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In Defense of One's Honor and Life (Tampa edition)
Attorney Greg Schultz argues passionately about the case as though he, not a client, faces life in prison. He does.
By David R. Corder
Associate Editor
Greg Schultz is almost ready for trial. Handwritten notes and yellow highlights dot well-worn legal papers. Ask a question, and the Clearwater attorney quickly retrieves supporting exhibits from a well-organized filing system to bolster his response. He argues with the passion of a man on trial for his life. He is.
Defying conventional wisdom, Schultz dismissed a court-appointed attorney last July and fully expected to defend himself as a co-defendant at trial next month in Tampa federal court against 38 criminal charges of conspiring to sell $18.4 million in unregistered securities to hundreds of investors.
Schultz, 55, acknowledges the risk he is taking. The federal charges carry prison time of around 150 years and millions of dollars in fines. "Yes, I'm concerned," he says of defending himself. "It's there. But I have a fast hand on the facts. Who else could understand what happened unless you were there."
It also doesn't help he can't afford private counsel to defend against the federal indictment issued Dec. 10, 2002. He claimed only $105 in cash and no assets in a financial statement he filed about a month later with the court. His wife pledged the deed on her home as bond collateral.
The charges against him consume his time. Schultz says he only rarely practices law these days, except for some occasional tax work. His wife's salary is his only other subsistence.
Although he didn't request it, Schultz gained more time earlier this month to prepare his defense. U.S. District Judge Elizabeth Kovachevich moved the trial date for Schultz and six co-defendants from February to June. Assistant U.S. attorneys Michael Runyon and Rachelle DesVaux Bedke each cited personal leave needs because of health issues. Bedke is on maternity leave.
However, Schultz doesn't buy Runyon's excuse. He says Runyon is trying to avoid discovery in a related federal civil action Schultz filed in October 2002 - prior to the indictment - against state and federal officials.
"It's a situation where Runyon is trying to avoid being available as a defendant in a case for purposes of answering the normal discovery material," Schultz says. "If we're allowed to proceed with our civil discovery first, we'll have total insight into the state and federal government's whole issuing case.
"It is also my position (Runyon) being sued and coming back with an indictment is a patent conflict of interest," Schultz adds.
In Schultz' view, the criminal indictment tells a story about an entrepreneur pitted against unwarranted governmental intrusion - in the vein of David vs. Goliath.
On the other hand, the government paints a picture of Schultz as a manipulator who orchestrated a pyramid scheme that robbed maybe as many as 400 investors - many of them elderly - of their life savings.
"It's a theoretical debate whether I brought all of this on myself," Schultz acknowledges.
The entrepreneur
Tax and securities law interested Schultz from the day he entered Macomb Community College near Detroit. That interest took him through Wayne State University, where he also earned a law degree in 1974. He later returned to earn a master's of laws degree in taxation.
Despite his love of securities law, Schultz focused on tax law because of the impact of the Middle East oil crisis in the mid-'70s on the Detroit automotive industry. He says he then lost a key part of his law practice, a lucrative retainer with a car carrier. By the early '80s, he relocated his family to Florida because of growth opportunities. He found a job at a friend's law practice in Clearwater.
Over the years, Schultz says he focused mainly on small-business tax planning and even helped a few through initial public offerings, though he now describes them mostly as insignificant. His business also focused heavily on private placement of investment dollars and offshore investments primarily in the Caribbean.
As his tax and securities practice grew in the 1990s, Schultz says he even invested in a Caribbean concrete block plant. He brokered sales of rock and limestone, some of which he says was used to build a runway at the U.S. Naval Base at Cuba's Guantanamo Bay.
In 1995, Schultz delved deeper into private placements. He and Holiday businessman R. John Zavodny, a client, formed Mortgage Income Capital Inc. and the affiliated Mortgage Income Trust. The partners marketed high-interest, eight-month promissory notes secured by first mortgages on Zavodny's real estate investments. (See related story.)
Then once in 1996 and twice in 1997 the predecessor of what is now the Florida Department of Financial Services audited Mortgage Income Trust. There were concerns whether the private placements paid off mature notes with new investment dollars - an illegal activity known as a pyramid or Ponzi scheme. Schultz, who had since resigned from Mortgage Income Capital, represented Zavodny at all three audits.
"Here is where the conflicts starts," Schultz says.
