Michael Avenatti is a lawyer. Sentenced to 14 years in federal prison for stealing millions from clients and committing tax fraud.
Michael John Avenatti, a suspended plaintiffs’ lawyer, was sentenced today to 168 months in federal prison for stealing millions of dollars from his clients, one of whom was a paraplegic with mental health issues, and obstructing the IRS’s efforts to collect more than $3 million in payroll taxes from an Avenatti-owned coffee shop.
Avenatti, 51, a former Newport Beach resident now in federal jail, was sentenced by US District Judge James V. Selna, who stated that Avenatti “has done great evil for which he must answer.”
In issuing the 14-year sentence, Judge Selna directed that it run concurrently with five-year terms previously issued in two federal prosecutions in the Southern District of New York.
Avenatti was also ordered by Judge Selna to pay $10,810,709 in restitution to four clients and the IRS.
The sentencing comes after Avenatti pleaded guilty to four counts of wire fraud and one count of attempting to hinder the administration of the Internal Revenue Code on June 16. He was taken into federal custody on February 7, shortly after being ordered to begin serving a term in one of the New York cases.
“Michael Avenatti was a dishonest lawyer who professed to be fighting for the underdog. In reality, he was solely concerned with his selfish objectives,” stated US Attorney Martin Estrada. “He stole millions of dollars from his clients to fund his lavish lifestyle, which included a private jet and race cars.” He has lost his privilege to practice law in California as a result of his illegal actions, and he will now spend a well-deserved jail sentence.”
“Michael Avenatti betrayed the trust that his clients had placed in him.” Instead of assisting his customers in receiving the compensation they were due, he pocketed the money, taking it from people who were already in pain. “The money was used to fund an extravagant lifestyle with no boundaries,” said Tyler Hatcher, Special Agent in Charge of the IRS Criminal Investigations’ Los Angeles Field Office. “While today’s sentencing concludes the government’s case against Mr. Avenatti, the enormous damage he has left behind will be felt for quite some time by his former clients.” It is our genuine hope that the fact that he has been held accountable for his illegal activities may bring some comfort to his victims.”
Wire Fraud is a Crime
Avenatti deposited money into client trust accounts on behalf of clients, misappropriated the funds, and then lied to the clients about receiving the funds or, in one case, claimed that the funds had already been paid to the client. Actual losses totaled around $7.6 million for the four clients.
“Although the details about each of the four clients underlying the charges in the indictment differ, the general pattern was the same,” prosecutors wrote in a sentencing memorandum. “[Avenatti] would lie about the true terms of the settlement agreement he had negotiated for the client, conceal the settlement payments that the counterparty had made, secretly take and spend the settlement proceeds that belonged to the client, and lull the client into not complaining or investigating further by providing small advances on the supposedly yet-to-be-paid funds.”
According to the court records:
- In the case of Geoffrey Johnson, Avenatti represented Johnson in a lawsuit against the County of Los Angeles, alleging, among other things, that the county violated Johnson’s constitutional rights, causing him to become a paraplegic. The county awarded Avenatti a $4 million settlement in January 2015, but within months he had siphoned the entire settlement amount from his legal firm’s trust account and utilized sections of it to finance his coffee company and pay personal costs. Avenatti never told Johnson about the settlement agreement and details, and he kept the receipt of the settlement amount from the county a secret from him. Instead of providing Johnson his share of the settlement, Avenatti provided him $1,900 in “advances” and paid his assisted living facility fee to falsely persuade him that Avenatti was still working on his behalf.
- In early 2017, Alexis Gardner received a $3 million settlement in a matter, which included a payout of $2.75 million. Gardner was never given a copy of the settlement agreement or told the real details of the deal. When Avenatti received the settlement money, he used the majority of it – $2.5 million – to buy his share of a jet, while falsely telling Gardner that the settlement called for monthly payments over eight years. Gardner received a tiny “advance” for rent and received roughly 12 monthly payments totaling approximately $227,500, which appeared to come from the individual who paid the settlement, but Avenatti subsequently ceased paying Gardner.
- In an intellectual property battle, Gregory Barela was to get a $1.9 million settlement. Avenatti stole the first $1.6 million tranche in January 2018, in part by supplying Barela with forged settlement paperwork suggesting that the payment would be made two months later. Avenatti utilized the funds to cover expenses at his coffee shop as well as his legal fees.
- Michelle Phan and Long Tran retained Avenatti to arrange a “Common Stock Repurchase Agreement” for the sale of over $27.5 million in Phan’s shares of ipsy, a company started by Phan, followed by another $8.15 million sale of Phan’s shares. Avenatti took his fees for the whole $35 million sale and delivered the balance to Phan when the first payment was received. When the second stock sale was completed and the company sent nearly $8.15 million to Phan, Avenatti kept $4 million for himself and used it to pay some of his law firm’s bankruptcy creditors, including the IRS; to fund his various businesses; and to make lulling payments to Johnson, Gardner, and Barela. When Phan and Tran requested Phan’s money, Avenatti told them that the stolen $4 million had already been wired to them and gave them a wire transfer confirmation document that really verified the transmission of an earlier $4 million payment.
The Taxation
“[Avenatti’s] scheme to defraud his clients was cruel – often reducing those clients to begging for needed funds and making them feel beholden to him when he ‘advanced’ or ‘loaned’ them funds that were, in fact, the clients’ own money,” prosecutors stated in the sentencing brief. The
Avenatti obstructed and hampered the IRS’s efforts to collect more than $3.2 million in unpaid payroll taxes, including money withheld from the paychecks of employees of Global Baristas US LLC, the Avenatti-owned company that operated Tully’s Coffee, which should have been paid to the IRS but was never paid.
To avoid IRS levies
- Avenatti obstructed the agency’s efforts by making false statements to an IRS revenue officer, directing employees to stop depositing cash receipts, and changing the company name, Employer Identification Number, and bank account information listed with his credit card processing company.
- Furthermore, prosecutors stated in support of charges in an indictment that Avenatti neglected to file individual tax returns or pay any personal income taxes from 2011 to 2017, despite having a large salary and living lavishly.
- He also neglected to file partnership forms or pay taxes – including payroll taxes – for his now-defunct Newport Beach-based law company Eagan Avenatti LLP, of which he was the managing partner, from 2013 to 2017, despite the fact that the firm received millions of dollars during that time. Furthermore, despite receiving large sums, Avenatti failed to submit business tax reports or pay taxes for Avenatti & Associates, of which he was president, from 2011 to 2017.
“[Avenatti’s] tax fraud scheme was massive,” prosecutors wrote in the sentencing memorandum, “resulting in losses to the federal treasury…and harming hundreds of his employees whose payroll taxes he stole.”
The IRS Criminal Investigation Division handled the investigation in this case. The Office of the United States Trustee assisted.
This case was prosecuted by Assistant United States Attorneys Brett A. Sagel of the Santa Ana Branch Office and Ranee A. Katzenstein, Chief of the Major Frauds Section.
