what showed up on their 941 or
payroll documentation.
Q
And if the two matched, was the loan typically granted?
A
Yes.
Q
And how was the money transferred, then? How was the money
funded by Harvest?
A
We sent out ACH transfers.
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ADAM SEERY - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 357
Q
So for the PPP applications that Harvest received, what was
important on those applications?
A
Well, all of the certifications were important, along with
the -- you know, obviously the amount of employees and the
payroll information, the loan amount they were requesting.
Q
Why was the number of employees, why was that important to be
accurate?
A
Because their loan amount was determined by the amount of
employees that they had.
Q
What about the payroll amount, why was that important to be
accurate?
A
The payroll amount basically validated how many employees
that they had.
Q
Did the payroll amount tie to the amount of the PPP loan that
was eventually granted?
A
Yes.
Q
What was the relationship between the monthly payroll and the
amount of the PPP loan?
A
So the way the payment was calculated was, you took the
full-time employees you had, their wages up to $100,000, you, on
an annualized basis, divided that by twelve and multiplied by
two-and-a-half times. And that was your overall loan amount that
a borrower could qualify for.
Q
Was it important that all questions on the form be answered
truthfully and accurately?
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ADAM SEERY - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 358
A
Absolutely.
Q
And what about the supporting documentation? Was it
important to Harvest that supporting documentation also be
truthful and accurate?
A
Yes.
Q
Why?
A
Because that's all we had to rely on in this program.
MR. WERNER: Thank you, Mr. Seery. No further
questions.
THE WITNESS: Thank you.
CROSS-EXAMINATION
BY MR. NANCE:
Q
Good afternoon, Mr. Seery.
A
Good afternoon.
Q
You are the CEO of Harvest?
A
Chief operating officer of Harvest.
Q
Chief operating officer?
A
Yep.
Q
Excuse me.
A
Also a principal.
Q
How long have you been with Harvest?
A
Six years.
Q
And prior to the pandemic, what did Harvest primarily do?
A
Commercial real estate SBA loans.
Q
With the onset of the pandemic, and the PPP program, I think
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ADAM SEERY - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 359
I heard you say that you shut down other loan programs to focus
on PPP; is that right?
A
Yes. So we shut down our core business of funding commercial
real estate loans, to focus on PPP, just due to the fact that it
was a high-volume program.
Q
During the year 2020, how many PPP loans would you estimate
Harvest funded?
A
5,200, approximately.
Q
Do you know how many applications you screened?
A
Well over 8,000 or 9,000.
Q
And of those you funded, what would be the -- I'm just
looking for an estimate here -- gross amount of PPP loan funds
funded?
A
What was the question?
Q
During the year 2020, what was the aggregate amount of the
PPP loans that Harvest funded?
A
Dollar-wise?
Q
Yes.
A
1.2 billion.
Q
What was the Congressionally mandated funding fee that you
would have earned on that?
A
Well, there was three different levels of the fee. It was
5 percent up to $350,000, three percent from $350,000 to
$2 million. And then it was 1 percent from $2 million to
$10 million.
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ADAM SEERY - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 360
Q
What were the bulk of these 5,200 loans?
A
Average loan size was around $200,000.
Q
So 5 percent would have been the typical fee you would have
made?
A
Five percent, correct.
Q
Yeah.
I'm sure you have done the numbers at some point. Do you
know what you earned in fees, Harvest earned in fees in total?
A
In 2020? I don't. I don't recall.
Q
Well, I mean, I could do some very quick math here.
$1.2 billion times 4 percent, which is less than 5, would be, I
don't know, have I got this right, $50 million, $60 million?
A
Somewhere in there. It sounds about right.
Q
Would you characterize this period as a bit of a funding
frenzy among -- and let me clarify it a little bit -- funding
frenzy among lenders like Harvest?
A
I wouldn't say "frenzy." What I would say is we had a short
period of time to help a lot of customers, just due to the amount
of funding and the amount of demand for PPP loans.
Q
So a high demand, a relatively short period in which to meet
it, and at least, in theory, a finite amount of ultimate money to
be accessed?
A
Yes. I mean, getting back to my point before, we screened
8,000 or 9,000 loans, but ultimately couldn't make it to the
finish line on a majority of those, because we just didn't have
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ADAM SEERY - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 361
the time.
Q
Didn't have the time to do it?
A
Didn't have the time, before funding ran out.
Q
Well, there was money, I believe, at the end of the initial
funding period in August 2020, there was still money to be had.
