Avenatti's sentence for client fraud, tax violations vacated

A 9th U.S. Circuit Court of Appeals panel vacated the 168-month sentence of former plaintiffs' attorney Michael J. Avenatti and remanded his wire fraud and obstruction of justice case to the district court for resentencing.

U.S. District Judge James V. Selna in Santa Ana failed to make explicit findings as to the elements of obstruction of justice based on perjury in connection with failure to pay taxes, so the enhancement must be vacated, the panel ruled in an unpublished opinion Wednesday. The panel also found that the court over-calculated the amount of loss due to Avenatti's fraud against four clients.

"Avenatti contends that the district court should have accounted for the value of his legal services and costs, as well as the value of certain payments he made to victims. We agree," stated the unsigned opinion from Circuit Judges Michelle T. Friedland and Roopali H. Desai, along with U.S. Judge Karen E. Schreier of the District of South Dakota, sitting by designation.

Regarding Avenatti's objection to the district court's obstruction of justice finding, the panel's opinion stated, "Because the perjury occurred outside of Avenatti's trial, the falsehoods had to be material to the separate underlying proceeding as well as to this proceeding."

Avenatti's attorney, H. Dean Steward in Newport Beach, said in an email: "Mr. Avenatti is encouraged by the decision today by the 9th Circuit. He looks forward to full due process and a complete hearing on the issues, as ordered by the Circuit Court."

The U.S. Attorney's office for the Central District of California declined to comment on the panel's opinion.

In 2022, Avenatti pleaded guilty to four counts of wire fraud and one count related to a tax violation. Government prosecutors accused Avenatti of bilking millions of dollars from his California clients. U.S. v. Avenatti, 8:19-cr-00061 (C.D., filed Apr. 10, 2019).

He was also convicted in New York of extorting more than $20 million from Nike and defrauding a client, the adult film actress known as Stormy Daniels, of profits from a memoir. Daniels also accused Avenatti of filing a defamation case against former President Donald Trump without her permission, which resulted in her being ordered to pay Trump's legal costs of $300,000.

The panel addressed Avenatti's argument to have all of the sentences in the cases run concurrently but found Selna did not abuse his discretion in concluding the Nike offense - attempting to extort money from a company - was not relevant conduct to the California client fraud matters.

However, the panel said the defrauding of Daniels was similar enough to the California charges and should be considered. The panel found Selna's calculation of $12.3 million lost from fraud and the imposition of a 20-level enhancement based on that calculation was wrong.

"Reasoning that Avenatti had forfeited his fees and costs by his fraudulent conduct, the district court did not reduce the settlement values to account for Avenatti's legal services and costs," the panel's opinion stated. "Forfeiture is a sanction that does not approximate the pecuniary harm caused by an attorney's misconduct. It has no place in calculating 'actual loss' for the purposes of enhancing a criminal defendant's sentence."

Additionally, the panel found Avenatti's former clients were never entitled to receive the full settlement values of their cases because they hired him on a contingency fee basis and agreed, by contract, to pay him a portion of any settlement as his fees and to reimburse him for his costs.

"Thus, even if Avenatti acted lawfully, his clients would not have received the full settlement amounts," the panel's opinion stated.

However, the panel disagreed with Avenatti's argument that the district court abused its discretion by applying both the misrepresentations-in-bankruptcy enhancement and the obstruction of justice enhancement to his sentencing.

"The misrepresentations-in-bankruptcy enhancement was based on statements Avenatti made in his law firm's bankruptcy proceedings, whereas the obstruction of justice enhancement was based on Avenatti's testimony at judgment-debtor examinations in separate civil proceedings. Thus, the conduct that formed the basis of the misrepresentations-in-bankruptcy enhancement was not the 'only conduct' that formed the basis for the obstruction of justice enhancement," the panel's opinion stated.

According to the sentencing guidelines under U.S.S.G. Section 2B1.1, in Avenatti's case, if the conduct that formed the basis for the misrepresentations-in-bankruptcy enhancement was the only conduct that formed the basis for an adjustment under the obstruction of justice enhancement, the latter enhancement would not be applied.