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TG SAC, DALLAS (196-0)

Prom

SubjllCl CONNIE "CHIP" ARMSTRONG;


FBW;
00: DALLAS

l.. a-=l~l~Y-a....d~v.....~....s....e-=d~a....s-f!!'"O-iPiP'o""w-s-:I
... p":"'h....o....n"""lir-c....
t-:--e"="l.e....

I I
r b7C
i---------- ~--""'!!"'"'lIlIlIIIIIIIIO!ra---
lis a check guaranty company headguarte~r-e
L....-_ _"'P"'!"" ...tcl-.1"...:n..-....
-......II1 l,;Uft.l:'U (~H ..:r 'K, I 1
Detroit.
COMPU CHECK does business in Texas and other states.
~~~p~~~ fr
October 1992, CONNIE "CHIP" ARMSTRONG bought ou?t
I . •
'For' information, ARMSTRONG's father, CONNIE C.
ARMSTRONG, has previously been convicted in the Northern District
of Texas of money laundering in an IRS stinq and served time~
. Approximately 1 1/2 years ago, articles appeared in The Dallas
Morning News and The Wall street Journal concerning a San
Francisco company called HAMILTON-TAFT HT ~ CHIP ARMSTRONG
purchased this company from /77). Y ::P.,,(f7rHl7? -;s:o J'JJ IJJ oC/:bfJ
_ _ _ _~ who was convicted in a THRIFTCON case and is serving
time. ARMSTRONG went from being a fireman in Plano to having 1::7C:
millions of dollars and living a high profile, extravagant
lifestyle. The newspaper articles concerned HT which handled
millions of dollars of payroll _ta~~s for a number of large
companies including NIEMAN MARCUS and affiliated stores.
Basically, HT was incurring extravagant expenses and making loans
from the large amounts of monies passing through HT. Writer
recalls the scheme whereby HT delayed making payroll tax payments
to the IRS by several months, eventually falling further and
further behind on the payments. The loss was in the millions~
The San Francisco Division investigated this case and there were
leads to the Tyler RA. ARMSTRONG had a ranch near Tyler.
2-196-0
WGEjdr
(2)
i
196-0

I
the same scheme
~allegeS that CHIP ARMSTRONG is perpetrating
wIth COMPU CHECK. So after takin over COMPU
· esident
1.S honest
and should be contacted by e accor 1ng 0
ARMSTRONG also fired All the directors with the~e~x~c~e~p~~~o~n~o·flb-
__~
l
Iexpenses.
whomL Ibelieves bought into this scheme.
~lleged that COMPO CHECK is running up extravagant
Like BT, ARMSTRONG is using this month's checks to pay
last month's expenditures, and therefore he believes COMPU CHECK
is falling further and further behind. He believes that
merchants in a number of states will eventually suffer 1":"J'7c
significant losses as a result of these activities. The company bID
has accounts with a number of auto chain stores. ARMSTRONG was
able to obtain about 60% of the stock pi CQ::~
from an investment company in Denver. L b e l i e v e s this
IHECK with a loan

loan transaction was also suspicious. ARMS N has offices in


Dallas where he runs COMPU CHECK from.

fraud 0" I~d~e~s:"'c~r~l~b~e~d~a~b~o~v~e~, =-eb":':u~t~l.:""!!t~ ~as no conclusive evidence o~f~~


profess ional opinion ~
is his
I as
o...---:,,_~~~~ I that ARMSTRONG is operating COMPU CJiEC~K~"'"
he did HT.

..

2
fD-302a (R~v 11-15-83)

196A-SF-93255

b7C
~onlmuahon of FD-302 of ~- - - - ......1...- • On _-----=.-----.;____
2/ B / 9 3 J Page _ 2 _

She said that it was apparent to her within the first


twenty-four hours while reviewing Hamilton Taft financial records
that Hamilton Taft was in a cash flow crisis. She said it was
then her job to look at investments and/or loans to determine the
likelihood of these assets generating any income~ She was to
insure that any future capital outflow was ureal investments".

She found out that almost immediately after Maxpharma


purchased Hamilton Taft from cigna corporation that Hamilton Taft
client funds were wire transferred out of Hamilton Taft. These
funds were in the form of notes and were booked at Hamilton Taft
as investments. But she saw no evidence of an attempt to collect
on these notes by Hamilton Taft. She said that some of the
transactions were incredibly complicated.

She said that she had frequent meetings concerning


these notes with Hamilton Taft officers. She discovered that
I I (PHD), Chief Financial Officer,l I
PHO), Director of Operations, I 1President
~~~--~~~~(PHO), Comptroller, were the only Hamilton Taft
off~cers a knew about the loans by Hamilton Taft which Were
outstanding and uncollected.

She further explained that she recalls ten to fourteen


million dollars in loans had left Hamilton Taft with no payments
returning to Hamilton Taft. She discussed these loans with
I Ibut not with I ,
All of these loans were
"brokered ll through the Maxpharma office in Dallas, Texas.
discovered that Maxpharma officers would telephoner
Hamilton Taft and instruct her to wire money to Ma~pharman
She
at 1
Dallas a9 d then a,~er the fact.Maxpharma would then send the
b7C notes toL Jln San FranC1SCO.

She felt that the officers at Hamilton Taft were


protective of~ I
oftenl IWQul~ accuse
I IOf raiding the funds of Hamilton Taft.1 )was not
very helpful in her audit. She felt that this was because he was
the person who actually wire transferred the funds from Hamilton
alIas. She understood the process being that (FNU)
of Maxpharma in Dallas would
o transfer un s an
r---. . . . . .~o=-~wire the monies. I
c:::
Iwould then instruct
~(PHO), a director, often
got irate at her inquiries regarding Hamilton Taft loans. A day
or two after she started working at Hamilton Taft she discovered
FD-302u (Re.v 11-15-83)

196A-SP-93255

ContinuatIOn of FD-302 of _.....=~~~~~~!!!!!!!l!II • On _ _2-:,./_8....:;/_9_ 3 • PAgo _ _3_ _

a "funny" transaction where two to three million dollars of


Hamilton Taft funds was wired to Dallas, Texas. She understood
thatl ~were working on some deal to raise funds.
She was told that these funds were supposedly to be used to
"recapi talize" Hamilton Taft. I linstructed her that the
details of the transaction was none of her business l but she
believes that the funds went to either Amerimac Company in
California or to Gulftex, a real estate business in Texas.
I ~said that from her examination of Hamilton
Taft financ1ai records she discovered that all the funds sent out
J7C for these loans had to be dedicated Hamilton Taft client funds.
She said that' lhad to know that
Hamilton Taft client funds were being used to finance these
investments. She understood thatl lactually assisted in
the creation of the notes to Hamilton Taft. One of these loans
in 1988 in the amount of approximately $200,000.00 was to a
CONNIE CHIP ARMSTRONG, JR. business in Dallas, Texas by the name
of Dresdner Corporation (PHD).
She said thatl 1 (PHO) I Sales Manager, and
1~------------l(PHO), Vice Presldent of dperations, at Hamilton
Taft were both concerned and upset at the news of the loans.
These loans violated Hamilton Taft's written cash management
policy which stated that Hamilton Taft can onJY invest client
funds in safe overnight type of investments. I I said that
she recalls that most of the notes for the 1988 loans were for a
90 or 180 day period. She stated that in or around March 1989
I Iwas fired byl I resigned.
She said that Arthur Anderson C.P.A. firm withdrew from
the Hamilton Taft audit a couple of days after they gave Hamilton
Taft their appointment letter. At that point she said that
management at Hamilton Taft felt that Hamilton Taft did not have
enough interest money to pay Arthur Anderson. Therefore,
Hamilton Taft did not receive any audited financial statements to
give the increasingly concerned Hamilton Taft clients. EDS one
of Hamilton Taft's largest clients was requesting audited
financial statements.
I 'said that she started taking legal action on
the debtors at the
notes to Hamilton Taft. She was taking
aggressive collection acti~she felt that she could have
collected on the Amerimac'L----Jandl rates if not for
FD-30la (Rev 11-15-83)

196A-SF-93255

Conunuullon of FD-302 of _~~~!!!!!!!!!!!~ ,---- , On _ _2-.;.1_8.....;1_9


_3 • Pngc: _4_

the ARMSTRONG takeover of Hamilton Taft in March of 1989. She


said that the I ~ and Amerimac notes totaled approximately $6
million dollars. She personally told ARMSTRONG at the Petit and
Martin law offices about the notes outstanding and her collection
efforts at Hamilton Taft. She told him that he should be able to
collect on some of these loans. She said that he did not seem
interested.

She said that in March of 19891 I concluded that


he was not able to recapitalize Hamilton Taft and that Hamilton
Taft would have to file for Chapter Seven bankruptcy protection
b7C so he conceded Hamilton Taft to ARMSTRONG 4She recalls a $20
million dollar figure being used at Hamilton Taft around the time
ARMSTRONG took control of Hamilton Taft. She said that the $20
million dollars represented the negative capital and the negative
cash flow at Hamilton Taft. She said that she felt at that time
that this much capital would be necessary to keep Hamilton Taft a
viable company. The financial condition of Hamilton Taft was
constantly being communicated to ARMSTRONG and his attorneys
during the legal actions. I 'said that she sat through
all of the depositions during ARMSTRONG's legal action to gain
control of Hamilton Taft.

She said that she understood that ARMSTRONG's plan for


Hamilton Taft was to recapitalize Hamilton Taft by investing $20
million dollars, rehirel Ito satisfy Wells Fargo Bank and
expand Hamilton Taft's customer base to infuse more revenue into
Hamilton Taft.
FD-3D2 (,REV 3-10-82)

- 1 -

FEDERAL BUREAU OF INVESTIGATION

Dale of ttllllSCnphon 2/10/93

was accompanied by her C~V1


attorney, [telephone (510) 836-4900], met the
interviewing agents at the San Francisco Federal Bureau of
Investigation (FBI) office. The interviewing ~gents identified
themselves and the purpose of the interview. L gave the I
following information:
I
Isaid that she was an independent contractor
in the financial consulting business. She described her
background as the following: bachelor of arts degree and a
masters degree in history with ten years of experience in the
commercial banking business. She stated that she was hired in or
around February of 1989 byl I
I Ito assist in the management Hamilton Taft Company and to
ass~st ~n the financial examination of Hamilton Taft by Petit &
Martin law firm. -

She said thatl ~ was a personal friend of hers


.and a director of Hamilton Taft.. I I understood 1....... _
to be a close personal friend ofl She said that
directors at Hamilton Taft changed frequently while she was
working at Hamilton Taft. The directors of Maxpharma Company
I 1 took direct control of Hamilton Taft from
Maxpharma Company officers in or around January 22, 1989. Then
Petit & Martin was retained byl I to do an audit of Hamilton
Taft. Petit & Martin hired Arthur Anderson C.P.A. firm to assist
in the audit ..
I Isaid that she reported formally reported to
Petit & Martin law firm and that some of that communication she
considers attorney client privileged communication so she will
not share that information With1the interviewing agents. She
reported verbally day to day to on an I
informal basis.

Investigation on 2/8/93
SA WILLARD L. HATCHER, JR./WLH IJvt1+
b7C by ~ )tt:1-1---,~ Dilledlcmted 2/10/93

TIus document contains neither recommendntlons nor conclusions oCthe FBI It IS the property oflhe FBI !lnd IS loaned 10 your agl:ncy.
It Ilnd lIs contents are not to be dlstnbuted outside your ngency
FD-36 (Rev 11-17-88)

FBI

TRANSMIT VIA: PRECEDENCE: CLASSIFICATION:


o Teletype o Immediate o TOP SECRET
o Facsimile o Priority o SECRET
IZJ AIRTEL o Routine o CONFIDENTIAL
o UNCLAS EFT 0
o UNCLAS

Date 2/22/93

TO SAC, DALLAS (196A-SF-93255) (P) (SQUAD 15)


FROM SAC, SAN FRANCISCO (196A-SF-93255) (P) (SQUAD 5)

SUBJECT CONNIE C. ARMSTRONG,


ET ALi
DOING BUSINESS AS HAMILTON TAFT AND COMPANY,
ET ALi
San Francisco, California;
FRAUD BY WIRE (B);
MAIL FRAUD;
BANKRUPTCY FRAUD ( a) j
00: SAN FRANCISCO

Reference Dallas airtel to San Francisco, dated May


5, 1992.

Enclosed for Dallas are the original and one copy


of six Federal Grand Jury Subpoenas for the individual
testimony of six individuals from the greater Dallas
Metropolitan area before a Federal Grand Jury convened at San
Francisco.

Dallas is requested to expeditiously serve the


attached sUbpoenas and advise each person served to call San
Francisco case agent I - I telephone number (415) b7C
553-7400 regarding there appearance in San Francisco as
directed on the subpoena. Below is a list of the names of the
individuals to whom subpoenas are to be served and addresses
where they may be located.

2 - Dallas (Ene. 12)


~~ - San Francisco
~KM/mac
(3)~
SEA.RCHED
SER I AT..:! ZED '?A ..
oIIl
I1mr.XED
FILED 15A
.

Approved: !.ff&
_Kw II./ ql----- Transmitted
(Number) (Time)
Per
---~----
F"1'L .E: 0
1
FEB 1 91993
2 UNITED STATES DISTRICT COURT ,"\ '
,.. :t··'jR'"
·· u II,' 1"'--,
NORTHERN DISTRICT OF CALIFORNIA fl;D.r;7·l/i=,;;::;."D:~rfi:·~:j·~~r~··..C.~E,i::-;
3 . • -;IN [JJSn~!CJ r~.'~ .•:/~1
oJ, I. ' : :.. :FQPMJ
.t.
l •

4 IN RE ) No. C-92-2996-CAL
)
5 HAMILTON TAFT & COMPANY, et al., )
6 - - - - - - - - - - - - - - - - - - ))
AND CONSOLIDATED CASES )
7
---------~---------)
)
8 FREDERICK S. WYLE/ Trustee in ) Chapter 11
9 Bankruptcy of HAMILTON TAFT & ) No. 91-3-1077 LK
COMPANY, ) Adv. ProeM No.
) 92-3-0057 LK
10 Plaintiff/ )
)
11 v. )
)
12 S & S CREDIT COMPANY, INC., )
)
13 Defendant.
:>0 )

....,j -i...:....
14
d' '"""iol fA CUlL DuCj{~ ~. \1;'7-2
.:c 1..L..
-=':J
15 ORDER OF AFFIRMANCE
II')
:u 16
-0::
~ Plaintiff and appellant Frederick s. Wyle/ as trustee
~<
L. 17 in bankruptcy of Hamilton Taft & Company, appeals from a
18 jUdgment of the Bankruptcy Court. That judgment was entered
19 on June 22/ 1992. The jUdgment dismissed the complaint and
20
directed that jUdgment be entered for defendant. The court's
21
reasons were set forth in its findings of facts and
22
conclusions of law, filed on June 17, 1992.
23
This appeal was briefed, argued, and submitted to the
24
court for decision. The court has reviewed the record in the
25
bankruptcy court, the briefs and arguments.of counsel, and the
26
27
28
000150
.J
1
I

2 applicable authorities, and concludes that the decision of the

3 Bankruptcy court should be affirmed.

4 The complaint seeks to recover for payments made by

5 Hamilton Taft & Company to the Internal Revenue Service on

"6 behalf of defendant S & S Credit Company. The complaint

7 alleges that the payments were preferential payments within

the meaning of section 547(b) of Title 11 of the United state~


8
9 Code.

10 That section requires that the trustee establish that

11 the transfers were the property of the debtor. However, this

12 court believes that the plaintiff's complaint and the

Bankruptcy Court's dismissal of it, are governed b~Begier v.


13
14 Internal Revenue Service, 496 U.S. 53 (1990). The decision in

15 Begier controls the facts and the result here. The payroll

16 taxes withheld by defendant, and paid by Hamilton Taft to the

17 Internal Revenue Service, were trust funds pursuant to section

18 7501(a) of Title 26 of the United states Code and were not the

19 property of the debtor. The distinctions for which plaintiff

20 argues between this case and Begier do not change the

21 application of Begier to this case.

22 The complaint was properly dismissed without leave to

23 amend, because the alleged payments were as a matter of law

24 not the property of the debtor l and no change in the


~. allegations which might be made by plaintiff could alter the

26
Order of Affirmance
27 No. C-92-2996-CAL -2-
I
28 000151
~ I
I

!
..
IPI!II filii

iWI 1IIiII~

II I•
I
11 11I
..
11IIIII
!lIiII1iP.!:

~
~ l 1
result. The payments were as a matter of law funds held
2
trust for the Internal Revenue Service and were not the
3
property of the debtor Hamilton Taft & company.
4
The jUdgment of the Bankruptcy court is therefo
5
affirmed.
6
Dated: February \J' I 1993.
7
8 C-~ Ct..: J~,:
CHARLES A. LEGGE au
9 UNITED STATES DISTRICT

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
·25
.26
Order of Affirmance
. 27 No. C-92-2996-CAL -3-

1
28 000152
To SAC, DALLAS (196-0) Date 3/16/93

From 1::-)']::.:
SA 1"""' _

Subject CONNIE IICHIP" ARMSTRONG;


FBW;
00: DALLAS

On February 23, 1993,1~~~~~ lcontacted writer


regarding captioned matter and attached 0 um dated January
26, 1993. Writer attempted to contact on two (2) prior l:..)'! C
occasions and was informed that as out of the C1ty.

writer andl~ ~~Idiscussed the activities of


ARMSTRONG as detailed in the January 26 1 1993 memorandum.
I Ihad nothing more to add but clarified a statement in the
referenced memoranduml ~

~ r-----------r
c: (reiterated the
in forma t ion pray l.ded ....t;;;,;O=--S=S:.:A..u...... .....Ili;l~...:=..:~::;.;::.-=-~
of the
his
professional opinion He suggested
that any investigati ct finding
process commence with ·a telephone call t0L--...,..__~~~........~
I lalso stated that he prefers to remaln detached from this b7D
matter unless and/or until his assistance is needed.

2-196-0
PRW/pw
/10 /1-- ,-'7;F- 12J$-~
~~--
I
; I
FD-lb a".. v 1ss)
JI- 17 I

FBI

TRANSI\lIT VIA PRECEDENCE: CLASSIFICATION:


o Teletype o Immedmte o TOP SECRET
o Fa~mllie o Prtunty o SECRET
x D AIRTEL o Routine o CONFIDENTIAL
o UNCLAS EFT O·
o UNCLAS

Date 4 / 19 / 9 3

TO DETROIT

FROM SAC, SAN FRANCISCO (196A-SF-93255) (P) (Squad 5)


SUBJECT Connie C. Armstrong; aka
Chip Arstrong Jr.;
former chaIrman of Hamilton Taft Company
San FrancIsco, now dba as Comp-U- Check Inc.
24901 Northwestern Highway, Seventh Floor
I southfIeld, MichIgan 48075
10f HamIlton

I
":T~a-:f~t~,-c-u-r-r-e-n-t~l-y-e-m-p-l~o-y-e-e-o"f'l"""'-~c-o-rn-p--'"U"""--Check
i
~.~~~ ~~~ __ ~I former presldent of
Hamilton Taft;
FBW (A); Mail Fraudj SecuritIes Fraud
b7C OO:SF

Enclosed for the Detrolt diviSIon is one copy of the


drafts of numerous finanCIal documents and a draft of the 13-0
flling for the securities Exchange Commlssion which were
provided to San Francisco cocase agent by captioned sUbject
I Ion 4/15/93.

For the lnformatlon of the Detro~t d~vlsion captioned


subJect Armstrong is one of several sUbJects In an ongolng
lnvestlgatlon WhIch commenced in San Francisco in January of
1991. San Franclsco'S case 15 centered around the fact that
Armstrong with the aSslstance of other Ham~lton Taft officers
transferred approximately $55,000,000 in Hamilton Taft client
funds to hIS personal use and or to hlS corporate alter egos
durIng the perIod of March 1989 thru March 1991.

PKM/dbc
2- Detrolt (ene-I) ~ ~
~ SAN FranCISCO (196A-SF-93255)

(Numher) (TUlle)
Hamllton Taft was a service company located in San
Francisco whose business was the payment of tax obligations
due various taxlng authorlties. It provided its tax payment
services for many of the Fortune 500 companies in the Unlted
states. It had been in bUSlness performing this serVlce Slnce
roughly 1980. Historically, the company had derived its lncome
from a nominal service fee it charged its clients and from the
use of the cllent funds for a short perlod of time usually
no more than one to three days. Durlng this short period of
time, Hamllton ~aft would invest the cllent funds in very
short ter'm, very secure and very liquld instruments_
succinctly stated, Hamllton Taft made lts money on the IIfloat U
or the perlod of time it actually was in receipt of client
funds and the time those funds had to be paid to the var10US
tax1ng author1tles.

When Armstrong took oyer tbelcompany in March of 1989


fromJ .he lmmedlately began
uSlng cl1ent funds to flnance an elaborate lifestyle and for
b7C the acquIsItion of personal assets Includlng the purchase of a
$10,000,000 ranch near Tyler Texas Wh1Ch he used as a personal
headquarters. In essence Armstrong operated a lI .... Ponzi" scheme.
ThlS scheme requlred that Armstrong replace those client funds
that he converted to his own use by using other client funds
were continually arrIving at Hamilton Taft to pay the tax
obllgatlons of other HamIlton Taft clIents which were going to
become due and oWlng in the very near future. Armstrong
wlthheld cllent checks lntended to pay for tax bills. He used
other client's funds to pay the prevIous cllent funds and
penaltles WhlCh were accrued for be1ng late.

It should be noted that captIoned sUbject I I


has
been interviewed at San Francisco on 4/2/92 at which tlme he
made some adm1sslons regard1ng hav1ng asslsted In the lllegal
wire transfer of large sums of client funds to Armstrong
directly and or to hlS corporate alter egos.r ~ advlsed b7C
San FranCISCO case agents that he 15 current~y employed at
Comp-U-Check and 1S worklng on lnstalllng a new computer r

system for th~s company_ Armstrong andl lare in the l


process of belng lndicted 1n San franc1sco for FEW Vl0lations.~
---'
A cursory review of the documents provided to San
Franc~5co case agents lndlcates that Armstrong lS contlnuing
to commlt fraudulent acts possibly lncludlng varlOUS
securlties laws violatlons and fraud by Wlre transactions.
More speclflcally, Armstrong appears to be "creating" assets
and then leveraglng these non eXlstent assets to fund at least
one of his companIes, CC Entertainment and Promotions, Inc
(CCEP) (see notes to flnancial statement, F-13).

2
Further rev~ew lndicates that Armstrong IS In the process of
convert~ng possIble acquired assets to hIS own use, through
the issuance of fraudulent debentures.
~ San Franclsco belIeves that the SecurIties Exchange
CommIssion may be investigatIng the recent acquisition of
Comp-U-Check by Armstrong.
The Hamilton Taft case has been the subject of
wIdespread medIa coverage inclUdIng a front page story In the
western edItIon of the Wall street Journal. Comp-U-Check has
also been the subJect of media coverage locally In Detrolt
inclUdIng an article In a lndustry news magazine called liThe
Collection Agency Report". The publIsher of this report, al--.. .
I I has contacted the San Francisco dIvision re~arding
~A~r-m-s-t~r-o-n~g and his recent acquiSItIon of Comp-U-Check. J J
himself IS a former Comp-U-Check employee who published a
b7C March 1993 artIcle concernIng Armstrong and comp-U-Check.
San FranCISCO suggests that Detroit have any case
agent assigned thIS matter contact San Francisco case agent J
I I
~prior to contacting lagain regarding
thlS matter. Addltlonal lnformat~on is avaIlable thru Lexis
Nexl.s and "Craln's Detrolt Business ll

LEAD: Conslder openlng a fraud by wire and or a


securltles fraud Investlgatlon.

3*
/. Feldman Waldman & Kline
A PROfeSSIONAL CORPORATION
Attorneys at Law

TWENTY·SEVENTH FLOOR RUSS BUILDING BRANCH OFFICE:


23S MONTGOMERY STREET S1'OCl.:l'ON, CALIFORNIA
SAN FRANCISCO, CAUFORNIA 'HIO~

TELEPHONE (115) 9BHJOO


FAX ('!15) J9i-Q12t

May 10, 1993

BY HAND DELIVERY
IFederal I
Special Agent
Bureau of Investigation
450 Golden Gate Avenue, 6th Floor
San Francisco, CA 94102

Re: Hamilton Taft & Company; Connie C4 Armstrong, Jr.

Dear 1 _
We are delivering to you the original of a Sony mini-
casette tape that we found in the records of Hamilton Taft. The
tape was in an envelope with the handwritten notation "GC&MN which
was attached to typewritten notes with the heading "Notes Tuesday,
February 13, 1990". A copy of the typewritten notes is enclosed.
The typewritten notes with the envelope containing the tape were
in a three-ring binder, labelled NDresdner Enterprises, Inc. Notes
1990". It is my understanding from our conversation today that
you will make a copy of the tape for our files on a regular size
cassette.
We are also delivering to you copies of the following
documents, all of which were located in files of Hamilton Taft:

1. Memorandum from I L))::tJl Drl


I I dated July 19 ~ 1989, r 7 NEnclosed Notes", to which is ')~~ "\:,
attached a document t~tled "Ch~p Armstrong Notes - July 19, 1989".
2. Document titled "Chip Armstrong Notes - August 22,
1989".

3. Document titled "Executive Committee Meeting


Dresdner capital January 11, 1990".
4. Document titled NDresdner Capital Executive
Committee Meeting Notes Thursday, January 25, 1990°.
Feldman Waldman & Kline
A PROFESSIONAL CORPOllATiON

Attorneys at Law
I~~~~_. . . .I Ll'/C
May 10, 1993
Page 2

5. Document titled "Personal and Confidential Monday,


February 5, 1990 Notes".

6. Document titled "Dresdner capital Executive


Committee Meeting Tuesday, February 13, 1990".

7. Document tilted nNotes Friday, February 16, 1990 n

8. Document titled "Dresdner capital staff Meeting


February 20, 1990".
9. Document titled "Chip Armstrong Notes to File May
la, 1990: Subject: Meeting to discuss Financial statement".

10. Document titled "Chip Armstrong Notes May 30, 1990:


Executive committee Meeting, May 23, 1990".
11. Document titled "Chip Armstrong Notes June 4, 1990:
Executive Committee Meeting, May 29, 1990 R •

12. Undated document titled "Hamilton Taft & Company


Notes and Business Plan".

