Michael Avenatti, attorney for Stormy Daniels, arrives at the Daniel P. Moynihan Courthouse in Manhattan for a hearing in front of Judge Kimba Wood regarding a search warrant that was executed at the home, hotel and office of Trump's lawyer Michael Cohen. Photo: David Handschuh/ALM
Federal prosecutors in Los Angeles have charged Michael Avenatti, who represented the adult film actress known as Stormy Daniels in her suit against President Donald Trump, with 36 counts of tax fraud, bankruptcy fraud and stealing from clients in a sweeping indictment announced Thursday.
The indictment, filed late Wednesday, accused Avenatti of stealing millions of dollars from clients. In particular, he faces 10 counts of wire fraud for pocketing millions of dollars from more than $12 million he received during the past five years as part of four settlements, including one on behalf of a paraplegic client.
In addition to embezzling clients, the new charges also include 19 counts of failing to file income tax returns, both personal and on behalf of his businesses, including his law firms, Avenatti & Associates and Eagan Avenatti, which filed for bankruptcy in 2017. The charges also include four counts of bankruptcy fraud against Avenatti for allegedly concealing assets in the Eagan Avenatti case, including $1.36 million in attorney fees from a settlement of litigation brought by ticket holders of the 2011 Super Bowl.
“The financial investigation conducted by the IRS details a man who allegedly failed to meet his obligations to the government, stole from his clients, and used his ill-gotten gains to support his racing team, the ownership of Tully’s coffee shops, and a private jet,” said Acting Special Agent in Charge Ryan L. Korner with the Internal Revenue Service in Los Angeles. The IRS announced the charges alongside U.S. Attorney Nick Hanna. “Individuals who intentionally thwart the IRS and fail to meet their tax obligations will be caught and they will be held accountable.”
Federal authorities also seized Avenatti’s private jet, which they alleged was purchased using client money.
If convicted, Avenatti faces up to 333 years in federal prison, plus two more years of a mandatory consecutive sentence on an aggravated identity theft count related to the bank fraud allegations. An arraignment hearing is set for April 29.
On Twitter, Avenatti denied the charges.
“I intend to fully fight all charges and plead NOT GUILTY,” he wrote. “I look forward to the entire truth being known as opposed to a one-sided version meant to sideline me.”
In an earlier post Thursday, he wrote, “For 20 years, I have represented Davids vs. Goliaths and relied on due process and our system of justice. Along the way, I have made many powerful enemies. I am entitled to a FULL presumption of innocence and am confident that justice will be done once ALL of the facts are known.”
Federal authorities arrested Avenatti, 48, who lives in Los Angeles, on March 25. He appeared in federal court last week in Santa Ana, California, with a legal team from Orange County boutique Bienert Katzman. He also faces federal charges in New York of threatening to extort more than $20 million from athletic company Nike Inc.
The initial charges in California accuse Avenatti of embezzling money from a $1.6 million settlement in a client’s trust account and providing false tax records to obtain $4.1 million in business loans from a bank in Mississippi, for which he now faces two counts of bank fraud.
The new indictment outlines a repeated pattern in which Avenatti allegedly pocketed the proceeds of settlements by lying to clients about the existence of the money or delays in payments, sometimes providing “advances” to avoid suspicion. The indictment claims Avenatti paid for some of those “advances” by embezzling other clients or using funds from his coffee business that should have gone toward payroll taxes to the IRS.
As part of the new indictment, federal prosecutors alleged that Avenatti failed to pay $3.2 million in payroll taxes for his company that owned Tully’s Coffee. Instead, they claim he used $2.5 million to pay for his law firm expenses and $200,000 for two rental payments on his home in Newport Beach, California. He also allegedly had employees of the coffee company deposit funds into other accounts to obstruct IRS liens and levies.
One of Avenatti's former clients in the indictment was Geoffrey Ernest Johnson, who is paraplegic. On Thursday, a spokesperson for Johnson provided an emailed statement on his behalf about the indictment: “Mr. Johnson is the victim of an appalling fraud perpetrated by the one person who owed him loyalty and honesty most of all: his own lawyer. Mr. Avenatti stole millions of dollars that were meant to compensate Mr. Johnson for a devastating injury, spent it on his own lavish lifestyle, then lied about it to Mr. Johnson for years to cover his tracks. His actions have left Mr. Johnson destitute. Mr. Johnson is cooperating fully with the government’s investigation, and hopes that justice will be done in this case. In the meantime, he asks respect for his privacy.”