Do you know differently?
A
I believe that's correct.
Q
So was it the program ran out of money, or the time ran out?
A
The program time ran out. The first funding, if you recall,
the initial batch went pretty quickly. And they had to go back
to Congress to get an additional funding requirement. And that
was the one that lasted beyond. But by that time, a lot of the
loans that we had screened had gotten done elsewhere.
Q
The applicants came to you. They're probably applying
elsewhere as well. And the other place gets approved and funded
before you could get to it?
A
Correct.
Q
Sounds like it's pretty competitive. I have used the word
"frenzy," but it's a competitive market to be sure?
A
Well, again, not competitive. Borrowers were just searching
for the easiest path of resistance to get their money, right?
Because if they couldn't get it from B of A, and they went to
Harvest and we had a backlog, then they would just go to the next
person until they could get the loan, worrying that they were not
going to have access to the funds before the program ran out.
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NISSEN LIDDIARD - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 362
Q
So you funded 5,200. But there was as many as 9,000 that
applied. What's the difference there, 40 -- 3,800. Of those
3,800, how many were rejected by Harvest, as opposed to your just
not being able to get to them to service them, to fund them?
A
I don't have that information.
Q
Do you have any estimate of how many would have -- how many
loan applicants were just turned down, just --
A
Again, don't recall.
Q
Okay. Thank you.
MR. WERNER: Nothing further, Your Honor. Thank you.
THE COURT: All right. You may step down.
THE WITNESS: Thank you.
THE COURT: Put your mask back on, please.
MS. CONNELLY: And the government calls Nissen Liddiard.
NISSEN LIDDIARD,
having been sworn under oath, testified as follows:
DIRECT EXAMINATION
BY MS. CONNELLY:
Q
Good afternoon. Can you please state your name and spell
your last name for the record.
A
Yes. Nissen Liddiard. L-I-D-D-I-A-R-D.
Q
And where do you currently live, city and state?
A
Stansbury Park, Utah.
Q
Where do you work?
A
Celtic Bank.
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NISSEN LIDDIARD - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 363
Q
What is Celtic Bank?
A
It's a Utah-chartered industrial bank.
Q
And is Celtic Bank FDIC insured?
A
Yes.
Q
And what is your job at Celtic Bank?
A
I'm the senior vice president, compliance officer.
Q
Can you just tell us what that means? What is a compliance
officer?
A
I oversee compliance with laws and regulations throughout our
entire bank.
Q
Can you just describe, what are your roles and
responsibilities on a day-to-day basis?
A
Sure. I work heavily in regulation, including bank secrecy
act, anti-money laundering. I oversee our fraud department.
Q
And how long have you worked at Celtic Bank?
A
Four years.
Q
Have you had any other roles in your time there?
A
I have been in compliance the entire time. I have had other
positions within compliance.
Q
And as part of that role, are you familiar with the customers
of Celtic Bank?
A
Yes.
Q
Who are they, primarily?
A
Primarily small business owners.
Q
And what types of services does Celtic Bank offer small
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NISSEN LIDDIARD - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 364
businesses?
A
We offer loans, primarily, to small businesses.
Q
And are you familiar with the term "SBA lender" or
SBA-approved lender"?
A
Yes.
Q
Is Celtic Bank an SBA-approved lender?
A
Yes.
Q
Are you familiar with the Paycheck Protection Program?
A
Yes.
Q
What was your understanding of the purpose of that program?
A
In March 2020 Congress enacted the CARES Act, which allowed
for the Paycheck Protection Program, to enable relief to small
businesses through SBA-approved lenders.
Q
And what role, if any, did Celtic play with respect to the
PPP?
A
We extended Paycheck Protection Program loans.
Q
Was Celtic Bank an approved lender in the PPP, from the
beginning of the program?
A
Yes.
Q
If a Celtic Bank customer was interested in applying for a
PPP loan, how would that customer apply through Celtic Bank?
A
They would fill out an online application through
celticbank.com.
Q
And did you need to be an existing Celtic Bank customer to
apply for a loan?
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NISSEN LIDDIARD - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 365
A
No.
Q
And after the customer went to celticbank.com, what would
happen next?
A
They would provide all the information required in the
application, which was substantially the same as the SBA's form.
They also had to provide identity verification information and
payroll documents, and other supporting documentation for the
loan.
Q
And who determined what type of information Celtic Bank
requested from the borrowers?
A
We worked off the SBA's interim final rule that implemented
the PPP.
