Heath v. Spearman, CASE NO. ED CV 13-99-JLS (PJW)

DANIEL WILLIAM HEATH, Petitioner, v. MARION E. SPEARMAN, WARDEN, Respondent.

CASE NO. ED CV 13-99-JLS (PJW)

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

March 28, 2017

FINAL REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE

This Final Report and Recommendation is submitted to the Honorable Josephine L. Staton, United States District Judge, pursuant to 28 U.S.C. § 636 and General Order 05-07 of the United States District Court for the Central District of California. For the reasons discussed below, it is recommended that the Petition be denied and the action be dismissed with prejudice.¹

I.SUMMARY OF PROCEEDINGS

A. State Court Proceedings

In 2008, Petitioner was convicted by a jury in Riverside County Superior Court of 400 counts of fraud and theft in connection with a fraudulent investment/securities scheme. (Supplemental Clerk's Transcript ("Sup. CT") 1030-49.) The jury also found him guilty of numerous sentencing enhancements. Petitioner was sentenced to 127 years in prison. (Reporter's Transcript ("RT") 124-141.)

Petitioner appealed to the California Court of Appeal, which affirmed his conviction and sentence in all respects, with the exception of certain pre-sentence credits. (Lodgment Nos. 2-11.) Petitioner then filed a petition for review in the California Supreme Court, which was summarily denied. (Lodgment Nos. 12-14.) He subsequently filed habeas corpus petitions in the Riverside County Superior Court, the California Court of Appeal, and the California Supreme Court, all of which were denied. (Lodgment Nos. 15-20.)

B. Federal Court Proceedings

After exhausting his state court remedies, Petitioner, proceeding pro se, filed a Habeas Corpus Petition in this court, pursuant to 28 U.S.C. § 2254, raising more than 20 claims, which the Court organized as follows:

1. Trial counsel was ineffective.

2. The trial court denied Petitioner his right to due process when it denied his request for funds to hire an investigator and an expert.

3. The convictions were based on evidence that was illegally seized.

4. Petitioner's sentence was cruel and unusual.

5. Unspecified claim.

(First Amended Petition ("Petition") at 5-6 and Attachments and Exhibits to Petition.)²

II.

STATEMENT OF FACTS³

From January 1993 through April 2004, Petitioner, co-defendants Denis O'Brien, Larre Schlarmann⁴, and Petitioner's father, the late John Heath, took in $187.6 million from over 1,600 investors in a Ponzi scheme that paid fictitious "interest" to old investors out of the funds received from new investors. The investors lost $117.8 million as a result of defendants' scheme. As the California Court of Appeal summarized.

[Petitioner] and Schlarmann first met in 1982, when Schlarmann was working in the grocery business and [Petitioner] was a salesman and delivery man for a water company. In 1983, [Petitioner] became a salesman for the Independent Order of Foresters (Foresters), an organization that sold insurance and other investment products, andwhere [Petitioner's] father, John Heath, already worked. Schlarmann became a mortgage broker and in 1985 moved to Big Bear Lake, where he worked as a licensed real estate broker.

Around 1989, Mike Allen, the owner of a Big Bear lodge, asked Schlarmann to find him a commercial loan, so that Allen could buy an adjoining parcel to his lodge and build cabins there. The project was eventually named Bear Manor. Schlarmann paid [Petitioner] a "handsome" referral fee in return for [Petitioner] raising $675,000 from some Foresters clients to fund the loan. Investors were to receive 10 percent interest and the loan term was supposed to be at most one year. Each investor received a recorded, fractionalized deed of trust as a security interest.

But Allen defaulted without completing the improvements, so [Petitioner] and Schlarmann foreclosed on the property. Schlarmann told [Petitioner] that if they sold the property in an unfinished condition, the investors would suffer a substantial loss. [Petitioner] suggested he and Schlarmann should complete the Bear Manor project themselves, then market the property and hopefully net a full recovery for the investors. But this would require raising more investment money in order to finish the cabins and to pay interest to current investors. Bear Manor was finished sometime before 1991.

The next project for [Petitioner] and Schlarmann was Janet Kay's Bed & Breakfast in Big Bear Lake. Schlarmann planned to build two showcase homes, one as his privateresidence and one as a bed and breakfast named after his wife. [Petitioner] raised almost $4 million for the project from investors who received fractionalized trust deeds as security.

[Petitioner] used over $1 million of investors' money to construct his own home in Chino Hills.