L)'/ C
PSM/gm
Enclosures

cc:
FELDMAN, WALDMAN & KLINE
A Professional Corporation
2 PATRICIA S.;MAR
L. J. CHRIS MARTINIAK
3 2700 Russ' Building
235 Montgomery street
4 San Francisco, CA 94104-3160
Telephone: (415) 981-1300
5
Attorneys for Frederick S. Wyle,
6 Trustee

8 UNITED STATES BANKRUPTCY COURT

9 NORTHERN DISTRICT OF CALIFORNIA

10

11 In re ) Chapter 11
) Substantively Consolidated
12 ) or Jointly Administered
)
13 HAMILTON TAFT & COMPANY, ) No. 91-3-1077 TC
KNIGHTSBRIDGE COMPANIES, INC. ) No. 91-3-2448 TC
14 THE REMINGTON COMPANIES, INC. ) No. 91-3-2449 TC
DRESDNER PETROLEUM, INC.
) No. 91-3-2450 TC
15 DRESDNER ENTERPRISES, INC.
) No. 91-3-2451 TC
)
16 Debtors. )
---------~-------)
17

18

19 THIRD INTERIM REPORT OF


FREDERICK S. ·WYLE, TRUSTEE
20
Ha.y 14, 1993
21

22

23

24

25

26
TABLE OF CONTENTS

2
3 SECTION

I. OVERVIEW AND SUMMARY OF REPORT •••••••••••..•.•••••...• 1

5 II. LEGAL AND FINANCIAL STATUS OF THE ESTATES ••••.•.•••••. 2

6 A. Appeals by Hamilton Taft, as Debtor .••••••••..••• 2

7 B. Reassignment of Bankruptcy Cases ••••••••••••.•••• 3

8 C. Financial Condition of the


Consolidated Estate .•..••..••••••.•.••••••....••• 3
9
D. Financial Condition of Dresdner Petroleum ..•..••• 4
10
III. RECOVERY AND LIQUIDATION OF ASSETS •.•.•..•••••...••••• 5
11
A. Major Assets Sold ••.•.•..••...•.•••.••..••••••••• 5
12
1. Seventh of Sonterra ••.••.••••••.•••••••••••• 5
13
2. Whispering Meadows and Glade Meadows •.••.••• 6
14
3. oil and Gas 1J.eases .••••.•••.••.••••••.•••••• 6
15
4• Texas StadiUIn Box ••••••••••••••••••••••••••• B
16
B. Major Assets Remaining Unsold ••..•••••••••••••••• 8
17
1. Do'Uble C Ranch 8
18
2. Rodeo Interests ...•..•...•.•..•••••...•..•.• 9.
19
c. Promissory Notes and Guarantees .••..•...•••.•..•• 9
20
1. Mohamed Hadid -••• 9 -- -
21
2. Stanley Rosenberg ..••.....••..•..•.•••...•• l1
22
3. Parker Automotive ..•...•.•...•..••....••.•• 12
23
4. McCall Family 13
2.4
5. Coffea International ••.•..•••.••..•••.•...• 13
25
6. PIF-Plaza Realty 14
26

-i-
IV. LITIGATION AGAINST ARMSTRONG •••.••...•.•.••••••.•••.. 1S

2 A. Armstrong Adversary Proceeding ••••••••...••••.•• 15

3 1. Bankruptcy Court Summary Judgment •••••••••• 16

2. District Court Summary Judgment •...•.•...•• 16

5 B. Contempt Proceedings and Settlement ••••••••••••• 1S

6 C. Criminal Investigation •••••••••••••••••.•••••••• 19

7 V. OTHER CLAIMS AND LITIGATION •••••••••••••••••••••••••• 20

8 A. Fidelity Bonds ••.••••••.•••••••••••••.••••.••••• 20

9 B. Peat Marwick •••••••••.•••••..••....••.•••••••••• 21

10 c. Preference Claims Against CUstomers ••....••..••• 23

11 D. Tax Penalty Refunds •..•.••...••..•... ~ •.•••.•••• 25

12 E. S&S Credit Penalty Refund •.••••••••••••••••••••• 26-

13 F. CIGNA-Howard Weil ••••.•.•••...•••••..•••.••.••••• 26

14 G. Miscellaneous Litigation •••••••••••••••••••••••• 27

15 1. Christine Grambling •••••••• ~ .•••••••••••••• 27

16 2. MaxPharma Insiders •.••.•.•.••••..••••••.••• 28

17 VI. FUTURE PLANS AND PROSPECTS FOR


DISTRIBUTIONS TO CREDITORS .•...•.•.••.....••..•..•••• 28
18
A. Consolidated Case ••••••••.•••••••••••••••••.•••• 28
19
B. Dresdner Petroleum ....•.•••.•••.• ". .••••••.•..••• 30
20

21
VII. ...
CONCLUSION ......••....•...•.•.•..•••••.••...•••.•••- •• 31 . . - -

22
APPENDIX A: STATEMENTS OF CASH RECEIPTS AND
23 DISBURSEMENTS AS OF MARCH 31, 1993
24

25

26

-ii-
:r. OVERVIEW AND SUMMARY OF REPORT

2 As this Third Interim Report is filed, the Hamilton


Taft bankruptcy case is nearing the second anniversary of the
3 order for relief entered on May 31, 1991. It has been two years
and two months since the bankruptcy case was commenced through
4 an involuntary petition after public disclosures that Connie C.
Armstrong, Jr. had diverted tens of millions of dollars of payroll
5 tax deposits that Hamilton Taft customers thought had been used "to
pay their taxes.
6
During these two years, intensive activity has been
7 focused on locating, recovering and liquidating assets acquired
with Hamilton Taft funds, and investigating and pursuing claims
8 against third parties to or with whom Armstrong loaned or invested
Hamilton Taft assets. At the time the trustee filed his Second
9 Interim Report in February, 1992, a number of major assets had been
recovered by the trustee, but the process of evaluating assets,
10 determining a sales strategy and selling the assets was only in
the beginning stages.
11
During the past year, all substantial tangible assets
12 available to be recovered have been recovered. Most of the
tangible assets held by the estate have been sold, except for the
13 Armstrong ranch-residence in Texas and certain passive ownership
interests in rodeo businesses.
14
Numerous suits have been filed against various persons
15 and entities who received Hamilton Taft funds as loans or
investments by Armstrong. Many such suits have been settled or
16 jUdgments obtained by the estate during the past year. Very few
of the defendants have been willing payors, and the legal efforts
17 have been, by necessity, vigorous, extensive and expensive.

18 The trustee has obtained a summary jUdgment ruling


from the United states District Court that Armstrong is liable
19 to the estate for breach of fiduciary,duty and conversion for his
misappropriation of Hamilton Taft funds. However, the amount qf
20 the damages and the jUdgment to be entered against him remain to
be determined. . -
21
The trustee's litigation pursuits have not all been
22 Armstrong-related. The trustee sued and recent~y reached an
$1.8 ~illion settlement with CIGNA corporation, a prior owner.of
23 Hamilton Taft, arising out of the 1988 leveraged buyout of CIGNA's
stock, which was financed with Hamilton Taft assets. In major
24 preference litigation, the Bankruptcy Court and the United states
District Court have ruled that delinquent payroll tax payments
25 during the 90-day preference period are not avoidable by the
trustee because the funds paid to the IRS were not Wproperty of
26 the debtor* under the Bankruptcy Code. As the issue is one of

THIRD INTERIM REPORT


-1-
law that affects potentially over $50 million in preference claims,
the trustee has appealed the decision to the Court of Appeal for
2 the Ninth Circuit.

3 As other litigation is completed or is nearing


completion, the future attention of the estate is expected to
4 focus on two major lawsuits which to a large extent will determine
the percentage distributions the estate will be able to pay
5 creditors on their claims. These suits are (i) an action filed
in Texas state court against the Underwriters of Lloyds for
6 $50 million of fidelity bond coverage covering Hamilton Taft for
theft by employees, set for trial in April, 1994, and (ii) an
7 action filed in California state court against KPMG Peat Harwick,
accountants for Hamilton Taft and Armstrong's Texas entities,
B for aiding and abetting and conspiring with Armstrong in his
misappropriation. of Hamilton Taft funds.
9
As litigation is inherently uncertain in outcome, the
10 trustee cannot predict the outcome of these or any other pend~ng
lawsuits, and therefore cannot estimate the potential distributions
11 to creditors, or when distributions will be made. Creditors and
parties in interest can, however, be assured that the trustee is
12 pursuing these lawsuits, and all other reasonable and cost-
effective avenues of recovery for the estate, vigorously and
13 expeditiously.

14
IX. LEGAL AND FINANCIAL STATUS OF THE ESTATES
15
A. Appeals by Hamilton Taft. as Debtor
16
On January 25, 1993, the Court of Appeals for the Ninth
17 Circuit affirmed the dismissal of the appeals by Hamilton Taft,
as Debtor, from the order appointing a trustee entered on March 26,
18 1991, the order approving the appointment of Frederick s. Wyle as
trustee entered on March 26, 1991, the order for relief entered on
19 May '31, 1991, and the order authorizing the trustee to shut down
Hamilton Taft's business entered on June 21, 1991.
20
The District Court had dismissed the appeals as m9~t
21 in February, 1992. In an unpublished opinion, the Ninth Circuit
upheld the District Court's determination that the appeals were
22 moot because the Debtor had failed to obtain a stay, thereby
permitting a substantial ~hange of circumstances to occur that
23 rendered it inequitable to consider the merits of the appeal.

2A On April 26, 1993, the Debtor, which claims to be acting


on authority of Connie C. Armstrong, Jr. as ·Chairman of the Board·
25 of Hamilton Taft, filed a petition for writ of certi~rori to the
u.s. Supreme Court. The petition was filed by Armstrong's personal
26

THIRD INTERIM REPORT


-2-
attorneys, who are also representing Armstrong in the trustee's
litigation against Armstrong.
2
B. Reassignment of Bankruptcy Cases
3
The Bankruptcy Court has reassigned the Hamilton Taft and
4 related bankruptcy cases to Chief Bankruptcy Judge Thomas Carlson.
The cases had previously been assigned to Chief JUdge Lloyd King,
5 who transferred from the Northern District of California to another
district in July, 1992. Prior to appointment of his replacement,
6 Judge King's cases were handled by temporary judges on an ad hoc
basis. A new jUdge, JUdge Dennis Mantal!, was installed in April,
7 1993 and has recused himself from the Hamilton Taft cases and all
adversary proceedings related thereto. (Judge Mantali was a member
8 of Pillsbury, Madison & Sutro, which performed pre-petition legal
services for-Hamilton Taft and Remington and is a creditor.
9 The firm, and JUdge Montali in particular, represented Stanley
Rosenberg in the trustee's adversary proceeding against Rosenberg
10 (see section III.C.2).)

11 c. Financial Condition of the Consolidated Estate


12 Appendix A contains schedules of the post-petition
receipts and disbursements of the Debtors in the consolidated
13 estate, i.e., Hamilton Taft, Knightsbridge, Remington and Dresdner
Enterprises, as of March 31, 1993. Separate schedules have
'14 also been prepared showing the receipts and disbursements during
the period of the trustee's administration, which commenced on
15 March 26, 1991 for Hamilton Taft and on July 22, 1991 for the
Texas Debtors.
16·
As of March 31, 1993, the consolidated estate had cash
17 on hand of $6,670,648. This compares with beginning cash balances
totalling $5,930,642 for the Debtors in the consolidated estate at
18 the commencement of their respective bankruptcy cases, of which
$5,856,509 was in Hamilton Taft and $74,133 in Knightsbridge,
19 Remington and Dresdner Enterprises combined. The March 31, 1993
balance does not reflect subs~antial settlements, totalling
20 approximately $2 million, received 'or agreed upon since that date.
(See, e. g., discussion of CIGNA settlement, section v. F. ) _.
21
Total post-petition cash receipts of the Debtors
22 comprising the consolidated estate totalled $7,766,223, as of
March 31, 1993. For the period of the trustee's administration,
23 total cash receipts were $7,669,810. (The difference is due
primarily to the sale of one Seventh of Sonterra townhouse by
24 Enterprises prior to the trustee's appointment.) More than
$5 million of these receipts were received during 1992. Among
25 the major sources of cash receipts, since the inception of the
bankruptcy cases, have been sales of real estate ($3,328,043),
26 sales of other assets ($1,042,014), recovery of a tax refund

THIRD INTERIM REPORT


-3-
from a Hamilton Taft customer, sandia Corporation ($932,076),
and recoveries from various litigation and claims ($1,267,426).
2 Details of these receipts and the activities producing them are
provided in other sections of this report.
3
post-petition disbursements by the Debtors comprising
4 the consolidated estate totalled $7,027,947, as of March 31, 1993.
Disbursements during the period of the trustee's administration
5 totalled $6,889,592. (The difference is due primarily to operating
expenses paid by Remington prior to the trustee's appointment.)
6 Post-petition disbursements include approximately $900,000 of
operating expenses of Hamilton Taft in the early stages of the
7 bankruptcy case before the trustee closed the Hamilton Taft
business.
8
Professional fees of the trustee and his attorneys,
9 accountants, appraisers and consultants account for $3,382,886 of
the post-petition disbursements, as of March 31, 1993. Additional
10 professional fees totalling $802,092 have been paid to attorneys
for the Creditors committee, the Texas debtors in possession, and
11 the petitioning creditors (Federal Express, Stanford University,
stanford Hospital and Verbatim corporation) who filed the Hamilton
12 Taft involuntary petition.

13 At present the estate maintains a small administrative


office in San Francisco, with three employees. The office performs
14 bookkeeping, administrative and litigation support services for
the estate. The estate also has three full-time employees located
15 at the HTC Ranch (formerly the Double C'Ranch) in Tyler, Texas,
who are responsible for ranch maintenance. The average monthly
16 operating expenses for the San Francisco office and the ranch are
approximately $35,000, not including taxes. and insurance for the
17 ranch.

18 Professional fees, especially legal fees, will continue


to be the major expense of the estate in the future. However, the
19 trustee believes that the amount spent by the estate for ongoing
legal fees will be deClining, as two of the la~gest cases, the
20 fidelity bond and Peat Marwick cases, are being handled unde~
contingency fee agreements (see sections V.A and V.B), and many of_
21 the remaining litigation matters that required substantial legal
fees in 1992 have been resolved or are nearing completion.
22
D. Financial Condition of Dresdner Petroleum
23
A schedule of cash receipts and disbursements for
24 Dresdner Petroleum, for the post-petition period and for the
period of trustee administration, is also included in Appendix A.
25
As of March 31, 1993, Dresdner Petroleum had a cash
26 balance of $380,104 in its account, including $38,000 which is

THIRD INTERIM REPORT


-4-
sUbject to mechanics liens. This balance was largely the result
of the sale of Petroleum's oil and gas leasehold interests in
2 December, 1992. Dresdner Petroleum had gross revenues from sale
of oil and gas of $1,585,224 during the post-petition period and
3 $1,332,922 during the period of trustee administration. However,
operating expenses and administrative expenses, including legal,
4 accounting and consultant fees, exceeded gross revenues, to produce
a cash deficit prior to receipt of the sale proceeds.
5

6 :rxx. RECOVERY AND LIOUIDATION OF ASSETS

7 During the past 18 months the trustee has focused major


attention on recovering and selling assets acquired with Hamilton
B Taft funds and pursuing claims against third parties to whom
Armstrong transferred Hamilton Taft funds through loans or
9 investments. That effort is not complete, but substantial
progress has been made in the recovery and liquidation of assets.
10 As discussed below, most of the physical assets have been sold,
but the largest property, the Double C Ranch, remains unsold.
11
Substantial resources have been devoted to litigation
12 against third parties who received Hamilton Taft money as
investments and loans. Efforts to recover from such recipients
13 have been expensive and time-consuming, as all the defendants have
asserted that they are not liable for one reason or another on the
14 various financial instruments and contracts they signed. Host of
the defendants are financially marginal, at best.
15
However, most of the litigation against third party
16 transferees has now been resolved, through settlements and
jUdgments. The trustee will continue to pursue the remaining
17 litigation on as efficient and cost-effective basis as possible.

18 A. Major Assets Sold

19 1. Seventh of Sonterra

20 The Seventh of Sonterra project consisted of 23 single- _


family townhouses and 28 developed single family pad sites lQcated_
21 near the seventh hole of the Sonterra Country Club in San Antonio,
Texas. The project was purchased by Dresdner Enterprises from the
22 Resolution Trust company for $1.9 million in January, 1991.
The trustee took possession of Sonterra in July, 1991, when he
23 was appointed trustee of Dresdner Enterprises.

24 After his appointment, the trustee continued Dresdner


Enterprises' sales program of selling townhouses individually to
2S retail purchasers. The Sonterra sales program has been completed,
and all of the townhouses and lots have been sold. The gross sales
26 prices received for the 22 townhouses and lots sold post-petition

THIRD INTERIM REPORT


-5-
totalled $2,889,000. However, substantial repair and buildout
costs, usually amounting to $8,000 to $15,000 per townhouse, were
2 spent by the estate in order to sell the townhouses. The net
amount realized by the estate, after deduction of direct sales,
3 maintenance and construction costs, was $2,099,686. The Seventh of
Sonterra asset is the only major asset acquired by Armstrong with
4 Hamilton Taft funds for which the estate has been able to recover
the amount Armstrong spent on the asset.
5
2. Whispering Meadows and Glade Meadows
6
Whispering Meadows and Glade Meadows are unimproved
7 residential tracts located in Arlington and Grapevine,
respectively, near Dallas. The properties were purchased by
8 Dresdner Enterprises from the Resolution Trust company, Whispering
Meadows in April, 1990 and Glade Meadows in May, 1990. Armstrong
9 spent a total of $1.1 million of Hamilton Taft funds on these
projects, including acquisition and development costs. The trustee
10 took possession of Whispering Meadows and Glade Meadows when he was
appointed trustee of Dresdner Enterprises in July, 1991.
11
Both Whispering Meadows and Glade Meadows have been sold.
12 Whispering Meadows was sold for $580,000 in June, 1992 to B.N.
Mitchell of Arlington, Texas. Glade Meadows was sold for $295,000
13 in February, 1993 to Pulte Home Corporation of Texas, a Michigan
corporation.
14
3. oil and Gas Leases
15
Dresdner Petroleum's oil and gas leases in Howard County
16 and Fisher County, Texas were sold in December, 1992 for a total
of $409,000, of which $371,000 was for the Howard County leases and
17 $38,000 for the Fisher County leases.

18 The leases were acquired by Dresdner Petroleum in May,


1990 for approximately $1.9 million. Dresdner Petroleum also spent
19 approximately $2 million for capital improvements, inclUding well
drilling, and for operating expenses, net of revenues. Allof.the
20 funds were obtained from Hamilton Taft.

21 The Howard County leasehold, with 46 production wells,


37 injection wells and 11 shut-in wells, was operated as a
22 secondary water flood program. At the time Dresdner Petroleum
acquired the Howard County leases, the leases were in a declining
23 state of production and had already had their primary recovery.
Dresdner Petroleum produced highly optimistic projections of
24 performance that it expected to achieve by reworking wells,
drilling new wells and increasing the rate of water projections.
2~ These projections were never realized.

26

THIRD INTERIM REPORT


-6-
The Fisher County project was an exploration project,
with one producing well, at the time Dresdner Petroleum purchased
2 the project. Dresdner Petroleum anticipated drilling approximately
20 wells in Fisher County, but drilled only two wells, with
3 disappointing results, and stopped the drilling program prior
to the bankruptcy filing.
After the "trustee took control of Dresdner Petroleum
5 in July, 1991, he retained Netherland, Sewell & Associates, Inc.,
consulting petroleum engineers and geologists in Dallas, to
6 determine the value and potential of the leases and advise the
trustee on the operation and disposition of the oil and gas
7 properties. Netherland, Sewell recommended continuing the water
injection program on the Howard County property for at least six
8 months to see if there was any improvement in performance.

9 To reduce Dresdner Petroleum's high overhead expenses,


the trustee employed an independent management company, KCM
10 Management of Dallas, to operate the oil and gas properties.
While the contract with KCM Management significantly lowered .
11 operating expenses so that the financial performance improved,
the level of oil production did not improve.
12
After one year of continued operation of the water
13 injection program, Netherland Sewell advised the trustee that
improvement in production was unlikely. The properties were put
14 on the market in July, 1992, and bids were solicited from some 55
companies. Seven bids were received for the Howard County leases,
lS ranging from $160,000 to $371,000, but only one offer was made for
Fisher County lease, for $38,000. Netherland, Sewell advised the
16 trustee that the bids were reasonable for the value of the
leaseholds, and recommended acceptance of the high bids. The
17 Howard County property was sold to O'Ryan oil and Gas of Odessa,
Texas, and the Fisher County property "to Liberty Operating Company
18 of Dallas.

19 A number of mechanics liens were recorded against the .


Fisher County lease, relating to pre-petition drilling activities.
20 The trustee has determined that the mechanics liens are valid-and
not avoidable under bankruptcy law. The unpaid claims secured by
21 the mechanics liens exceed the $38,000 obtained from the sale of
the Fisher County lease. The trustee expects to file a plan of
22 reorganization for Dresdner Petroleum (see section VI.B), which
will provide for the Fisher County sales proceeds, less the
23 trustee's claim for reimbursement to the estate of preservation and
sales expenses under section 506{c) of the Bankruptcy Code, to be
24 paid to the mechanics lien creditors in accordance with Texas law.
There are no liens on the Howard County proceeds, except the 1ien
25 of Hamilton Taft.

26

THIRD INTERIM REPORT


-7-
4. Texas Stadium Box

2 In March, 1992, through a Bankruptcy Court jUdgment (see


section IV.A.I), the trustee obtained title to Armstrong's stadium
3 box at Texas Stadium in Irving, Texas, home of the Dallas Cowboys
football team. Armstrong had purchased three stadium boxes in
4 March, 1990, but he sold two of them in March and April 1991,
shortly after the filing of the Hamilton· Taft involuntary
5 bankruptcy petition.

6 In July, 1992, the trustee sold the remaining stadium box


to Texas Stadium for $210,000.
7
B. Major Assets Remaining Unsold
B
1. Double C Ranch
9
The single most costly asset purchased by Armstrong with
10 Hamilton Taft funds was the Double C Ranch, a 1,700-acre luxury
ranch acquired by Armstrong in February, 1990.· Armstrong used the
11 ranch as his personal residence and to raise cattle and train
horses. Armstrong spent over $9.3 million of Hamilton Taft's'
12 funds on the ranch, inclUding $6.5 million for the purchase price,
approximately $1 million for improvements, $600,000 for purchase of
13 livestock and equipment, and $1 million to fund operating deficits.
After the trustee commenced foreclosure action, Armstrong deeded
14 the ranch to the trustee in September, 1991, in lieu of
foreclosure.
15
Despite active market efforts since December, 1991, the
16 ranch remains unsold. In October, 1992, the trustee executed an
agreement for sale of the ranch to Mancil A. and Marsha M. Hervey,
17 of Kilgore, Texas for $5,125,000, which was approved by the
Bankruptcy Court. However, the Herveys defaulted in December,
18 1992, and failed to deposit the purchase price into escrow.
After giving the Herveys several extensions of time to perform,
19 the trustee terminated the Herveysl contract on December 22, 1992.

20 The trustee is continuing his efforts to sell the ~anch~ _


A one-year exclusive listing agreement with Town & Country Real
21 Estate of Center, Texas expired in December, 1992. The trustee
has decided not to renew Town & Country's listing agreement, and
22 is negotiating with new brokers, as well as pursuing selling
efforts on bis own.
23
The carrying costs of the ranch continue to be
24 substantial, totalling approximately $275,000 per year, including
insurance, property taxes, utilities and maintenance costs. The
25 trustee has attempted to reduce the m~intenance expenses as much
as possible, consistent with the need to maintain security and the
26 appearance of the ranch for sale purposes.

THIRD INTERIM REPORT


-8-
2. Rodeo Interests
2 Through the March, ~992 jUdgment, the trustee obtained
Armstrong's 49% stock interest in Pro Rodeo, Inc., which puts on
3 rodeo shows and supplies livestock for rodeos, and Armstrong's
approximately 30% limited partnership interest in Rodeo Partners,
4 Ltd., which owns the Mesquite Arena near Dallas, where rodeo shows
are performed. Pro Rodeo is controlled by Don Gay, a former rodeo
5 star who owns the other 51% of the stock of the company. Rodeo
Partners has four other partners, Don Gay and his f~ther, Neal Gay,
6 also formerly a rodeo star, Don Carter, owner of the Dallas
Mavericks basketball team, and Jack Beckman, who manages the
7 partnership. The partners of Rodeo Partners,also own proportionate
stock interests in Arena Promotions, Inc., the general partner of
8 Rodeo Partners, which leases and operates the Mesquite Arena.
9 Armstrong spent a total of $1,850,000 in Hamilton Taft
funds for the rodeo interests. There appears to be little
10 relationship between that sum and any potential return from these
acquisitions. No income has been paid by either of these entities
11 to their shareholders or partners for three years, although some .
substantial debt paydowns were made, largely with the $1,850,000
12 received from Armstrong. The trustee has not yet actively marketed
the rodeo interests, except to ascertain whether the other
13 shareholder of Pro Rodeo and other partners of Rodeo Partners would
be interested in acquiring the estate's interests. The trustee
1.4 was not able to obtain acceptable offers from these parties,.
15 The, trustee is currently.gathering and analyzing
financial and legal information on the operations and assets of
16 Pro Rodeo and Rodeo Partners. Minority ~nterests in closely
held businesses that have not paid income for some years are not
17 readily saleable. On the positive side, the assets have not to
date required substantial expenditures by the estate or active
18 management efforts by the trustee. The trustee believes that
it is preferable for the estate to hold the interests until a
19 suitable sale or other means of liquidation develop rather than
to sell the interests for an unsatisfactory price.
20
c. promissory Notes and Guarantees
21
1. Mohamed Hadid
22
The trustee has obtai~ed a default jUdgment against
23 Mohamed Hadid, formerly a Washington, D.C. developer, for
$10,065,138, inclUding interest, for loans of $3 million he
24 received from Hamilton Taft in March, 1989, just before Armstrong
acquired Hamilton Taft, and $5,796,300 he received from Armstrong,
25 through Remington, under a loan agreement executed in September,
1990. The default jUdgment was entered in March, 1992, after
26 Hadid failed to answer the complaint.