Q
And can you tell us, where is Celtic Bank's servers located?
A
Salt Lake City, Utah.
Q
Is that where a PPP application would be received?
A
Yes.
Q
And is that where a PPP loan note would go?
A
Yes.
Q
Did Celtic Bank have any servers in Washington State?
A
No.
Q
You mentioned that Celtic Bank had its own website that
borrowers could fill in their information on. Was the
information that Celtic Bank requested -- strike that. Did
Celtic Bank ask the same questions that were on the SBA form?
A
Yes. Among other questions.
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NISSEN LIDDIARD - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 366
Q
And was it important to Celtic Bank that applicants provided
truthful and accurate information in their responses?
A
Yes.
Q
And why was that?
A
The lenders were allowed to rely on the borrower's
certifications made in the application to extend the loan.
Q
Was there something in particular about the circumstances of
the PPP that made the SBA establish that rule?
A
Yes. The SBA, along with the U.S. Government, were trying to
get funds out quickly, due to the pandemic and the need for
relief.
Q
And so among the questions that were asked, what sorts of
questions would be asked?
A
The borrower was to tell us how many employees they had, how
much payroll they had, in a given year, an average monthly
payroll. They were also required to certify to certain things,
such as, you know, criminal history, their loan history with the
U.S. Government, with the SBA.
Q
And so you mentioned payroll. Did Celtic Bank expect
truthful answers to the question about monthly payroll?
A
Yes.
Q
And why was that important?
A
The monthly payroll amount determined the max loan that they
were eligible for.
Q
And you also mentioned asking about the number of employees.
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NISSEN LIDDIARD - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 367
Did Celtic Bank expect truthful answers to the question about
number of employees?
A
Yes.
Q
Why was that?
A
The loan amount was capped based on annual salary, per
employee, at $100,000. So if the amount of employees was wrong
or inflated, then the loan amount could be inflated, and indicate
that they were eligible for an amount that they were actually
not.
Q
And what sort of supporting documentation did Celtic Bank
require for these PPP loans?
A
Generally we required payroll tax forms, so IRS forms, 941,
940s, W-3s, W-2s, Schedule Cs, to support the loan amount.
Q
And did Celtic Bank expect that the supporting tax forms that
were submitted with these loan applications were accurate and
truthful?
A
Yes.
Q
And why was that important?
A
The loan amount was supported by the tax forms that were
provided, or the other forms that were provided. And if they
were not accurate, then the loan amount could have been inflated
and the borrower would not be eligible for the amount they were
requesting.
Q
So what did Celtic Bank look for on a tax form to corroborate
the application?
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NISSEN LIDDIARD - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 368
A
We looked at wages and then the number of employees. And
depending on how -- what period the tax form covered, so we would
look at, you know, multiple tax forms, or one, depending on the
period. Usually for a year.
Q
And would it matter -- or, did Celtic Bank expect that
applicants answered all of the questions that were found on the
form truthfully?
A
Yes.
Q
And why did that matter?
A
Because the interim final rule allowed us to rely on the
borrower's certifications in the application in order to extend
the loan.
Q
And would Celtic Bank have funded a PPP loan if it learned
that a business lied about its payroll numbers, its employees, or
probation status?
A
No.
Q
Would Celtic Bank fund a PPP loan if it learned that a
business had provided fake tax forms --
A
No.
Q
-- as part of its application.
Sorry, go ahead.
A
No. Will you rephrase? Sorry.
Q
Yes. Would Celtic Bank have funded a PPP loan if it learned
that a business had provided fake tax forms as supporting
documentation?
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NISSEN LIDDIARD - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 369
A
No.
Q
What steps, if any, would Celtic Bank have taken if they
learned that a PPP -- or that a business made false statements or
provided fake tax forms and had actually been approved for a
loan?
A
We would attempt to recover the funds by contacting the
receiving financial institution and asking them to provide the
funds back to us from the borrower's account. And we would also
report the same to law enforcement.
MR. CONNELLY: Thank you. Nothing further.
THE COURT: All right.
CROSS-EXAMINATION
BY MR. NANCE:
Q
Good afternoon, is it Ms. Liddiard?
A
Liddiard, yes.
Q
Is that right?
And, again, your title at Celtic Bank is?
A
SBP compliance officer.
Q
Okay. How large is Celtic Bank?
A
In terms of dollars?
Q
Yeah.
A
Right now we have assets of about $2 billion.
Q
When you say "assets of," does that include money that's
loaned out?
A
Assets are the loans that are currently on the books.