In 1991 or 1992, Foresters terminated [Petitioner's] employment because [Petitioner] had directed Foresters' clients to outside investments.

In 1993, [Petitioner] established Heath & Associates, a financial service company to offer investments. Through direct mail and cold phone calls, the company invited people to attend informational seminars. [Petitioner] formed Private Capital Management (PCM) around 1994. [Petitioner] had investors put their money into PCM; [Petitioner] used the PCM money to make "loans" at his discretion to companies that needed start-up capital or operating funds.

The next project, Northwoods Resort, began in 1993, when [Petitioner] and Schlarmann bought an abandoned hotel project in the Big Bear area with intentions of developing it. The cost eventually ballooned from $8 million to $22 million. Investors received interests in a limited partnership. After construction and cleanup, part of the hotel opened in 1995; it was finally completed in 1998.

Janet Kay's Bed & Breakfast was never profitable and was losing $40,000 a month before [Petitioner] and Schlarmann closed it in 1994. Schlarmann wanted to sellthe property after the bed and breakfast closed, but [Petitioner] refused. [Petitioner] did not want investors to learn the business had failed and that they would suffer a loss. [Petitioner] felt such a disclosure would hurt his ability to raise more money. [Petitioner's] brochure stated that no investor had ever lost money with Heath & Associates.

By 2000, Northwoods Resort was breaking even operationally, but revenues were insufficient to cover its debt service of about $2.5 million per year.

[Petitioner] and Schlarmann continued operating Bear Manor until their arrest in 2004. During that time, Bear Manor lost money. [Petitioner] used PCM investment money to cover Bear Manor's operational losses, but did not show the cash infusions as loans on the property's books.

Other money-losing projects pursued by [Petitioner] and Schlarmann and financed with investor money included a golf center and 36 Quizno's restaurants.

Fraud Perpetrated on Investor Victims

In the space of 11 years, from January 1993 through April 2004, defendants took in $187.6 million from about 1,500 people in a Ponzi scheme in which investors were paid money that came from other investors' funds. The investors were ultimately paid $69.8 million and lost $117.8 million of principal.

Linda Brown was the marketing director for Heath & Associates. She was originally hired as a telemarketer who, along with as many as 13 other telemarketers, phonedpeople over age 50 and invited them to a free lunch (or dinner) and financial planning seminar. In a scripted solicitation, the telemarketers explained that the seminar would discuss maximizing interest, alternatives to certificates of deposit, reducing taxes, protecting assets, making safe investments, "and other assets [of concern] to the senior community." Invitees were assured that no business would be conducted at the seminar, the meal would be great, and [Petitioner] was an excellent, knowledgeable speaker. Telemarketers were awarded a bonus when someone signed up to attend a seminar or a personal consultation with a Heath & Associates "financial planner." Advertisements were also run for the seminars.

Brown's husband invested his retirement savings of $487,000 with [Petitioner] in 2002. Brown asked [Petitioner] to find some good investments for the money. She told him not to invest all the money in PCM, and that she wanted a $150,000 annuity and a government insured investment. Unbeknownst to Brown, however, [Petitioner] invested most of the money in PCM and the balance in three companies owned by [Petitioner].

Once, a telemarketer saw on O'Brien's desk an interoffice memorandum about the company's financial troubles and the need to hold off clients who asked about delinquent interest payments. At an office party, as O'Brien left the room, he chuckled, rubbed his hands with a sinister motion, and told the telemarketers, "Oh good. Now we can go rip off some old people."

A Heath & Associates salesperson testified he introduced O'Brien at seminars as being in the top one percent of financial planners in the country.

James Byrne, a law school professor and an expert on commercial fraud, opined that defendants' sale of investments involved commercial fraud. Byrne reached this conclusion after reviewing the receiver's reports; transcripts of defendants' presentations to and interviews with victims; defendants' contracts with victims; and defendants' advertisements, prospectuses, and other explanations of the investment written for the public. The advertisements unrealistically offered an investment return that was triple the return on a certificate of deposit, was guaranteed for five years, and was impervious to market fluctuations, and also promised that the investor's principal would be secure. The advertisements played on seniors' fears ("Will you survive the next five years?") and promised inside information ("Come learn what the banks won't tell you").

Byrne had reviewed a DVD of O'Brien giving a seminar presentation that was clearly tailored for seniors and laid the basis for follow up personal consultations to talk

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