February 9, 1999

Portland, Maine

Prosecution witness Sylvia Paine, a retired bookkeeper from Veazie, testified that at the urging of government informants Armand Pelletier and Donald Shields, she and her husband invested a total of over $300,000 in what was purported to be earmarked to pay legal fees for Catherine Duffy Petit's lawsuit against Key Bank.

In a court session that was cut short to allow a juror to attend to an ill family member, U.S. Attorneys attempted to solidify their claim that Petit orchestrated a $6.8 million fraud over an eight-year period by playing a tape of a 1994 bankruptcy hearing in which Petit is heard claiming that Key Bank had been in contact with the creditor that petitioned for her 1993 involuntary bankruptcy.

''I'm not proud of this bankruptcy, but I have nothing to hide from you or anyone else in this state,'' Petit told a group of creditors at the hearing. ''I'm in debt already. The only asset left is the Key Bank lawsuit. Let us go forward. This is crazy. We know that Connor[attorney for petitioning creditor, New England Mortgage Co.] is talking to Ralph Lancaster[attorney for Pierce Atwood, Key Bank's counsel]. He told us.''

Petit's Key Bank lawsuit - filed in 1986 in York County Superior Court and still pending - contends that the bank's predecessors, Depositors Trust, and a Portland law firm conspired to take her ownership of the Old Orchard Beach Pier. The law firm settled for $3.9 million in 1990.

Tuesday, jurors heard Paine say that in 1994 she first heard of the Petit lawsuit against Key Bank from Brewer businessman, Armand Pelletier, a man she said she and her husband had made loans to in the past and one that ''was a very well-respected businessman in the community.''

Pelletier - like Thomas Blackburn, Donald Shields, James Erskine, Greg O'Halloran and Robert Paradis - has pleaded guilty to felony charges in connection with the fraud and have agreed to testify in exchange for leniency.

Petit, Paul Richard, Roland Morin and David Hall are facing 87-counts of conspiracy, mail fraud, bankruptcy fraud, money laundering and securities fraud. A fifth defendant, Steven Hall, was granted a mistrial by Judge D. Brock Hornby last week after his attorney was hospitalized for an illness. He could be tried at a later date.

Pelletier, Paine told Assistant U.S. Attorney Donald Clark, told her of the lawsuit and its investment potential and then came for a return visit with Thomas Blackburn, who he introduced as a lawyer with more knowledge of the suit.

Blackburn was labelled by Petit's co-counsel David Beneman in his opening statement on January 25 as the ringleader of the fraud, a man who used her name and lawsuit to raise millions of dollars for himself and associates.

Last week, Blackburn acknowledged in his testimony that he committed several felonies in addition to the one he pleaded guilty to in connection with the case, but stuck to his assertion that he raised over $4.3 million at Petit's orders and guided the money back to her through her employees.

Paine said Blackburn told her that there was a $4 million escrow account that would protect the principal of her investment and also said that he would pay her commissions if she brought in others to invest.

''I never would have done this,'' Paine said of her initial $50,000 investment, ''but we trusted Armand Pelletier and Tom Blackburn.''

She wrote the check out to Pelletier and days later he returned with an assignment, or note, that promised a $75,000 return in six months.

In his cross-examination, Beneman pointed out to Paine that the assignment had a fax reference from Prime Capital, an investment company that Blackburn owned, was dated the same day as the transaction in a space reserved for the due date six months hence and was a photocopy, not an original. The signatures of Petit and Blackburn were on the assignments.

Blackburn testified last week that Petit pre-signed a stack of assignments and gave them to her.

Much later on, when Paine met Petit, she testified that Petit told her that the assignments affixed with her signature were all forgeries. She said that Petit said she felt terrible, but could not honor the assignments.

However, that's after Paine was convinced to invest an additional six times, totalling over $300,000. Pelletier eventually introduced her to Shields, who Paine understood to be partners with the Brewer man in a number of financial ventures, including Fort Hill Financial and F&L Associates.

For one $32,500 investment in July, 1995, Paine told Beneman that Pelletier designated $12,500 for the Petit lawsuit and $20,000 to Shields and Fort Hill Financial, the Wiscasset company the two ran together. The assignment she received had a notation referring to a ''legal deal'' and Flex Mortgage.

