The following examples of bankruptcy fraud investigations are excerpts from public record documents on file in the court records in the judicial district in which the cases were prosecuted.
Lou Pearlman Sentenced to 25 Years in Prison
On May 21, 2008, in Orlando, Fla., Lou Pearlman was sentenced to 25 years in prison, to be followed by three years of supervised release, and ordered to pay a $400 assessment. In addition, a restitution hearing will be held on July 16, 2008. Pearlman was also required to forfeit to the United States assets and property, including a $200 million money judgment, a $25,000 bank check, several high-end vehicles, and any assets to be discovered in the future to satisfy the $200 million money judgment. Pearlman pleaded guilty to charges of conspiracy to commit an offense against the United States, money laundering, and presenting or using a false claim in a bankruptcy proceeding on March 4, 2008. According to his plea agreement, for more than 20 years, Pearlman was successful in raising millions of dollars based on false representations about two companies affiliated with him - Transcontinental Airlines Travel Services, Inc. and Transcontinental Airlines, Inc. Pearlman represented to thousands of investors and several federally insured financial institutions that those two companies were successful companies in the airline business and that Pearlman’s ownership interest in those companies was worth millions of dollars. To the contrary, Transcontinental Airlines Travel Services, Inc. and Transcontinental Airlines, Inc. existed only on paper. Those companies had minimal employees, business operations, and revenue. This case involves three conspiracies and schemes perpetrated by Pearlman and others: (1) a “Ponzi” scheme based on fraudulent investments offered in connection with Transcontinental Airlines Travel Services, Inc. and Transcontinental Airlines, Inc., (2) a bank fraud scheme involving misrepresentations about the financial condition of Pearlman and his companies, and (3) a bankruptcy fraud scheme. The amount of loss for these three schemes is currently estimated at over $300 million.
Financial Planner Sentenced for Tax Evasion and False Statements on a Bankruptcy Petition
On April 11, 2008, in Columbia, S.C., Charles E. Atwell, a financial planner, was sentenced to 51 months in prison, to be followed by three years of supervised release, and ordered to pay a $50,000 fine. He was also ordered to cooperate with the Internal Revenue Service in the assessment, filing, and paying of back taxes. Atwell was convicted by at a jury trial in February 2008 on four counts of tax evasion and one count of making false statements in a bankruptcy petition. Evidence presented at trial revealed that during the years 2000 through 2003, Atwell made more than $2 million in commissions for selling financial products such as insurance policies, annuities, and mutual funds. The evidence also revealed that Atwell did not file tax returns or pay any income taxes during any of the years in question. In fact, Atwell had not filed personal tax returns since 1995; however, he had used bogus tax returns to attach to loan applications and other financial dealings. To help hide his income, Atwell used the bank accounts of several entities that he controlled, such as Professional Planning Inc. of Greenville, T and E Associates, and the Atwell Family Trust. In March 2003, Atwell signed and filed a bankruptcy petition claiming that his income in 2001 was only approximately $17,000, when in fact, it was approximately $800,000. The petition also alleged that Atwell’s 2002 income was approximately $41,000, when in fact it was approximately $400,000.
Virginia Man Sentenced to 46 Months in Prison on Tax Evasion and Bankruptcy Fraud Charges
On April 7, 2008 in Norfolk, Va., Charles Eugene Lancaster, of Virginia Beach, Va., was sentenced to 46 months of in prison and ordered to pay $444,435 in restitution. Lancaster pleaded guilty on November 29, 2006, to bankruptcy fraud and tax evasion. According to court records, Lancaster was the general manager of Auto Sport and Imperial Motors, two used car dealerships located in Virginia Beach. In 1998 and again in 1999, Lancaster formed two shell corporations, naming his ex-spouse as the owner of the first corporation and his girlfriend the owner of the second. Thereafter, Lancaster received all of his income owing to him as the general manager from the two dealerships through these two new corporate entities. By employing this scheme, Lancaster was able to disguise his earnings from the IRS because the income earned by the corporations was not subject to a 1099 or W-2 filing requirement. At the end of each year, Lancaster issued himself W-2 forms which vastly under-reported his true income. After 1999, neither of Lancaster's two corporations filed any tax returns. Lancaster filed personal tax returns for tax years 1999 through 2002 which reflected only his W-2 earnings rather than his true income. In 2003 and 2004, however, Lancaster did not file any tax returns, personal or corporate. During this time period of 1999-2004, Lancaster evaded paying $337,407 in federal taxes. In addition, Lancaster filed for personal bankruptcy in July 2001. As a result of his fraudulent bankruptcy filings, Lancaster was able to discharge $107,028 in back taxes owed to the Internal Revenue Service.
