A groggy Merrill Osmond, admitted to Utah Valley Hospital because of stress, was persuaded by James Gary Sheets to invest in a Sheets operation that eventually cost Osmond's pension plan $50,000, according to federal court testimony Friday.

Sheets' embezzlement and fraud trial is expected to last five weeks.Carol Blanchard Oldroyd, Springville, Osmond's bookkeeper and manager, testified that from May 20 to May 22, 1985, Osmond was hospitalized under another name at Utah Valley Hospital suffering from stress, sleeplessness and back pains.

He did not use his real name, "to keep the press away," she said.

Osmond was so worried about financial problems, including tax difficulties, and was under so much stress that she called Sheets to visit him and console him.

"Mr. Sheets was Merrill's trusted friend and adviser. I thought it would do Merrill good to have a trusted adviser assure him, as a bishop, as a friend," she said.

Oldroyd said she had no idea that any financial material would be discussed and added that Osmond was not in any condition to make a good financial decision.

"He was very tired. He was groggy. He hadn't slept and he wasn't in very good condition."

However, Oldroyd said Sheets then told Osmond about what he said was a safe investment, Working Fund II, which Osmond decided to invest in. Oldroyd said she would have him sign blank withdrawal slips to put money from his Black Bear Profit Sharing Plan into Working Fund II. She said he eventually lost $50,000.

Two different James Gary Sheets have been described during his trial, which began this week: a conniving businessman who deliberately misled investors and a kind-hearted and trustworthy man whose company happened to fail.

The first Sheets was sketched by Acting U.S. Attorney Stewart Walz, outlining the prosecution argument. The second Sheets was described by defense lawyer Peter Stirba in his opening statement. He said Sheets had little to do with the day-to-day operation of his companies, Coordinated Financial Services (later called CFS) and J. Gary Sheets and Associates (called JGSA).

Both sides stressed the same thing: the trust between Sheets and investors. Walz said Sheets betrayed that trust. Stirba said the trust shows what kind of man Sheets is.

The trial has special interest because Sheets had dealings with the murderer and forger Mark Hofmann, who then killed Sheets' wife, Kathleen, and former business partner Steven Christensen.

Walz condemned Sheets as "a man who sold three investments and used the money from those investments as his own personal bank without telling the investors what he was doing."

Some people invested hundreds of thousands of dollars with Sheets' companies, he said, "and even over $1 million."

Walz conceded that Sheets did not begin his companies with the intention of defrauding anybody. But when the companies started to fail, he engaged in a course of conduct that cost the investors dearly and deceived them, Walz said.

The prosecutor said the charges come down to one basic question: "Did the defendant tell the truth to the investors?"

The answer, said Walz, is no. He said Sheets knew investment funds he established (Working Fund I and Working Fund II) had no chance of success.

To bolster that, he read a Feb. 28, 1985, diary entry by Kathleen Sheets: "Gary laid the company's problems out tonight. Very scary and upsetting. Oh, I pray it will turn out OK."

Yet after this point, Sheets continued to solicit large investments, Walz said. A sizable amount of money from the working funds did not go to perform the funds' business, he said.

In fact, he charged the funds "had no chance ever in some day paying the 17 percent return that the investors were told they were going to get . . . The investments were not safe, as Mr. Sheets represented to the investors."

Sheets told some investors their money would go to renovate the Auerbach Building, or into a pool for income retirement accounts or to finance projects, he said. Some didn't know where it was going but simply trusted Sheets.

Walz rattled off a stream of figures to show where money invested in the Working Funds went, including loans to CFS, to pay doctors who had invested in another project, and $331,972 to Sheets personally, and $208,000 to Steven Christensen.

JGSA employees held meetings to decide where to spend investors' money, but Sheets didn't attend and would often overrule the employees' recommendations, he said.

Walz said an accountant for JGSA would testify that in order for investors to receive the 17 percent return, the funds "would have to earn 24 percent."

In order for JGSA to make that much money, it would have to sell partnerships, but almost none were sold, he said.

Stirba said Sheets' companies seemed to be doing well until they paid for a financial audit in 1985 that showed they were $2.5 million insolvent. The audit is what destroyed the investment empire, he said.

As soon as the audit was issued, in July 1985, CFS shut down since it legally couldn't operate then. "It fully complied with the law," Stirba said.

He sought to shift blame from Sheets.

"He didn't run the company. He hired people to run the company . . . It was so big, Mr. Sheets was out on the road doing what he does best, which was dealing with the customers."

He said the companies earned $45 million between 1971 and 1985, and that among those who were wiped out financially when they collapsed was Sheets himself.

In 1984, an audit found CFS worth $2.4 million, he said.

Among possible factors causing the collapse, said Stirba, are changes in the tax code to make tax shelters less attractive and the slump in the real estate market.

Stirba said that before the audit, Sheets' executives thought 1985 and 1986 would be their biggest year yet. They figured they would raise $50 million to $100 million in 1986.

In 1984, they decided to go nationwide, he said. The company believed it would have an agreement with a major insurance firm, Cigna, to sell investments in the Sheets' companies.

"He was not a hands-on manager," Stirba said. "Basically, he was down on the road selling the product."

He mentioned an Oct. 28, 1984, memorandum from Christensen about putting together the Working Fund. He said Christensen ran JGSA and none of the executives objected to the memo.

Sheets loved Christensen like a son, he said. "Mr. Sheets trusted Mr. Christensen implicitly."

Attempting to show that Sheets did not believe the investments would fail, Stirba called Sheets an optimist. He said that even after the bombings, when Sheets was broken and CFS was in financial ruins, Sheets declared in tears that the company could survive and he would make it work out right for investors.

"He's the kind of guy who, when things get tough, says `I'm a believer in what I can do and I'm going to go and do it.' "

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The charges against Sheets

34 counts in all of:

- Mail fraud

- Transportation of money obtained by fraud

- Embezzlement from pension plans

- Securities fraud