DANIEL E. SCHNEIDER, FINANCIAL ACQUISITION SOVEREIGN TRUST, and GLOBAL AMERICAN PROSPERITY FOUNDATION, Defendants, and GORDON A. DUNLOP, FIRST CONSORTIUM INTERNATIONAL, NORMAN FADEL and KEN KARLSON, Relief Defendants. No. 98-CV-14-D ORDER GRANTING PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION, DENYING RELIEF DEFENDANT KARLSON AND RELIEF DEFENDANT FADEL'S OBJECTIONS BASED UPON PERSONAL JURISDICTION, AND GRANTING PLAINTIFF'S MOTION TO MODIFY THE ASSET FREEZE AS TO GENESIS INTERNATIONAL This matter comes before the Court on Plaintiff's Motion for Preliminary Injunction, Relief Defendant Karlson's Motion to Dismiss, Relief Defendant Fadel's objection to personal jurisdiction, and Plaintiff's Motion to Modify the Asset Freeze as to Genesis International. The Court, having carefully reviewed the briefs and materials submitted in support of the Motions and the opposition thereto, and being otherwise fully advised in the premises, FINDS and ORDERS as follows: Background Plaintiff filed its Complaint on January 20, 1998, asserting that the named Defendants have perpetrated securities fraud in violation of Rule 10(b) of the Securities Exchange Act of 1934, Section 17(a) of the Securities Act of 1933, and Rule 10b-5. This Court previously entered a Temporary Restraining Order pursuant to F.R.C.P. 65, Section 20(b) of the 1933 Act, and Section 21(d) of the 1934 ,act. Defendant Schneider procured, and otherwise channeled funds from a variety of entities in conjunction with several multilevel marketing arrangements, but primarily through two investment schemes: a prime bank trading program and the sale of railroad bonds. Defendant Schneider channeled these funds through himself and the other named defendants to a variety of individuals and entities in an array of transactions which are more fully detailed in his deposition. See Government's Exhibit 1 and the Account Summaries contained in Government's Exhibits 3 & 4. Defendant Schneider apparently received and dispersed commissions to others from the amounts that were channeled

through his bank accounts and other investment arrangements. Defendant Schneider maintains a bank account in Worland, Wyoming under the name of Global American Prosperity Foundation (GAPF). The record reflects that Defendant Schneider has also used Defendant Financial Acquisition Sovereign Trust in conjunction with the prime bank trading program, and it is undisputed that a Genesis International bank account contains about $25,000 to $30,000 in funds transferred from the GAPF account. The GAPF account records and the deposition testimony demonstrate that: a) Defendant Schneider investors and other entities trading program and the sale bonds (C&S bonds) which were received substantial sums from in conjunction with the prime bank of Chicago and Saginaw Railroad deposited in the GAPF account;

b) these funds included money deposited from Randall Smith in conjunction with his purchase of C&S bonds from Defendant Schneider, and money deposited from Michael Belcher in conjunction with his (and his associates) investment in the prime bank trading program; c) investor funds were commingled with a myriad of other funds in the GAPF account; d) Defendant Schneider paid funds out of this account for his personal use, including expenses, purchasing real property, and various loans and other investments including Genesis International; and e) Defendant Schneider paid funds out of this account to Defendant First Consortium International, which Defendant Dunlop is associated with, in conjunction with the prime bank trading program. Defendant Schneider testified that he sold C&S bonds to various individuals, including Winn Parker (individually, but who is also associated with the West Texas Development Trust, and also invested in them himself. See Schneider deposition at pp. 65-72. The purchase price was approximately $40,000 per bond. According to Defendant Schneider, Relief Defendant Fadel was associated with the sale of C&S bonds, including setting the price of the bonds, paying Mr. Schneider's commission, and possibly identifying sources to buy the bonds from (i.e. Relief Defendant Karlson). Id. and pp.74, 81-84, 94. Defendant Schneider transferred approximately $482,000 to Relief Defendant Fadel in June of 1997. See Government's Exhibit 4 and Relief Defendants Fadel and Karlson's responses to Plaintiff's Request for Admissions arid Responses to Interrogatories. Relief Defendant Fadel transferred $384,000 of this $482,000 to Relief Defendant Karlson, who owned some C&S bonds, having allegedly purchased them for about $1,500 per bond. Relief Defendant Fadel kept the difference, transferring $21,000 of the remaining amount to other entities, and retaining the balance as his "referral fee" (most of which has been dispersed). Relief Defendant Karlson invested $350,000 of his $384,000 and