THIRD INTERIM REPORT


-9-
In April, 1992, Hadid moved to set aside the default,
claiming, among other defenses, that he had never been served,
2 although he was personally served in Albertville, France during the
1992 winter Olympics after the trustee learned from news articles
3 that Hadid was planning to participate in the olympics. In June,
1992, the Bankruptcy Court denied Hadid's motion to set aside the
A default, stating that his default was willful and he had presented
no meritorious defense to the trustee's promissory note claims.
5
Hadid filed a notice of appeal, but entered into a
6 settlement with the trustee in September, 1992, under which he
dismissed his appeal, thereby allowing the $10 million default
7 judgment to become final. In return, the trustee dismissed without
prejudice his claims against Hadid's estranged wife, Mary Butler
8 Hadid (RButler-), on her purported guarantee of Hadid's debt.
After consulting with a handwriting expert, the trustee concluded
9 that there was substantial doubt as to whether Butler had herself
signed the guarantee. She also testified that she did not
10 authorize anybody else to sign the guarantee on her behalf.
Under the settlement, the trustee retains the right for three
11 years to refile the action against Butl~r, should new evidence
justify such action.
12
After obtaining jUdgment against Hadid, tha trustee
13 took Hadid's debtor's examination in June, 1992. Hadid testified
that he has no current sources of income, that he has been living
14 on loans and donations from friends, that all of his real property
assets have been foreclosed, and that he has jUdgments against him
15 totalling $60-$70 million. He testified that his only significant
remaining asset was a contract right to receive consulting
16 payments, discussed below. The trustee has filed the jUdgment
in states in which Hadid was known to reside or do business, and
17 will continue to pursue other reasonable actions to locate and
protect the estate's interest in any assets that Hadid may now
18 or later own. At this time, the trustee has no knowledge of any
substantial assets available for execution on the Hadid judgment,
19 other than the consulting payments, which the trustee is pursuing,
as discussed below. To date, no amounts have been collected from
20 Hadid."
21 Although Hadid had agreed to secure the Remington loan
made in September, 1990 with partnership interests he held at
22 the.time in four partnerships which own Ritz Carlton hotels in
Washington, D.C., New York, Houston and Aspen, Colorado, Hadid
23 never executed the necessary documents to perfect the security
interests. Armstrong authorized the release of the $5.7 million
24 in loans to Hadid notwithstanding Hadid's failure to perfect the
liens.
25
In June, 1991, prior to the trustee taking control of
26 Hadid's note to Remington, Hadid transferred his partnership

THIRD INTERIM REPORT


-10-
interests in the Ritz Carlton hotels to his business partner in the
Ritz Carlton ventures, Abdulaziz bin Ibrahim AI-Ibrahim (Rlbrahim R )
2 of Saudi Arabia, in settlement of business disputes between them.
Upon learning of the transfers, the trustee filed suit against
3 Ibrahim seeking recovery of the security interests on the grounds,
among others, that although the security interests were not
4 perfected, Ibrahim had actual notice of Remington's rights in
the collateral, and, furthermore, the transfers were in violation
5 of the automatic stay because they occurred after Remington filed
its Chapter 11 petition.
6
Although the trustee believes that he has meritorious
7 legal grounds to set aside the transfer of Hadid's Ritz Carlton
interests to Ibrahim, there is substantial doubt-as to whether
8 the collateral has any value, even if recovered. The Ritz Carlton
hotels are heavily encumbered, and appraisals obtained by Ibrahim
9 indicate that three of the hotels clearly have no equity value and
the' fourth hotel probably has no equity value. Ibrahim also has
10 prior liens on Hadid's hotel partnership interests, which are
senior to Remington's security interest, to secure advances
11 Ibrahim made to Hadid to finance Hadid's share of partnership
contributions. Ibrahim also claims that, in any event, Hadid's
12 partnership interests have been severely diluted by Ibrahim's
advances to the partnerships to fund construction and operating
13 deficits.

lA In the settlement agreement between Ibrahim and Hadid,


in which Hadid relinquished all of his Ritz Carlton interests,
15 Ibrahim agreed to pay Hadid consulting payments of $25,000 per
month for three years, payable in quarterly installments. The
16 trustee attached the consulting payment rights prior to obtaining
jUdgment against Hadid, and-is now seeking to execute on the
17 payment rights, which total $675,000 in unpaid past and future
payments. Ibrahim has not made the quarterly payments since the
18 trustee's attachment, and is now claiming that Hadid breached his
obligations under the settlement agreement and therefore the·
19 consulting payments are no longer owing.

20 The trustee is seeking a settlement with Ibrahim o~the _


consulting payments and other claims of the estate against Ibrahim
21 arising out of the Ibrahim-Hadid settlement agreement and the
transfers of the Ritz Carlton interests. While Ibrahim has
22 expressed interest in settlement, and the trustee has agreed to
postpone litigation activity pending settlement discussions, no
23 settlement has been reached.
2.4 2. stanley Rosenberg
2S The trustee has settled for $400,000 the estate's claims
against stanley Rosenberg, a San Antonio attorney and businessman,
26 arising out of Rosenberg's guarantee of $1 million of Remington's

THIRD INTERIM REPORT


-11-
investment in River City Fair. River city Fair was a restaurant
and gambling complex in San Antonio, in which Armstrong invested
2 $2 million, through Remington, in september, 1989. The project was
placed in bankruptcy and ceased operations less than one year after
3 it opened.

4 The trustee filed suit in December, 1991 against


Rosenberg on his guarantee. Rosenberg denied liability, claiming,
5 among other defenses, that Armstrong orally released him from his
guarantee. Subsequently, the complaint was amended~~o add other
6 causes of action, including claims for fraudulent conveyances
arising out of Rosenberg's dealings with Hamilton Taft before
7 Armstrong acquired Hamilton Taft.

8 Based partially on a review of Rosenberg's financial


statements, which showed debts substantially exceeding the value
9 of his assets, the trustee agreed to a $400,000 settlement with
Rosenberg. Rosenberg paid $250,000 in February, 1993. The
10 remaining $150,000 is secured by an irrevocable bank letter of
credit and is due in February, 1995.
11
3. Parker Automotive
12
After lengthy litigation, the trustee reached a
13 settlement in September, 1992 of Remington's claim against Parker
Automotive Corporation, arising out of a $3 million loan Armstrong
14 caused Remington to make in February, 1991. Parker was a
financially distressed company in Costa Mesa, California, which
15 manufactured and distributed equipment and chemicals designed to
clean automobile engines. Remington held a convertible note for
16 $3 million, secured by a second lien on most assets of Parker,
junior to a lien for approximately $700,000 in principal owed to
17 Home Bank, Parker's receivables lender. Remington also obtained
immediate voting control of Parker, and Armstrong controlled the
18 company from February, 1991 until he resigned in June, 1991, as
the company's financial condition continued to deteriorate.
19
Parker filed a Chapter 11 petition on July 26, 1991,
20 four days after the trustee took control of Remington and the_
Parker note. A Chapter 11 trustee was appointed for Parker, •
21 who closed Parker's business and contracted for sale of most of
its assets to Enviromotive corporation in February, 1992, for
22 $1.5 million, payable $500,000 at closing and the remainder over
a one-year period, secured by~the assets to be sold.
23
The Parker trustee challenged the secured claims of both
24 Remington and Home Bank, seeking to subordinate their claims to
other creditors. After extensive discovery, the parties reached a
25 settlement in September, 1992. The secured creditors agreed that
15% of the Enviromotive sale proceeds would be retained by the
26 Parker estate, with 85% divided between Home Bank and Remington

THIRD INTERIM REPORT


-12-
in accordance with an allocation formula which recognizes Home
Bank's first priority position, but enables Remington to share in
2 recoveries without waiting until Home Bank is paid in full.
3 Under the settlement formula, Remington would receive
a maximum of $555,000 if the entire Enviromotive purchase price
4 of $1.5 million is received. However, after paying approximately
$775,000 of the purchase price, Enviromotive defaulted when the
5 balance became due in February, 1993. Disputes have also arisen
between Enviromotive and the Parker estate over interpretation and
6 implementation of the purchase agreement. The parties are engaged
in negotiations over future payments, but at this time, the trustee
7 is pessimistic that the purchase payments will be completed, and
believes that litigation against Enviromotive and its investor.
S group, which guaranteed the purchase payments, will be likely.
To date, Remington has received a total of $204,404 from
9 the Parker sale proceeds.
10 4. McCall Family
11 The trustee has settled litigation against three members
of the McCall family of Plano, Texas, arising out of $600,000 in
12 loans they received in January, 1991. The loans were made from
Knightsbridge's account, but the promissory notes were made payable
13 to Armstrong personally. In November, 1991, in violation of a
preliminary injunction of the Bankruptcy Court, Armstrong sold the
14 notes to one of the McCalls for $275,000, which Armstrong kept and
used to finance a new business. The trustee has since recovered
15 the $275,000 from Armstrong after obtaining a judgment against him
for contempt. (See Section IV.B.)
16
After learning of the payment to Armstrong, the trustee
17 filed an adversary proceeding against the McCalls in 'February,
1992, to invalidate Armstrong's sale of the notes on the ground
18 that the sale violated the preliminary injunction and the automatic
stay, for recovery on the notes on behalf of Knightsbridge, or,
19 alternatively, for recovery of the $600,000 as fraudulent
conveyances from Knightsbridge. In November, 1992, the trustee
20 agreed to a settlement with the McCalls, under which they will .
pay the estate $325,000 over a two-year period, secured by certain _.
21 real estate interests in Texas. The McCalls also stipUlated to a
jUdgment, which will not be enforced if the settlement payments are
22 timely made. The first $40,000 payment has been received by the
trustee, and installment payments will be due semiannually in June
23 and December, with the balance due in December, 1994.
24 s. Coffea International

25 Between August, 1989 and February, 1991, Armstrong


transferred a total of $339,000 from Remington and Knightsbridge
26 to or for the account of Coffea International, Inc., a company

THIRD INTERIM REPORT


-13-
controlled by his brother, Robert Ch~d Armstrong, which is in the
business of distributing imported gourmet coffee beans. Some of
2 the transferred funds, $62,000, were reflected by promissory notes
executed by Chad Armstrong to Remington, but most of the funds were
3 transferred without any written agreement or documentation as to
any terms of repayment or otherwise. The transfers were booked as
A an -investment- by Remington in stock of Coffea, but no stock was
ever issued.
5
In August, 1992, the trustee filed suit against Coffea
6 and Chad Armstrong for recovery of the funds transferred to them
as fraudulent conveyances. Both defendants deny any obligation to
7 repay any of the funds they received, and, in fact, claim that they
have been damaged because Connie Armstrong pramlsed to invest even
8 larger sums in Coffea, which he failed to provide. The trustee has
sought a settlement with the defendants, but they have not been
9 willing to offer any repayment to the estate and claim to be
judgment-proof, while actively defending the lawsuit. Trial of
10 the Coffea lawsuit is scheduled for May 24, 1993.

11 6. PIP-Plaza Realty

12 CCAJ corporation, an Armstrong company still under the


control of Armstrong, holds a $5 million non-recourse promissory
13 note of Plaza Realty company, an affiliate of Gulftex Financial
corporation. In June, 1989, Armstrong, through CCAJ corporation,
14 entered into a joint venture with Gulftex, called Professional Fund
(-PIF-), which owned shopping center interests. Armstrong invested
15 $6 million in PIF, of which $1.5 million was a -rollover- of a loan
which Hamilton Taft's prior owner, MaxPharma, made to Gulftex
16 shortly before Armstrong acquired Hamilton Taft.

17 The joint venture with Gulftex quickly soured, and in


February, 1990, Armstrong sold CCAJ corporation's 50% interest
18 in PIF to Plaza Realty for $1 million cash and a $5 million
non-recourse note, secured by interests in partnerships and
19 corporations Which, in turn, owned commercial real estate.
After one payment of $400,000, Plaza Realty defaulted on the
20 note in 1990.

21 Instead of pursuing the collateral securing'the Plaza


Realty note, which Armstrong apparently had decided was not worth
22 pursuing, CCAJ Corporation filed a fraud suit in 1990 against Plaza
Realty, Gulftex and its principals, claiming that CCAJ Corporation
23 had been defrauded in both the original PIF investment and the 1990
sale to Plaza Realty. After filing the suit, CCAJ corporation did
2A little to prosecute the action, and dismissed it without prejudice
in December, 1991.
25
Although the trustee does not have control of CCAJ
26 Corporation or the Plaza Realty note, the trustee has investigated

THIRD INTERIM REPORT


-14-
the prospects of recovery on the note and/or the fraud suit to
determine whether it would be worthwhile for the estate to seek
2 possession and control of CCAJ corporation's rights and claims.
The trustee has determined that the fraud claim should not be
3 pursued by the estate. As part of the Plaza Realty sale, CCAJ
Corporation released all of its claims arising out of the original
4 PIF transaction, including any fraud claims. In order to revive
the PIF fraud claims, the release would have to be invalidated on
5 the ground that it was procured by fraud in the Plaza Realty sale
transaction. The trustee believes that it is not reasonably likely
6 that such fraud could be established, and that a lawsuit dependent
on proving that Armstrong was defrauded would not appear to be a
7 worthwhile investment for the estate.

8 The trustee has also investigated the collateral securing


the Plaza Realty note. Because the note is non-recourse, its value
9 is entirely dependent on the value of" the collateral. The trustee
has ascertained that all but one of the seven partnership and
10 corporate stock interests which secure the Plaza Realty note are
worthless because the underlying real estate assets owned by the
11 entities have been foreclosed. The only collateral left is an
18% interest in a partnership which owns an office building in
12 Brownsville, Texas, which was appraised at $835,000 several years
ago, but is heavily mortgaged. The financial information provided
13 to the trustee indicates that the equity in the building, if any,
would not likely return a subst~ntial amount to the holder of
14 the Plaza Realty note, but the trustee will continue to seek
information about the remaining collateral and pursue any recovery
15 available to the estate, to the eXtent it would be cost effective
to do so.
16

17 IV. LITIGATION AGAINST ARMSTRONG

18 A. Armstrong Adversary proceeding

19 In the Second Interim Report, the trustee reported that


settlement discussions with Armstrong, which had taken place over
20 seven months from June, 1991 to January, 1992, had failed, and that_
the trustee planned to proceed with litigation of claims against
21 Armstrong for his diversion of Hamilton Taft funds.

22 The Armstrong litigation proceeded in two courts, the


Bankruptcy Court,. which had jurisdiction over the trustee's claims
23 for fraudulent conveyances, constructive trust, turnover orders
and injunctive relief, and the u.s. District court, which had
24 jurisdiction over the trustee's damage claims for breach of
fiduciary duty, conversion and breach of contract. The claims
25 against Armstrong were bifurcated between t~~e two courts because
of a District Court ruling that Armstrong was entitled to
26 ·a District Court jury trial on the trustee's damage claims.

THIRD INTERIM REPORT


-15-
1. Bankruptcy court Summary Judgment

2 The trustee placed first priority on recovering assets


rema~n1ng in Armstrong's possession which could be liquidated for
3 the benefit of the estate. On March 20, 1992, the trustee obtained
a partial summary jUdgment in the Bankruptcy Court, through which
A the trustee recovered several assets held in Armstrong's name,
which were purchased through a debtor entity, usually Remington ~r
5 Knightsbridge. The Bankruptcy Court ruled that such assets were
property of the consolidated estate, and entered a turnover order
6 requiring Armstrong to transfer title to and possession of the
assets to the trustee.
7
Through the judgment, the trustee obtained the McCall
8 notes, the Pro Rodeo and Rodeo Partners interests, the Coffea
International claims, the Texas Stadium box, certain furniture
9 purchased for an Aspen, Colorado condominium, and Armstrong's two
remaining automobiles, a 1989 Jaguar and a 1990 Ford truck. (Three
10 other luxury Vehicles, a 1990 Rolls Royce, 1990 Jaguar and 1989
Lincoln Limousine, had been recovered and sold by the trustee in
11 1991.)

12 After Armstrong's turnover of assets under the March 20,


1992 jUdgment, the only known assets remaining in Armstrong's
13 possession which were purchased with Hamilton Taft funds were the
Plaza Realty note held by CCAJ Corporation (see section III.C.6),
14 cash totalling less than $15,000 in bank aqcounts frozen by court
orders, certain office furniture owned by two inactive Armstrong
15 companies, and Armstrong's personal and household possessions.
The cash and proceeds from the sale of the office furniture, which
16 together totalled $26,249, were subsequently paid to the estate as
part of Armstrong's satisfaction of a $275,000 contempt judgment
17 (see Section IV.B).

18 2. District court Summary Judgment

19 After recovering assets through the Bankruptcy Court


jUdgment, the trustee filed a motion for partial summary jUdgment
20 in the District court in August, 1992, on the damage claims _ .
for Armstrong's breach of fiduciary duty and conversion in . _
21 misappropriating $55.3 million from Hamilton Taft in the two-year
period that he owned and controlled Hamilton Taft. The trustee
22 sought a determination that Armstrong was liable to the Hamilton
Taft estate for the full amount of th,e $55. 3 million that was
23 misappropriated, less the net proceeds from the liquidation of
any assets recovered by the trustee that were acquired with the
2A diverted funds.

25 Armstrong vigorously opposed the summary jUdgment motion.


With new counsel, Armstrong waived his Fifth Amendment rights and
26 on October 30, 1992, filed a lengthy declaration in which, for the

THIRD INTERIM REPORT


-16-
first time since the Hamilton Taft bankruptcy, he provided sworn
testimony in which he attempted to justify his use of Hamilton Taft
2 funds for his and his Texas entities' investments and other
expenditures. Armstrong had twice previously refused to testify
3 in deposition on any matters relating to Hamilton Taft on Fifth
Amendment grounds.

In his declaration, Armstrong testified that all of


5 his activities with Hamilton Taft funds were intended to benefit
Hamilton Taft, because he was trying to cure the deficit that
6 existed at the time he acquired Hamilton Taft and that had been
caused by misuse of Hamilton Taft funds by the prior owner,
7 MaxPharma. Armstrong testified that his business strategy was to
use Hamilton Taft's cash flow to invest in undervalued assets which
8 had the potential for rapid appreciation which would create value
to fill the existing whole R caused by MaxPharma. Armstrong claimed
9 that he had legal and accounting advice that his use of Hamilton
Taft customer tax deposits for what Armstrong himself described as
10 an Raggressive investment strategy· was not improper and that the
customer contracts allowed Hamilton Taft unrestricted use of .
11 customer tax deposits, so long as Hamilton Taft paid any interest
and penalties resulting from late payment of taxes.
12
On December 18, 1992, the District Court rejected
13 Armstrong's defense and granted the trustee summary jUdgment as
to liability, ruling that as a matter of law Armstrong's conduct
14 constituted a breach of fiduciary duty and conversion. The
District Court ruled that Armstrong's interpretation of the
15 customer contracts was barred by the doctrine of collateral
estoppel, because the Bankruptcy Court, in entering the order
16 for relief on the involuntary petition against Hamilton Taft
on May 31, 1991, had already rejected Armstrong's arguments.
17 The Bankruptcy Court, in determining that the petitioning creditors
had claims not subject to bona fide dispute, had ruled that the
18 Hamilton Taft customer contracts obligated Hamilton Taft to pay
its customers' taxes timely, and, in order to have funds readily
19 available to meet this obligation, Hamilton Taft was allowed to
invest customer funds only in short term, liquid investments.
20
Following the grant of summary judgment on liability,
21 the trustee filed a motion for summary adjudication of damages on
January 25, 1993. In the motion, the trustee requested that the
22 court determine that there is no triable issue of fact that after
crediting Armstrong with the net proceeds from asset recqveries,
23 including a generous allowance for unsold property, the estate
has incurred at least $41 million in damages from Armstrong's
24 misappropriations. The damage motion is set for hearing on June 4,
1993.
25

26

THIRD INTERIM REPORT


-17-
B. contempt Proceedings and Settlement
2 Contempt proceedings against Armstrong have continued
to require substantial attention of the trustee and his attorneys.
3 On April 7, 1992, the Bankruptcy Court entered two civil contempt
orders against Armstrong for his violation of Bankruptcy Court
A injunctions which restricted his transfer and expenditure of assets
pending determination of the trustee's claims for his diversion of
5 Hamilton Taft assets.
6 The first contempt jUdgment (·Contempt Order #1·)
required Armstrong to repay $37,725 that he spent for personal
7 expenditures which were not for ·ordinary day to day operating
expenses· and thus were in violation of a temporary restraining
8 order issued.on April 4, 1991. The second contempt jUdgment
(NContempt Order #2·) arose out of Armstrong's purported sale of
9 the McCall notes to one of the McCalls for $275,000, which he kept
and spent, in violation of the Bankruptcy Court's preliminary
10 injunction issued on July 22, 1991. The Bankruptcy Court found
that Armstrong had willfully and intentionally violated the
11 preliminary injunction and ordered Armstrong to repay $275,000 to
the estate, plus attorneys' fees to be determined. The Court also
12 referred Armstrong's conduct to the u.s. Attorney for consideration
of criminal contempt charges, and issued a supplemental preliminary
13 injunction which imposed further restrictions on Armstrong's
expenditures and transfers of assets, including a limit of
lA $3,500 per month for living expenses, until Contempt Order t2
was satisfied.
15
Armstrong appealed the two contempt jUdgments to the
16 District Court. While the appeals were pending, Armstrong violated
the supplemental preliminary injunction by repaying personal loans
17 of $47,OOO"to friends, which resulted in the trustee filing a third
contempt motion in September, 1992. On October 26, 1992, the
18 Bankruptcy Court found that Armstrong had violated the injunction
and again referred his actions to the U.S. Attorneys for criminal
19 contempt investigation. However, the Bankruptcy Court did not
issue a civil contempt order because on the day of the hearing on
20 the contempt motion, Armstrong tendered to the trustee checks-to
repay the $47,000.
21
After the third contempt hearing, Armstrong and the
22 trustee entered into negotiations for settlement of not only the
two existing contempt jUdgments, but other claims of the trustee
23 for violations of preliminary injunctions for which the trustee
had not yet instituted contempt proceedings. These included the
24 trustee's claim that Armstrong had violated the July 22, 1991
preliminary injunction in spending two federal tax refunds,
-25 totalling $226,000, which he had obtained for his ~990 and
1991 taxes. ~strong also sought the trustee's agreement to
26 modifications of the supplemental preliminary injunction,

THIRD INTERIM REPORT


-18-
including an increase in his monthly personal expenditures and
elimination of certain restrictions on business expenditures,
2 which Armstrong claimed unduly interfered with his ability to
conduct business and earn a living.
3
On November 30,' 1992, shortly before the District Court
4 hearing on Armstrong's appeal of Contempt Orders #1 and #2,
Armstrong agreed to a settlement with the trustee of his
5 obligations under Contempt Orders #1 and #2 and the additional
claims of the trustee for injunction violations. Armstrong agreed
6 to pay the trustee the full amount of the two contempt jUdgments,
plus $25,000 in attorneys fees, totalling $337,725, no later than
7 January 31, 1993, and to pay an additional $225,000 by March 31,
1993, in satisfaction of additional claims of the trustee arising
8 out of violation of the Bankruptcy Court injunctions. The trustee
agreed to modify the supplemental preliminary injunction to permit
9 Armstrong greater flexibility in business expenditures and to
increase his personal living allowance to $5,000 per month. The
10 trustee also agreed that upon full payment of the sums required
by the settlement, the supplemental preliminary injunction would
11 terminate.

12 Armstrong paid the required amounts for Contempt Orders


#1 and 2, most of which was paid through a personal check for
13 $233,275.98 on February 1, 1993. According to financial reports
Armstrong is required to make to the trustee, the source of the
14 February 1, 1993 payment was an advance to Armstrong from a company
called Comp-U-Check, located in Detroit, Michigan, which is a
15 publicly-held company in which Armstrong acquired a controlling
interest in October, 1992. According to SEC filings, Comp-U-Check
16 is in the business of providing check guarantee and bad check
collection services to retail merchants.
17
On March 31, 1993, when the $225,000 payment was due,
18 Armstrong delivered a personal check which was rejected twice by
the bank on which it was drawn for insufficient funds. In the
19 settlement agreement, Armstrong stipulated to immediate entry of
jUdgment for $225,000 if he failed to make the March 31, 1993
20 payment. A judgment was entered against Armstrong for $225,060 .
on April 16, 1993. The Trustee has also referred Armstrong'·s·
21 delivery of a bad check to the FBI for investigation. Because of
Armstrong's default on the March 31, 1993 payment, the supplemental
22 preliminary injunction remains in effect.

23 c. Criminal Investigation

24 A criminal investigation by the U.S. Attorney's office


and Federal Bureau of Investigation of the diversion of funds from
25 Hamilton Taft is active and ongoing. The trustee has no prediction
as to when the criminal investigation will be completed.
26

THIRD INTERIM REPORT


-19-
v. OTHER CLAIMS AND LITIGATION
2 A. Fi~elity Bonds

3 In July, 1992, the trustee filed suit in Texas


state court in Houston against certain Underwriters of Lloyds
4 (·Underwriters·) who issued fidelity bonds which insured Hamilton
Taft for theft by employees. The bonds contain $20 million primary
5 coverage and $30 million excess coverage, for a total of $50
million. The suit also the names as a defendant London Risk
6 Specialists, Inc., a Houston-based insurance broker which placed
the insurance.
7
The fidelity bonds were advertised by 'Hamilton Taft to
8 its customers as a means of protection for the customers' tax
deposits with Hamilton Taft. Most of the customer contracts
9 required that Hamilton Taft carry fidelity bond coverage.

10 Shortly after the trustee's appointment, after the


trustee's accountant verified Armstrong's diversions of over
11 $50 million from Hamilton Taft, the trustee gave notiqe on
April 25, 1991 to the Underwriters .of a claim under the fidelity
12 bonds. After many months of investigating the claim, in which
Underwriters were provided voluminous records of Hamilton Taft and
13 the Armstrong entities in Texas, the Underwriters in June, 1992,
advised the trustee of its ·preliminary analysis· denying coverage.
14 Among the Underwriters' contentions were that the policies did not
cover theft by Armstrong because of his ownership and control of
15 the company, and that Hamilton Taft misrepresented and concealed
material facts when it applied for the insurance. After receiving
16 the Underwriters' communication, the trustee filed suit.

