The following examples of bankruptcy fraud investigations are written from public record documents on file in the court records in the judicial district in which the cases were prosecuted.
Leader of Mortgage Fraud Scheme Sentenced to 6 ½ Years in Prison
On September 11, 2009, in Greenbelt, Md., Michael K. Lewis, of Takoma Park, Md., was sentenced to 78 months in prison, followed by three years of supervised release, for conspiracy and bankruptcy fraud. Lewis previously agreed to a forfeiture judgment of $2,228,878, the proceeds of his criminal activity. According to his plea agreement, from at least 2004 until May 2008, Lewis and his conspirators offered to help financially vulnerable individuals save their homes from foreclosure, but instead defrauded homeowners and mortgage lenders. Through television advertisements, Lewis represented that he could improve homeowners’ credit, save their homes from foreclosure and assist them with bankruptcy. Viewers who called the toll-free number were scheduled to meet with Lewis, for a fee. At the meetings, Lewis solicited individuals to become MKL Associates and to purchase a variety of for-fee services, such as the Michael K. Lewis Financial Diet for reducing debt, as well as a prepaid legal plan, income tax return preparation services and bankruptcy petition preparation. Lewis and his co-conspirators fraudulently represented to homeowners that their “lease/buy-back program” would help the homeowners to keep their homes. Lewis and Winston Thomas, a senior loan officer with a mortgage lender, told the homeowners that they had to sign their homes over to Earnest Lewis to gain “good credit.” Earnest Lewis would be used to temporarily refinance their homes and they could repurchase the homes in roughly one year. During the interim, they could remain in their homes only by paying inflated “rent” and fees by having their bank accounts directly debited to an account belonging to co-conspirator Cheryl Brooke’s company “In the House Technologies.” Brooke then made payments to Earnest Lewis and Thomas, with the remaining funds being used by Michael K. Lewis and Brooke for their personal benefit. Lewis also referred several homeowners to Brooke to file bankruptcy related paperwork as a way to postpone foreclosure proceedings in order to give them time to participate in the lease/buy-back program. Earnest Lewis was sentenced to 54 months in prison. Winston Thomas was sentenced to 37 months in prison. Cheryl Brooke was sentenced to 46 months in prison.
Man Sentenced to 27 Months in Prison; Paid IRS Over $2 Million in Taxes, Interest and Penalties
On August 28, 2009, in Pittsburgh, Pa., Antoine Cawog, a resident of Westmoreland County, Pennsylvania, was sentenced to 27 months in prison, to be followed by three years of supervised release, and ordered to pay a $75,000 fine. Pursuant to the terms of his plea agreement, Cawog paid the IRS $2,200,000 in taxes, penalties and interest which had accrued over the course of his criminal conduct. Cawog pleaded guilty to charges of tax evasion and making a false statement in relation to a bankruptcy case. According to court documents, from January 2004 through March 20, 2008, Cawog evaded taxes by various affirmative acts, including: placing his real property and other assets in nominee names; transferring his money and property to bank and investment accounts located in the country of Lebanon; preparing and filing false financial records with the IRS; and filing with the U.S. Bankruptcy Court false bankruptcy petitions and false operating reports which failed to reveal the existence of numerous bank accounts and other assets, as well as falsely stated income and the value of identified assets. Evidence in the case established that Cawog opened a number of local bank accounts which he did not disclose to the IRS or to the U.S. Bankruptcy Court, through which he has able to transfer millions of dollars to accounts he held in Lebanon. The evidence also proved that on October 13, 2006, Cawog submitted a falsified Summary of Schedules in connection with his pending bankruptcy case, in which he stated his total assets to be worth $13,499, when in fact, he knew them to be worth in excess of $2,000,000.
Montana Man Sentenced to 41 Months in Prison
On July 15, 2009, in Billings, Mont., Donald Keith Ferguson, a resident of Fromberg, Montana, was sentenced to 41 months in prison, to be followed by three years of supervised release, and ordered to pay a $400 special assessment and $80,000 in restitution. Ferguson was sentenced after having been found guilty of bankruptcy fraud, obstruction of bankruptcy court proceedings, interference with Internal Revenue Service (IRS) Laws, and attempt to evade or defeat tax. At trial the evidence showed that Ferguson had not filed a tax return since 1996. Additionally, when he was assessed a tax deficiency for 1998, 1999 and 2000, Ferguson attempted to pay that deficiency with checks that had been drawn on a bank account he had closed over four years before. Ferguson never paid off these tax deficiencies and continued to file correspondence with the IRS indicating that he was exempt from levy and that the 1040 form did not apply to him. After Ferguson attempted to pay his tax debt with bogus checks in 2002, he also began defaulting on his mortgage payments with Wells Fargo Bank. He filed for bankruptcy in March 2004. Evidence showed that during the bankruptcy proceeding Ferguson failed to disclose two personal banking accounts in his bankruptcy petition and his meeting of creditors. When these accounts were discovered, he never provided records from these accounts as requested. Documentation introduced at trial showed that over $122,000 in large expenditures was routed through one of these undisclosed bank accounts. Additionally, testimony and documentation illustrated that during the course of the bankruptcy proceeding Ferguson made misleading statements, omitted facts, and generally frustrated the bankruptcy proceedings by representing that he had a secured lien against himself in the amount of $100,000,000,000, providing evasive and inaccurate accounts of his income, omitting bank accounts, not fully disclosing all of his real property, refusing to accept court orders, and generally making frivolous filings.
