Avenatti ex-client: He didn’t say her money was used for his bankruptcy

SANTA ANA -- A YouTube star broke down in tears Thursday as she told a jury that disgraced attorney Michael J. Avenatti stole $4 million from a deal he negotiated for her to part from a company she helped found.

"I was absolutely devastated, because the defendant was someone I believed to be trustworthy, who upheld the law, who's supposed to protect me," Michelle Phan, a beauty influencer, said. "And the fact that he took my money like that, I was just utterly shattered."

Avenatti is accused of stealing $10 million from five clients. U.S. prosecutors say he used the money to fund his lavish lifestyle that included a private plane, though those allegations have not been allowed during the trial. Some of the money was used to pay off creditors after his law firm filed for bankruptcy, the prosecutors say. USA v. Avenatti, 19-CR-00061 (C.D. Cal., filed April 10, 2019).

Avenatti, who is representing himself, has maintained the clients were unaware of exactly how much they were owed and often didn't account for help he provided.

Testimony resumed Thursday after a break Wednesday when a juror said she was exposed to someone with COVID-19. U.S. District Judge James V. Selna told the jury that the juror had tested negative.

The government is nearing the end of its case-in-chief. Avenatti is expected to begin calling his witnesses next week.

Phan was the last of the five clients to testify in the trial before Selna. All of them told similar stories of being kept in the dark for months or years about the whereabouts of their money.

Under direct questioning from Assistant U.S. Attorney Brett A. Sagel, Phan described for jurors how she built a multi-million-dollar cosmetics business from her early days posting makeup tutorials on YouTube. One of the companies she helped found was Personalized Beauty Discovery Inc., known as IPSY.

Phan testified she hired Avenatti to help her exit IPSY in 2017. Avenatti "was very confident, and because of his confidence," she too felt secure that he could get the job done, she said. A contingency agreement signed in August 2017 stated Avenatti would get 7.5% of whatever Phan recovered in her exit from IPSY. The deal was struck a month later with IPSY agreeing to make two payments over two years. The first payment of $27.4 million was paid in September 2017, and the second $8.4 million was to be paid one year later. But IPSY made the second payment six months early, in March 2018. Phan received her first payment and half of the second.

"At that time, did the defendant tell you he told the bankruptcy court he'd pay off his creditors, including the IRS, to get out of bankruptcy?" Sagel asked.

Phan said no.

Sagel asked if Phan brought it up to Avenatti in April 2018 when they both happened to be in New York City.

Phan said she did not. Phan explained she wanted to avoid work talk when she was there to celebrate the conclusion of one of her events.

In November 2018, she reported the missing payments to the Newport Beach Police Department, Phan testified.

Avenatti focused his questioning on how much harder the negotiation was than Phan expected. He also got her to admit she didn't give the police all of the texts she exchanged with him.

"You knew in September of 2017 that it was going to be anything but easy, isn't that true?" Avenatti asked.

"No, because you said it would be easy," Phan shot back.

Avenatti asked Phan if she knew he actually began working on her exit plan six months before their fee agreement was signed.

Phan said no.

"Ms. Phan, isn't it true that when you met with the Newport Beach [investigators] in November of 2018 they repeatedly told you that there was not enough evidence to charge me with a crime?" he asked. He asked the question three times but prosecutors successfully objected.

"Isn't it true you weren't satisfied with what happened with Newport Beach Police, which is why you contacted Mr. Sagel and his colleagues? Isn't that true?" Avenatti tried for a third time. "Yes or no?"

Sagel didn't object. Phan said she couldn't recall.

Phan remained composed throughout most of her testimony but broke into tears when prosecutors showed her text messages in which she asked Avenatti for her money.

"How many text messages did he go over with you about why you didn't receive $4 million?" Sagel asked?

"Zero," she whispered, and began to cry.