The four settlements detailed in the indictment were:
- Avenatti allegedly obtained a $4 million settlement in 2015 for Johnson, referred to in the indictment as “Client 1,” in a case against Los Angeles County alleging constitutional violations. According to the indictment, Avenatti immediately told the client he couldn’t give him the settlement proceeds until Los Angeles County approved a “special needs trust” for him. Avenatti then transferred the settlement funds to other bank accounts associated with his auto-racing and coffee businesses, and to pay personal expenses, the indictment says, draining all the proceeds within months. Before last month, when he finally told “Client 1” that his “special needs trust” had been approved, Avenatti had made 69 payments to his client totaling $124,000 as purported “advances," the indictment says. His actions allegedly prevented “Client 1” from closing on a house and receiving Social Security benefits.
- Avenatti also had filed a lawsuit on behalf of “Client 2” against “an individual with whom Client 2 had a personal relationship,” referred to in the indictment as “Individual 1.” Under a $3 million settlement reached in 2017, “Individual 1” was supposed to pay $2.75 million of the settlement within weeks, with the remainder due in 2020, the indictment says. But Avenatti allegedly told “Client 2” that the settlement proceeds would come in monthly installments, then made 11 payments totaling $194,000. Meanwhile, he transferred $2.5 million to another trust account for another law firm, referred to in the indictment as “Law Firm 1,” which he then used to purchase a private airplane from the Honda Aircraft Company for Avenatti, the indictment says.
- Avenatti represented “Client 3” in an intellectual property dispute with a Colorado company referred to in the indictment as “Company 1.” A $1.9 million settlement he obtained in 2017 required an initial payment of $1.6 million, with subsequent payments due through 2021, the indictment says. Avenatti allegedly provided “Client 3” with an “altered copy of the settlement agreement” that stated the $1.6 million was not due until three months later, then used most of the funds to pay for his coffee business expenses. He later made $130,000 in payments to “Client 3” as “advances,” the indictment says.
- Avenatti also represented “Client 4” and “Client 5” in a “common stock repurchase agreement” in 2017 involving a company referred to in the indictment as “Company 2.” Under the agreement, “Company 2” agreed to repurchase more than $35 million in shares from “Client 4,” but Avenatti used $4 million of the payment for his own purposes, according to the indictment. In particular, Avenatti allegedly had more than $2.8 million transferred to an attorney trust account for SulmeyerKupetz, the law firm representing Avenatti in the Eagan Avenatti bankruptcy, to pay off his law firm’s creditors, including the IRS.
Details in the criminal charges largely mirror accusations in a federal civil case in which a former lawyer at Eagan Avenatti is seeking to enforce a $10 million judgment against Avenatti tied to the firm’s bankruptcy case. Last month, the lawyer, Jason Frank, sought to appoint a receiver, citing “brazen acts of bankruptcy fraud” and evidence that Avenatti and his firm had hidden “millions of dollars in EA’s assets in undisclosed bank accounts and client trust accounts and have been improperly and fraudulently transferring millions of dollars to Avenatti and his various corporate entities, as well as to third parties.”
Frank’s motion cites the NFL fees and a federal case with facts similar to that involving “Client 3,” in which Eagan Avenatti represented the plaintiff, Greg Barela, against a company called Brock USA LLC. Frank’s motion also mentions facts similar to that of “Client 4” and “Client 5,” calling it “the most devious example of bankruptcy fraud.”
Earlier this month, Frank filed a motion to allow his firm, Frank Sims & Stolper in Irvine, California, to replace Avenatti as lead class counsel in a case over the cost of allegedly defective surgical gowns. He cited more than $10 million in assets from attorney fees and costs anticipated to come from the case, in which Avenatti obtained a $454 million verdict in 2017 against Kimberly-Clark Corp. The case is now on appeal.
Avenatti is best known for representing Daniels, whose real name is Stephanie Clifford, in her lawsuit claiming she was paid thousands of dollars during the 2016 presidential campaign to keep quiet about a sexual affair with Trump.
Read the Indictment: Avenatti Charged With 36 Counts Including Theft From Clients, Tax Fraud, Perjury