Idaho Man Sentenced on Bankruptcy Fraud and Tax Charges
On June 11, 2009, in Boise, Idaho, Jeffrey Lewis Grinolds, of Juliaetta, Idaho, was sentenced to one year and one day in prison, to be followed by three years of supervised release and ordered to pay $208,024 in restitution. Grinolds pleaded guilty in September 2008 to the charges of bankruptcy fraud and failure to file an income tax return. According to court documents, Grinolds filed for chapter 7 bankruptcy in April 2003 claiming that he had only $30 cash and an interest in a wrecked Peterbilt truck worth $300. Specifically he denied having any checking or savings accounts, or any interest in any businesses. Grinolds further denied having had a sole proprietorship or being self-employed any time over the preceding six years. However, at the time he filed for bankruptcy, Grinolds had an interest in a sole proprietorship called Grinolds Fabrication. He also had interests in logging contracts with Guy Bennett Lumber Company and a savings account containing more than $4,000. Grinolds willfully failed to file federal income tax returns for tax year 2003, despite earning gross income in excess of $389,000 during that period.
San Diego Man Sentenced for Bankruptcy Fraud and Tax Evasion
On May 29, 2009, in San Diego, Calif., Stevan Charles Pedroarena was sentenced to serve 10 months in custody, followed by four months in a Residential Re-entry Center, followed by three years of supervised release following his release from prison for charges arising out of bankruptcy fraud in 1999 and tax evasion for years 2000 through 2002. In addition, the judge ordered Pedroarena to pay over $514,000 in restitution. Pedroarena pled guilty to a two-count Superseding Information - one count of bankruptcy fraud and one count of tax evasion - on May 6, 2008. According to information presented in court, Pedroarena admitted that he fraudulently failed to report on his 1999 bankruptcy petition that he had filed his state and federal tax returns prior to declaring bankruptcy and expected a refund of over $8,000. Additionally, Pedroarena admitted that he failed to declare $772,500.00 of his taxable income for the 2000 tax year. Pedroarena further admitted as part of the plea agreement that he owed a total of $183,181.00 in outstanding taxes for tax years 2000 through 2002. Pedroarena agreed to pay the outstanding tax, as well as applicable penalties and interest, to the IRS as a condition of the plea agreement.
California Chiropractor Sentenced to More than 11 Years in Prison for Bankruptcy Fraud
On April 27, 2009, in Sacramento, Calif., Thomas M. Klassy, of Weed, Calif., was sentenced to 135 months in prison. On June 5, 2008, a jury found Klassy guilty of making false declarations under penalty of perjury in a bankruptcy case, fraudulently concealing property in a bankruptcy case, and money laundering. The evidence introduced at trial showed that Klassy committed perjury in his bankruptcy proceedings and thereby concealed substantial assets from the bankruptcy court. Among the false statements he made under oath were that he did not own an airplane, a pickup truck, a one-third interest in a 220-acre ranch, $205,000 he received for the sale of his chiropractic business, and two shell corporations named Rose Ventures Inc. and Aromor Inc. As to the sale of his business, Klassy said that he sold it for only $60,000. The evidence showed that he gave the bankruptcy court trustee a forged contract while concealing the true contract of $265,000. Klassy was also convicted of money laundering for funneling $205,000 through an attorney’s trust account and then back to Rose Ventures Inc. and Aromor Inc. bank accounts. He held these shell corporations in the names of straw-men to avoid having his name attached to the corporations. Klassy used blank checks that had been pre-signed by the straw-man to spend the corporations’ money.