17 The trustee seeks recovery against the Underwriters


of damages of $50 million, the amount of the policy limits, for
18 refusing coverage under the policies. The trustee also requests
treble damages under Texas statutes for bad faith denial of
19 coverage and unfair insurance practices. Alternatively, in the
event Hamilton Taft's loss is not covered by the existing language'
20 of the policy, the trustee seeks reformation of the policies ~o­
reflect the intent of the parties that the fidelity bonds wer~
21 to provide insurance protection for customer tax deposits. The
trustee also seeks damages against London Risk Specialists, the
22 broker, for negligence in failing to obtain adequate coverage,
if coverage is denied.
23
The trustee has retained Joseph D. Jamail, a prominent
24 HOllston trial attorney, to represent the estate in the fidelity
bond litigation under a contingency fee arrangement, in which
25 Jamai~ will receive one-third of any net recovery. Jamail will
be assisted in the litigation by the trustee's regular counsel,
26 Feldman, Waldman & Kline, who will receive one-third of the fee

THIRD INTERIM REPORT


-20-
payable to Jamail on the actual damages portion of any award
obtained by jUdgment, or on any settlement up to the amount of
2 the policy limits of the fidelity bonds.
3 Immediately after the suit was filed, the Underwriters
sought transfer of the suit to California. They first removed the
state court suit to the u.s. District Court in Houston on the dual
grounds that a federal question' was involved because the theft
5 involved federal withholding taxes and, secondly, that the claims
were related to the Hamilton Taft bankruptcy, so th~t bankruptcy
6 jurisdiction was appropriate. The Underwriters then filed a motion
for change of venue to the u.s. District Court in San Francis~o.
7 The trustee filed a motion for abstention and remand of the case
to the Texas state court.
8
In December, 1992, the U.S. District Court in Houston
9 granted the trustee's motion and ordered the case remanded .to
the Texas state court. The District Court ruled that no federal
10 question was involved and that while the case was related to the
Hamilton Taft bankruptcy, mandatory abstention was required under
11 28 U.S.C. § 1334 because the suit was one which could not have been
brought in a federal court absent bankruptcy jurisdiction, and an
12 action had been commenced in, and could be timely adjudicated in,
state court.
13
Discovery is now proceeding in the state court action.
14 Trial is set for April 18, 1994.
15 B. Peat Harwick
16 On March 25, 1993, the trustee filed suit against KPMG
Peat Marwick and one of its former partners, Keith L. Voigts,
17 in San Francisco Superior Court, for conspiracy and aiding and
abetting in Armstrong's breach of fiduciary duty and conversion
18 of Hamilton Taft funds, and for professional negligence. During
the two-year period of Armstrong's control of Hamilton Taft, Peat
19 Marwick performed a variety of accounting and financial consulting
work for Hamilton Taft and Armstrong's Texas companies. The .
20 trustee seeks the full amount of Hamilton Taft's loss, up to ~B5
million, from Peat Marwick, for its participation in Armstrong's
21 misappropriation of Hamilton Taft funds. The complaint also seeks
punitive damages.
22
·Voigts, a partner in Peat Marwick's Dallas office, was
23 the partner in charge of Peat Marwick's services for Hamilton Taft
and the Armstrong entities. When the trustee filed a motion for
24 partial summary jUdgment against Armstrong on the breach of
fiduciary duty and conversion claims (see section IV.A.2), Voigts
25 submitted a declaration in support of Armstrong, in which he
described in detail his and Peat Marwick's involvement in
26 Armstrong's transactions with Hamilton Taft funds.

THIRD INTERIM REPORT


-21-
Voigts stated in his declaration that he worked closely
with Armstrong in developing and implementing Armstrong's business
2 strategy of using Hamilton Taft's cash flow to acquire supposedly
undervalued investments in order to create assets to fill the
3 Nhole R caused by the previous MaxPharma management. Voigts
testified that Peat Marwick analyzed and researched the issue
4 of Hamilton Taft's right to use funds received from clients for
Armstrong's investment strategy and concluded that'Armstrong could
5 appropriately use client funds for such purpose. Voigts also
stated that he and Peat Harwick assisted Armstrong in conducting
6 due diligence on a number of acquisitions and investments,
inclUding the Parker Automotive loan, the Professional Investment
7 Fund ('PIF') shopping center joint venture, the Dresdner Petroleum
oil and gas leases, the River City Fair project in San Antonio, and
8 the Weir Brothers excavation business.

9 The trustee's investigation has also disclosed that


Peat Marwick prepared financial statements designed to show a
10 substantial improvement in Hamilton Taft's financial condition
under Armstrong's management. Peat Marwick prepared and issued
11 an audit report of Hamilton Taft, as of March 31, 1989 (a few days
after Armstrong took control of Hamilton Taft), which contained
12 a going concern qualification and showed Hamilton Taft to be
insolvent, with a working capital deficit of over $18 million.
13 Only three months later, Peat Harwick issued a review report of
Hamilton Taft's balance sheet, as of June 30, 1989, which contained.
14 no going concern qualification and shdwed Hamilton Taft to be
solvent, with a positive working capital position. The dramatic
15 turnaround was achieved by tranSferring $18.9 million in largely
uncollectible Hamilton Taft receivables, -representing loans and
16 advances by Hamilton Taft during the MaxPharma era, to the
Armstrong entity now known as Remington, in return for Remington's
17 note to Hamilton Taft in the same amount. Peat Marwick reported
the Remington note as a current asset at its full face value, based
18 on Peat Harwick's assessment that the PIF shopping center joint
venture, in which Armstrong had invested $6 million a few months
19 earlier with Hamilton Taft assets (see Section III.C.6), was worth
in excess of $18 million, and therefore the Remington note to
20 Hamilton Taft was Rfully secured·.

21 By the end of 1989, Armstrong and Peat Marwick knew that


the PIF investment was in trouble. In February, 1990, Armstrong-·
22 sold the PIF joint venture interest for $1 million cash and a
$5 million non-recourse note, of which $4.6 million was never paid.
23 (See Section III.C.6.) Peat Harwick never issued a correction of
its unqualified review report. Although Peat Marwick was retained
24 to perform a year-end audit of Hamilton Taft as of December 31,
1989, it never completed its work. Internal memoranda indicate
25 that the year-end audit report was never issued ~ecause the
Armstrong Texas entities had no assets among them with sufficient
26 value to support the $18 million Remington note to Hamilton Taft,

THIRD INTERIM REPORT


-22-
and consequently any year-end audit report would have shown
Ha~ilton Taft to be insolvent.
2
Voigts left Peat Marwick in March, 1991, shortly before
3 the Hamilton Taft bankruptcy, and since then has been involved in
a variety of business ventures with Armstrong. Voigts is currently
4 on the board of directors of two corporations controlled by
Armstrong, Comp-U-Check, Inc. in Detroit and CC Entertainment and
5 Promotions, Inc. in Dallas. He was a co-founder with Armstrong of
CC Entertainment and Promotions and, through his company, Voigts,
6 Adelson & Associates, is a major shareholder. Voigts also made a
personal loan to Armstrong in 1992 to pay legal fees arising out
7 of the trustee's legal actions against Armstrong.
8 Feldman, Waldman & Kline, the trustee's regular counsel,
and Joseph D. Jamail, who is representing the estate in the
9 fidelity bond litigation, are co-counsel for the Peat Marwick suit
under a contingency fee agreement. The attorneys will receive
10 one-third of any net recovery, which will be shared equally by
the Feldman firm and Jamail.
11
c. Preference Claims Against CUstomers
12
In January and February, 1992, the trustee filed
13 preference actions against two Hamilton Taft customers, Volume
Shoe Corporation for $3.4 million and S&S Credit corporation for
14 $12.5 million. The claims were for recovery of certain payments
made in January and Karch, 1991, i.e., within 90 days of the
15 Hamilton Taft bankruptcy, under circumstances that the trustee
bel-ieves make them avoidable under bankruptcy preference statutes.
16 The payments were not made in the ordinary course of business,
but were delinquent payments made by Hamilton Taft in the course
17 of Armstrong's program of systematically holding customer checks
at periodic intervals and then reissuing checks at a later date
18 to cover the earlier delinquencies.
19 In addition to the Volume Shoe and S&S payments,
approximately $37 million paid to some 47 other Hamilton Taft
20 customers fall in the same category and are potentially subjeet to~­
avoidance. However, because all of the claims raise the identical
21 legal issue of whether the payments in question were made from
·property of the debtor· under the Bankruptcy Code, the trustee
22 decided to have the issue raised and decided in a test case before
engaging a large number of customers in litigation over the same
23 issue.
24 On May 15, 1992, the Bankruptcy Court, on a motion to
dismiss filed by S&S Credit, ruled that under the Supreme Court
25 decision in Begier v. Internal Revenue Service, 486 U.S. 53 (1990),
the transfers in question were not made from property of the
26 debtor, but from funds deemed to be held in trust for the Internal

THIRD INTERIM REPORT


-23-
Revenue Service and thus were not avoidable by the trustee. Begier
involved the issue of whether a bankruptcy trustee could recover
2 from the IRS withholding taxes paid by the debtor-employer from
commingled funds in its general operating account. Begier held
3 that under section 7501 of the Internal Revenue Code, a trust was
created for the benefit of the IRS the moment that payroll taxes
A were originally collected or withheld, and Congress intended to
apply ·reasonable assumptions· to the tracing of funds so that any
5 voluntary payment by the taxpayer from its assets would be assumed
to have been paid from the trust funds that had been withheld or
6 collected.

7 The Bankruptcy Court, in deciding S&S Credit's motion


to dismiss, held that Begier stated a public poiicy to prevent
8 a trustee from recovering any payments of payroll taxes as
preferences; even though the trustee in this case was not seeking
9 recovery from the IRS, but from a creditor on whose behalf the
tax payments had been made.
10
The trustee appealed the S&S credit decision to the
11 District Court, which affirmed the Bankruptcy Court's ruling on
February 18, 1993. The trustee has appealed the District Court's
12 ruling to the Court of Appeals for the Ninth Circuit. The trustee
believes that the Bankruptcy Court and District Court erroneously
13 extended Begier to a case where the debtor was not the taxpayer
making payment out of its own accounts, but a third party who made
1.4 the tax payments from commingled funds received from hundreds of "
similarly-situated taxpayer clients. The trustee argued that in
15 such a situation, a ·reasonable assumption· that a ne~s existed
between the funds withheld from numerous clients and the funds used
16 to pay a particular client's tax obligation simply could not exist.
The trustee argued that Begier, which was intended to protect
17 the IRS's rights under section 7501, does not protect a creditor,
who would be a general unsecured creditor, from recovery of a
18 preference received at the expense of other creditors on an equal
footing.
19
The S&S Credit appeal is now pending before the Ninth-
20 Circuit. Because the two-year limitations period for the trustee -
to file Hamilton Taft avoidance actions expired on March 26, ~993, -
21 the trustee could not risk a delay in filing suit against the other
47 customers who received similar payments until after the Ninth
22 Circuit decided the appeal. On March 25, 1993, the trustee filed
a single adversary proceeding seeking recovery of $36.9 million
23 received by the other 47 customers. The trustee simultaneously
filed "a motion, which is pending, requesting that the Bankruptcy
2..4 Court stay the adversary proceeding until the Ninth Circuit rules
on the S&S Credit appeal.
25

26

THIRD INTERIM REPORT


-24-
D. Tax Penalty Refunds
2 In October, ~992, the trustee proposed to all Hamilton
Taft clients for whom Hamilton Taft paid tax penalties of more
3 than $50,000 that the estate and the clients cooperate in jointly
pursuing refund of approximately $6.1 million in tax penalties, on
4 the ground that reasonable cause existed for the late payment of
taxes because of Armstrong's systematic misappropriation of taxes
5 deposited by clients with Hamilton Taft. Under the Internal
Revenue Code, late penalties may be excused if the failure to meet
6 the requirements of the Code are due to reasonable cause and not
willful neglect.
7
The trustee proposed joint pursuit of -the claims
8 priEarily to avoid a standing issue if either the estate or the
clients pursued the tax penalties individually. section 6511(a)
9 of the Internal Revenue Code provides that any claim for refund
must be filed by the wtaxpayer-, while section 6402(a) of the Code
10 authorizes payment of refunds only to -the person who made the
payment. N Where the party making penalty payments has not been
11 the taxpayer itself, the IRS has, in prior refund litigation,
argued that whichever entity pursued the refund lacked standing
12 to either claim or receive the refund.
13 Under the agreement offered by the trustee to clients on
an individual basis, the trustee would assign to the client any
14 rights the Hamilton Taft estate had to claim a refund and would
agree that the client should be treated as the entity which paid
15 the penalty because at the time of payment, Hamilton Taft owed
to the client the amount of the penalty under its contractual
16 obligation to indemnify the clients for late payment of taxes.
The refund claim would be filed in the name of the client, and
17 any net proceeds, after deduction of legal fees and costs, would
be divided equally between the client and the estate.
18
Fifteen clients, with penalty refund claims totalling
19 $1.5 million, have so far agreed to the trustee's proposal, and a
number of other clients have advised the trustee that they are
20 considering it. Under the agreement, the clients have retained a
single attorney, Mitchell J. Friedman, a tax specialist, to file
21 and pursue refund claims on their behalf on a contingency fee
basis. Friedman will receive one-third of any recovery on each
22 claim, if the claim is settled pursuant to the IRS administrative
process, and 40% of any recovery if the claim is not resolved at
23 the administrative level. The trustee has agreed to advance up to
$50,000 for out-of-pocket costs, not to exceed 2% of the aggregate
24 amount of penalties at issue in the refund claims filed by
Friedman.
25
Thus far, one district IRS office has approved and paid
26 a refund claim in the amount of $34,947. However, the trustee has

THIRD INTERIM REPORT


-25-
am
been advised that the Western regional office of the IRS has now
taken over the claims and has announced its intention to oppose the
2 payment of any refunds. rd
E. S&S credit Penalty Refund

The estate has received $160,091 from S&S Credit in


settlement of a claim for a post-petition tax penalty refund paid
by the IRS to S&S Credit in May, 1991. The estate's claim to the
penalty refund was separate from the preference action filed
against S&S Credit for payment of delinquent taxes during the
prepetition period. (See section V.C.)

In September, 1990, Hamilton Taft paid the" IRS $170,382


as a penalty for late payment of payroll tax obligations of S&S
Credit. Subsequently, the IRS agreed to abate the penalty and to
refund the penalty payment. In May, 1991, during the postpetition
period, IRS paid a refund of $180,091, which included interest,
directly to S&S Credit.

The trustee claimed that the refund belonged to the d


estate, and that the payment to S&S Credit in effect constituted a
post-petition payment of S&S Credit's pre-petition unsecured claim
for unpaid tax liabilities. The trustee and S&S Credit agreed to a
"ettlement of $160,091, which was paid by S&S Credit on May 7,
_993. ret
P. CIGNA-Howard Weil
The trustee has agreed to settle for $1.8 million the
claims of the Hamilton Taft estate against ClGNA Corporation and
its subsidiaries arising out of the leveraged buyout of CIGNA's
stock in Hamilton Taft in 1988.

CIGNA, through a subsidiary, Connecticut General


Corporation, was formerly the sole owner of Hamilton Taft. In
January, 1988, CIGNA sold its stock in Hamilton Taft to MaxPha~a,
Inc. (MaxPharma, in turn, transferred Hamilton Taft to an insider
who then transferred Hamilton Taft to Connie C. Armstrong, Jr~ in --
March, 1989). CIGNA received $4.1 million from the sale, of" which
$2.5 million was designated as the purchase price and $1.6 million
as repayment of advances CIGNA had made to Hamilton Taft.- Of the
$4.1 million received by CIGNA, $3.6 million came from'the proceeds 00
of sale of treasury bills purchased with Hamilton Taft funds.

The transaction was structured as follows: on the day


of the closing of the CIGNA-MaxPharma sale, $5 million of Hamilton ate
Taft funds were used to purchase u.s. treasury bills, which were-
I sold to Howard, Weil, Labouisse, Friederichs, Inc. (-Howard Weil·),
! a brokerage house, under a reverse repurchase agreement, in which nth
,T ...... mil ton Taft was obligated to repurchase the bonds at a later

THIRD INTERIM REPORT


-26-
before the Hamilton Taft bankruptcy. Grambling also received a
$35,000 bonus on January 15, 1991.
2
The trustee seeks recovery of the severance payment and
3 bonus as a fraudulent conveyance, on the ground that the estate
did not receive reasonably equivalent value for the payments.
4 Alternatively, if consideration was received, the trustee seeks
recovery of the payments as preferences.
5
Grambling, through her attorney, has informed' the trus~ee
6 that she has worked only sporadically since leaving Hamilton Taft
and does not have the financial ability to satisfy any jUdgment.
7 The trustee has requested financial information .from Grambling in
order to consider settlement.
B
2. HaxPharma Insiders
9
The trustee has filed an adversary proceeding against
10 three MaxPharma insiders for payments they received from MaxPharma
from funds transferred from Hamilton Taft during the period that
11 MaxPharma controlled Hamilton Taft.

12 The payments were $400,000 paid as a bonus to Lawrence B.


Costello, MaxPharma's president, $250,000 paid as a loan to Wayne
13 Litchfield, a MaxPharma director and attorney, and $400,000 paid as
a bonus to Fran Bartlett, Hamilton Taft's president. The trustee
14 seeks recovery of the payments as subsequent transfers of funds
fraudulently conveyed from Hamilton Taft and paid to insiders who
15 had knowledge of the source of the funds they received. The
trustee does not have knowle~ge at present as to the financial
16 condition of any of the defendants.

17
VI. FUTURE PLANS AND PROSPECTS FOR DISTRIBUTIONS TO CREDITORS
18
A. Consolidated Case
19
with most of the assets sold and much of the estate's
20 litigation complete or near completion, the focus of the estate's --
attention in the next year will be on the two major lawsuits that
21 will largely determine the amount of distributions to creditors in
the Hamilton Taft bankruptcy. These suits are the fidelity bond
22 litigation against Underwriters of Lloyds and the action against
Peat-Ma-rwick for aiding and abetting and conspiracy with Armstrong.
23 since there are over $100 million in creditors' claims asserted
against the consolidated estate, only the fidelity bond and Peat
24 Marwick suits have a reasonable potential for yielding recoveries
for the estate of a size that would significantly affect the
25 percentage distribution to creditors. If the litigation efforts
against the Underwriters of Lloyds and Peat Harwick are successful,
26

THIRD INTERIM REPORT


-2B-
creditors may realize a substantial percentage payment on their"
claims ..
2
While the trustee expects to obtain a large judgment
3 against Armstrong, its collectability is uncertain and will be
dependent on Armstrong's future income potential, which in turn
4 may be affected by the outcome of the criminal investigation.
A successful outcome in the preference actions against "Hamilton
5 Taft customers could very significantly affect the allocation of
distributions among creditors, but is likely to have less impact
6 on the percentage dividend paid to creditors as a group, as
repayment of preferences increases claims against the estate by
7 a like amount.

8 The trustee cannot predict when he will be in a position


to make a distribution to creditors of the consolidated estate.
9 At this time, it is the trustee's jUdgment that it would not be
worthwhile to make a partial distribution to creditors until either
10 the Peat Marwick or the fidelity bond litigation, or possibly both,
are completed and the results are known.
11
Before any distributions are made, claims against the
12 estate will have to be finally reviewed and appropriate objections
made and resolved.. The trustee has not made any decisions as to
13 claims objections, and does not intend to undertake to review and
object to creditor claims until the value of unsecured claims is
14 better known. It will also not be feasible to make a distribution
until the S&S Credit appeal is finally ~etermined and the
15 preference claims against Hamilton Taft customers are resolved,
as potential preference liability affects a creditor's right to
16 receive distributions from the estate.

17 It remains the trustee's intent to eventually file, in


conjunction with the Creditors Committee, a Chapter 11 liquidating
18 plan for the consolidated estate for the purpose of making
distributions to creditors. While an alternative is to convert to
19 a Chapter 7 at the time of distribution, thereby saving the cost of
the plan process, a conversion would reopen the bar date for filing
20 claims and expose the estate to new, unknown claims which co~ld-be-­
potentially prejudicial to creditors with claims already on" file.
21
While a Chapter 11 liquidating plan could be filed, and
22 confirmation sought, at any time, there is no functional purpose or
benefit to having a plan confirmed until the estate is ready to
23 make distributions. Therefore, the trustee has not considered it
worthwhile to divert attention from asset and claims recoveries in
24 order to file and seek confirmation of a liquidating plan.

25

26 / / /

THIRD INTERIM REPORT


-29-
B. Dresdner Petroleum

2 As all of the assets of Dresdner Petroleum have been


liquidated and consist of cash (See section III.A.3), the trustee
3 expects in the near future to file a Chapter 11 liquidating plan
for Dresdner Petroleum so that its assets can be distributed to
4 creditors. All claims in the Dresdner Petroleum case have been
analyzed, and the trustee has filed objections to those claims
5 which he considers to be invalid or inaccurate in amount, based on
Dresdner Petroleum's books and records. ~l objections to trade
6 claims, i.e., claims based on goods and services supplied to
Dresdner Petroleum, have been resolved, and the total allowed
7 trade claims can be fixed at about $370,000. The only significant
outstanding claims for which the trustee's objections have not
8 been resolved are claims of certain creditors of Hamilton Taft and
Remington, who filed duplicate claims against Dresdner Petroleum
9 and who have been unwilling to· withdraw those claims.
10 As previously discussed, Dresdner Petroleum's cash totals
approximately $380,000, as of March 31, 1993. (See section II.D.)
11 That amount will be reduced by payment of the trustee's fees and
accrued and future administrative expenses of Dresdner Petroleum.
12 In addition, $38,000 of the cash, attributable to the sale of the
Fisher County leasehold, is encumbered by mechanics liens. (See
13 section III.A.3.) After deduction of the encumbered Fisher County
funds and accrued and estimated future Chapter 11 administrative
14 expenses, the trustee estimates that the amount available for
distribution to pre-petition creditors will be in the $280,000
lS range.
16 Hamilton Taft held a recorded deed of trust on the Howard
County leasehold, which accounted for most of the sale proceeds
17 received by Dresdner Petroleum. Payment of all of the Howard
County proceeds to the consolidated estate on the deed of trust
18 would leave no assets available to make any payment to the trade
creditors of Dresdner Petroleum. After consultation with the
19 Creditors Committee of Hamilton Taft, the trustee intends to
propose in the Dresdner Petroleum plan that the Dresdner Petroleum
20 assets (after payment of administrative expenses and valid -
mechanics lien claims) be divided 50% to the consolidated estate
21 and 50% to Dresdner Petroleum trade creditors. The trustee will
seek subordination of any claims of Hamilton Taft or Remington
22 creditors filed in the Dresdner Petroleum case, so as not to dilute
the amount available to pay Dresdner Petroleum ·creditors. The
23 trustee's best estimate is that this program would result in
Dresdner Petroleum trade creditors receiving payment on their
24 claims in the 40% range.
25

26 / / /

THIRD INTERIM REPORT


-30-
VII. CONCLUSION

2 These bankruptcy estates have involved a very extensive


analysis of a business with a cash flow of over $6 billion per
3 year, unpaid tax deposits received from clients of over $90
million, creditors' claims totalling in excess of $100 million,
4 and a vigorous asset recovery and litigation program, requiring
more than a dozen lawsuits.
5
The trustee believes that the speed and quality with
6 which the estate's attorneys and professional advisers have
performed their work is extraordinary, and that in light of
7 the difficulties encountered, they have had excellent results.
Although the cost of these efforts has been considerable, the
8 trustee believes that the administration of the case is now at
a point where it is manageable without the extraordinary efforts
9 of the past two years and with reasonable prospects.

10 The trustee wishes to thank creditors for their


understanding, cooperation and support.
11

12

13 Dated: May 14, 1993

14

15

16

17

18

19

20

21

22

23

24

25

26

THIRD INTERIM REPORT


-31-
)' . .

APPENDIX A

STATErvlENTS OF CASH RECEIPTS AND


DISBURSEMENTS FOR THE DEBTORS
AS OF MARCH 31, 1993
¥

I '''tea
Hemming Morse S.. Office
160 Bavut Rood
Founh RoM
Cerrifieti Public Accountants San Mateo, CA 94402
Mnd Consu~nts T~ 1~151 574-1900
Fax: 14151 378-4090

Frederick S. Wyle, Trustee for


Hamilton Taft & Company

ACCOUNTANT'S REPORT

We have compiled the accompanying consolidated statements of cash receipts and


disbursements of Hamilton Taft & Company (a California corporation in bankruptcy),
Knightsbridge Companies, Inc. (a Texas corporation in bankruptcy), Remington Companies,
Inc. (a Texas corporation in banlcruptey), and Dresdner Enterprises, Inc. (a Texas
corporation in bankruptcy) and the statement of cash receipts and disbursements of Dresdner
Petroleum, Inc. (a Texas corporation in bankruptcy) for the Post-Petition and Trustee periods
ended March 31, 1993 in accordance Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.

A compilation is limited to presenting, in the form of financial statements, information that is


the representation of management. We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion or any other form of
assurance on them.

1kw,w-{
San Mateo, CalIfornia
May 4, 1993

II A-Ol
Consoli dated
Hamilton Taft & Company. Knightsbridge Companies. Inc.
Remington Companies, Inc. and Dresdner Enterprises. Inc.

and

Dresdner Petroleum, Inc.

Schedules of Cash Receipts and Disbursements


For The Cumulative Periods Ended March 31, 1993

Contents

Accountant's Compilation Report

Consolidated Companies
Schedule A-1 Statemant of Cash Receipts and Disbursements
For The Cumulative Post-Petition Periods Ended March 31. 1993

Schedule A-2 Statement of Cash Receipts and Disbursements


For The Cumulative TrustGQ Administration Ended March 31.1993

SchadulQ A-3 SchaduIG of Cash and Cash Equivalents at March 31 t 1993

Dresdner Petroleum, Inc.


Schedule B-1 Statement of Cash Receipts and Disbursements
For The Cumulative Post-Petition Period and Trustee Administration
Ended March 31, 1993

Schedule B-2 Schedule of Cash and Cash Equivalents at March 31.1993

Consolidated Companies and Dresdner Petroleum, Inc.