Millennium Investment
Growth in the national financial markets during 1996-97 appealed not only to Schultz's entrepreneurial inklings but his long-time love for securities work. He sensed a new opportunity through private placements in companies that appeared ripe for initial public offerings.
In August 1997, Schultz joined with Danny Wey - a Clearwater certified public accountant and co-defendant in the federal indictment - to form Millennium Investment Inc. The company sold eight-month promissory notes paying 13% interest - an attractive incentive for private investors used to earning much lower yields on certificates of deposit. Using entities such as Stonehedge Group Inc., Schultz and Wey would invest the proceeds into private company stock, with the anticipation of much higher yields when the company went public.
Early on, for instance, Millennium Investment acquired private stock in Clearwater-based Aqua Clara Bottling & Distribution Co., a water-bottling company acquired in February 2002 by Miami-based Bevsystems International Inc.
Schultz says Millennium bought private Aqua Clara stock at 50 cents a share. Shares then moved quickly to about $3 each when the company went public. Millennium cashed in at about $2.25 to $2.50 a share. "We focused on companies we thought were safe and who offered a good profit potential," he says.
Not all the deals went as well, however.
From 1997-1998, Schultz and Wey invested Millennium's private placement proceeds into companies such as CNG Communications Inc.; Hydro Grow Inc; Beverly Hills Ltd.; BizRocket.com Inc.; Global Seafood Technologies; and Progressive Telecommunications Inc.
The Millennium partners anticipated strong returns from their investment in CNG Communications Inc., which Schultz says owned communications towers and underlying real estate valued at about $28 million. But in the summer of 1999, he says CNG decided against an IPO and opted to sell company assets to a company known as West Tower.
"We recouped our investment but it caused a severe cash flow problem," he says. "We did a lot of work for (CNG). We arranged financing for them, and we didn't expect a monetary fee. We got a rate of return on the investment, but nowhere near the profits if we had completed the plan."
Delinquent notes
Meanwhile, the regular cycle of eight-month notes became due and payable, Schultz says. The partners struggled with cash flow problems rather risk bankruptcy by covering the deficits with high-cost conventional loans. Besides, he says, they expected to recover quickly with the anticipated merger of Hydro Grow, a hydroponics agribusiness that cultivated premium strains of lettuce, into Asgard Alliance Corp.
However, investor complaints over the delinquent notes resounded with a thud in the Tampa office of state financial investigators. Schultz says he met with investigators in September 1999 and explained the dynamics of the Hydro Grow-Asgard deal and how it would benefit the note holders.
"I don't think they understood it," he says. "They would ask, 'Why not deplete cash flow after the CNG deal and pay off the notes? We couldn't deplete our whole cash flow because it would bankrupt the whole business. We had enough in the hopper through tenacity to know we were going to make it."
The explanation apparently didn't satisfy the state financial investigators. On Oct. 27, 1999, they raided Millennium's offices and seized all of the company's business records. Pinellas Circuit Judge Crockett Farnell appointed Miami attorney Gary Lipson as receiver of 11 operating entities under the Millennium Investment umbrella. Schultz says the raid effectively killed any chance the company could recoup investor proceeds. "Then watch the rug being pulled out from underneath you," he says.
Schultz says he spent the better part of the next eight months trying to work out a settlement. It didn't work. In June 2000, state financial investigators secured a temporary restraining order against Millennium Investment for the sale of $5 million in unregistered securities.
State exhibits listed Millennium Investment's assets at about $7 million. Schultz disputes that. He says the company owned $9.6 million in just stock holdings, not counting other valuations such as the company's offshore investments. "We could have realized more if they left us alone," he says. "I say, 'In four to five months I can pay off everyone.' What difference would it make waiting four months?"
There may be some support for Schultz's reasoning based on a receiver's statement Lipson filed in the 6th Circuit. "Based on such information, the receiver believes that despite the substantial anticipated difficulties described herein, his efforts can result in the recognition of a substantial value, over time, for the benefit of the creditors, note holders, shareholders, security-holders and investors of the defendant entities," the report states.
Class action claim
Acting on his frustrations, Schultz filed a federal civil court action in January 2001 against the state over the raid. He argued that state investigators exceeded the scope of the investigation to the extent they harmed investors by seizing the business records. He also claims they seized confidential attorney-client documents.