Ex-Restaurant Owner Sentenced to Prison for Tax & Bankruptcy Fraud
On February 15, 2008 in San Diego, Calif., Karl James, the former owner and operator of more than 50 Taco Bell franchises in southern California and Arizona, was sentenced to serve 36 months in prison and ordered to pay $1.12 million in restitution to the victims of his bankruptcy fraud and $1.17 in restitution to the Internal Revenue Service (IRS) for unpaid taxes. James pleaded guilty on October 19, 2005 to bankruptcy fraud and tax evasion. In his plea agreement, James, who at that time was the president and chief executive officer of Golden West Tacos Inc. (GWT), admitted that from May 2, 1998, through June 5, 2001, he fraudulently diverted more than $3 million in GWT income and assets for his personal use, including beverage and food supplier rebate checks issued to GWT and expensive residences purchased with the company’s funds. James admitted to hiding the scheme by transferring GWT assets to "off book" company accounts and accounts in the name of others, including his late father, his stepmother, and Sea Horse Enterprises LLC, a limited liability company that James owned and controlled. He further admitted that he transferred residences in Rancho Santa Fe and Palm Springs, Calif., to his nominees and concealed these transfers by making false entries in GWT’s books and records. In pleading guilty, James admitted that in filing Chapter 11 bankruptcy petitions, he concealed the existence and fraudulent diversion of approximately $2 million. James also admitted that he filed fraudulent individual income tax returns for the tax years 1998, 1999 and 2000 and failed to report more than $3 million in diverted GWT funds. In doing so, James evaded more than $1.1 million in personal income taxes for the three years.
New Jersey Man Sentenced to 48 Months in Federal Prison for Cash Structuring and Bankruptcy Fraud
On February 8, 2008, in Camden, N.J., Moty Rosenkrantz, aka Michael Rosenkrantz, was sentenced to 48 months in prison, three years of supervised release upon completion of his prison term, and ordered to pay a $10,000 fine. According to court documents, Rosenkrantz, who owned a business named B & W Motor Cars, pleaded guilty on February 5, 2007, to one count of structuring bank transactions to evade reporting requirements and one count of bankruptcy fraud. In pleading guilty, Rosenkrantz admitted that from late February 2003 through March 2003, he structured at least 38 bank withdrawals, totaling approximately $368,100. Furthermore, Rosenkrantz admitted that in July 2003 he filed a voluntary petition for bankruptcy, in which he falsely represented that no financial accounts in his name were closed, sold or otherwise transferred within one year preceding the bankruptcy filing date, when in fact, he had closed at least seven bank accounts in March 2003.
Lubbock, Texas Cotton Broker Sentenced to Federal Prison
On December 28, 2007, in Lubbock, Texas, Billie Wayne Spradling, Jr., a Lubbock businessman who pleaded guilty to a federal felony charge related to a bankruptcy matter, was sentenced to 24 months in prison. In October, Spradling, pleaded guilty to one count of false account in a bankruptcy case. Spradling was also ordered to pay $196,787 restitution for disbursement to the U.S. Bankruptcy Trustee in Lubbock. According to court documents, Billie Wayne Spradling Jr. admitted that he fraudulently failed to disclose $196,786 in assets and income from his cotton brokerage business, ACSI II, in documents filed in a pending involuntary Chapter 7 bankruptcy case against him. The schedules Spradling and his bankruptcy attorneys filed relied on false business and personal income information. Spradling falsely represented his financial affairs in those schedules to officers of the bankruptcy court, the creditors, the trustee, and the U.S. Trustee. Spradling further admitted that he conducted his business with no distinction between the corporate and personal businesses.