Notes to Statements of Cash Receipts and Disbursements

A-02
Hamilton Taft & Company. Knightsbridge Companies, Inc.
Remington Companies. Inc. and Dresdner Enterprises. Inc.
Consolidated Statement of Cash Receipts and Disbursements
For the Cumulative Post-Petition periods ended March 31. 1993
(See Accompanying Notes and Accountanes Compilation Report)

Cumulative for Post-Petition Periods


HamUton Taft Texas Debtors Consolidated Consolidated
To 10/31/91 To 10/31/91 Sinee 11/01/91 Total
Receipts:
Gross real estate sales $711,250 $3,170.250 $3,861,500
Less cost of sales (158,875) (301,765) (460,640)
Net procGQds from &ala of rnal 9statG 552.375 2,868.485 3,420,860

Net proceeds from sale of livestock-HTC Ranch $192,174 158.300 350,474


Net procoods from sale of other assats 156,956 167,412 367.172 691,540
Interest received 169,054 284 327,244 496,582
Sandia Corporation recovery 932,076 932,076
Other receipts (~Detailed Schedule) 186,380 78,793 1,609,517 1.874,690
Total Receipts 704,564 798,865 6,262,794 7,766,223

Dish ursements:
Employee costs: Ranch (Since 8/01/91) 37,136 109,221 146,357
Employee costs: Other 445,270 258,805 258,716 972,791
SubtotaJ: Employ" costs 482~406 268,805 367,937 1,119,148

Other operating costs (See :>etaIled Schedule) 474,122 15,329 810,967 1,300,418
Professional Fees: Trustee and Trustee's Professionals
TrustaG'a Attorney; & Accountant 628,814 2,328,669 2,957,483
Trustee'. Appraisers and Consultants 20,811 9,070 28,061 57,942
Trustee's fees 104,088 263,373 367,461
ProfG"ional Fags: Creditor's CommrttQQ 14,536 139,429 153,965
Professional Fees: Debtor-in-Possession 13,516 67.753 81~
Professional Fees: Petitioning Creditors 566.858 566,858 .
Ranch operating costs 16,114 105,729 121,843
Settlement Bank One furniture lease 188,945 188,945
Trustee's administrative costs 6.401 5,014 11.415
Trustee's bond 600 14.950 15,550
U.S. Trustee fees 4,500 2,100 19,050 2S,6S0
Disbursements for operations 1,940,737 309,420 4,717,790 6,967/347
Net loans to Petroleum See Note 3 60,000.. 60,000
Total disbursements 1,940,737 369,420 4,717,790 7,027,947
-
Excess of Receipts (Disbursements) (1,236,173) 429,445 1,545,004 738$6

Beginning Cash and Cash Equivalent Balances


Balance as of bankruptcy petition 5,856.509 74,133 5,930,642
Ranch cash balance as of August 1 1991
t 1,730 1.730
Transfer of Texas Debtors' cash balances 503,Sn (503,5n) 0

~nding Cash and Cash Equivalent Balances $5,125,643 $0 $1,545,004 $6,670,64a

Schedule A-1
A-D3
Hamilton Taft & Company, Knightsbridge Companies. Inc.
Remington Companies, rnc. and Dresdner Enterprises. Inc.
Consolidated Statement of Cash Receipts and Disbursements
For the Cumulative Post-Petition periods ended March 31, 1993
(See Accompanying Notes and Accountant's Camp ilation Report)

Cumulative for Post-Petition Periods


Hamitb'l Taft Taxaa DebtoR Consolidated Consolidated
To 10/31/91 To 10/S1/91 snce 11101/91 Total

Detail of Other Receipts:


Expense reimbursements $20.422 $20,422
Loan Repayment - Dresciler Petroleum See Note 3 70,500 70,500
Litigation and Claim Recoveries:
Connie C. Annstrong, Jr. 25,000 337,827 362,827
Gulflex settlement 38,888 38,888
David McCan settlement 40,000 40,000
Meadow Owens seWamant 400,000 400.000
Parker Automotive settlement 183,155 183,155
Rosenberg settlement 250,000 250,000
Monthly service fees $32 109
1 3,735 35,844
Net customer funds (Tax Agency funds) 24.974 24,974
Returned customer checks (pre-Petition) 97,455 97.455
Reimbursement-Ranch nsuranca claims 107,343 107,343
Recovery of Unclaimed Property 53,568 53r568
other receipts 31,842 53,793 104,079 189,714

Total Other Receipts $186.380 $78.793 1.609,517 $1,874.690

Detan of Other Operating Costs Paid:


Equipmsrt leases $9,979 $4,947 $14,926
Insurance 78,741 121,191 199,932
Utigation costs 0 234 59,181 59.415
Office supplies & expanses 0 30,699 13,810 44,509
Other costs of operations 51,006 36,397 124 87,527
Outside services 0 5,814 21,495 'Z7,309
Postage.freight & shipping 4,283 2,433 6.716
Publication costs 12,961 12,961
Relocation costs 15,905 15,905
Rent 72,658 35,327 104,390 212..375
Supplies 11,873 t1,873
Taxes: Property & business 179,405 179 405
1

Telephone 15,573 9 1875 6,211 31,659


Travel & auto expenses 17,453 8,236 25,689
Work-in-Process: ReaJ Estate 12,647 242.437 255,084
Real Estate holding costs 51,010 51,010

Affiliate expenses paid 2,946 2,946


Accrued raabilitles: Post- Petition 133,861 609 134,470
Costs aJJocated to other affiliates (143,554) (143,554)
Prepaid expenses & deposits 62,522 5,490 68,012
Property and equipment 1,814 435 2,249

Total other operating costs $474.122 $15,329 $810.967 $1,300.418

Schedule A-1
A-04
"

Hamilton Taft & Company. Knightsbridge Companies. Inc.


Remington Companies, Inc. and Dresdner Enterprises, Inc.
Consolidated Statement of Cash Receipts and Disbursements
For the Cumulative Periods of Trustee Administration Ended March 31, 1993
(See Accompanying Notes and Accountant's Compilation Report)

Cumulative Trustee Periods


Hamilton Te1t Tams D.btorla ConaoILdmad Consolidated
To 10/31/91 To 10/31/91 Since 11/01/91 Total
Receipts:
Gross real estate sales $593,750 $3,170,250 $3,764,000
Less cost of sales (134,192) (301,765) (435,957)
Net proceeds from sale of real estate 459,558 ~,4B5 3,328.043

Net proceeds from sale of livestock-HTC Ranch $192.174 158,300 350.474


Net proceeds from sale of other assets 156,956 167,412 367,172 691,540
Interest received 169,054 284 327,244 496,582
Sandia Corporation racovery 932,016 932,076

Other receipts (See Detailed Schedule) 186,380 75.197 1.609,517 1.871.094


Total Receipts 704,564 702.452 6,262,794 7,669,810

Disbursements:
EmpJoyGla costs: Ranch (Sinca 8j01J91) 37,136 109,221 146.357
Employee costs: Other
Employees 445,270 195,523 258,716 899,509
Subtotal: Employee costs 482,406 195,523 367/iJ37 1.045,866

Other operating costs (SeQ Detailed Schedule) 474.122 (60,145) 810,967 1.224,945
Professional Fees: Trustee and Trustee's Professiorlals
Trustee's Attorneys & Accountant 628,814 2,328.669 4957,483
Trustee's Appraisers and Consultants 20,811 9,070 28,061 57,942
Trustee's fees 104,088 263;sl3 367.461
Professional Fees: Creditor's Committee 14.536 139.429 153,965
Professional Fees: Debtor-in-Possession 13,416 67,753 81,169
Professional Fees: Petitioning Creditors 566,858 566,858
Ranch operating costs 16,114 105,729 121,843
Settlement Bank Onca fumltuf'Q kla$.Q 188,945 188,945
Trustee's administrative costs 6,401 5,014 11,415
Trustee's bond 600 14,950 15,550
U.S. Trustee faGS 4,500 2,100 19.050 25,650
Disbursements for operations 1,940,737 160,565 4,717.790 6,819,092
Repayment of loan from Petroleum See Note 3 10,500 10,500
Loan to Petroleum See Note 3 60,000 -50,000 -.- -
Total disbursements 1,940,737 231,065 4,717,790 6,889,592 ._-

Excess of Receipts (Disbursements) (1.236,173) 471,387 1,545,004 780~19

Beginning Cash and Cash Equivalent Balances


Balance as of appointment of Trustee 5,856,509 32,190 5.888,699
Ranch cash balance as of August 1 t 1991 1,130 1,730
Transfer of Texas Debtors' cash balances 503,577 (503 ,?II) 0

Ending Cash and Cash Equivalent Balances $5,125,643 $0 $1,545,004 $6,670,648

Schedule A-2
A-OS
" .
"

Hamilton Taft & Company, Knightsbridge Companies, Inc.


Remington Companies, Inc. and Dresdner Enterprises, Inc.
Consolidated Statement of Cash Receipts and Disbursements
For the Cumulative Periods of Trustee Administration Ended March 31, 1993
(See Accompanying Notes and Accountant·s Compilation Report)

Cumulative Trustee Periods


Keuniion Taft T.xaa Oebtora eor.or.cfated Consolidated
To 10/31/91 To 10/31/91 Slnco11/01/91 Total

Detail of Other Receipts:


Expense reimbursements $20.422 $20,422
Loan Repayment - Dresdner Petroleum See Note 3 70,500 70,500
Litigation and Claim R~overies:
ConniQ C. Arm~trong, Jr. 25,000 337.827 362,a27
Gutnex settlement 38.888 38,888
David McCan settlement 40,000 40,000
Meadow Owens ~ttlaroont 400,000 400,000
Parker Automotive settlement 183,155 183,155
Rosenberg settlement 250,000 250,000
Monthly service fees 32,109 3,735 35,844
Net customer funds (Tax Agency funds) 24,974 24,974
Returned customer checks (pre-Petition) 97,455 97,455
Reimbursements-Ranch insurance claims 107,343 107.343
Recovery of Unclaimed Property 53.568 53.568
Other receipts 31,842 50,197 104,079 186,118

Total other l"9CQipts $186,380 $75,197 $1,609,517 $1.871.094

Detail of Other Operating Costs:


Equipmeri laasas $9,979 $9/if79
Insurance 78.741 121,191 199,932
Litigation costs 59,181 59,181
Office suppr~s & expenses 27,382 13,810 41,192
Other costs of operations 51,006 261 124 51.391
Outside services 21,495 21,495
Postage;frelght & shipping 4,283 2,433 6,716
pubrlCation costs 12.961 12.961
Relocatlon costs 15.905 15,905
Rent 72,658 31,994 104,390 209,G42
Supplies 11,873 11,873
Taxes: Property & business 179.405 179,405
Telephone 15.573 4,291 6,211 "26,075 _. -
Travel & auto expenses 5,507 8,236 -'3,743
Work-in-Process: Real Estate 11,235 242..437 253,672
Real Estate holding costs 51,010 51,010

Affiliate expenses paid 2,946 2,946


Accrued liabilfties: Post-Petition 133.861 609 134,470
Costs allocated to other affiliates (143,554) (143,554)
Prepaid expenses & deposits 62,522 2,740 65,262
Property and equipment purchased 1,814 435 2,249

Total other operating costs $474,122 ($60.145) $810,967 $1,224,945

Schedule A-2

A-06
" ,

DRESDNER PETROLEUM. INC.


(A Texas Corporation In Bankruptcy)

Statement of Cash Receipts and Disbursements


For The Cumulative Post-Petition and Trustee Periods
Ended March 31. 1993
(See Accompanying Notes and Accountant's Compilation Report)

Post- Petition Trustee


Period: Period:
4/29/91 7/22/91
Through Through
3/31/93 3/31/93
Receipts:
au and gas revenues $1,585,224 $1.332.922
less costs of production 1.233,948. 1,150,276
Net proceeds from aU and gas revenues 351:zT6 182.646
Sale of oil & gas properties· 410.400 410.400
Interest received from Affiliates 151 151
Collection of accounts receivable 39,384 39.384
Other receipts 16,599 13,109
Refund of legal fees 7.759 7,759
Receipts before transfers from Affiliates 825,569 653,448
Transfers From Affiliates:
loan repayment received from Remington See Note 3 10,500 10,500
loan from Knightsbridge See Note 3 60,000 60,000
Total racQipt.£ 896,069 723,948

Disbursements:
Consurta.nt Foos 17,342 17,342
Employee costs 259,421 134.331
Insurance 38,632 36,632
Interest paid to affiliate 78 78
Office expenses 767 746
Professional Fees:
Trustee's Attorneys & Accountant 17,185 17,185
Attorney for Debtor-in-Possassion 5,888 ~.888
Property taxes 63,224 63.224
Purchase of field equipment 6.633 6,633
Rent 14.B87 8,220
R oyafties paid 19,204 19,204
Telephone 6.995 597
Travel and entertainment 182 182
Trustee's bond 300 300
U.S. Trustee fees 9,250 8,500
Subtotal: Disbursements 459.987 321,061
Transfers To Affiliates:
loan to Remington See Note 3 10,500
Repayment of loan from Knightsbridge See Note 3 70.500
Total disbursements 540,987 391,561
Excess receipts (disbursements) 355,082 332,387
Beginning cash balance 25,023 47,718
Ending cash balance $380,105 $380.105

Schedule B-1

A-DB
• \ I

Dresdner Petroleum, Inc.


(A Texas Corporation In Bankruptcy)

Schedule of Cash and Cash Equivalents at March 31 r 1993


{See Accompanying Notes and Accountant's Compilation Report}

Cash Accounts:
General Operating Pacific Bank
Account #1150-852204 $7,077

General Operating NCNS Bank - Texas o


(KCM Managemont)

Subtotal: cash accounts 7.077

Cash Equivalents:
Money Market Pacific Bank
Account #1150-852152 373,027

Total Cash and Cash Equivalents $380.105

Schedule B-2
A-09
f ••• I I
"

HAMILTON TAFr & CO:MPANY, KNIGHTSBRIDGE COMPANIFS t INC.,


REMINGTON CO:MPANIFS, INC. and DRESDNER ENTERPRISES, INC.
(A Group of Affiliated Companies Substantively Consolidated In Bankruptcy)
and
DRESDNER PETROLEUM, INC.
Notes to Statements of Cash Receipts and Disbursements
For the periods ended March 31, 1993

Note 1: Consolidated Cash Statements


The accompanying consolidated statements of cash receipts and disbursements
include the accounts of the following companies:

1) Knightsbridge Companies, Inc. (Knightsbridge);

2) Knightsbridge's wholly owned subsidiaries including Hamilton Taft &


Company (Hamilton Taft) and The Remington Companies Inc.
(Remington);

3) Remington's wholly owned subsidiaries including Dresdner Enterprises,


Inc. (Enterprise) and Remington Corporate Financial Group, Inc.;

4) Enterprise's wholly owned subsidiaries including DEl, Inc., Chayson


Mortgage and Investment Company, Cal-Pacific Management Cotp.,
and Suisse Texas, Inc.

Knightsbridge also owns a controlling interest in Dresdner Petroleum, Inc.


(Petroleum). Cash flows arising from the operations of Dresdner Petroleum, Inc.
have not been included in the consolidated statement of cash receipts and
disbursements. ..

The term -Texas Debtors· as used in these statements of cash receipts and
disbursements means Knightsbridge, Remington and Enterprise. Petroleum's
statement of cash receipts and disbursements is presented separately.

Several of the affiliated companies have fued for protection under Chapter 11 of· -
the United States Bankruptcy Code. On March 20, 1991, an involuntary petition
was filed in San Francisco for Hamilton Taft and on March 26, 1991, Frederick S.
Wyle was appointed ~ trustee in bankruptcy.

Knightsbridge filed for protection under Chapter 11 of the United States


Bankruptcy Code on April 19, 1991 and Remington, and Enterprises filed on April
29, 1991, all in Dallas, Texas.

A-IO
, '.' I,
'/

HAMILTON TAFI' & CO:MPANY, KNIGHTSBRIDGE COMPANIES, INC.,


REMIN"GTON COMPANIES, INC. and DRESDNER ENTERPRISES, INC.
(A Group of AflUiated Companies Substantively Consolidated In Bankruptcy)
and
DRESDNER PETROLEUM, INC.
Notes to Statements of Cash Receipts and Disbursements
For the periods ended March 31, 1993

(Note 1: Consolidated Cash Statements - Continued)


On July 22, 1991, Frederick S. Wyle was appointed as interim trustee in
bankruptcy for Remington, Enterprises and Knightsbridge. His appointment was
made permanent on November 4, 1991.

On November 4, 1991, the Bankruptcy Court ordered the substantive consolidation


of Hamilton Taft & Company, and the Texas Debtorn including Remington,
Enterprises and Knightsbridge. Frederick S. Wyle was appointed trustee for the
consolidated estates.

The accompanying statements of cash receipts and disbursement include both the
Post-Petition periods and the periods of Trustee administration for each debtor.
For Hamilton Taft, the Post-Petition period and the period of Trustee
administration date from 1darch 20, 1991 (even thoLlgh the trustee was not
appointed unti11darch 26, 1991). The Post-Petition period for the Texas Debtors
dates from April 19, 1991 for Knightsbridge and April 29, 1991 for Remington
and Enterprises. The period of Trustee administIation for the Texas Debtors dates
from July 22, 1991, the date of the appointment of the interim trustee.

Note 2: Dresdner Petroleum, Inc.


Dresdner Petroleum filed for protection under Chapter 11 of the United States
Bankruptcy Code in Dallas, Texas on April 29, 1991. On July 22, 1991,
Frederick S. Wyle was appointed as interim trustee in bankruptcy. His
appointment was made permanent on November 4, 1991. For the accompanying
statement of cash receipts and disbursements, the Post-Petition period for Dresdner
Petroleum dates from April 29, 1991 and the period of Trustee administration dates
from July 22, 1991.

Dresdner Petroleum held a controlling ownership interest and operated a number of


oil wells located in Howard County, Texas and in Fisher County, Texas. Others
held a minority interest in certain of these producing wells and Dresdner Petroleum
paid a share of the income produced to these minority interests, as well as collected
a share of the costs of production.

The costs of production reflect the payments for the various field services required
for well operations. Prior to November 1991, the management and accounting for
the oil and gas production was perfonned by Dresdner Petroleum t s staff located in
its Dallas, Texas office. At the end of October, 1991, this office was closed and

A-II
HAMILTON TAFT & CO:MPANY, KNIGHTSBRIDGE CO:MPANIES, JNe.. ,
RElVIINGTON COMPANIES,INC.. and DRESDNER ENTERPRISES, INC..
(A Group of AIriliated Companies Substantively Coru;olidated In Bankruptcy)
and
DRESDNER PETROLEUM, INC.
Notes to Statements of Cash Receipts and Disbursements
,f;; For the periods ended March 31, 1993

(Note 2: Dresdner Petroleum Continued)


M

the staff tenninated. The management and accounting functions for the oil and gas
production was transferred to an independent management company, which
received a monthly fee of approximately $15,750. Prior to November, 1991,
a.dministrat.ive expenses of Dresdner Petroleum's office were not.included in the
costs of pioduction; since November, 1991 the monthly fee paid to the independent
management ~mpany has been included in the cost of production.

During December 1992, all of the oil and gas property owned by Dresdner
Petroleum was sold under a sale agreement approved by the Bankruptcy Court for
total proceeds of $409,000. The remainder of the receipts under "Sale of oil &
gas properties" was for earlier sales of excess equipment.

Note 3: Loans Between Texas Debtors and Petroleum


Prior to the Trustee s appointment, the Texas Debtors and Petroleum bad
t

established a practice of extending loans between and amongst themselves in order


to alleviate cash flow problems. These loans had been repaid prior to the Trustee's
appointment, except for a loan of $10,500 from Dresdner Petroleum to Remington
Companies, Inc. The Trustee repaid this loan during August 1991. Since the
receipts and disbursements associated with these transactions have been shown net,
on the consolidated statement of cash receipt and disbursements, the related
receipts and disbursements offset to zero for the cumulative post-petition period but
reflect the Trustee's repayment for the cumulative Trustee period.

Also during August 1991, the Trustee loaned $60,000 from Knightsbridge
Companies to Dresdner Petroleum. Dresdner Petroleum repaid this loan during
January 1993 with a repayment of $70,500, which was an overpayment of
$10,500. This overpayment was an error and will be returned to Dresdner
Petroleum in May 1993.

A-12
FC-3~2 (1I.ev. 3-10-82)

--!--
FEDERAL BUREAU OF INVESTIGATION

Date o[ tran9cription 5/21/93

On the morning of May 11, 1993,1


,..-------., at the Law Firm of Feldman Waldm-a-n-a-n....d~K~i~~....n-e-,......i-o-c-a"""!t~e-d..........
at 235 Montgomery street, San Francisco, California 94104,
telephone number (415) 981-1300, was interviewed at her place of
employment. I I provided the writer with the following
documents as well as an original of a Sony micro cassette tape,
which were found in the records of the Hamilton Taft Corporation.
It is to be noted that this law firm is consul for the trustee's
office, which was appointed by the US Bankruptcy Court to handle'
the Hamilton Taft Estate. I lin looking through records of t/t'_:
Hamilton Taft found the previously referenced tape. A copy of
type written notes entitled (notes Tuesday, February 13, 1990) is
also enclosed. These notes appear to be notes taken regarding
the actual recording of the referenced micro cassette tape, which
is apparently the voice of CONNIE CHIP ARMSTRONG, the former
Chairman of the Board for Hamilton Taft corporation located in
San Francisco.

Additionally, I Iprovided a letter addressed to


the writer dated May 10, 1993, from I I
which notes thy delivery of the rforementianed tape and other
eXhibits to SAL , of the FBI. A copy of this
cover letter and copies of the exhibits are attached to and
considered part of this interview document. The original of the
micro cassette tape which was also delivered to the writer has
been placed into evidence.

f)

I t7t~II- ?F- '1:;);; >


In\'estiglltion on 5/11/93 at San Francisco, CA File N 5(J6 .. r;, - 51
~~--------~~~~O:~~~1 Dated~~~~5~/~1~5~/~9=3 _

This document contains neither recommendations nor conclusions of the FBI. It is the properly DC tbe FBI and is loaned to your agency;
it and its contents are not to be distributed outside your agency.
FD-36 (Rev 8-29-85)

FBI

TRANSMIT VIA: PRECEDENCE: CLASSIFICATION:


[Xl Teletype D Immediate o TOP SECRET
o Facsimile !Xl Priority o SECRET
D AIRTEL o Routine o CO NFIDENTIAL
D UNCLAS EFT 0
!Xl UNCLAS

Date 6/16/93

FM FBI SAN FRANCISCO (196A-SF-93255) (P) (SQUAD 5)


TO FBI DALLAS/PRIORITY/

BT

UNCLAS

CITE: //3790//
PASS: SSA 1----~I(WCC-5)•

SUBJECT: CONNIE C. ARMSTRONG, JR.; AKA CHIP ARMSTRONG, JR.,

DBA HAMILTON TAFT AND COMPANY, 1 MARKET PLAZA, 32ND FLOOR,


SPEAR STREET TOWER, SAN FRANCISCO, CALIFORNIA 94105, FRAUD BY

WIRE (A); MAIL FRAUD; 00: SAN FRANCISCO.


REFERENCE SAN FRANCISCO TELETYPE TO DALLAS, DATED MARCH
23, 1991. ALSO REFERENCED SAN FRANCISCO TELEPHONE CALLS TO

THE DALLAS DIVISION, JUNE 15, 1993.


FOR THE INFORMATION OF THE DALLAS DIVISION, THIS MATTER

IS CURRENTLY BEING INVESTIGATED AT SAN FRANCISCO WITH A VIEW

TOWARD INDICTING CAPTIONED SUBJECT ARMSTRONG AND THREE OTHER

f" :: I'Im
suRCHED~
SE1UAL17:@~--
INDEXED - rI
'P ~ Vv'-( 1,"li\o.....C "UIL&D

Approved: ;2wf/I/f?A?, Original filename: rV\ Pr e C.D' W {b 7


Time Received: --y--_ _ Telprep filenam e: _....:....lJ'V_'A.....;....=C-=--D=-'.=O_'"=,_C_J_I_b_-..:....l _
MRII JULIAN DATE _?_q_~_I_t:_b_,., ~/_2_-
ISN: _
FOX DATE & TIME OF ACCEPTANCE gp 3) j7Jtll1?3 ~
~PAGE 2 196A-SF-93255 UNCLAS

INDIVIDUALS. TWO OF THE INDIVIDUALSI IAND~ ___


______~IARE CURRENTLY EMPLOYEES OF ARMSTRONG'S LATEST BUSINESS

ENDEAVOR, COMP-U-CHECK, WHICH IS DOMICILED IN DALLAS, TEXAS.


b7C
ARMSTRONG RECENTLY MOVED THIS PUBLICLY TRADED COMPANY AFTER

HAVING PURCHASED ITi THE DETROIT, MICHIGAN AREA TO DALLAS. AT

THE DIRECTION OF ASSISTANT UNITED STATES ATTORNEY, MICHAEL

YAMAGUCHI, A SERIES OF SUBPOENAS HAVE RECENTLY BEEN SERVED IN


THE DALLAS AREA BY DALLAS DIVISION PERSONNEL. THESE PERSONS

SUBPOENAED HAVE ADVISED THAT THEY WILL SUBMIT TO INTERVIEW BY

THE FBI IN LIEU OF APPEARANCE AT SAN FRANCISCO.


SAN FRANCISCO HAS OBTAINED LOCAL APPROVAL FOR TRAVEL BY

CO-CASE AGENT, S~ ~O THE DALLAS DIVISION ON


JUNE 21, 1993. THE PURPOSE OF THIS VISIT IS TO CONDUCT SEVEN

TO NINE INTERVIEWS OF FORMER ARMSTRONG EMPLOYEES. IT IS

ANTICIPATED THAT SAN FRANCISCO WILL NOT REQUIRE ASSISTANCE

FROM THE DALLAS DIVISION OTHER THAN AN INTERVIEW ROOM AT THE

DALLAS OFFICE. NONE OF THESE INTERVIEWS ARE SUBJECT

INTERVIEWS.

THE SAN FRANCISCO DIVISION FEELS THAT SOMETIME DURING THE

WEEK OF JUNE 21ST THROUGH THE 25TH OF A BRIEF MEETING SHOULD


~PAGE 3 196A-SF-93255 UNCLAS

TAKE PLACE BETWEEN SAN FRANCISCO CASE AGENT AND SSAI iOF

DALLAS IN ORDER TO BRIEF DALLAS AS TO POTENTIAL FRAUD BY WIRE

VIOLATIONS ON GOING IN THE DALLAS TERRITORY.


1.)7 C~
UNLESS ADVISED TO THE CONTRARY BY DALLAS SAI~ IWILL

ARRIVE IN DALLAS ON THE AFTERNOON, OF JULY 21, 1993.