In his opinion, Schultz says the complaint angered state investigators. He claims the federal civil discovery process will support his arguments. On May 22, 2001, a federal judge refused to dismiss the state and its investigators as defendants in Schultz's federal civil action. "When the state realized they were now exposed to civil litigation, without immunity, they ran to the feds," he says.
Schultz says part of the proof is in a letter dated May 21, 2001, that prosecutor Runyon sent to Schultz. He says it identified him as the target of a federal grand jury investigation. Only Schultz claims the letter carried a June 4 or 5 postal date. He says he kept the envelope, though he didn't produce it during an interview.
In September 2002, Schultz voluntarily dismissed the federal civil complaint without prejudice. He attributed the decision to a health concern with one of the plaintiffs. In October 2002, he refiled it as a $300 million class action complaint. This time the defendants included U.S. Attorney General John Ashcroft, Runyon, Lipson and other public-private individuals associated with the state's case.
In December 2002, the U.S. attorney's office indicted Schultz; Wey; Joseph Cuciniello, an Oldsmar resident affiliated with Stonehedge Group and other entities; Dean A. Sinibaldi, a Fort Myers-based life insurance agent; Anthony Cuciniello Jr., an Odessa resident affiliated with Stonehedge Group and other entities; Robert M. Phillips, a Palmetto resident associated with the Millennium-affiliated West Coast Distributors Inc.; and Gene A. Tyrrell, an Arizona resident associated with the Millennium-affiliated Innovative Financial Concepts LLC.
Legal battle
Since his indictment, Schultz has filed seven motions and a total of 140 exhibits. Two of the motions sought dismissal of the federal charges on allegations of conflicts of governmental interest and outrageous governmental conduct. He also sought a dismissal on grounds the state and federal governments violated the Fourth and Fifth amendments of the U.S. Constitution.
Prosecutors Runyon and Bedke responded with motions to strike, claiming his allegations are unfounded. The U.S. attorney's office did not respond to a request for comment about this article.
"Like the defendant's motion to dismiss for prosecutorial vindictiveness, his motion contains ridiculous allegations of government misconduct, which are not founded in fact," according to a prosecutorial motion to strike.
Earlier this month, Kovachevich dealt Schultz and the co-defendants a blow. She denied not only Schultz's motions but also others filed by the co-defendants. Schultz considers the judge's decision as nothing more than another obstacle in his fight to retain his freedom.
"This may be a temporary setback, but it doesn't mean I've lost the war," he says. "The legal theories are still applicable in this case. I'm optimistic due to the evidence I have available."
Mortgage Income Trust
By David R. Corder
Associate Editor
It's not just Greg Schultz's work at Millennium Investment Inc. that interested state officials.
Although they didn't charge Shultz with a crime, the Florida Department of Financial Services and the statewide prosecutor's office took action last November against one of Schultz's former business partners.
State officials arrested R. John Zavodny of Holiday on one count of securities fraud and 53 counts of sales of unregistered securities following an investigation into Mortgage Income Capital Inc. and its affiliated Mortgage Income Trust and Mortgage Income Trust-12M.
Schultz and Zavodny formed Mortgage Income Capital in 1995 to sell high-interest, eight-month promissory notes secured with first mortgages on Zavodny's real estate interests.
Not long afterward Schultz resigned from the partnership to form Millennium Investment. It, too, offered private investors high-interest, eight-month promissory notes. But Schultz and his partner, Clearwater accountant Danny Wey, invested the proceeds into private company stock on anticipation of initial public offerings.
Besides Zavodny, the state also charged three others for their roles as Mortgage Income Trust brokers. They are life insurance agents Peter G. Fager and Pamella Lee Perkins Winslow, both of Sarasota, and Dean A. Sinibaldi of Fort Myers. Each is charged with one count of securities fraud and up to 17 counts of sales of unregistered securities.
When he resigned his partnership, Schultz continued to represent Zavodny as legal counsel. He defends Zavodny's business practices. "There is a vast quantum of evidence that would establish that there really wasn't anything wrongfully done or any wrongful activity," Schultz says.
However, the state claims private investors, most of them elderly, lost from $2 million to $3 million. The state claims Zavodny and the co-defendants misrepresented the investments and led investors to believe the investment funds would be readily available after the notes matured.
"Investors were not made aware that the MIT and MIT-12M were involved in long-term loans and property development, with their investments being used to fund these long-term transactions," according to the state. "Multiple investors were not paid when they requested the return of their principal and interest at maturity."
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