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NISSEN LIDDIARD - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 370
Q
So you have got $2 billion out on loan now?
A
Yes.
Q
That you hope to get back, right?
A
Correct.
Q
In your bank, how many -- you are in Utah?
A
Yes.
Q
And do you have -- are you outside the state at all?
A
We have very few employees that are outside the state of
Utah.
Q
Do you have a marketing department?
A
Yes.
Q
I mean, they market the banks services, but do they market
loans?
A
Yes.
Q
Loan origination would be the name for that?
A
Yes.
Q
Of that $2 billion that is loaned out, that's outstanding,
how much of that would be PPP loans?
A
Currently we have about $1 billion extended.
Q
Okay. So about half of the bank's total business is PPP
loans?
A
As of today, yes.
Q
Was it more this time a year ago, or less?
A
More.
Q
More.
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NISSEN LIDDIARD - Cross (Nance)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 371
How many loan, PPP loans, comprise that $1 billion?
A
I wouldn't be able to say. I don't know as of today.
Q
Well, do you know the average size of the PPP loans that
Celtic extended?
A
We -- yes. The average size was around $30,000.
Q
So smaller loans?
A
Yes.
Q
Yeah.
So I believe the -- isn't the lending fee structure 5 percent
on loans, on smaller loans?
A
I can't speak to that.
Q
You don't know?
A
I wasn't a part of the lending fee.
Q
You don't know what the bank made through lending --
A
I do not.
Q
-- PPP loans?
THE COURT: One at a time, please.
MR. NANCE: Sorry.
Q
You testified about the amount of the payroll of a PPP
borrower being in direct relation to the amount of money that
could be loaned through the program.
A
Yes.
Q
Right?
The larger the payroll, the more that the applicant becomes
qualified for?
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 372
A
Correct.
MR. NANCE: That's all I have. Thank you.
MS. CONNELLY: Nothing, Your Honor.
THE COURT: You may step down. Put your mask back on,
please.
MR. WERNER: The government calls David Haagsma.
DAVE HAAGSMA,
having been sworn under oath, testified as follows:
THE COURT: Take your mask off, please.
THE WITNESS: Thank you.
DIRECT EXAMINATION
BY MR. WERNER:
Q
Good afternoon.
A
Good afternoon.
Q
Please state your name and spell your last name?
A
Dave Haagsma. Last name is H-A-A-G-S-M-A.
Q
Mr. Haagsma, what city and state do you live in?
A
I live in Grand Rapids, Michigan.
Q
What do you do for work?
A
I work in commercial banking at Huntington Bank.
Q
And what is your current position at Huntington Bank?
A
I'm a portfolio manager, team lead.
Q
And where did you work last year, in 2020?
A
TCF Bank.
Q
What is the relationship between TCF Bank and Huntington
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 373
Bank?
A
Sure.
Huntington acquired TCF Bank, and that transaction closed
this year.
Q
And so what was your position at TCF Bank in 2020?
A
In 2020, I was the director of credit support.
Q
And prior to being the director of credit support, did you
have any previous positions with TCF Bank?
A
I did, yep.
Q
What were those positions?
A
I was a relationship manager in commercial lending.
Q
How long did you work in commercial lending and as a
relationship manager in your last position at TCF Bank? How long
did you work for TCF Bank?
A
I worked for TCF Bank for technically twelve years, but the
bank changed names a couple of times because of mergers and
acquisitions.
Q
What is TCF Bank? I'm sorry. What was TCF Bank?
A
Sure.
A regional bank, primarily located in Michigan, Ohio,
Minnesota, doing commercial lending and also traditional consumer
retail.
Q
In 2020, were the deposits in TCF Bank federally insured?
A
They were.
Q
And are you familiar with the term "SBA-approved lender"?
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 374
A
I am, yes.
Q
And in 2020, was TCF Bank an SBA-approved lender?
A
Yes, it was.
Q
And, again, what was your position at TCF Bank in 2020?
A
I was a director of credit support.
Q
What were your duties as director of credit support at TCF
Bank in 2020?
A
Yep.
My job was to see the -- oversee the underwriting function
and the documentation function.
Q
For what types of loans?
A
For commercial loans.
Q
And, generally, was there a size of those loans?
A
They ranged from as little as $50,000 up to $20 million.
Q
And did TCF Bank participate in the PPP, or Paycheck
Protection Program?
A
We did.
Q
And what was your role in connection with TCF Bank's
participation in the PPP program?
A
Yep.