RESERVATIONS ARE CURRENTLY BEING MADE BY DALLAS SECRETARY'r,


)

_________I(PH). SAI ~CAN BE CONTACTED AT (415) J'

553-7608.

BT
FD~302 (REV. 3-10-%2)

- 1 -

FEDERAL BUREAU OF INVESTIGATION

Dille of trnnscriptian 6/25/93

met the interview~ng agents at the Dallas Federal Bureau


of Investigation (FBI) office. I Iwas advised of the
b7D Interviewinr Agents' identity and of the purpose of the
interview. I gave the following information:

I
ARMSTRONG, JR. he had worked
I Before h~ was hired by CONNIE (CHIP

11.- __
b-;C

I Isaid he was interviewed and hired by ARMSTRONG biD


to replacel I

b'!e

lnvI:5ligtition on 6/21/93 File # 196A-SF-93255 -c ~ J-)


br SA WILLARD L. HATCHER, JR. /Wlh~ DlIte diCUlfed

~ ~ b7C
67 2 5793
This documenl conlnins neimer recommendations nar concluBi[,,,~ u . . .t': FDl. It iB the property of the FnI Ilnd is IOBned to your aIlcncy;
it Dnd ils conteotsate not 10 be; distributed out~ide your llgency.
'0-3020 (Re.... 1t-15~83)

196A-SF-93255

b7C
Continuation of FD-302 of ---l1-a- Lb"7 0' , On _~6---=--/-2-5--.:./-9-3-_'Page _ _2~_

Dresdner Enterprises did not have to set up trust accounts to


handle the investments of Hamilton Taft client funds.

I ~or Dresdner
Enterorises. advised ARMSTRONG to set up an investment committee

I I were made part of this l.nvestment comml.ttee. He


said that this committee recommended three real estate
investments~
I 11..-----------------

b7C
;0-302a (Rev. 11-15-83)

196A-SF-93255

Continuation of FO-302 of
_~~~!!"'!!'IIIIIIII!!!!!"!!!!!!!~ Lb7C • On ~_6--=.1_2_5--.,;1;....9_3
_ _• Page _ _3_ _
1:-:7D

I Iworked on
arr~naina these deals from August through September of 1990.

h7e

~ ~Isaid tha~ I told him that ARMSTRONG was a


"genius" for moving on Hamilton Taft and that ARMSTRONG hired
outstanding management for acquisition reviews in Dallas.
I I~aid tha: he remembered someone at Hamilton Taft telling
him thatL Jwould, on occasion, "vouch" for ARMSTRONG and
Hamilton Taft to outside parties.

He said that the Dallas based employees 1 won


ARMSTRONG get the funds for his ranch he purchased.
':D-:302n (Rev. 11-15-8:3)

196A-SF-93255

Continulliion of FD-302 of I On _ _6_1_2_5~/=--9_3__• Page _ _4_ _

understood that ARMSTRONG could not have invested $5,OOO,OOO~OO


of Hamilton Taft client tax funds into a non-revenue generating
enterprise such as the ranch. Initially ARMSTRONG told employees
that he used his personal funds to purchase the ranch. Later, he
heard that ARMSTRONG toldl Ithat he used Hamilton Taft
b7C client tax funds to purchase the ranch.
I Ithe ARMSTRONG fourth of July party in
1990 was a waste of funds. He said that ARMSTRONG could have
gotten some return for this money if he had invited some clients
and/or businessman. I ~ever in his life has he h7C
came across someone who "blew" money like ARMSTRONG.

r I said after hearing ARMSTRONG repeatedly state


that Hamilton Taft was adding new clients he felt Hamilton Taft
was earning profits which could have been invested. He said that
ARMSTRONG told him that the last thing he wanted to do was
something illegal while at Hamilton Taft.
I 'said that! I prepared
~:5b f~;W ~rojections for the Dallas based ARMSTRONG companies.
I. t ~ __ Jroutinely reviewed the monthly financial statements of
e Da as based ARMSTRONG companies. There were no months
within which the Dallas based companies as a whole entity
(Dresdner Enterprises or Remington Companies) ever made a profit.
b7D
I I said he had asked I I

The Interviewing Agents askedl Ihow long did he


think ARMSTRONG would have been able to continue business
operations? I Isaid he was surprised how lonq ARMSTRONG was
able to continue operations. He felt this was so because of the
lack of revenue generation by the ARMSTRONG companies. I ~
said he never confronted ARMSTRONG about the fact that
b'7J
ARMSTRONG's operations could not operate much longer due to the
lack of revenues, but he did hear other employees/officers of the
Dallas based companies tell ARMSTRONG this in group meetings.
ARMSTRONG would challenge anyone who tried to explain this fact
FD-302n (Rev. 11.15-(3)

196A-SF-93255

Continulltion of FD-302 of I On _ _6.....:./_2_5---:/~9_3


_ _' Pnge ~

to him.

b7C

i IHamllton Taft not only had an asset proBlem


problem.
(Rev 3-10-82)

- 1 -

FEDERAL BUREAU OF INVESTIGATION

Dale of lranscrJphoo

A CONFIDENTIAL SOURCE advised as follows:

He/she believes that CONNIE C. "CHIP" ARMSTRONG, JR.


has comm~tted illegal acts in the conduct of his businesses which
include CC ENTERTAINMENT AND PROMOTIONS, INC. (CCEP), Dallas,
Texas; COMP-U-CHECK, INC. (CUC), 12750 Merit Drive, suite 300, LB
39, Dallas, Texas 75251 Dallas, Texas; HAMILTON TAFT AND COMPANY
(HTC), San Francisco, CA; and TAUREAUX, Dallas, Texas.
He/she be11eves ARMSTRONG to be guilty of the
following:
1. Failing to pay state and Federal payroll taxes for
employees of COMP-U-CHECK (CUC) in both MICHIGAN and TEXAS.
He/she believes that CUC owed the state of MICHIGAN and the U. s.
Government over $80,000 in payroll taxes for its fifty some
employees before it moved its operation on or about July 1, 1993
from Southfield, Michigan to Dallas, Texas. Since moving to
Dallas it has increased its tax liability beyond $200,000.

2. Causing the issuance of non-sufficient fund payroll


checks on CUC's account at the COMERICA Bank, southfield,
Michigan to CUC's employees in Dallas, Texas. After the checks
bounced, cue attempted to appease some of their employees by
reissuing checks on CUC's account at EQUITABLE BANK, Preston &
Campbell Roads 1 Dallas 1 Texas. cue's If I I t:'!r'=
resigned her position after only one month of emp~oyment, s~nce
she did not want any further involvement in connection with the
issuance of non-sufficient fund checks.

3. Causing cue to violate Federal Wage/Hour Laws.


He/she noted that when cue laid off its employees in Southfield,
Michigan, cue was responsible for severance pay to those
employees and was to provide them with their last pay check
within 48 hours. It is his/her belief that cue has not paid any
of those employees. In addition, he/she knows that cue is in
violation of the Federal Consolidated Omnibus Reconciliation Act
(COBRA), which requires that severed employees be officially

Inve'l1aallon DD 7/27 /93 at Dallas, Texas File' 196A-SF-93255

by -.af~ I---_b 7 c; _ _ _ Date dictated ....7....,1....2_8_1""'9....3t..- _

Thu document conlatns neither recommendallOD! nor conclulloDJ of the FBI It u the property of tbe FBI and b loaned to your aseney,
II Rnd lh ,.nn.,.nt~ lin- TIn! in h .. ""tt~I)o"lI .. rt n A.. "''''~ .
FD-~02il (Rev 11-J5-&3)

196A-SF-93255

Continuation of FD-30J of CONFIDENTIAL SOURCE ,On 7/27/93 . P8ae _ _2_ _

notified within 72 hours from the time of their severance


concerning health insurance options.

4. Siphoning funds from companies in the form of loans


to pay other companies from which ARMSTRONG could withdraw funds
to pay his personal and legal expenses. This technique
eventually leads to the bankruptcy of the companies loaning the
funds.

CONNIE C. ARMSTRONG, JR., a white, male, date of birth:


June 9, 1993, social security number 460-96-6682, resides at 5909
Luther Lane, Apartment 2307, Dallas, Texas 75225 telephone 214-
369-6954. He is Chairman and Chief Executive Officer (CEO) of

O e ~eved
X, telephone 214-265-0586, I
and I
~
,~~ I
l
Ithere1is
' He ~s
to be 11.V1ng at that address Wl.th his girlfriend,
::J His former wife, name unrecal1ed, is married
1)7(:

~ ,ran to
insurance businessman 1n Dallas, Texas telephone
____~-- __~I The ranch that he owned in East Texas was allegedly
confiscated by the bankruptcy trustee.

He is
security

ARMSTRONG owns 100% of TAUREAUX which has the same hie


business address as CUC. He/she believes that~__~~~~ __
the President and Chief Financial Officer (CFO). He/she
described TAUREAUX as a shell corporation, with no bank account,
or operating funds. It was set up as · pany to
acm:ire otb;r,com anies co or ions. ARMSTRONG's
I ~ J 1S although he gets
pal throu9h cuc. telephone in Dallas, Texas is
Jb--__....J
____I----------iisl lof cue wit;.;;,;;h--..._
~ 1 Directors of cue include I
\ accountant ~n-llcensed
(CPA) and'
attorney and certified pUblic
JI I{phonetic) is an
------
1:)'/I,=:
advisory board membe[ whQ ~s assocIated with ARMSTRONG.
ARMSTRONG'sl JARMSTRONG is part of cue and gets ",
involved with miscellaneous projects. J
'I
•J
~r
FD-30.::!a (Rev I1-L5-83)

196A-SF-93255

Continuation of FD-302 of CONFIDENTIAL SOURCE ,On 7/27/93 ,Page _ _3_ _

for finding new


I land]
acqu~srtrons
~are tasked with the responsibility
for TAUREAUX ang 2Ytttng deals
together. They are paid out of CUC funds.
books and records for CCEP.
I Jkeeps the

Because of what he/she perceives to be ARMSTRONG's


credit rating, he/she wonders how ARMSTRONG can come up with the
infusion of capital into cue. Amounts as high as a half million
dollars at a time are wired into cue's account at EQUITABLE BANK
in Dallas. ARMSTRONG's father, CONNIE C. ARMSTRONG, SR is also
on CUC's payroll at the rate of some $3000 per month. He does
nothing that he/she is aware of to earn that salary. It is
his/her understanding that cue's credit rating is so bad that
credit card companies are cutting them off. He/she mentioned
that AMERICAN EXPRESS COMPANY (AMEXCO) has terminated cue's
credit because of a $121,000 outstanding balance on cue's
business account. h7C

He/she believes that ARMSTRONG set up the TAUREAUX


Corporation (Te) to act as the holding company for his other
acquisitions. ARMSTRONG owns 100% of the ownership in TC and TC
owns the 65%lownerShiP in cuc which owns 100% ownership in CCEP .
...... . is ARMSTRONG/51 I
Since ARMSTRONG and he/she have had a falling out,
ARMSTRONG has been telling everyone thatl I
Ifar CUC, misrepresented the emp-i~o-ym--e-n-t~-o-p-p-o-r~t-u-n-1P't~~es
....w~it~h-C-U-C-.-

I~~ noted that CUC has not paid any of its vendors
(Clients or'cue) since March, 1993.
ARMSTRONG also lied in a deposition that he provided on
october 15, 1992 in the UNITED STATES BANKRUPTCY COURT in the
NORTHERN DISTRICT OF CALIFORNIA- Oakland Division, Case Number
91-3-1077-LK. That deposition was given in a bankruptcy matter
entitled HAMILTON TAFT & COMPANY AND CONSOLIDATED CASES vs CONNIE
C. ARMSTRONG, JR, ET AL. ARMSTRONG's comments beginning around
page 75 concerning his involvement with CCEP were false and
misleading. Besides being President, ARMSTRONG was the driving
force behind CCEP, is heavily involved in CCEP, and basically
uses CCEP as a source of his personal operating capital. In
his/her opinion, ARMSTRONG is using the funds from CCEP to keep
them out of sight of the bankruptcy court.
FD-3020 (Rev 11-15-83)

196A-SF-93255

ConllOuahon of FD-302 DC CONFIDENTIAL SOURCE • On 7/27/93 .Plllle~_4


__

I
case. He reels tnatl
lin that
May have a conf11ct of interest.
ARMSTRONG told him/her that iii lis instrumental in getting
ARMSTRONG indicted, the trustee would gain some percentage of
money from a fiduciary bond that LLOYDS OF LONDON holds on
ARMSTRONG in connection with ARMSTRONG's former employment with
HTC. In addition, it is believed that] ~nd his attorneys
have siphoned off millions of dollars ~n fees from the HTC.

~ H~e~(She has known I Isince 1982. At that


time, I was an engagement partner with the PEAT MARWICK
accounting firm that was auditing the books and records of 1)7(,:
DIVERSIFIED HUMAN RESOURCES GROUP, INC., Dallas, Texas.
In 1991, I Ileft PEAT MARWICK and started to work
for ARMSTRONG in a company named CHENAL. ARMSTRONG obtained the
money to start CHENAL from money that he was given from an
individual that had obtained a loan from HTC. ARMSTRONG had
started that company to raise money for research and development
in computer software for health care systems. , Ikept the
books and records. ~ I
who wrote the software, was only
associated with ARM T~ONG 1n the CHENAL corporation. While he is
no longer connected with ARMSTRONG, I lis believed to be in
the Dallas area selling these software programs to health
organizations.
In connection with employment contracts that AVA
obtained for ARMSTRONG regarding operations at CHENAL, HTC, and
ARMSTRONG personally, ARMSTRONG on August 2. 1992, i~sued a
$100,000 promissory note tol land' Jwith a
maturity date of August 2, 1993. CHENAL eventually went out of
business and a trustee took over the business and liquidated it.
CHENAL had been located in The Madison Building on the third
floor. b'/e
~ ~I ~ into the picture as a close friend
ofl I ~was to have begun work for AVA but
went to work for ARMSTRONG at cuc.
CCEP was incorporated on August 3, 1992 and is located
at 8235 Douglas, Suite 1111, Dallas, Texas 75225. It is his/her
belief that CCEP was founded by ARMSTRONG to provide him with the
mechanism to work around a court order issued at the direction of
the trustee in his California bankruptcy case. ARMSTRONG was the
FD-301a (Rev Ll-15-83)

196A-SF-93255

ConhnUBtlOn of FD-301 of CONFIDENTIAL SOURCE ,On 7/27/93 , pl ae _ _5_ _

President.! Iwas a and


I I was 1S e as He understands
that I !has been deposed in e Federal
investigation of ARMSTRONG. w listed as t~j
re istered agent or incorpora or. and I _
h - - - - - - , t - I were in Administration an 1.ons of ~C~C~E:'VI:P~w~h""'!'~""'f""":'e
handled the finances. r- one of ARMSTRONG's best
~r~l-e~n~s and work for him at HAMILTON TAFT AND COMPANY, CHENAL,
and now CCEP. He noted that ARMSTRONG met his qirlfriend
"Honey", true name unknown, throughl Iwas
employed with CHENAL, CCEP, and now as a saiesperson ~n cue's
Arlington, Texas office

On March 18, 1992, the name of ADELSON LEFFKE &


ASSOCIATES, INC. was changed to ADELSON votGTS & ASSOCIATES, INC.
(AVA) and relocated from the Madison Building, 15851 Dallas
Parkway, suite 675, Dallas, Texas 75248 to One Galleria Tower,
3355 cel Road, suite 500, Dallas, Texas 75240. At that time,

0 or
ecame a partner by obtaining 49% ownership in AVA while
retained 51% ownership.
u 1 time for CUC.
In October, 1992,

He/she always wondered where ARMSTRONG was getting his


to I Iwent

operating capital from. On the one hand, he/she knew that


ARMSTRONG would issue loans from one business to another. But in
view of ARMSTRONG's questionable credit rating, he/she wondered
who would loan him the funds that would ultimately be the basis
for the loans. He/she gained a little insight whenr
left AVA and left a file behind containing financial~r~e~c~o~r~d~s~o~f~­
CCEP. A quick glance at a cash flow document for cue showed
$225,000 being loaned to CCEP.

It was" iwhO had gone to MANUFACTURERS


HANOVER TRUST CO PANY (MHTC), location unknown, with ARMSTRONG to
negotiate for the purchase of CUC. CUC was a company that was in
poor financial shape. MaTe had a lien on $200,000 worth of
assets mostly computer equipment and a $2.8 million note
collateralized by cue stock. They offered MHTC $200,000 to pay
off the lien on the equipment and obtained 65% ownership in cue's
stock.. In addition" the Trust :ompan y : : ~erica, . location . b'7C
unknown, through the~rr _ __ J{phonet1c), prov1ded .,
ARMSTRONG with a $550,600 deben urea $ 0,000 allegedly went to
MHTC to payoff the lien on cue's computer equipment and possibly
other office equipment and $225,000 went to CCEP in the form of a
-30:::!n (Rev 11-15-83)

196A-SF-93255

ContmuallOn o[ FD-302 of CONFIDENTIAL SOURCE • On 7/27/93 .P8ie~_6


__

loan from CUC to pay for ARMSTRONG's expenses such as $15,000 to L,'/C
the law firm of EPPRIGHT & GOLOMBECK; ~lOO,OOO to the law firm of
BURDICK, CARROLL, $51,500 tol ~ Ifor a note payable, and
approximately $21,000 reimbursement 0 ARMSTRONG for out of
pocket expenses. He/she does not know for what purpose the money
from the TRUST COMPANY OF AMERICA was to be used.
http://clinton6.nara.gov/1993/07/1 993-07-29-president-nominates-eight.

View I-leader

THE WHITE HOUSE

Office of the Press Secretary

For Immediate Release July 29, 1993

PRESIDENT NOMINATES EIGHT U.S. ATTORNEYS

The President nominated eight individuals to be U.S. Attorneys today:

Eric H. Holder, Jr., for the District of Columbia


Michael Joseph Yamaguchi for the Northern District of
California
Randall K. Rathbun for the District of Kansas
Thomas Justin Monaghan for the District of Nebraska
Stephen Charles Lewis for the Northern District of Oklahoma
Vicki Miles-LaGrange for the Western District of Oklahoma
John W. Raley, Jr. for the Eastern District of Oklahoma
Frederick W. Theiman for the Western District of
Pennsylvania

Eric H. Holder, Jr. has been an Associate Judge on the

District of Columbia Superior Court since 1988. Prior to his appointment to that position, he served for 12
years as a trial attorney in the Criminal Division of the Justice Department. His responsibilities at the
Justice Department included the investigation and trial of complex political corruption cases, the
preparation of federal Courts of Appeals briefs and appellate advocacy, and supervision of other
government corruption investigations. Holder holds his B.A. and J.D. degrees fronl Columbia University.

Michael Joseph Yamaguchi has been an Assistant U.S. Attorney for Northern California since 1980,
serving for four years in the Civil and Tax Division and more recently in the Criminal Division. He has
also worked during that time as an Adjunct Professor of Law at the University of San Francisco, and has
been active in the American Bar Association. A Captain in the U.S. Army Reserves, Yamaguchi has also
worked as a Visiting Professor of Law at McGeorge Law School in Sacramento, and was tormerly an
accountant with the:firm of Peat, Marwick, Mitchell & Co. He earned his B.A. from UCLA, J.D. frOITI the
University of San Francisco, and LL.M. from New York University.

(more)
U.S. Attorneys
page two

Randall Rathbun is a partner in Depew, Gillen & Rabun, a Wichita firm specializing in environmental
litigation. Before joining that firm in 1980, he was with the criminal and civil litigation firm of Curfman,
Brainerd, Harris, Bell, Weigand & Depew. He was previously on the Board of Editors of the Kansas Trial
Lawyers Association Journal, and has spoken widely on topics relating to environmental law. Rathbun is a
graduate of Kansas State University and Washburn University School of Law.

Thomas J. Monaghan, is a partner in Monaghan, Tiedman & Lynch, an Omaha frrm with which he has
been associated since 1978. He was formerly with the firm of Young & White. Monaghan also served
foml1985-91 on the adjunct faculty of the College of St. Mary, and has spoken at numerous Nebraska

10f2 5/7/20092:59 PM
FD-36 (Rev 11-11-88)

FBI

TRANSMIT VIA: PRECEDENCE: CLASSIFICATION:


o Teletype o Immediate o TOP SECRET
o Facsimile D Priority o SECRET
lKJ AIRTEL o Routine o CONFIDENTIAL
o UNCLAS EFT 0
o UNCLAS

Date 7/30/93

TO SAC, SAN FRANCISCO (196A-SF-93255) (SQ 5)

FROM SAC, DALLAS (196A-SF-93255) (WCC-S) (RUC)

SUBJECT CONNIE C. ARMSTRONG,


ET ALi dba
HAMILTON TAFT AND COMPANY, ET AL,
San Francisco, California
FBW (B); MFi BF (A)
OO:SF

Re Dallas airtel to San Francisco, dated 5/18/93.

Enclosed for the San Francisco Division are the


following:
b7C
an intervie~~floPies 0: ;; ;;-3Q~ ~~!1~~t1D~ tb~ results of
11- ..,I L;"',
I
_I

IDallas, Texas on / / .
San Francisco will be advised of any further
developments.

Dallas is maintaining this InatteL' itl an RUC!d


status.

2 - San Francisco (2 encs.)


1 - Dallas (196A-SF-93255) (1 encs.)
LeG/
(3)

SEARCHED -------zI r.t--


~1i-''' ~T l"I:.l ---!f-i(..J..---
INDE.YED~
}TILED I
Approved: _ Transrn i He d Per _
(Number) (Time)

';:C~::·.-=:J LT c:n'T'np ~l{ c L-t Sf'!.


FD-36 (Rev 11-17-86)

FBI

TRANSMIT VIA: PRECEDENCE: CLASSIFICATION:


o Teletype o Immediate o TOP SECRET
o Facsimile o Priority o SECRET
IX] AIRTEL o Routine o CONFIDENTIAL
o UNCLAS E If T 0
o UNCLAS

Date 8/2/93

TO SAC, SAN FRANCISCO (196A-SF-93255) (SQ 5)

D~~~~ROM SAC, DALLAS (196A-SF-93255) (WCC-S) (RUC)

SUBJECT CONNIE C. ARMSTRONG,


ET AL; dba
HAMILTON TAFT AND COMPANY, ET AL,
San Francisco, California
FBW (B); MF; BF (A)
OO:SF

Re Dallas airtel to San Francisco, dated 7/30/93.

Enclosed for the San Francisco Division are the b2


following:
IJ"iD
Two copies of an FD-302 reflecting the results of
an interview with Dallas source 4D~~b~ I
~n 7/27/93.
Dallas sourcel ladvised that he plans
to meet with CONNIE C. ARMSTRONG sometime during the week of
August 2, 1993 and has agreed to the meeting being recorded.
He anticipates the conversations will includ~ corr~ents
concerning the failure of COMP-U-CHECK, INC. (CUC) to meet its
payroll and their issuance of non-sufficient fund checks on
COMERICA BANK, Southfield, Michigan as well as the source of
funds being received by EQUITABLE BANK, Dallas, Texas which
are being utilized to make good on the non-sufficient fund

I'

2 - San Francisco (2 encs.)


1 - Dallas (196A-SF-93255) (1 enc.)
LeG/
(3 )

Approved: _ Transmitted Per


(Number) (Time)
---------

::':T Or.. _ ~ h -;.,.,;1


4)
checks issued on the COMERICA BANK.
In view of ARMSTRONG's activities involving cue and
CC ENTERTAINMENT AND PROMOTIONS, INC., Dallas, Texas which
have the appearance of a ·'bust out" operation and the masking
of income to ARMSTRONG to avoid restrictions allegedly imposed
by the US Bankruptcy Court, ND CA:-.Oa)(l_~~~ __ Di~-~~-!2!!L---.Ql\.~~~--.j:_~
q~eni!!..g a new 1_~32~_=P1_=_-,f~1~. S~_~G.!~gQ, ~.l1._.~e advls~.d of
.
aQproEr~~~~!"_~~~9~y_~_~~p_!L_~nts n, __ ---------n--

DALLAS
AT DALLAS, TEXAS

Will coordinate and monitor Dallas source's meeting with


CONNIE C. ARMSTRONG during the week of August 2, 1993.

2
FBI
TRANSMIT VIA: PRECEDENCE: CLASSIFICATION:
o Teletype o Immediate o TOP SECRET
o Facsimile D Inority o SECRET
!KJ AIRTEL D Routine o CONFIDENTIAL
o UNCLAS EFT 0
o UNCLAS

Date 8/4/93

TO DALLAS, SAC

FROM SAC, SAN FRANCISCO (196A-SF-93255) (P)

SUBJECT CONNIE CHIP ARMSTRONG, JRj


ET ALi
WIRE FRAUD (A)i
MAIL FRAUDj
00: SAN FRANCISCO

Reference airtel dated February 22,

SA HATCHER has obtained verbal/ailth~l::i:~tion from


united states Attorney, MICHAEL YAMAGUCHT, forL _ I
I Iconfidential source to record conversa lons with b2
subiects of this case. I I

2 - DALLAS
(1) - SAN FRANCISCO
WLH/wlh
1. " '

Approved: ":fS:~ Transmitted


(Nmnber) (Tune)
PCI' _
7~·75g--:Rev 5-31-91)
'D." Director, FBI ( Date J/J3/93 ...
Attn CID, \ill (, G rol1a1 Cr,me Section \

(1 96B-D.L- 66524) ( p)

Notification of SAC Authority Granted


E 1.' l-.. L for '2m I FgeftB; Use
F 1jL'V; Lli"
UO: D.l . . LLHS of Consensual MonitOring EqUipment (Nontelephomc)
1

Form must be submitted Within 5 working days of the date


authOrizatIon was granted

I. Reason for Proposed Use (Check) 2 Type of EqUipment (Check)


~ Corroborate 0 Protect o Protect !8T Transmitter/ o Mlcrophone/ ~Concealed
TestImony Consentmg Government ReceIver Amplifier Recorder
Party Property
o Other (Specify) o Other (Speedy)
3 Consentmg Party (Check one) 4 Interceptee(s) (Include Title If Public Official)
o Nonconfldentlal Part~ I-b2 - Cqil!JhH c. ~'JRIJiS~j'ROUG, I
o Confidential Source (Name)
~ Cooperative WItness b7D I lana ochers b7C
-
:5 Duration of proposed use 90 days 6 InstallatIon of EqUipment {Check} 7 Locatton where equipment
lUI' Ie J 90 dSj 2) a Concealed on Person D In Vehicle Will be utilized (City and State)
Date AuthOrized 4/13/93 o In Motel Room o
Other (SpeCify)
EXpiratIon Date 1 2/] 1 /93 Dallas, IJ1el:as
3 The follOWing requirements have been fulfilled 9 Government attorney In JudiCial dlstnct where Interception
8 a Consenting party has agreed to testify. WIll take place foresees no entrapment and concurs In the use of
~ b Consenting party has executed consent form thiS technique being appropnate
~ c Recording/transmitting deVice Will only be activated ~ Yes 0 No Date '11,193
I I b7E Identity of Gov't Atty tlUS , PH I '.1, t> Uti?HRE.3!