dispersed the remaining amount in loans to other entities and for personal expenses. Only nominal amounts of these funds remain. The West Texas Development Trust has been identified as a purchaser of C&S bonds from Relief Defendants Fadel and Karlson. Relief Defendants Fadel and Karlson acknowledge selling C&S bonds to the Trust, but deny selling bonds to Defendant Schneider, despite having admitted to receiving about $482,000 directly from Defendant Schneider and retaining nearly all of that amount as referral fees and sale proceeds. According to Winn Parker (on behalf of the Trust), no representations were made by Karlson or Fadel concerning the C&S bonds, and no purchasers have expressed any concern regarding the investment or requested a refund of their money. Randall Smith testified in his deposition that Defendant Schneider made several representations to him regarding the C&S bonds. See Government's Exhibit 2 at pp. 9-30. Defendant Schneider represented that the bonds were, in aggregate, worth between $105 million and $110 million. See also Schneider deposition at p. 75. Defendant Schneider contends this valuation was based on a report he received from a Mr. Dobbins. Mr. Smith's understanding of the arrangement, based on Defendant Schneider's representations, was that the bonds had accrued (and were accruing) about 7% interest per year since their issuance in 1872. As a result, the bonds could be cashed at a bank for a discounted price of $2 - $5 million per bond (2 - 5% of the bond's value). Defendant Schneider represented that the bonds were backed by gold bullion and/or coins. See also Schneider deposition at p. 76. Based on the foregoing representations, Mr. Smith purchased seven bonds from Defendant Schneider at $40,000 per bond. Mr. Smith wired the purchase money directly to the GAPF bank account. Defendant Schneider also represented to Mr. Smith that his bonds were being held for safekeeping in San Francisco and were being pooled somehow in the West Texas Development Trust, possibly involving some contract arrangement with the Trust, to be cashed in. Smith deposition at pp. 23-29. According to Mr. Smith, Mr., Parker, on behalf of the Trust, called Mr. Smith and confirmed this information and that further information on the bonds was being collated so that the bonds could be cashed in at a bank. Mr. Smith testified that Mr. Parker obtained his name and number from Defendant Schneider. At the time of his deposition, Mr. Smith had not asked to receive any of his money back. Defendant Schneider also apparently represented to some investors that he was working with Relief Defendant Fadel to "put [the C&S bonds] into a program..." arrangement through a company, government or trust arrangement. Schneider deposition at pp. 808l, 93-99. According to Defendant Schneider, people associated with Relief Defendant Fadel, which Mr. Fadel had directed that Defendant Schneider call, represented to him that these programs had been successful in the past. Schneider deposition at p. 82. Despite the purported (and convenient) "satisfaction" of purchasers such as the West Texas Development Trust, Relief

Defendants Karlson and Fadel's activities in conjunction with the West Texas Development Trust and the C&S bonds certainly do not pass this Court's "smell" test based on the circumstantial evidence and testimony contained in the record. In addition to the above testimony, Defendant Schneider has implicated Mr. Parker in placing the C&S bonds in some form of trading program. Schneider deposition at 88-89. Richard Michael Gaddy, presumably Mike Gaddy (a trustee of the Trust), also wired funds directly to the GAPF account. Michael Belcher testified in his deposition, and at the preliminary injunction hearing, that Defendant Schneider made several representations to him regarding the prime bank trading program. See Defendant's Exhibit 1. Based on these representations, Mr. Belcher understood that he would be investing in high yield medium term notes or bonds associated with overseas banks. (Several exhibits contained in the record describe this arrangement in more detail) Mr. Belcher would receive a 15 - 50% yield per month, depending on the frequency and amount of the purported trades. Defendant Schneider represented that these "programs" had been successful in the past, and that there was "minimal risk" associated with such programs. In addition, the notes, etc. were backed by a 60 day performance bond, which meant that the principal amount invested was protected--if there was no trade within sixty days, the principal would be returned, with interest. Based on Defendant Schneider's representations, Mr. Belcher (and others associated with him) invested $195,000 (which was wired to the GAPF account) and at one point received $37,500 in "return" on the investment. Mr. Belcher understood that the money deposited with GAPF would be sent out of the country to Canada. London, and other locations. Defendant Schneider admits that money from the GAPF account was transferred to various entities outside the country. He further represented to investors that there could be delays in receiving money back, as trading depended on the frequency of trades and how many trades were completed. Defendant Schneider represented to Mr. Belcher that the investments were "doing good," that he had received no complaints, and that he would get Mr. Belcher's principal back for him. The Court's findings as previously stated on the record in conjunction with Plaintiff's Motion for Temporary Restraining Order, and Plaintiff's Motion for Preliminary Injunction, as well as all exhibits received or appended to the respective Motions, are incorporated herein by reference. Standard for Preliminary Injunction Both Securities Acts provide that the SEC may, upon a proper showing, seek to enjoin any person who is engaged or about to engage in any acts or practices which constitute or will constitute a violation of the Acts or any rule or regulation prescribed pursuant thereto. See 15 U.S.C. �� 77t(b) and 78(u). A "proper showing" requires a prima facie case of previous violations, and a reasonable and substantial likelihood that the