I led a team that looked at the applications that came in and
looked to see -- test eligibility. And then the second part was
looking at the loan amount that was applied for and making sure
that the documentation that was submitted supported that loan
amount.
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 375
Q
And that was you and your team that did that job for TCF
Bank?
A
It was.
Q
And was TCF Bank involved in the Paycheck Protection Program
at the very beginning, around April 2020?
A
We were.
Q
How would an applicant for PPP apply with TCF Bank?
A
We had an online application. So they would go to the TCF
website and apply directly through the website -- and we had it
set up so it mimicked the SBA application -- and fill out the
application, both the loan amount information and then the
certifications that an applicant needed to make.
Q
When an applicant completed a PPP application, where did TCF
Bank receive that information?
A
We received that in through our website portal. And we had
people working on those loans in Minnesota, Michigan, and Ohio.
Q
So if an application was submitted from Washington State,
that application would be transmitted in interstate wire
communication to either Minnesota, Michigan or Ohio?
A
Correct.
Q
Does TCF Bank -- Sorry. What was the purpose of the PPP, to
your understanding?
A
The PPP program was set up to help small businesses that were
impacted by COVID, whether they had to shut down or did not have
the same revenue because customers could not visit the business,
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 376
or were shut down themselves. So PPP was there to provide funds
to help employers continue to pay their employees, and then also
pay utility bills and rent.
Q
And who created the form application for PPP?
A
The SBA.
Q
And is that the form that TCF Bank used -- required its PPP
applicants to complete?
A
Yes.
Q
What information generally was required to be submitted on
that form?
A
There were really two parts. The first part was establishing
the loan amount. So it would ask for monthly payroll, number of
employees. And then the second part was certification, various
questions to test eligibility.
Q
So there are eligibility questions and certifications, as
well as employees and payroll?
A
Correct.
Q
And what types of supporting information did TCF Bank
require, to go along with its PPP applications?
A
Sure. It depended on the applicant type. So, for instance,
a business would submit payroll documentation. In that, there
were several acceptable documents that could be provided to
support the payroll. If it was a sole proprietor, so an
individual filing their business taxes on their personal return,
then we would require a Schedule C from their personal return.
Case 2:20-cr-00174-JCC Document 131 Filed 11/22/21 Page 205 of 211
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 377
Q
Who made the determination whether or not to fund a PPP
application that was submitted to TCF Bank?
A
The bank did.
Q
And, again, what guidelines did the bank use to make that
determination?
A
We followed the SBA rules.
THE COURT: Counsel, you can generally assume if your
question begins with "again," it's not needed.
MR. WERNER: Yes, Your Honor.
Q
What was TCF's relationship with Chemical Bank?
A
Chemical Bank and TCF Bank merged in 2019. And that merger
was concluded in 2020, when the systems were converted.
Q
And what was Chemical -- TCF Bank and Chemical Bank's
respective roles in funding PPP loans?
A
So both banks took in applications. We used the Chemical
Bank service department to fund the loans. And that service
department was located in Michigan.
Q
So an application could be received at TCF Bank and funded
through Chemical Bank?
A
Correct.
Q
That's the same entity?
A
Yeah. Chemical Bank, a division of TCF.
Q
Was it important to TCF Bank that the PPP applicants provide
truthful and accurate information?
A
Yes, it was.
Case 2:20-cr-00174-JCC Document 131 Filed 11/22/21 Page 206 of 211
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 378
Q
Why?
A
That was the only thing we had to rely on, was the customer's
words, through those certifications. And then the supporting
documentation that they provided.
Q
And if an applicant misrepresented employee -- number of
employees, payroll amounts, or made false tax filings, would that
matter to TCF Bank?
A
Yes, it would. All of those items could affect the loan
amount or eligibility.
MR. WERNER: No further questions. Thank you.
THE COURT: Mr. Nance?
CROSS-EXAMINATION
BY DEFENSE COUNSEL:
Q
Good afternoon, Mr. Haagsma.
A
Good afternoon. Haagsma.
Q
Haagsma, excuse me.
I miss your -- you're at TCF Bank now?
A
I'm at Huntington Bank now. Huntington acquired TCF Bank
this year.
Q
I'm sorry. Your present position at Huntington is what?
A
I'm in the commercial banking group. I'm a portfolio
manager, team lead.
Q
Okay. In the first half of 2020, you were at TCF?
A
I was.
Q
You were. Okay.