JudiCial District IJar- hp I II 0, s! · I c~ of 1'exas


10 \lIalatlon(s) Tltle(s) J8 Sec(s) 1343 USC

11 DOJ notification required 0 Yes liij' No If "Yes" check reason below


o InterceptIon relates to an Investtgatlon of a member of Congress. a Federal Judge. member of the Executive Branch at Executive
Level IV or above. or a person who has served In such capacity Within the prevIous 2 years
o
o
extortIon relating to the performance of hIs/her offJclal dutIes
Interception relates to an investIgation of a Federal law enforcement offiCIal
11)(i
InterceptIon relates to an investigation of any publiC offiCIal and the oHense investigated IS one InvolVing bnbery, conflict of Interest, or
J ~1~ 1>
,t I!J _..- c..:.-7.i:JI!si'::;;r~7'-1
LJ
o Consentlng/nanconsentlng person IS a member of the diplomatIC corps of a foreign _Dun ry
o Consentmg/nonconsentlng person 15 or has been a member of the Witness Security Program and that fact IS known to the agency
Involved or Its officers
o Consentmg/nonconsentlng person IS In the custody of the Bureau of Prisons or the U S Marshals Service
o Attorney General, Deputy Attorney General, ASSOCIate Attorney General, ASSistant Attorney General for the Criminal DIVISIon, or the
U S Attorney tn the district where an investigation IS bemg conducted has requested the Investigating agency to obtain prior wntten
consent for making a consensual interception In a speCIfiC Investlgatton
12 SynopsIs of Case (Attach additional page If necessary) A Coopel. a.l.~lng ~VJ. \..ncss has advJ sed Llla L. •

Ij.:i.t1~'.L1HOUG I I .liliMS':CRONG ':'s L.he suJ .Jec I: 01 ail lnvesL.LgaLJ_On I .


~
..... .Lle ban Franc.LsGO Dl Vlfi~on wh~.('e he nUS1...EQ out hr.J,.1..J.L'l'ON-'.1."lF'C. 4--
,/111'),-
b7C }I/ /;~
13 JustifIcation statement necessrtatlng emergency authOrizatIon
...,L~'-l-~--I::::::;..-<'--,'-- Date ~
~---'-----";'----'are fjzf/r~
cu e a 18} ,f... oJ/A
Signature z W Date 1f'Yi!1!J
2 Bureau (SubstantIve Desk)
o 17 To be executed at FBIHQ (LCD)
(Complete only If DOJ notIficatIon 15 necessary)
~2-
'COpy 1
Signature Date
,FD-('21 (I}ev (-12-89) (NontelephonJc Cr MOnitoring Usa.ge Report)
AIRTEL
,
. I ()-,
\..-. -, \\
\: "
Federal Bureau or Investigation

.C)·---'~~om~ SAC, DALLAS (196B-DL-66524) {P} (WCC5) Date: 12/28/93


-- ------
To' DIRECTOR, FBI
Attn ELSUR Index

Subject CONNIE C. ARMSTRONG;


ET ALi
FBWi MF;
00: DALLAS

X Emergency Authortty, Re Dallas FD-759 to FBIHQ dated 9/13/93


captioned as above
Routine AuthorIty Re to FBIHQ
- - - dated and Bu to _
dated captIoned as above.
NOTE: If no confirming communication received from FBIHQ in response to
your request for routine use of a nODtelephonic consensual monitoring device. mark below:

_ _ _ No confummg communicatIOn receIved from FBIHQ to date

The followmg Information relates to the use of the equipment


_ _ _ Its use provided Iniormatlon which corroborated 01'" assisted Hl
corroboratIng the allegation or suspicion,
It was used, but no InformatIon of value was obtamed. ~
x ~
It was not used.
(Only Q.W. of the above applIes) / q0 B- uL -~({)Jt7~
· / J hl1.
-
\' \

Complete and submIt withIn 30 days of expiration of each and every period
of authorizalJOn granted for non telephonic consensual monitoring by eIther the- SAC, DOJ or
FBIHQ-CID (whether an InHial or a subsequent authorizatIon), and for each extenSion
or renewal thereof.

Transmit to FBIHQ in a sealed brown envelope labeled -Director. FBI, ELSUR


Index, FBIHQ,"

_ /1- c.~ 7 J;J-


~ Bureau
(~~ Dall as (2 - 19 6B - DL- 6 6 52 4 )
(1 - 196B-DL-66524 Sub A)
TMK/rlh
(5 )
, u-340 (Rev.B-18-89)

Universal File Case Number _


-----"--=::.......L-.L.---=""--_~:.....--=--....=:....- _..I:~___?_-

FtSf-
from- - - - - - _............ ;-;:-;--=--~-----:':---~~--------
(Name of Contributor)

(Address of Contributor)

(City and State)

~ M'~J J.~~d~,h~~~,~~~~/~~~~~~
(Name of Special Agent)

To Be Returned 0 Yes ~. No
Receipt Given 0 Yes prNo
Grand Jury Material ~ Dis'seminate Only Pursuant to Rule 6 (e)
Federal Rules of Criminal Procedure
DYes !1No
Title: j1 . A ./
LONII/t' e C!1t;'r' /<!/'At>rfi;VV5 / V;:j
C 7,4-L)

Reference: +;D - 302- 9/J.ofi.3


-----~-=--=-~'::-:-------'-~----:.....-_--------

(Communication Enclosing Material)

inal notes re interview of


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FD-302 (Rev, 3-10-82)

- 1-

FEDERAL BUREAU OF INVESTIGATION

Date of tra~riplion 10/4/93

I
the interviewing agents at the San Francisco Federal Bureau of
Im~
Investigation (FBI) office. I Iwas accompanied by two
attorneys representing KPMG Peat Marwick:~I ~
I I both members of the MCCUTCHEN AND DOYLE, BROWN,
ENERSEN law firm in San Francisco. I Iwas advised of the
interviewin~ agents' identity and of the purpose of the
interview. [ I gave the following information:
I I explained his professional background. He is
currently employed as an Au · eat Marwick in
San Francisco California.
~ ~rnd later gained a Bachelor of Science degree in tl'/C
Accounting. In 1981 he joined KPMG Peat Marwick's office in
London,- England. He worked as a chartered accountant for three
years in England. In 1985 he transferred to the San Francisco
office of KPMG Peat Marwick. In 1987 he returned to London. In
or around February of 1989 he moved back to San Francisco
permanently. He sat for the Certified Public Accountant exam in
May of 1992 and he passed all parts, but he has not yet attained
his certification.
I Isaid he first became involved with the Hamilton
Taft Company audit in or around March of 1989. He attended a
meeting with the Comptroller of Hamilton Taft and Company, I----~
I Where he met Hamilton Taft's new President, I
I
I ! The purpose of the meeting was for KPMG P~e-a-t~~M~a-r-w~~-c~k~
to get an understanding of Hamilton Taft's operations. I~~~~~
understanding of Hamilton Taft's business is that Hamilton Taft
collected payroll taxes for contracted clients and remitted these
taxes to the appropriate federal and state agencies. I I
recalls reviewing an old Hamilton Taft financial statement
prepared by the Arthur Anderson pUblic accounting firm.
KPMG Peat Marwick retained an engagement letter from
CONNIE C. ARMSTRONG, JR. (CHIP ARMSTRONG) for
Hamilton Taft's March 31, 1989 balance sheet.
Che audit of
pnderstood

9/30/93 San Francisco, CA 196A-SF-93255 (Sub C)-Sf

J,.
Invellligationon at File #

SA liULAIl.J;1 1; I llbIS:airdE ! I WLH JtR"?f-


by ~ J-b'7 C Date dictated -=1::. .:0: :. ./L. 4. .:. .L. /. : ;.9-=3 _

This document containll neither rccomrnendationn nor conl;lusionB of the FBI. It is the property of the FBI and is loaned to your agency;
it nnd its conlenUl nrc not to be distributed outside your agency,
FD-302a (Rev. 1H5 83)6

196A-SF-93255 (Sub C)

Conunuation of FD-302 of
__
J-----_.............. b7:=
........_ - - - - - - - - - ,
On 10/4/93
-------
,Page 2
----

that ARMSTRONG was the sole owner of Hamilton Taft. This audit
was to establish the financial condit~on of Hamilton Taft at the
time of ARMSTRONG's purchase. I
I said he understood that
Dallas, Texas KPMG Peat Marwick partner, I ~as the one
who obtained ARMSTRONG as a client, in other words, he was the
b'7C
engagement partner whose job was to give final review of KPMG
Peat Harwick accounting services. I I as the engagement
partner, normally would be the only person allowed to contact the
client directly. It was! 'understanding that and I I
KPMG Peat Marwick provided several services to ARMSTRONG and his
companies. These services may have included technical advice,
compilations as well as audited financial statements. He
recalled that KPMG Peat Marwick in San Francisco assisted in i,
Hamilton Taft filing of delinquent 1988 tax returns. Also he 'f,,'

recalled KPMG Peat Marwick in New York came to Hamilton Taft in


1989 to give a sales and use tax presentation.

~ Isaid that KPMG Peat Marwick performed a June 3D,


1989 Hamilton Taft balance sheet review immediately after the
March 89 audit. The audit work for the June 1989 review had
8lreadY b7gun before th 7 issuance of the March ~989.audit. ~Ji
1
Iaa, ~al.d that he belJ.eved the purpose of the reVl.ew was for
.... ~
ARMSTRONG to see that the programs he put into effect at Hamilton
Taft were being followed at Hamilton Taft and to establish a
financial track record for Hamilton Taft after his take over.

b7C I ~said that his responsibilities during the March


89 audit and the June 89 review were to oversee the completion of
the work papers by the KPMG feat Harwick audit st~ff and,to work
with the engagement partner,L ~uperv1sor,
I I Assistant Accountant and LISA RAGO compiled the work
papers on the KPMG Peat Marwick audit and review of Hamilton Taft
in 1989. I
Isaid he reviewed all work papers submitted by
KPMG Peat Marw~ck accountants for t e amilton Taft audit and
review. I
~ said he reported to /nl,,,,j,~~ normally by
telephone, abou problems and work completion during the Hamilton
Taft audit and review.

b7C Isaid an unusual issue that arose during the


Marcn 89 audit was whether certain investments had value. There
were a series of notes from individuals and companies payable to
Hamilton Taft but probably uncollectible. The March 89 balance
sheet reflected these notes as assets but kept a reserve for
uncollectible balance against these notes.
em, . •
I '
I
y,
,P""J02a (Re ... 11-15-0)

,', I
i lr:i"
·_~6A-SF-93255 (Sub C) f' .JJ:J/
V
I:"

"/"/] I)V>I,
/~)i f

/ "\,/1'1
.I~t,

c!!nu,etion ofFD-302 of MARl< STEDMAN AUSTIN


_____- .....- / - • On 10/4/93 . Pai c - -3- -

AUSTIN understood that Hamilton Taft client funds did


not necessarily have to be hel~n a ~rust. He understood t~
rrorn represe t tions made b VOIGTS durin conversations. AUSTIN
un ers ood that VOIGTS wrote a let er or a memorandum to he file
that reflected this understanding. He felt that VOIGTS was told
this by Hamilton Taft attorneys from the firm of Godwin, Carlton
and Maxwell. AUSTIN said that the first time he became aware of
the fact that Hamilton Taft employees were issuing checks to pay
client taxes but not mailing them was in December of 1989 when
ERIN MURRAY (aka, ERIN COLLEEN PITTOCK) brought up the issue
, during the December 1989 audit of Hamilton Taft.

AUSTIN e:~lained that MURRAY was planning,the Hamilton


Taft's year end, December 1989, audit and that during a meeting
with Hamilton Taft personnel she became aware that a series of
checks for client tax payments were voided in August 1989 and
later issued sometime that year. AUSTIN said that KPMG Peat
Marwick found out that these reissued checks had not be presented
or mailed to the tax authorities for payment as of December of
1989. The Hamilton Taft personnel who disclosed this to }~~y
were FRANK HYDE and JAMES PAILEB.

AUSTIN said that his and KPMG Peat Harwick's response


to these allocations was "Let's find out what's happening".. He
telephoned VOIGTS and told him about the discovery. VOIGTS said
that he would take a look at the issue when he comes out to visit
Hamilton Taft offices in San Francisco. A meeting was scheduled
with ARMSTRONG to discuss an audit plan for the December 89
audit.

This meeting was held in or around January of 1990 at


the San Francisco Hamilton Taft office. Present at this mee~ing
were VOIGTS, MURRAY, ARMSTRONG and AUSTIN. The issue of withheld
client tax payments was mentioned. Specifi~ally, three client
outstanding client tax payment checks were mentioned in the
meeting. When this issue about withheld client checks was
presented ARMSTRONG got upset and he wanted 'to know who at
Hamilton Taft made these type of statements. .MURRAY told
ARMSTRONG it was PAILLE. ARMSTRONG got angry at MURRAY because
he felt she should have qotten all of the details before raising
the issue. He felt that MURRAY did not have the facts straight.
r~Y did not return to the Hamilton Taft audit. She did not
want to go back and ARMSTRONG did not want her back.

000085
.1~ .- .~
( /1)..301l (Re'V. 11·15~83)

~96A-SF-93255 (Sub C)

:o~tiOD orFD-302 or MARK" STEDMAN AUSTIN


_~ ' On 10/4/93
. 4 -
' Paic - -

AUSTIN recalled receiving a telephone call from PAILLE


in early January of 1990 informing him he was resigning because
.. - of the long commute and the stress of the job. AUSTIN recalls
HYDE also resigning in or around January of 1990. AUSTIN does
not recall telephoning PAILLE at his residence at any time.
VOIGTS telephoned AUSTIN in or around February of 1990
and informed him that the December 1989 audit had been postponed.
AUSTIN recalled that the audit was postponed due to the fact that
Hamilton Taft no longer had a comptroller and that the accounting
functions were being moved to Dallas, Texas.
Later in or around Ju~e of 1990 the December 1989 audit
of Hamilton Taft was started. The issue of withheld client
checks arose again and KPMG Peat Marwick requested audit evidence
documenting Hamilton Taft's handling of these checks. KPMG Peat
Marwick Senior Accountant, KIRSTEN CONOVER was asked to examine
this issue.

CONOVER had prepared a new schedule of outstanding


checks as of ~2/31/89. Included in these checks were the
withheld client checks. Hamilton Taft moved it's accounting
functions back to San Francisco by this time and the new
accounting staff were unable to piece together what had happened
to the client checks withheld in 1989. This issue of these
withheld client checks were presented to STEVE SOLODOFF, the new
Hamilton Taft comptroller. Hamilton Taft was never able to fully
resolve the issue, but Hamilton Taft was able to estimate the
amount of tax penalties caused by these held back checks to be
approximately $940,000.00. ~USTIN informed VOIGTS about these
penalties and he seemed not be surprised. -
AUSTIN stated that l~Y had expressed an opinion in
1989 that Hamilton Taft was diverting client tax payments for
other purposes. "Z,QIGHT aE...peared to be not surprised at :HURRAY I s
statement. AUSTIN said that KPMG Peat MarvTick already kriew that

000086
FD-302a (Rev. 1l~15~B3)

196A-SF-93255 (Sub C)

Continuation of FD-302 of _ 3_ _• Page _ _5_ _


_ _ _ _ _ _ • On _ _1_°....;,1_4....;,1_9

some client tax payments were being diverted to Dresdner


Enterprises in Dallas, Texas. ~ I stated that he personally
did not know what Dresdner did with the diverted funds.

~ Iwas asked questions by the interviewing agents


specifically concerning the Hamilton Taft financial statements.
, I gave the following information concerning the financial
statements.
The June 1989 review was started in June of 1989 and
completed in August of 1989. The March 1989 audit was issued in
or around the end of September. I ~staff Accountant,
with KPMG Peat Marwick compiled the work papers for the June 1989
review and I I said he reviewed them andc:::J was available to
answer questions andl Ireviewed the final work product and
signed the review letter.
The only problem I Irecalled during the June 1989
review was that there were a lot of investments in notes
receivable. i 'stated that financial reviews normally are
intended for internal use by the client. KPMG Peat Marwick
basically relies upon the information submitted by the client for
review. I I stated that KPMG Peat Marwick can check the
validity of a note receivable by doing one or all of the
following due diligence examinations:
'b7C A) Review financial statement of debtor.
0'\
UJ Review terms of the note.
C) Review payment history of debtor for note.
D) Review collateral backing note.

~ ~Istated that the fact a financial statement carne


from a big six accounting firm like KPMG Peat Marwick rather than
a small local CPA firm mayor may not influence an outside party
considering doing business with the firm presenting the
financials. It depends on the type of person receiving the
financial statements. If the person receiving the financials is
an executive of a fortune 500 company he or she would consider a
business being audited by a big six firm more prestigious than a
like firm with financial statements audited by a small local
firm.

~ Isaid that the fact that any implied contractual


liabilities existed at Hamilton Taft would have to be footnoted

_ .._._.. _ - - - - -
FD-302a (Rev. ll-15-B3)

196A-SF-93255 (Sub" C)

Continuntilln of FD-302 of JI..- ....IL Ll '7 C: _ _ _ _ _ _ , On _ _1_0_'_4_/_9_3_ _, Page _ _6_ _

only if it were one of the items in the KPMG Peat Marwick audit
disclosure checklist used by KPMG Peat Marwick auditors. The
client had a lot of input as to what footnotes were included in
financial statements and all footnotes had to be approved by the
engagement partner who wasl I in this case. He explained
that the March 31, 1989 audit and the June 30, 1989 rlXlew §rOU1d
have been reviewed by two KPMG Peat Marwick partners, and
I I
I Istated he was not aware of the particular due
diligence review that I Iconducted referencing the $18.9
million note receivable from Dresdner Enteryrises. He heard that
Dresdner had appraisals of the collateral. ~said i ~
have been unusual if the engagement partner, in th1S case
was directly involved in any field work of appraising asse s.
The engagement partners main job would be to review the work of
others and to handle interaction between the client and KPMG Peat
Marwick in order to coordinate the facilitation services.

The interviewing agents asked he had any I lif


direct knowledge of a financial audit or reV1ew being performed
by KPMG Peat Marwick for any of the ARMSTRONG Dallas haseq
companies including but not limited to Dresdner? . J
responded by stating that he had no direct knowledge of any type
b7C of financial statements being issued for Dresdner or any of
ARMSTRONG's Dallas companies. But he was aware that at one time
KPMG Peat Marwick auditors were reviewing financial records at
the Dresdner offices in Dallas, Texas. He knows of this because
I pnd other accountants working on the Hamilton Taft audit in
1990 had telephone conversations with the KPMG Peat Marwick
people at the Dresdner office.

I lexplained that it was custom for KPMG Feat


Marwick to Issue "drafts" of financial statements for the client
to review prior to issuing an actual financial statement He a

said that could be what thel Imemorandum dated


October 20, 1989 referenced when it mentioned two versions of a
Hamilton Taft June 30, 1989 review (See the copy of page of memo
attached as Exhibit #1). I I stated that he had authority to
issue drafts to clients. The drafts are destroyed at KPMG Peat
Marwick after the issuance of the official (signed) review. The
drafts are not endorsed with the KPMG Peat Marwick signature.

--------- ------------------
FD-302a (Rev. 1HS-83)

196A-SF-93255 (Sub C)

Continuation ofFD-J02 of
b7C _ _ _ _ , On _ _1_0_/_4_/_9_3__• Page _ _7_ _

The interviewing agents asked I lif he recalled


I--------------~Ipickinqup an endorsed (finished) copy of the
June 30/ 1989 Hamilton Taft review and later on reYllrnipglit
because ARMSTRONG was not happy with the figures? L said he
recalled an incident of returning the endorsed June 30 Hamilton
biC Taft review statewent but he did not recall specifically who was
involved. L Jstated that he remembers that the issues may
have been wording of a footnote and/or the fact that KPMG Peat
Marwick deducted an uAllowance for Trade Receivables" from the
accounts receivable. He believed that the changes and re-
issuance of the Hamilton Taft June 30, 1989 review statement
indicated an increase in Hamilton Taft's net worth of about
$200,000.00. The discission to reissue Hamilton Taft's financial
review was ultimately made bY! I
The interviewing agents presented a copy of an exhibit
from KPMG Peat Marwick's work papers for the Hamilton Taft June
30/ 1989 review which is a photocopy of the Dresdner Note
Receivable (See Promissor¥ Note Attached as Exhibit #2). The
interviewing agents askedL Ito read the note and determine
if this is a short term balance sheet asset or a long term asset.
I Ireviewed the note and said that the note is a long term
asset because it is due and payable for a period over one year
and/or accounting cycle. The interviewing agents asked~I ~
was this $18.9 million note purposefully umisclassified" as a
short term note on the Hamilton Taft June 30, 1989 review in
order to indicate a positive working capital balance at Hamilton
Taft rather than the true negative working capital balance that
would have been revealed if note was classified correctly? b7C

I 'said that the Dresdner promissory note was not


purposefully misclassified but instead it appears to be
unintentionally and erroneously classified by KPMG Peat Marwick
as a current asset. He does not know why or how this error was
made by KPMG Peat Harwick. He said if this note was classified
correctly the review financial statement would reflect a working
capital deficit at Hamilton Taft. He did offer that it is
customary for the client to submit the balance sheet for review
with the assets and liabilities already classified. He did say
that KPMG Peat Marwick would have reviewed each material item on
the balance sheet and performed the due diligence he stated
earlier on notes receivable.
FD-3024 (Rev. 11-15-83)

196A-SF-93255 (Sub C)

Continuation of FD-302 of
J Lb7C _ _ _ _ _ , On _ _1_0.....;.1_4....;1_9_3_ _• Page _ _8_ _

______~Isaid it was customary at KPMG Peat Marwick for


him and the engagement partner to review each item submitted as a
work paper for a financial review. He said it was customary for
each person that reviewed such an item to note his or herlds~ ~
initials on the bottom right hand side of the work paper. I ~
did not recall reviewing this particular note. I !noted that
from the appearance of the copy of the work paper the .
interviewing agents presented thatl Iwas the accountant who
b'iC submitted this note. And he noted that it appears that the work
paper was entered on October 9, 1989 which is approximately 100
days after the Hamilton Taft review was dated. The date on the
upper left hand side of this workpaper should have read June 30,
1989 rather than March 31, 1989 (See Exhibit #2). I Isaid he
would not have approved the June 30, 1989 Hamilton Taft review
statement without reviewing this note. The interviewing agents
asked if it was possible that the promissory note was switched
after the issuance of the June 30, 1990 review. I
Isaid he
did not know.
I I said that footnote #4 to the Hamilton Taft June
30, 1989 balance sheet noted that this note receivable from
Dresdner was Udue in full on July 1, 1990". The" interviewing
agents asked if not this footnote would further mislead
investor's or clients of Hamilton Taft that Hamilton Taft was
fUlly capitalized. I Isaid that footnote #4 could have
mislead someone into believing that the promissary note worth
$18.9 million was actually a current asset when in fact it was a
long term asset.
IIsaid, unlike audited financial statements, the
financial reV1ews were -intended for internal use by the client.
He said that no written admonition or caution was give by KPMG
Peat Marwick to Hamilton Taft regarding the use of the financial
review statement.
The interviewing agents presented a copy of footnote
#10 to the Hamilton Taft June 3D, 1989 review which states among
other things that Hamilton Taft has a working capital deficit and
that Hamilton Taft had collected more from clients that is
available to pay those client's taxes. The interviewing agents
asked did this not sound like an explanation of theft or
embezzlement of client funds by Hamilton Taft? I Isaid that
this was not a concern of his as a KPMG Peat Marwick auditor. He
said that he had no way of knowing that the clients were not
· FD-302a (Rev. ll·l 5·83)

196A-SF-93255 (Sub C)

Continuation of FD-302 of =====::======~ __ ~_)


l-_! C_: ' On _~1-0...:./-4--=1-9-3--.Page --==9=-_

already aware of these activities. He said he first was aware of


client deposits to Hamilton Taft for future tax liabilities were
being used to pay current client tax liabilities in or around
March or April of 1989. It was his understanding at the time of
the review that Hamilton Taft could use clients cash to pay past
liabilities.

~ ~Istated that it was his professional opinion and


experience that it would be a conflict of interest for a KPMG
Peat Marwick engagement partner to be on the board of directors
of a client company. He said this was because a member of the
board makes business decisions rather than offer professional
advice.

I I
said that KPMG Peat Marwick resigned from the
Hamilton Taft account in or around January of 1991 because
Hamilton Taft was never able to provide KPMG Peat Marwick
sufficient audit evidence of the ultimate disposition for the
voided and unpresented checks asked for in the December of 1989
balance sheet audit. The resi nation was ersonally delivered by
I land himself to President of Hamilton
Taft, in San Francisco. dld not voice any surprise by
KPMG Peat Marwick's resignation and he did not offer any
objections.

The interviewing agents presented a photocopy of a hand


written work paper contained in the June 30, 1989 Hamilton Taft
review work papers. This work paper references ownership of
Hamilton Taft (See E~ibit #3). I ~aid that this document
was written byl ~
U I

at eith~~ Sandia Savings or Team Bank. Chip, it is important


hie that we control the bankinq relationships. A larqe part of
my sales pitch to Bane One has b@en our ability to bring them
so many accounts. If I now tell him those accounts went
somewhere else, it does not help. I discussed this wIth
Laddie and he said he was unaware of it.
I am leavinq our payroll account at Turtle Creek Bank as an
accommodation to the employees. Bane One agreed that was the
proper thinq to do and had no problem with that. In addition ..
Bane One can make payroll direct deposit to Turtle Creek.
Patti was informed on Wednesday that our Limo lease had been
approved by LeaseUSA. This has not yet been confirmed. As
Dresdner grows and develops lessor relationships, this problem
will go away.
With respect to HTC, Chemical was to determine on Monday what
division would have responsibility for HTC. I don't know how
that was resolved. Security Pacific should be signed up next
week as both a concentration account, controlled disbursement
account and TT & L. They are waiting for the 6/30 tinancials.
American National of Chicago is dead. They were insistent
that funding of the controlled disbursement account be made
by a third-party institution, which is unrealistic.

