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Avenatti to give up financial control of law firm after he’s accused of hiding millions

SANTA ANA CA JULY 25, 2018 -- Michael Avenatti outside the Ronald Reagan Federal Courthouse Wednes
Michael Avenatti denies allegations that he hid millions of dollars from the court overseeing the bankruptcy of his law firm.
(Irfan Khan / Los Angeles Times)

Michael Avenatti agreed Wednesday to relinquish financial control of his longtime law firm hours after a former partner filed papers accusing him of hiding millions of dollars from the court that oversaw its bankruptcy.

The celebrity lawyer and his firm, Eagan Avenatti, consented to the appointment of a receiver to take possession of its bank accounts, case files, computers and other assets.

Avenatti also promised to cooperate with efforts by Jason Frank, a former lawyer at Eagan Avenatti, to collect on his $10-million judgment against the firm. Avenatti will continue to work as the lead lawyer in his law practice, which he now calls Avenatti & Associates.

The agreement came after Frank asked a federal court Tuesday night to appoint a receiver to seize Eagan Avenatti and stop the firm from draining its assets. U.S. Magistrate Judge Karen E. Scott in Orange County signed an order late Wednesday naming Newport Beach accountant Brian Weiss as the receiver.

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Frank’s court papers alleged that Avenatti used nefarious bank maneuvers when his firm was under federal bankruptcy protection to hide millions of dollars from its creditors.

“This includes brazen acts of bankruptcy fraud,” Frank’s lawyer, Scott H. Sims, wrote in the court documents.

Avenatti denied wrongdoing.

“Every dollar has been properly accounted for and reported as required and as previously set forth in numerous accountings,” he said. “This is much to-do about nothing.”

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Avenatti, best known for representing porn actress Stormy Daniels, said the bankruptcy court did not require him to receive all of his legal fees through Eagan Avenatti.

“There has never been any misdeeds or fraud — any claim to the contrary is politically motivated, completely bogus and driven by Jason’s own personal demons and vendetta,” he said.

During the year when Eagan Avenatti was under U.S. Bankruptcy Court protection, starting in March 2017, it was required by law to file monthly reports on its income and spending.

Avenatti signed the reports under penalty of perjury as the firm’s managing partner and majority owner.

But the reports did not disclose that Avenatti opened six bank accounts that received millions of dollars in legal fees during the bankruptcy, Frank claimed Tuesday in his court papers.

The monthly reports also divulged nothing about the personal compensation to Avenatti, which would have required permission from the bankruptcy trustee, the documents alleged.

He used some of the money for personal expenses such as $13,000 in rent for his Century City apartment; a $3,640 payment on his Ferrari; $21,000 for Passport 420, an Avenatti company that owns a Honda jet; $150,000 for his troubled coffee company, Global Baristas; $53,600 for his ex-wife, Christine Carlin; and $232,875 for HTP Motorsport, his auto racing team, the records showed.

In a joint court stipulation filed late Wednesday, Frank agreed to withdraw the court papers alleging bankruptcy fraud, and Avenatti and his firm accepted the receivership.

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Frank, who was a nonequity partner at Eagan Avenatti, won the $10-million judgment after the bankruptcy case was dismissed last March. He’d accused the firm of cheating him out of more than $15 million in pay he was due under his employment contract.

Last month, Frank asked U.S. District Judge Virginia A. Phillips to hold Avenatti and the firm in contempt of court for defying a subpoena for financial records. Frank urged the judge to jail Avenatti to compel compliance. Phillips has not yet scheduled a hearing on the request.

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Irvine lawyer Jason Frank is trying to collect a $10-million judgment that he won against Eagan Avenatti, the longtime law firm of Michael Avenatti.
(Irfan Khan / Los Angeles Times)

Through subpoenas to banks, Frank obtained records that detail millions of dollars in legal fees, settlement payments and other funds that Avenatti collected during the bankruptcy but did not disclose to the trustee, his Tuesday court filing showed.

In one case, Eagan Avenatti was representing ticket holders who sued the NFL over seating snafus at the 2011 Super Bowl in Arlington, Texas. After the NFL case settled, a Texas lawyer told Avenatti in a May 2017 email that he was ready to transfer $1.4 million to Eagan Avenatti, the court records show.

Avenatti responded with wiring instructions that split the money. He directed $409,000 to a firm account that was disclosed to the bankruptcy trustee and the remaining $953,000 to an undisclosed account that he controlled.

Over the next two months, Avenatti moved nearly all of the $953,000 in seven transactions to another undisclosed account, according to the bank records that Frank filed in court. Avenatti then shifted it — once again spread across seven transactions of almost identical amounts — to a bank account held by Avenatti & Associates, his personal corporation. Avenatti & Associates, in turn, used much of the money to pay his personal expenses during those two months, the documents show.

Avenatti said he and his company were entitled to reimbursement for more than $1 million in out-of-pocket expenses in litigating the case against the NFL.

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In the weeks after his law firm emerged from bankruptcy last year, Avenatti became a constant presence on cable news channels as he taunted President Trump over the $130,000 paid to Daniels to keep her quiet about their alleged 2006 sexual encounter.

Avenatti later traveled the nation and raised money to explore a campaign for president. A few weeks after his November arrest on suspicion of domestic violence, he announced he would not run. Los Angeles prosecutors later declined to file charges.

After agreeing Wednesday to the receivership, Avenatti called the move “a big nothing” and said his law practice, with more than 10 lawyers, was thriving at multiple offices, including one in Echo Park.

“We have never had more business or bigger cases,” he said.

He now identifies the practice as Avenatti & Associates, but it employs the same lawyers and office staff who were on the Eagan Avenatti payroll, and they continue to use Eagan Avenatti email addresses. Eagan Avenatti was recently evicted from its Newport Beach office suite after skipping monthly rent payments.

Frank argued in his court papers that Avenatti was deliberately diverting Eagan Avenatti legal fees to Avenatti & Associates in an attempt to dodge creditors like himself, demonstrating the need for a receiver.


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