DOJ pursues more charges against arrested Avenatti

Michael J. Avenatti’s arrest on federal extortion, bank and wire fraud charges follows multiple civil court allegations that he misappropriated client funds, and authorities said Monday they’re continuing to probe the troubled attorney’s financial dealings for more possible charges.

Avenatti was released on $300,000 bond in New York City after his arrest Monday on charges he embezzled a client’s $1.6 million settlement and used phony tax returns to obtain a bank loan. He also was arrested in a separate case that accuses him of trying to extort up to $25 million from Nike in a plot with Los Angeles lawyer Mark J. Gergaos, who according to several media reports is an unnamed co-conspirator in that case.

“On his Twitter account, Mr. Avenatti describes himself as ‘attorney, advocate, fighter for good.’ But the allegations in this case describe something different: a corrupt lawyer who instead fights for his own selfish interests,” Nicola T. “Nick” Hanna, U.S. attorney for the Central District, said at a news conference in Los Angeles Monday.

A warrant for Avenatti’s arrest was issued Friday, the same day he testified all day in U.S. District Court in Los Angeles in a judgment debtor exam related to $10 million he owes his former partner, Jason M. Frank, over the bankruptcy of his firm Eagan Avenatti LLP.

Frank and his new parters, Scott H. Sims and Andrew D. Stolper, have been pursuing payment of that as well as a $4.85 million judgment against Avenatti personally. They’ve obtained bank records that detail transactions by Avenatti that appear to show him using client trust fund accounts and law firm money for personal expenses, including payments to an ex-wife and money to a former girlfriend. Sims and Stolper also say the records show Avenatti deposited a $4 million settlement without paying the client, which he vehemently denied under oath Friday.

Stolper also said he has a recent letter from Orrick, Herrington & Sutcliffe LLP that details Avenatti’s alleged theft of another client’s money.

The new federal charges against Avenatti in the Central District of California don’t relate to either case. Instead, they stem from allegations that surfaced in January when Steven E. Bledsoe, a partner at Larson O’Brien LLP, filed a complaint with JAMS describing what he said was a scheme by Avenatti to steal client Gregory Barela’s settlement money that involved him presenting Barela a falsified document.

Bledsoe met with federal investigators on March 19. He told the Daily Journal on Monday that the case “is a very sad situation for all involved.”

“I wouldn’t have believed this case if I had not seen the documents myself,” Bledsoe said. “I have never seen a case where a lawyer appears to have falsified legal documents in order to steal his client’s money.”

Bledsoe added that he attended Avenatti’s judgment debtor exam in Los Angeles on Friday and, “unfortunately, Mr. Barela does not appear to be the only victim of Mr. Avenatti.”

When announcing the charges, Hanna said they paint “an ugly picture of lawless conduct and greed.”

“Lawyers have a sworn duty to obey the law and protect their clients. Our system of justice depends on it,” Hanna said. “Mr. Avenatti has breached that duty, and violated the principals of honesty and fairness that he claims to uphold.”

Shortly after Hanna’s remarks, Geoffrey S. Berman, the U.S. attorney for the Southern District of New York, detailed the four-count extortion case against Avenatti in a New York City news conference, saying Avenatti’s threats against Nike “had nothing to do with zealous advocacy for a client or any other kind of legitimate legal work.”

“Instead, Avenatti used illegal and extortionist threats for the purpose of obtaining millions of dollars in payments for himself,” Berman said.

Avenatti claimed to represent an amateur basketball coach who knew of Nike misconduct involving paid amateur athletes, similar to the college basketball corruption cases being pursued in the Southern District of New York, Berman said. The FBI started covertly recording his conversations with Nike officials after the company contacted federal authorities following an initial March 19 meeting. Avenatti met with Nike officials again March 21, then two hours later wrote on Twitter that the basketball scandal “is likely far, far broader than imagined.”

“While this tweet went out to the public, it was intended and designed for an audience of one. This was Michael Avenatti’s shot across Nike’s bow,” Berman said.

Avenatti used legal terms that were “mere devices to provide cover for Avenatti’s extortionist demands,” Berman said.

“By engaging in the conduct alleged in the complaint, Avenatti was not acting like an attorney. A suit and tie doesn’t mask the fact that at its core, this was an old-fashioned shake down,” Berman said.

According to the 11-page complaint filed in New York, Avenatti and “a co-conspirator not named as a defendant herein” worked together to try to extort Nike and the co-conspirator joined Avenatti in the meetings and calls.

The co-conspirator is described as an attorney licensed to practice in California, and “similarly known for representation of celebrity and public figure clients.” That’s Geragos, according to the Wall Street Journal and The New York Times.

Asked about the allegations on Monday, a woman who answered the phone at Geragos’ Los Angeles office said, “I can tell you right now he will not be commenting on that.”

Avenatti is expected to soon appear in court in California, where his Central District charges will proceed in Orange County.

According to the Central District complaint, the IRS obtained a warrant on Feb. 22 to search seven “digital devices” that had been provided by former employees of Global Baristas, Avenatti’s Seattle-area coffee company venture that’s been linked in recent judgment debtor exams to suspicious transactions involving client and firm money. Hanna said the investigation, which began when an IRS revenue officer “made a criminal referral over a year ago,” is far from over because agents are “executing search warrants as we speak.”

In addition to the alleged theft of Barela’s settlement, Avenatti is accused of fraudulently obtaining an $850,500 loan for Global Baristas in January 2014 as well as a $2.75 million loan for Eagan Avenatti LLP in March 2014, then another $500,000 loan for the firm in December 2015. The Department of Justice alleges each was based on a fraudulent claim that he’d earned $4.5 million in 2011, $5.4 million in 2012 and $4 million in 2013 and paid $1.6 million in taxes in 2012 as well as $1.25 million in 2013. Instead, the IRS says he never filed personal income tax returns in 2011, 2012 or 2013, nor did he pay estimated taxes in 2012 or 2013.

“In fact, at the time, Avenatti still owed the IRS approximately $850,438 in unpaid personal income taxes, plus interest and penalties, from the 2009 and 2010 tax years,” according to the complaint.