defendants, if not enjoined, will violate securities laws in the future. See S.E.C. v. Unifund Sal, 920 F.2d 1028 (2nd Cir. 1990); S.E.C. v, Pros Intern., Inc., 994 F.2d 767 (10th Cir. 1993). Determination of the likelihood of future violations requires analysis of several factors, such as the seriousness of the violation, the degree of scienter, whether defendant's occupation will present opportunities for future violations and whether defendant has recognized his conduct and gives sincere assurances against future violations. Pros Intern, Inc., 994 F.2d at 769. Although no single factor is determinative, the degree of scienter bears heavily on the decision. Id. A. Prima Facie Case To establish liability for the equitable relief sought, a plaintiff must show the following under � 10(b) and Rule 10b-5: 1) that the defendant made an untrue statement of material fact, or failed to state a material fact; 2) that the conduct occurred in connection with the purchase or sale of a security; 3) that the defendant made the statement or omission with scienter; and 4) that the investor relied on the misrepresentation. Anixter v. Home-Stake Production, 77 F.3d 1215, 1225 (10th Cir 1996). Recklessness satisfies the scienter requirement under � 10(b). Recklessness is defined as conduct that is an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Anixter, 77 F.3d at 1232. Scienter is not required under Section 17 of the 1933 Act. Based on the record before the Court, Defendant Schneider made untrue statements of material fact, and/or failed to state material facts in conjunction with the sale of C&S bonds and the prime bank trading program. It is apparently undisputed that both the bonds and the trading program are "securities." Defendant Schneider made the representations, as previously described, to investors despite (or in spite of) the following: a) The record reflects that the C&S bonds have no value, other than that of a collectible. The C&S bonds were discharged in an 1876 bankruptcy proceeding (Richardson v, Green, 130 U.S. 104 (1889)), which has also been confirmed by the CSX railroad. In fact, these bonds could be purchased from a museum in Michigan for about $29.95 each. Defendant Schneider contends that he based the bonds' valuation on a report from Mr. Dobbins, but did no further investigation into the basis of the report's valuation or to independently verify the accuracy of the valuation. Schneider deposition at pp. 74-76. Defendant Schneider's representations regarding the bonds' value were based solely on this report. b) The record reflects that prime bank trading schemes are fictitious according to readily available information. Therefore, based on the evidence contained in the record, Defendant Schneider's material representations to investors were