West Virginia Father and Son Sentenced for Multiple Fraud Schemes
On January 28, 2009, in Charleston, W.V., Eddie Burl Smith and his son, Edward Michael Smith, were sentenced for their roles in multiple fraud schemes. Eddie Burl Smith was sentenced to 57 months in prison, followed by three years of supervised release and fined $50,000. Edward Michael Smith was sentenced to 24 months in prison, followed by three years of supervised release, and fined $25,000. Edward Michael Smith was also ordered to pay more than $283,000 in restitution. In October 2008, Eddie Smith pleaded guilty to his role in a large-scale conspiracy to defraud the United States of tax revenue and bankruptcy fraud related to his operation of Carl E. Smith, Inc. (CESI), a pipeline contracting firm that operated out of Sandyville, West Virginia. Edward Smith also pleaded guilty in October 2008 to income tax evasion, bankruptcy fraud, and defrauding employees of CESI out of health care benefits. According to court documents, Eddie Smith charged as business expenses to CESI almost $9,000,000 in personal expenditures. Some of the specific criminal activity included filing false corporate and personal tax returns; using numerous employees of CESI and its subsidiaries to perform work related to personal hobby interests at the expense of CESI and its subsidiaries; issuing payroll checks from CESI for friends and family member who performed no duties on behalf of CESI; destroying and hiding corporate records with the intent to obstruct a criminal investigation by the Internal Revenue Service and the Department of Labor, and fraudulently acquiring, converting, and failing to report as income, proceeds from the sale of assets of CESI and its subsidiaries. Also, for the purpose of evading CESI's obligation to withhold and match trust fund taxes, Eddie Smith issued bogus "expense checks" to employees which purported to represent reimbursement of employee expenses when in fact the checks represented portions of the employees' regular wages. Court documents further state that in August 2002, Edward Smith sought and established a health care benefit program at CESI through Benefit Assistance Corporation (BAC). Beginning in July 2003 and continuing thereafter, Edward Smith failed to remit over $100,000 in premiums and other monies due the program and instead misapplied those funds for the use by others. As a result of this misapplication, approximately $283,670 in health care claims of 40 CESI employees went unpaid. Edward Smith also evaded personal income taxes. On or about January 5, 2005, Edward and Eddie Smith asked the bankruptcy court for permission for a subsidiary of CESI to purchase certain oil wells for $400,000 and gave to the bankruptcy court proposed documents to affect the purchase. However, the defendants failed to tell the bankruptcy court a number of the wells involved in the transaction were conveyed to Smith Well Service, LLC (SWS), an entity owned by Edward Smith, rather than to the CESI subsidiary. Thereafter, from in or about January 2005 through at least August 2007, the Smiths received and deposited funds in excess of $400,000 in a bank account in the name of SWS.
Defendant Sentenced to Nine Years in Prison for Fraud and Tax Crimes in $40 Million Schemes
On October 24, 2008, in Baltimore, Md., Alan B. Fabian, of Cockeysville, Maryland, was sentenced to 108 months in prison, to be followed by three years of supervised release for mail fraud and filing a false tax return in connection with a scheme to defraud his former employer, an equipment leasing broker, and several financial institutions of approximately $32 million between 2001 and 2004. Fabian also admitted that between 2005 and 2007, he deceived two banks and an invoice discounting company into providing $7,500,000 in financing to entities he controlled, including the Centre for Management and Technology (CMAT), which is currently in bankruptcy. Fabian was ordered to forfeit his interest in several beachfront properties in North Carolina, three cars and a limited liability company. According to his plea agreement and court documents, from March 2001 to July 2004, Fabian caused Strategic Partners International LLC and later, Strategic Partners International (SPI), Inc., companies that he formed to enter into approximately 50 sale-leaseback transactions to purportedly purchase $32 million in computer hardware and software. In fact, SPI either never purchased such equipment or purchased substantially less expensive equipment. Fabian diverted millions of dollars provided to SPI by the leasing company for his personal benefit. In July 2004, Fabian defaulted on all outstanding leases. This caused two of the funding sources to file a petition forcing SPI, Inc. into bankruptcy. In an effort to keep the millions of dollars that he pocketed from going back to SPI’s creditors, Fabian obstructed justice in the bankruptcy case by testifying falsely under oath in depositions and by filing a false Statement of Financial Affairs with the Bankruptcy Court. Under this scheme, court documents stated that Fabian admitted to filing false tax returns for the 2002, 2003, and 2004 tax years, failing to pay a total of $974,009 in taxes. In July 2004, Fabian worked at CMAT and formed several additional related entities. Beginning in April 2005, Fabian obtained lines of credit and equipment loans from two banks. Between April 2005 and June 2007, Fabian made misrepresentations and submitted false documents to the banks to support periodic increases to the loans and credit lines. According to court documents, by 2007, Fabian was paying himself an annual salary of $800,000. By July and August 2007 when the banks demanded payment of the credit lines and loans, Fabian’s CMAT entities were unable to pay the amounts owed. As a result, the banks sustained losses totaling $7,322,000. CMAT was also placed into involuntary bankruptcy by its creditors and faces creditor claims of approximately $30 million.
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