Flex Mortgage was a New Hampshire-based company that Shields had developed an interest in. It's owner, Ingrid Kiefer, a German-born business woman, was convicted on a number of felony fraud counts in the Granite State and also in Massachusetts.

Shields was ordered by a U.S. District Court judge in Bangor to pay almost $350,000 in RICO-related damages to a man who filed suit against him in connection with the Flex Mortgage case.

After the summer of 1995, when the Paines had invested hundreds of thousands with Pelletier, Blackburn and Shields and had not received a nickel back, Paine testified that she demanded to meet Petit.

In January, 1996 she met with Petit at Pelletier's office in Brewer, she said. Petit told her the case against Key Bank was still ongoing - it had been dismissed on summary judgement by a York County Superior Court judge, but was on appeal and was reinstated by the Maine Supreme Judicial Court in December, 1996.

Paine also testified that Petit told her of the existence of a $4 million escrow account that would cover any investments. In his cross-examination, Beneman pressed her on this assertion, but she adamantly insisted that Petit told her of the account.

Later, after Clark redirected, Beneman asked Paine about some inconsistencies between her testimony and her statement to the FBI in 1997.

In her statement to the FBI, she said that Petit told her at their first face-to-face meeting that of all the money raised, Petit received only $50,000 to help fund her lawsuit The rest, she told, her had been raised fraudulently and had disappeared.

In her testimony, Paine said that it wasn't until the second meeting with Petit that she was told that. At the first meeting, she said, Petit did not say there was anything wrong.

''I don't know if he[FBI agent] misunderstood me, but that's not true,'' Paine told Beneman.

Questioned by Clark about whether Petit mentioned her bankruptcy, Paine said she said that it was behind her and would not affect the outcome of the lawsuit. Petit and her three corporations sued Key Bank separately. She has been placed in involuntary bankruptcy, but her corporations have not.

By the fall of 1996, Paine told Beneman, she and her husband had not received any money and there were rumors that Pelletier, the man she had given most of the money to, was leaving town.

''Everyone in town knew he was selling stuff right and left. Tractors, trucks and all kinds of things,'' she told Petit's attorney.

About that time, Paine testified, Pelletier told Paine of a trip he was taking to the Cayman Island, a lush resort destination also known for its strict banking secrecy laws. In a hearing last June, Shields told a West Bath District Court judge that he, Pelletier and Dr. Gordon Paine, a Camden physician, had gone on the trip together.

She said she became concerned when she asked Pelletier if he were moving, he responded that he wasn't and she suddenly discovered his house was vacant. He called her and told her he was living in Old Orchard Beach, but wouldn't give her the address.

Ultimately, she testified, her concern about Pelletier and Shields led her to the Consumer Affairs Division of the Attorney General's office to ask some questions. They listened briefly to her complaints, she said, but then contacted her for a follow-up meeting to talk to her about Petit and Richard. She never did find out information related to the two men, she said.

Petit contacted her after she swore out afadavits to the AG's office and ''was indignant,'' Paine testified.

''I told her I was confused. I still am confused,'' Paine said to Beneman.

Evan Slavitt, Richard's attorney then questioned Paine about her involvement with Richard during these transactions.

In his opening statement on January 25, Slavitt characterized Richard as a man who was trying to help Petit fight her lawsuit and also try to uncover the frauds that had been committed in her name.

Ultimately, that would lead to Richard offering to purchase Petit's Key Bank case from the bankruptcy court and to attempt to right the wrongs by rewriting assignments given to investors by Blackburn and others, Slavitt said then.

Tuesday, Paine told Slavitt that Richard came with Greg O'Halloran to meet with her and offered to buy her assignments for double the investment plus interest. Both he and O'Halloran convinced her to invest an additional $25,000, she told Slavitt.

The check was made out to Richard. O'Halloran, who has also pleaded guilty to charges in exchange for his testimony, agreed in a state civil suit agreement to pay the $25,000 sum back to Paine. She has received $19,000, Paine told Slavitt.

Under cross-examination by Morin's attorney, David van Dyke, and David Hall's attorney, Bruce Hochman, Paine testified that she had never met either defendant and had never written out a check or given money to them.

Deliberations will continue on Wednesday