untrue and/or Defendant Schneider failed to state material facts to the investors in making these representations. Defendant Schneider was, at the very minimum' reckless in making representations to investors. Schneider deposition at pp. 31-34, 39-47, 75-78. He failed to conduct meaningful independent research to verify the material representations he made to investors despite readily available information to the contrary, and proceeded to recklessly cultivate investors based on others' alleged unsubstantiated representations to him, and his false representations to investors. Information as to the value of and/or return to be received on an investment, as well as the risks of the investment, is information which would clearly mislead investors. The gross disparity between the purchase price of the bonds and the valuation which Defendant Schneider represented to other investors evidences Defendant Schneider's recklessness, as does the purported offer to place the bonds into some kind of "program." If the bonds were truly worth what Defendant Schneider represented them to be, why would others even sell them to him, and why would he sell them for 2% of their alleged value to investors? The standards of ordinary care would certainly dictate some form of independent verification, given this gross disparity. Further, Defendant Schneider procured investors for the prime bank trading program, promising an exorbitant rate of return despite not knowing how it worked, who performed the "trades," and failing to otherwise conduct research to verify the representations he made. Defendant Schneider admits to having questions in this regard, but his cohorts refused to provide him further information. Perhaps the $300,000 Defendant Schneider received in referral fees associated with this transaction soothed his "concerns." Mr. Smith and Mr. Belcher testified that they relied on Defendant Schneider's representations in purchasing the C&S bonds and investing in the prime bank trading program. In any event, plaintiff has certainly met its prima facie burden under Section 17 of the 1933 Act. B. Likelihood of Future Violations Defendant Schneider was, at the very least, highly reckless as to both investment schemes. In addition, Defendant Schneider continues to engage in numerous multilevel marketing "businesses," including Genesis International. He testified that most of his contacts associated with the "investments" in this case came from engaging in this type of business. Defendant Schneider, in association with a myriad of other entities and individuals, also haphazardly channeled voluminous investor funds through the GAPF account. Due to the high degree of recklessness exhibited, the state of the record, and the nature of Defendant Schneider's business interests and previous channeling of investor funds, the Court finds that a reasonable and substantial basis exists that the

named defendants, if not enjoined will continue to violate the Securities Acts. C. Relief Defendants Plaintiff has not alleged that the Relief Defendants violated the Securities Acts, but has alleged that the Relief Defendant received investor funds connected with the named Defendants' Securities Acts violations. Relief Defendant Karlson contends that he does not have sufficient contacts with the District of Wyoming for this Court to exercise personal jurisdiction over him, properly serve him, and that venue is improper as a result. Relief Defendant Fadel asserts essentially the same objections. When the personal jurisdiction of a federal court is invoked based upon a federal statute providing for nationwide service of process (a statute providing for service in any district in which the defendant is an inhabitant or may be found), the relevant inquiry is whether that party has had sufficient minimum contacts with the United States. Therefore, specific contacts with the district in which enforcement is sought, the District of Wyoming, are unnecessary. Id, at 417. It is undisputed that these Relief Defendants had sufficient contacts with the United States in conjunction with the transactions involved in this matter. Therefore, the Relief Defendant's respective motions are DENIED. Based on the evidence presented, Relief Defendants Fadel and Karlson have been sufficiently linked with this case to justify the asset freeze and other conditions imposed by this Court pursuant to its equitable powers. Mr. Fadel received funds directly from the GAPF account and/or Defendant Schneider, and transferred most of these funds directly to Mr. Karlson. While this alone may be sufficient, Defendant Schneider's testimony further links Mr. Fadel, and others (including Mr. Karlson), to the transactions at issue and to Defendant Schneider. Mr. Smith's testimony corroborates this. The remaining Relief Defendants have not appeared in this action, and have not otherwise denied that they received funds from the GAPF account in conjunction with the prime bank trading program. The Court suspects that they played a more meaningful role than this. Therefore, all of the relief defendants are properly subjected to the asset freeze and other conditions imposed by this Court. Conclusion Based on the evidence contained in the record, this Court believes that plaintiff has convincingly demonstrated the existence of an elaborate shell game designed to defraud easilyduped investors. The layered relationship between and among the named Defendants and Relief Defendants is likely intended to shield some or all of the investment schemers from being implicated in a criminal conspiracy to defraud investors. At the

very least, Plaintiff has persuaded this Court that there are some cold-blooded, conniving crooks in this misbegotten cast of characters. Until the Court is able to cull the dishonest players from the duped ones, a Preliminary Injunction is amply justified. THEREFORE, it is hereby ORDERED that Plaintiff's Motion for Preliminary Injunction is GRANTED, and the terms of this Court's previous Temporary Restraining Order shall be continued pending trial, or further Order of this Court. It is further ORDERED, that Relief Defendant Karlson's Motion to Dismiss is DENIED. It is further ORDERED that Defendant Fadel's objection based on a lack of personal jurisdiction is similarly DENIED. It is further ORDERED that Plaintiff's Motion to Modify the Asset Freeze as to Genesis International is GRANTED to the extent specified in the Motion. Rather than resorting to continued ex parte contacts with the Court regarding the asset freeze in this case, and pending the accountings to be performed pursuant to this Court's Orders, the parties should first attempt to resolve resulting differences among themselves, and if necessary have their respective attorneys file motions with the Court. DATED this 13th day of February, 1998. /s/ William F. Downes United States District Judge