Case 2:20-cr-00174-JCC Document 131 Filed 11/22/21 Page 207 of 211
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 379
Did TCF have a -- or does it or did it have a marketing
department?
A
Yes, we had a marketing department.
Q
Okay. This included the loan origination?
A
Yes.
Q
Okay. Are loan originators typically paid by commission?
A
Loan originators at TCF Bank were paid a base salary. But
they did have a bonus potential based on the business that they
brought in.
Q
Okay. Getting loans would be considered getting business?
A
Correct.
Q
Right. What -- for the year 2020, what percentage of TCF's
lending business was PPP lending as opposed to other types of
commercial lending?
A
Sure. I don't know what the percentage was, but it was a
large percentage. Essentially, most conventional lending ceased
for the second and third quarter of 2020.
Q
Do you have a -- can you estimate the number of PPP loans
that TCF funded last year, in 2020?
A
Yes. 2020 round one, it was roughly 16,000.
Q
And I didn't ask you. How large of a bank is TCF?
A
Yeah. TCF, pre-Huntington acquisition, was about $60
billion.
Q
I think we're learning, when that is stated, that's the
amount of outstanding loans?
Case 2:20-cr-00174-JCC Document 131 Filed 11/22/21 Page 208 of 211
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 380
A
That's the asset size. So loans make up the majority of the
assets, yes.
Q
And you're saying that about 16,000 PPP loans were funded
last year in 2020?
A
Correct.
Q
Do you have an estimate of the aggregate loan value of those
PPP loans?
A
I believe it was right around $2 billion.
Q
And we could do math, but what was the typical size of the
PPP loan?
A
I can't do math that quickly in my head. But just going off
of the applications and anecdotally, I would say most of the
loans were -- a majority were under $100,000.
Q
And TCF screened the loan applications and funded them
themselves and serviced them afterwards, is that so?
A
Correct.
Q
And then Huntington took those over when the merger occurred.
And they are doing that now?
A
They did, those that were not already forgiven.
Q
What role did TCF have in the forgiveness process?
A
A similar role as taking in the original application. So we
took in the forgiveness applications, reviewed those, based on
the requirements of the program, which is based on the size of
the loan, and then submitted those forgiveness applications to
the SBA.
Case 2:20-cr-00174-JCC Document 131 Filed 11/22/21 Page 209 of 211
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DAVE HAAGSMA - Direct (Werner)
Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 381
Q
Okay. When they're forgiven, the lender -- or, I'm sorry,
the borrower gets forgiven and you, the lender, gets reimbursed,
right?
A
Yes. Yep. So the SBA pays off the bank loan, since the bank
funded the PPP.
Q
Okay. And so there's three ways that such a loan could go.
It could go out to the term of the loan, and be paid. There
could be a default, in which case the SBA would guarantee it and
pay you, pay TCF. Or it could be forgiven, in which case the
borrower is off the hook, and you, the lender, are reimbursed for
what you loaned out?
A
Correct. If there's a default, there's a guarantee. But the
SBA, and from our experience being a preferred lender, the SBA
could come back and look at our due diligence process. And if we
didn't follow the rules, that could jeopardize the guarantee.
Q
Okay. That's never happened, though, right? It hasn't
happened yet?
A
On PPP?
Q
Yes.
A
Not that I'm aware of.
Q
Okay. Thank you.
THE COURT: Redirect?
MR. WERNER: No. Thank you, Your Honor.
THE COURT: All right. You may step down. Put your
mask back on.
Case 2:20-cr-00174-JCC Document 131 Filed 11/22/21 Page 210 of 211
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Nickoline Drury, RMR, CRR - Federal Court Reporter - (206)370-8508 - 700 Stewart Street, Suite 17205, Seattle, WA 98101
November 16, 2021 - 382
Ladies and gentlemen, we will recess until tomorrow morning
at 9 a.m. Please remember the Court's admonitions not to discuss
the case with anyone, not even amongst yourselves, not with
anybody else. Don't let anybody talk to you about the case,
don't do any research or investigation about the case, and don't
read, listen, or watch anything about the case.
I will see you tomorrow morning at 9:00. We will be in
recess.
THE CLERK: Please rise. Court is in recess.
(Adjourned.)
C E R T I F I C A T E
I, Nickoline M. Drury, RMR, CRR, Court Reporter for the
United States District Court in the Western District of
Washington at Seattle, do certify that the foregoing is a correct
transcript, to the best of my ability, from the record of
proceedings in the above-entitled matter.
/s/ Nickoline Drury
Nickoline Drury
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