Michael Avenatti is under arrest, charged with fraud and extortion

LOS ANGELES -- Michael J. Avenatti was charged in Los Angeles Monday with federal bank and wire fraud for allegedly embezzling a client's $1.6 million settlement and using phony tax returns to obtain a bank loan, the first criminal action against a troubled attorney who's been accused of bilking several clients and former law partners.

Avenatti was arrested on separate federal charges in New York that accuses him of trying to extort millions of dollars from Nike over threatened legal action.

He's currently in custody in New York, where he traveled after testifying all day Friday in U.S. District Court in downtown Los Angeles. The hearing was a judgment debtor exam related to $10 million he owes former partner Jason M. Frank.

Frank and his new parter, Andrew D. Stolper, have been pursuing payment of that as well as a $4.85 million judgment against Avenatti personally, and they've obtained bank records that details 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. They also show Avenatti depositing client settlement money but not paying the client, which he vehemently denied while under oath Friday.

The charges in the Central District of California are for the same case in which Larson O'Brien LLP is representing a former Avenatti client accusing him of theft. The client's new attorney, Steven E. Bledsoe, filed a complaint with JAMS in January and attended Avenatti's judgment debtor exam on Friday.

U.S. Attorney Nicola T. "Nick" Hanna said at a news conference in Los Angeles that Avenatti got the settlement in January 2018, then falsified documents to show the client it was due in March. He then advanced the client $130,000.

"In essence it appears Mr. Avenatti loaned the client's own money to the client. Money Mr. Avenatti had already secretly collected," Hanna said.

Additionally, according to a 197-page criminal complaint, Avenatti fraudulently obtained 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. Each was based on a fraudulent claim that he'd earned $4.5 million on 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.

Hanna said the charges paint "an ugly picture of lawless conduct and greed."

"On his Twitter account, Mr. Avenatti describes himself as 'attorney, advocate, fighter for good,'" Hanna said. "But the allegations in this case describe something different: a corrupt lawyer who instead fights for his own selfish interests."

Hanna said the investigation began when an IRS revenue officer "made a criminal referral over a year ago." He said agents are "executing search warrants as we speak."

According to the complaint, the IRS obtained a warrant on Feb. 22 to search seven "digital devices" that had been provided to the IRS 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.

"Lawyers have a sworn duty to obey the law and protect their clients. Our systems 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"

Geoffrey S. Berman, the U.S. attorney for the Southern District of New York, detailed the extortion plot in a news conference in New York City, which he said "had nothing to do wth 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 misconduct at Nike similar to the college basketball corruption cases being pursued in the Southern District of New York. He told Nike to pay or he'd hold a press conference "that he claimed would dramatically drive down the stock price of the company at its market value," Berman said.

Nike officials called federal authorities after their first meeting with Avenatti on March 19 in Manhattan. All meetings and phone calls afterward were covertly recorded for the FBI, Berman said. Avenatti told Nike he'd time the press conference around the start of the NCAA basketball tournament and its quarterly earnings call, to maximize financial damage, Berman said. He sought $25 million to conduct an internal investigation "that the company did not request," Berman said, then offered to leave the company alone with no investigation in exchange for $22.5 million.

"When asked by a lawyer for the company why the company would agree to such an arrangement, Avenatti responded in substance that he had the company in a very vulnerable position where he could wipe out $5- to $10 billion of its market capital," Berman said.

Avenatti met wth Nike officials again Monday morning, then 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. Berman said Avenatti used legal terms that were "mere devices to provide cover for Avenatti's extortionist demands."

"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. "Our legal system, our system of justice requires and relies on attorneys ,members of the bar to not simply follow the law but to uphold its finest principals and ideals. But when lawyers use their law licenses as weapons, as a guise to extort payments for themselves, they no longer are acting as attorneys, they are acting as criminals and they will be held responsible for their conduct."

Berman was joined by FBI Assistant Director-in-Charge William F. Sweeney Jr., called the case "nothing more than a straight-forward case of extortion."

"In the even that anybody needs to be reminded, this type of behavior is illegal, and it will not be tolerated. Especially when committed by a lawyer who's supposed to use his license to practice law, not willfully violate it," Sweeny said.