Former Owners of San Francisco Clothing Factories Sentenced for Concealing Millions of Dollars from Bankruptcy Court
On November 30, 2007, in San Francisco, Calif., Toha "Jimmy" Quan was sentenced to 48 months in prison and his wife, Anna Wong, was sentenced to 14 months in prison in bankruptcy fraud case. Both defendants will serve three years of supervised release after their individual prison terms. Also, the court will hold further proceedings in January 2008, to determine the amount that the defendants will be ordered to pay in restitution. Both Quan and Wong were convicted on May 23, 2007, on various federal charges including conspiracy to conceal assets, concealment of assets, bankruptcy fraud, the making of false statements on documents submitted to the Bankruptcy Court, and money laundering. According to evidence at trial, from 1997 through 2003, Quan and Wong placed three of their companies into Chapter 11 reorganization bankruptcy. Two of the companies – Win Fashion Inc. and Wins of California, Inc. – were clothing manufacturing companies operating in the South of Market area of San Francisco. The third, Tomi LLC, was a property management company. By placing the three companies into Chapter 11, the numerous creditors of the companies could not collect money due them. Evidence showed that both before and after filing bankruptcy, Quan and Wong deliberately transferred approximately $6 million in assets out of the bankrupt companies so that those funds would not be available to pay creditors. They moved the funds into other companies that they owned, and thereby placed the assets out of the reach of the creditors of the bankrupt companies and the Bankruptcy Court. The evidence further showed that they failed to disclose these transfers to the Bankruptcy Court, as is required by law. Additionally, evidence showed that Quan and Wong stopped paying its hourly workers in the clothing factory. By the time Quan and Wong put Wins of California in bankruptcy in August 2001, they owed over $800,000 in wages to their employees. The state of California, through the State Department of Labor Standards Enforcement, stepped in on behalf of the employees and was able to pay them out of a state fund maintained for the benefit of garment workers.
Civil Rights Attorney Sentenced to 36 Months in Prison for Attempted Tax Evasion and Bankruptcy Fraud
On November 27, 2007, in Los Angeles, Calif., Stephen G. Yagman, a civil rights attorney, was sentenced to 36 months in prison for his conviction in June 2007 on charges of attempting to evade the payment of more than $100,000 in federal income taxes and committing bankruptcy fraud. According to evidence presented at trial, Yagman filed federal income tax returns for the tax years 1994 through 1997, but paid only a small portion of the taxes that, according to his own returns, were owed to the Internal Revenue Service (IRS). As a result of the underpayment, Yagman accumulated federal income tax liabilities for those four years that, with interest and penalties, totaled more than $158,000. During the four years, Yagman also failed to pay significant amounts of federal payroll taxes owed by his law firm, which was then called Yagman & Yagman, P.C. Instead of paying these overdue federal taxes, Yagman engaged in a scheme to conceal his assets and to impede the collection efforts of the IRS. As part of the scheme, Yagman deposited hundreds of thousands of dollars into various bank and brokerage accounts in his girlfriend's name to disguise his personal assets. Yagman used the accounts to pay for personal purchases and to conduct the majority of his personal financial transactions. In 1999, Yagman attempted to subvert the IRS's collection efforts by filing for both personal and corporate bankruptcy. He made numerous misrepresentations and omissions in his bankruptcy petitions and in court proceedings relating to those petitions. Yagman failed to disclose in his bankruptcy proceedings various personal bank and brokerage accounts that he controlled, but were in his girlfriend's name, as well as hundreds of thousands of dollars in legal settlements, client payments and attorney’s fees that he received in 1999 and 2000.
FY 2007 Examples of Bankruptcy Fraud Investigations
Table of Contents - Bankruptcy Fraud Investigations
Criminal Investigation (CI) home page
How to Report Suspected Tax Fraud Activities
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