Subar is still waiting for Fowles and Paille to prepare their


comments on the last draft. He has been waiting tor three
\leeks. As soon as those comments are' received, the final
draft will be produced. This report is an important tool in
obtaining new financing. It shows that an increase in income
is reasonable and possible as a result of implementing Subarts
new procedures. The delay only hurts us more.

"UDIT ISSUES:

Keith vc)"lqhts and I had II. Neoma to Jeaus A • • •tinq en Hondlly.


lie va• •11 shocked as v. "Gr. with the 6/30 HTC nat worth of'
/ $91,000. Re knew nothing ot it. Arter vorkinq with the San
\ Francilleo Office, he has reissued that report 8hovlft9 $313,000 n
s the net worth. However I . Thursday morninq he lnfonUld)De r J'VI.J'j,..

\ithat the new audits were delivered to our· ....Oftlca in San


Franc!mco on Wednasday afternoon. I asked Xelth to have his
San Francisco office prepare Bore copies and ••nd to me and
e agreed, once

BUDGET ISSUES:
~ could get in touch with that otfice.

As you know, the budget forms for 1990 went out two weeks ago
and due back at the end of ne~t week4 If everyone is on time
(Which is unlikely for HTC) , we should have a good analysis
ot next year by the first week in November.
PROMISSORY UOTE:

r..prl1 10, 1989 Dallas County, Texas $18,962,255.00

FOR VALUE RECEIVED, the undersigned (the "Haker") promises to


pay to the order of Hamilton Taft , CompahY, a California
corporation (t.he "Holder ll ) , at 74 Hew Montgomery, San Francisco,
California 94105, or at such other place or places as any holder
of this Promissory Note may designate in w~iting, the principal sum
of Eighteen l'1illion Nine Hundred Sixty Two Thousand Two Hundred
Fifty Five and No/IDO Dollars ($lB,962,255.00) in legal and lawful
money of the United states of Merica, together with interest on
the unpaid balance from time to time remaining unpaid prior to
maturity at the lesser of (al the maximum la~ful rate (as
hereinafter defined) or (b) nine percent :(9%)) per annum. Interest
shall be computed on the basis of a 360 day-year and for the actual
number of days elapsed (including the first day but excluding the
last day), unless such calCUlation would result in a usurious rate,
in which case interest shall be calculated on a per annum basis of
a year of 365 or 366 days, as the case may be.

Maker shall pay to Holder hereof quarterly installments oE


interest hereon commencing october 1, 1989, and continuing for five
(5) years ~ith the final quarterly payment consisting of all of the
,utstanding principal in addition to the accrued interest as set
forth herein. Such quarterly payments shall be made by Maker on
or before october 1, January 1, April 1 and July 1 of each year
until maturity on July 1, 1994. All payments are to'b~ applied
first to accrued interest and the balance to reduction of the
unpaid principal until the principal is paid in full. This
Promissory Hote may be prepaid in part or in full at any time
without penalty at the discretion of the Haker.

Baker hereby pledges to Holder, as security for the full and


timely payment of this Note, all of Maker' 5 rights, title and
interest in, to and under that car-tain Renewe~/__!1-o_~J.f ied and
Increased Promissory Note in the amount of \ $1, 50U, ®.9-, by and
between Gulftex Financial Corporation, a Texas corporation,
Gulfstates Management corporation, a Texas corporat.ion, Whitehall
Interests, Inc., a Texas corporation, and Whitehall General
Interest.s, Inc., a Texas corporation, as makers and Hamilton Taft
& company, as payee., dated February 16, 1989 (the IIGulftex Note ll ) ,
Which Gulftex Note was sold to Maker pursuant to that certain Sale
and Assignment of Promissory Uotes and il.ccQunts Receivable, by and
between Holder and Maker, dated April 10, 19B9, and the collateral
securing such Gulftex Note; provided that Maker reserves the right
to convert the Maker's interest in the Gulftex l~ote into an equity
interest in the makers of the Gulftex Note or t.heir- \.mderlying
businesses; provid~d further that upon such conversion, the Maker's
equity interest shall be pledged to Holder as security for the full
and timely payment of this Hate.

PROMISSORY NOTE - Page 1

_· _· · _ ~'~~-~·_-"--~-----------------r
· Exhibit 2

All past due principal and interest shall bear interest until
paid at the maximum lawful rate of interest in accordance with the
laws of the state of Texas and the United states. A J ii
If default is made in the payment of any installment of ~~ -
principal or interest under this promissory Note, then Holder may, ~~~~\
at its option, declare the entire unpaid principal balance of and rt i'\ fl.l
accrued and unpaid interest on this Promissory Note to be 1 ~, I IJU,
immediately due and payable without notice or demand, foreclose all
liens and security interests securing the payment of this
Promissory Note, or any part thereof, and offset against this
Promissory Note any sum or sums owed by the Holder to Maker, atll~------
at the option of the Holder. . I
~~ ------~ __
The undersigned and all other parties now or hereafter liable
for the payment hereof, whether as endorser, guarantor, surety or
otherwise, severalty waive notice of demand, notice of
acceleration, notice of presentment, demand, presentment, notice
of dishonor, dil igence in collecting I grace and protest, and
consent to all extensions that from time to time may be granted by
the Holder hereof and to all partial payments hereon, whether
before or after demand.

No delay or omission on the part of the Holder in exercising


any right hereunde~ shall operate as a waiver of such right or of
any other right under this Promissory Note. A waiver on anyone
occasion shall not be construed as a bar to or waiver of any right
or remedy on any future occasion.

If this Promissory Note is not paid when due, or if it is


collected through a bankruptcy, probate or other court, the
_undersigned agrees to pay all costs of collection, including, but
not limited to, reasonable attorney's fees, filing fees, costs of
• court and other costs and expenses incurred by the Holder hereof.

This Promissory Note shall be binding upon and inure to the


benefit of the parties hereon and their respective successors and
assigns. The Holder may assign any of its right, title or interest
in and to this Promissory Note or any security agreements or
collateral in connection herewith without the consent of the Maker
hereof.

This Promissory Note shall be construed under and in


accordance with the laws of the state of Texas.
Notwithstanding anything to the contrary contained in this
Promissory Note or in any other agreement entered into in
connection with or securing the indebtedness evidenced by this
Promissory Note, whether now existing or hereafter arising and
whether written or oral, it is agreed that the aggregate of all
interest and any other charges constituting interest, or

PROMISSORY NOTE - Page 2


adjudicated as constituting interest, and contracted for,
chargeable or receivable under this promissory Note or otherwise
in connection with this loan transaction, shall under no
circumstances exceed the total amount of interest permitted at the
maximum lawful rate. If from any circumstance the Holder shall
ever receive interest, or any other charges constituting interest,
or adjudicated as constituting interest, in excess of the total
amount of interest which would have been earned at the maximum
lawful rate, the amount of such excess interest shall be applied
to the reduction of the principal amount owing on this promissory
note or on account of any other principal indebtedness of Maker to
the holder, and not to the payment of interest. If the amount of
such excess interest exceeds the unpaid principal balance of this
Promissory Note and such other indebtedness, the amount of such
excess interest that exceeds the unpaid principal balance of this
Promissory Note and such other indebtedness shall be refunded to
Maker. All sums paid or agreed to be paid to the Holder for the
use, forbearance or detention of the indebtedness of Maker to the
Holder shall be amortized, prorated, allocated and spread
throughout the full term of this promissory Note until payment in
full so that the actual rate of interest on account of such
indebtedness is uniform throughout the term of this Promissory
Note.

IN WITNESS WHEREOF, the Maker has caused this promissory Note


to be made and executed as of the day and year first above written.

DRESDNER ENTERPRISES, INC.,


a Texas Corporation

BY:~C~
Its: t! ,$0.

PROMISSORY NOTE - Page 3


CERTIFICATE OF SECRETARY

I, the undersigned, the duly elected Secretary of Dresdner


Enterprises, Inc., a Texas corporation, do hereby certify:

That the attached copy of the Promissory Note, dated April 10,
1989, by Dresdner Enterprises, Inc., as Maker, and Hamilton
Taft & Company, as Holder, is a true and correct copy of the
original.

IN WITNESS WHEREOF, I have hereunto sUbscribed my name and


affixed the seal of Dresdner Enterprises, Inc. this 30th day of
June, 1989.

-----------,~s~@"'II""llt..,e~t
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'D-302& (Rev. 11-ls-l3)

196A-SF-93255 SUB C

ContinuaUoa oj FD-301 oj --l1~~!!!!!!!I!II L b'! D


---------- .OD 10/22/93 r Paae 2
----
At this point in time, I Iwas reminded that he has
an agreement with the government to provide truthful information
regarding Hamilton Taft and that in exchange he was being given
immunity from prosecution. He was told that should he
intentionally omit any information or provide any false
information to the FBI, knowing that information to be false that
this would be a separate violation of federal law for which he
could possibly be prosecuted. He stated he understood this
statement which was made to him by Special Aqentl land that
he would tell the truth to interviewing agents. b7C

b '/ c:
=0-759 (Rev 5-31-91)

r0 DIrector. FBI ( )
Attn CID I ~CONON.LC CHllvlES Section

SAC, DALLA S

Title CON~ c. c;l~1S'l'RONG. aka NotificatIon of SAC Authority


I:

~
CHi ,RM3TRONG: for *fS:iii(jW
t:> b7C of Consensual Momtonng Equipment (NonteJephomc)
01-1PU-CHECK, a
Form must be submItted wlthm 5 worktng days of the date
FBW authonzatlon was granted
on· nA ToT.AS
1. Reason for Proposed Use (Check) 2 Type of EqUIpment (Check)
~Corroborate 0 Protect o Protect lit Transmltterl o Mlcrophone/ II Concealed
TestImony Consentmg Government Receiver AmplifIer Recorder
Party Property
o Other (SpeCify) o Other (SpeCify)
3 Consentmg Party (Check/oe) 4 Interceotee(s) (Include Title 1f Public OffICIal)
D Nonconfldentlal Party Lb:2 _ I 1 t')
') I c

-)
o Confidential Source (Name)
and Ol:her as':::;Ol".l..ates
:i1 Cooperative Witness b7D
5. Duration of proposed use (90 days) 6 Installation of EqUIpment (Check) 7 LocatIon where equIpment
o Concealed on Person D In VehIcle Will be utIlized (CIty and Slate)
Dale Authonzed .10/28/93 o In Motel Room rg Other (Specify)
EXpiration Date 1/25/94 Dallas, 'llexas
in Off~ce
8
i The follOWing reqUIrements have been fulfllied
a Consenting party has agreed to testify
b ConsentIng party has executed consent form
9 Government attorney In JudICial district where interception
WIll take place foresees no entrapment and concurs In the use of
thIS technique being appropriate
C Recordmg/transmlttmg deVIce Will only be activated ~ Yes o No Date 10/27/93
I I b7E Identtty of Gov't Atty AUSA 'r:CRRY HfiR '£
18 Sec(s) 1343
-
USC
JudiCial District Northern D~sirl.ct: of 'l'exCls
1u \/lOlatlon(5) Tltle(s)

11 OOJ notification required 0 Yes K No If "Yes" check reason below


o InterceptIOn relates to an investigatIon of a member of Congress, a Federal judge, member of the Executive Branch at Executive
Level IV or above. or a person who has served In such capacity within the prevIous 2 years
o Interception relates to an InvestIgation of any publIc offiCial and the offense Investigated IS one involving bribery, conflIct of Interest. or
extortion relatmg to the performance of his/her offiCIal duties 1re1/- J2
f}J / ~ I .. e:;~. f/}
o Interception relates to an investigation of a Federal law enforcement offICial J.,LJ=;. --: W~ 2. t
IlfJP- ~ - - --
o Consentmg/nanconsentlng person IS a member of the diplomatIc corps of a foreign country
o Consenttng/nonconsenttng person IS or has been a member of the Witness Security Program and that fact IS known to the agency
Involved or Its officers
o Consentlng/nonconsentmg person IS In the custody of the Bureau of Prisons or the U S Marshals Service
o Attorney General, Deputy Attorney General, ASSOCiate Attorney General, ASSistant Attorney General for the CrJmlnal DIVISion, or the
U S Attorney In the dlstnct where an InvestigatIon IS being conducted has requested the investigating agency to obtain pnor wnt1en
consent for making a consensual Interception In a speCIfic investigation

12 SynopsIs of Case (Attach addt : c z caccscnc:)


ft I P [> RL1S'CBONG L__- ~

)'7 D E
an
:
lnvesLlgatlon In San FranClSCO DiV1Sl.On where he busted out a company
I~A~m~1"P"1sI'\'lII/'I"I'R!"f'O~N'I'7'G....~J..~s!"'-!E~1'fl1:'i"'e~sIll1l"lA'Q.b!'laj'l"l!e~c"l"L....,O
.. """y......- -

called HLU-1J..LIJ.\ON TAFT. \.ARMSTRONG may also be skJ.nunJ..ng a loan ob-callleq from
an J.nves"cment company orJ.gl.nally made for the benefl t.. of COHPU-CH:CC.L<.)

13 JustIfication statement necessitating emergency authonejt

N/A

2 ureau (Substantive Desk \

COpy 1
FD-301 (Rev. 3-10-82)

- 1-
FEDERAL BUREAU OF INVESTIGATION

Date of transcription 11/15/93

On the morning of October 22, 1993,1 was I


interviewed via prior arrangemen~ at the sap Francis 70 Office of
the Federal Bu L 119 a
-
t-',"I('
,
represented by In addition to
special Agents (SAs) and HATCHER, of the
California ~te pepartment of Justice was present dur nq this
interview. L- lis cross designated to assist the united
states Attorney's Office in the prosecution of the Hamilton Taft
case. I I

b7D

InvclligDtlon on 10/22/93 It San Francisco« CA PUe' 196A-SF-93255 SUB C ~()

,Qe>. .. ~~ IWI LURD L. HATCHERJ Jr • j- . i"


~""' ...,j~&.P&lKM
...../~m.....l""YJ--_'_}-_"'_-- Date dictated 10/22/93

This document contain, neither recommend.tions Dor conclusloD5 01 the PBI. It is the property of tbe FBI Ind is loaned to your agency;
il and its content!! are not to be distributed outside your .aeney.
I, ~

FD-302 (Rev 3-10-82)

--.L-
FEDERAL BUREAU OF INVESTIGATION

Date of transcription 11/15/93

CONNIE C. ARMSTRONG, JR., also known as CHIP ARMSTRONG,


was contacted at his place of business: COMP-U-CHECK, INC.,
12750 Merit Drive, suite 300. After being advised as to the
identity of the interviewing agent and the nature of the
interview, he provided the following information:

ARMSTRONG is not familiar~~~~~


__~~~~-rAL GROUP,
INC. familiar with
(WESTlN) He ilS
Neither
~~~~Inorl .ever loaned ARM TRONG any money.
did provide ARMSTRONG with a surety bond that was to back a loan
from UNITED BANK AND TRUST, Abilene, Texas. This never went
through. The bond was no good. It had nothing to back it.
ARMSTRONG filed bankruptcy in 1985. He purchased the
HAMILTON-TAFT COMPANY in March, 1989. The bond and loan that b"le
ARMSTRONG sought occurred when ARMSTRONG was seeking financing
for the HAMILTON-TAFT acquisition. ARMSTRONG believes this to
h~ve
Slnce.been in 1987 or 1988. He has had no contact withlba.- _

InvestigalJon on ----,ol=.;1=-/<-=1.=5-L.-/......=9;...:3=---_ _ 8t Dalla S I Texas FJle II 196B-DL-5885B -


III ~~
I
1,/./

'-"

Daledlclated 11/15/93

ThiS document contain' neither recommendatIons nor conclusIons of the FBI illS the (lfoperly of the FBI Bnd 15 loaned to your agency,
It and Its contents are not to be dlstnbuted outside your agency
J~759 (~ev 5-31-91)

_0' Director, FBI { . t C 11 ). Date 12/1/93


Attn. CID, W'hl. e 0 ar Cr ~me Section

SAC, DA r!T'~~j (196B-DL-66524)( P) /


Itle CONN.lE C. ARMS'.rRONG; Notification of SAC Authority Granted
/: Err' AL; for~lQ\MJse
' __1_., COMPU-CHDCI(-V1CT.LM;
of Consensual Monitoring Equipment (Nontelephonlc)
FDW I I

00: DALLAS Form must be submitted wIthin 5 workIng days of the date
authorizatIon was granted

Reason for Proposed Use (Check) 2 Type of Equipment (Check)


~ Corroborate 0 Protect o Protect !if Transmitter! o
Microphone/ ~ Concealed
Testimony ConsentIng Government Receiver Amplifier Recorder
Party Property -
o Other (Speedy) o Other (Specify) CCTV wlAudio
Consentmg Party (Check one) 4 Interceptee(s) (Include TItle If PublIC OffiCial)
o Nonconfldenllal Party J Lb2 _
o Confidential Source (Name) CONNIE CHJ.P ARHSTRONG and others
i£ Cooperative Wrtness b7D
1.
DuratJDn o~~e.
(90 days ~6 Installation of EqUipment (Check) 7 Location where equipment
(rQt~ ~ Concealed on Person o In Vehicle wIll be utlhzed (City and State)
Date Authonzed" 12/2/93 o In Motel Room o Other (Specify)
EXpiration Date" 3/2/94 Dallas, ~'exas

, The following requirements have been fulftlled 9 Government attorney In JudIcial dlstnct where interception
aa ConsenlJng party has agreed to testify will take place foresees no entrapment and concurs In the use of
if b Consenting party has executed consent form. this technique being appropriate \

S]l c Recording/transmittIng device will only be actlvatp.rl ~Yes o No Dale 12/2/93


I I b7E
-
Identity of Gov't Atty LINDA GROVES
JudICial District Northern Dls,rlct of rl'exa S
LJ 1I1olatlOn(s). Trtle(s] 18 Sec(s) 13~3 usc
DOJ notrflcatlon reqUired DYes DIl. No If "Yes" check reason below
D Interception relates to an investigation of a member of Congress, a Federal Judge, member of the Executive Branch at Executive
Level IV or above, or a person who has served In such capacIty Within the prevIous 2 years
o Intercepllon relates to an InvestIgatIOn of any pubhc offiCial and the oHense Investlgated IS one InvolVing bnbery, conflict of Interest, or
extortion relating to the performance of his/her offiCial duties
o Interception relates to an investlga1lon of a Federal law enforcement offICial
o Consenhng/nonconsentlng person 15 a member of the diplomatiC corps of a foreign country
o Consenbnglnonconsentlng person IS or has been a member of the Witness Security Program and that fact IS known to the agency
Involved or Its officers
D Consentlnglnonconsentmg person JS In the custody of the Bureau of Prisons or the U S Marshals Service "
' ...
o Attorney General, Deputy Attorney General, ASSOCIate Attorney General, ASSistant Attorney General for the Cnmlnal DIVISion, or the
US Attorney In the district where an investigation IS being conducted has requested the investIgating agency to obtain pnor written
consent for making a consensual interception In a speCifIC Investigation
-2-..--------------------:-------------------------------- '~

~ureau(~anllve Desk!
COPY1~~_
r,-s21- O:~ev <&-12-89) (Nontelephontc Cr Momtoflnl Uuge Report)
AIRTEL
Federal Bureau of Investigation
From~ALLAS (196B-DL-66524) (P) (WCC5) Dale 3/3/94

To DIRECTOR, FBI
Attn ELSUR Index.
~·w
Subject
o
CONNIE C.. ARMSTRONG I JR .. i
J
I

ET ALi
LCOMPU-CHECK - Vict~j
FBW;
00: DALLAS

X Emergency AuthorIty. Re Dallas FD-759 to FBIHQ dated 12/1/93


captloned as above
_ _ _ RoutIne Authority Re to FBIHQ
dated and Bu to
---~---
dated captioned as above

NOTE: If no confirming communication received from FBIHQ in response to


your request for routine use of a nontelephonic consensual monitoring device, mark below:

_ _ _ No confIrmmg communIcatiOn receIved from FBIHQ to date.

The followmg InformatIOn relates to the use of the equipment


__ Its use provIded mformatJon whIch corroborated or assisted
__X In
corroboratIng the allegation or SUspiCIon
was used, but no mformation of value was obtained.
-
__ - ItIt
-_ was not used
(Only ~ of the above applIes)
lQ&.6- j)L-IoC,S~tf - 9
Complete and submu wIthin 30 days of expuation of each and every penod
of authonzanon granted for nontelephonlc consensual monitoring by either the SAC, DOJ or
FBIHQ-CID (whether an Initial or a subsequent authOf1ZatIOD), and for each extension
or renewal thereof
TransmIt to FBIHQ in a sealed brown envelope labeled -Director. FBI, ELSUR
Index, FBIHQ."

~1 Bureau
I~- Dallas (2 - 196B-DL-66524)
(1 - 196B-D~66524 SUb A)
AFW/rlh
(5)
· D· 7tj~ (Rev 5-31-91)

To Director. FBI (19 GB-DL- 66524) Date 12/3/93


Attn CIO, tv}); 1-e Co] 1 a r CrJ me ...
Section

SAC. Dl;LL6; (19 6B-DL-6 65 24) (P )

Title CONNiE C. A~ISTRONG Notification of SAC Authority Granted


ET AL 'OEEme 'Ise
FB~v i I'-1F
of ~nsensual MonitOring Equipment (Nontelephomc)
00: DALLAS
Form must be submrtted within 5 working days of the date
authOrizatIon was granted

1 Reason for Proposed Use (Check) 2 Type of EqUipment (Check)


~ Corroborate 0 Protect o Protect t8J Transmrtterl o
Mlcrophonel D Concealed
TestImony Consentmg Government ReceIVer Amplifier Recorder
Party Property
o Other (Specify) o Other (Specdy) '" ,.!.,
"
3 Consentmg Party (CheC~QDeJ 4 Interceptee(s) (Include Title If PublIC OffiCial)
_ ....AJ;

o Nonconfldentlal Party l-b2 - CONN1E c. I


o Confldenbal Sou rce (Name)
ARlv1SIJ.'RONG,
~ CooperatlVe Witness b7D I land others b'il"-
I .~,

-
5. Duration of proposed use 90 days 6. Installation of EqUIpment (Check) 7 Location where equIpment
tt' It 12' jZr ~ Concealed on Person 0 In Vehicle Will be utilized (CIty and State)
Date Authonzed 12/11/93 o In Motel Room oOther (Specify)
EXpiration Date 3/10/93 Dallas, Texas

B The follOWing requIrements have been fulfilled 9 Government attorney In JudiCIal district where InterceptIon
'81 a Consenting party has agreed to testify Will take place foresees no entrapment and concurs In the use of
f2g b Consenting party has executed consent form thiS techmque being appropnate
SCI BeCP((hoQ/trapsmlt1!PQ deY'ce Will on'l be activated ~Yes o No Date 12/2./93
b7E Identity of Gov't Arty AtJSA LINDA GROVES .r.

JudICial Dlsfnct Northern D.l.st..r~ct of rrexas


lu vlolatlon(s) Tltle(s) J8 Sec(s) ) 343 USC
11 DOJ notification reqUired 0 Yes ~ No If "Yes" check reason below
o Interception relates to an investigation of a member of Congress, a Federal Judge, member of the Executive Branch at Executive
Level IV or above, or a person who has served In such capacIty wlthm the prevIous 2 years
o Interception relates to an investigation of any public offiCial and the offense investIgated IS one involVing bnbery, conflict of Interest. or
extortion relating to the performance of hlslher offiCIal duties
o InterceptlOn relates to an investigation of a Federal law enforcement offtclal- - - - - - - - - - - ------ .----- -
o Consentrng/nonconsentlng person IS a member of the diplomatIC corps of a foreign country
o Consentlng/nonconsentlng person IS or has been a member of the Witness Secunty Program and that fact IS known to the agency
Involved or rts officers
o Consentlng/nonconsentlng person IS In the custody of the Bureau of Prisons or the U S Marshals Service
o Attorney General. Deputy Attorney General, ASSOCiate Attorney General, ASSIstant Attorney General for the Criminal DIVISion. or the
U S Attorney In the district where an investIgation IS being conducted has requested the IOvesttgatlOg agency to obtain prror wntten
consent for making a consensual Interception In a specific InvestIgation

12 SynopsIs of Case (Attach additional page If necessary) Coopera-cing Wi tness has adv~sed -chat
=) i~1SJ].IR01JG

lnvestigat10n 1n the San FranC1SCO


Hl~4.lLTON-TAFT..

b7C
cu e a
Signature ~
LJreau (SubstantIve Desk\
o 17 To be executed at FBIHQ (LCD)
(Complete only If DOJ notification IS necessary)

COpy 1 f'ytf- SIgnature Date


/} ....-
D-6'21 (Rev 4-12-89) (Nanteleph Momtorlng Uuge Report) - i.?-/( #,
'- 'J AIRTEL
Federal Bureau of Investigation
SAC, DALLAS (196B-DL-66524) (P) (WCC5)oate 3/17/94

DIRECTOR, FBI
Attn ELSUR Index

Subject CONNIE C. ARMSTRONG, JR.;


ET ALi
FBW; MFj
00: DALLAS

X
Emergency Authority Re Dallas FD-759 to FBIHQ dated 12/3/93
captioned as above.
_ _ _ Routme Authority Re to FBIHQ
dated and Bu to - - - - - - -
dated captIOned as above

NOTE: If no confirming communication received from FBIHQ In response to


your request for routine use of a nontelephonic consensual monitoring device, mark below:

No conflrmmg commUnication receIved from FB~~~T'


-~ !.J/5J.L(- -
The fallowIng InformatJon relates to the use of the e UJp nr

Complete and submIt withIn 30 days of expuatlOn of each and every perIod
of authOrIZatIOn granted for nontelephonic consensual monitoring by either the SAC, DOlor
FBIHQ-CID (whether an inItial or a subsequent authorIzatIon), and for each extenSlOn
or renewal thereof

Transmit to FBIHQ 10 a sealed brown envelope labeled -Director, FBI, ELSUR


Index, FBIHQ" '

)-lp'l/L/
~jBureau
. ~- Dallas (2 - 196B-DL-66524)
(1 - 196B-DL-66524 Sub A)
MSM/rlh
(5)