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BAD BLOOD

Former Client Accuses Michael Avenatti of Operating Law Firm Like a ‘Ponzi Scheme’

A former client of Michael Avenatti alleges the lawyer secretly pocketed his money after helping him secure a settlement, but Avenatti vehemently denies it.

A former client of Michael Avenatti alleges the celebrity lawyer secretly pocketed his money after helping him secure a settlement, then tried to lend him back some of the funds with 10 percent interest. That client, Gregory Barela, made the allegations in a statement of claims filed with Judicial Arbitration and Mediation Services (JAMS), a private arbitration organization. Barela’s lawyer provided the claim, which is not public, to The Daily Beast.

“Avenatti was operating his law firm in a Ponzi scheme like manner, taking settlement proceeds received for clients to pay off debts, pay the other individual Defendants’ salaries and bonuses, and fund his lavish lifestyle, while telling clients that the settlement proceeds had not been received or would be received at a later date,” says the claim, which also targets two other lawyers at Avenatti’s firm.

Avenatti vehemently disputes the allegations.

“These allegations are completely fabricated, bogus and fraudulent,” he told The Daily Beast. “We have no idea where this is coming from or why someone would make up this ridiculous false story and deceive his attorneys. Until recently when we demanded to be relieved as counsel, we previously represented Mr. Barela in multiple matters and he has received 100 percent of what he is entitled to. We have never had any contact with [Gregory Barela’s wife and co-plaintiff] Talitha Barela.”

According to the statement of claims, Avenatti handled litigation with an unnamed third party for Barela, securing him a confidential settlement. In January 2018, according to Barela’s claim, the third party started paying funds into a client trust account managed by Avenatti for him to pass to Barela. But instead of doing so, Avenatti allegedly told Barela the third party never paid the settlement money. As the months passed, Barela’s suit says, he grew increasingly anxious about the money, frequently asking Avenatti when it would come through.

Barela needed the money to cover other business expenses, the statement says, and faced financial hardship because he couldn’t get it. Avenatti eventually offered to lend him money to help him get by, the claim says. Instead, Barela retained new counsel. Those lawyers contacted the third party with which Barela had entered into a settlement, and allegedly learned it had already started making payments to Avenatti, which were intended for Barela, back in January 2018—payments Barela’s claim says he has yet to receive.

“Mr. Barela hired our firm to investigate what happened to the settlement payment that he was supposed to have received early last year,” Steven Bledsoe, a lawyer with Larson O’Brien LLP representing Barela, told The Daily Beast. “As part of our investigation, we contacted the lawyer for the settling party and he gave us a copy of the unaltered settlement agreement and the wire-transfer confirmation showing that his client made the settlement payment to the bank account specified by Mr. Avenatti five days before it was due.”

Stephen Larson, a former federal judge, is also representing Barela.

A review of online public records shows that in March 2018, Barela was charged with a crime in San Diego County.

The complaint against Avenatti is published below with some redactions. Bledsoe said this is because the terms of the settlement between Barela and the third party are confidential. Additionally, The Daily Beast has redacted the names of Avenatti’s associates because of privacy concerns.

Bledsoe said his firm served the claim on Avenatti by mail on Jan. 14, 2019 and by email on Jan. 17. He said the firm filed it with JAMS on Jan. 14.

Gabriel J. Chin, a professor of law at the University of California, Davis, said that if true, the allegations against Avenatti are “extremely serious” and “a big, big problem.”

Besides potentially violating professional ethics, the alleged actions could be criminal, Chin told The Daily Beast.

He compared a lawyer pocketing settlement funds from a client to a letter-carrier snatching cash from an envelope. “They’re guilty of theft. They’ve stolen that money. It’s the same principle,” Chin said. “The lawyer has the money for a particular purpose, but if they use it for something other than that purpose, then they’ve stolen it.”

Then there are potential ethical violations, Chin said, including the duty of candor to the client—in this alleged case, keeping the client informed of the settlement.

“When you get money on behalf of a client, you hold it in trust for that client. And if there’s one thing that they teach you in ethics class, in law school, it’s that you don’t commingle your own funds and client funds,” Chin added.

Neil Wertlieb, an adjunct professor at UCLA School of Law, said losing client funds is “a very sensitive area” that could lead to disbarment.

If there’s one thing that they teach you in ethics class, in law school, it’s that you don’t commingle your own funds and client funds.

“Attorneys act in a fiduciary capacity with their clients, and as it pertains to receipt of settlement proceeds, they have to act in accordance with their fiduciary responsibility,” said Wertlieb, who is the former chairman of California State Bar’s Committee on Professional Responsibility and Conduct. “If any portion of that money rightfully belongs to the client, that’s money that should have been sent out to the client and not used for any other purpose.”

The other allegations made by Barela—the failure to pay the client, lying about the receipt of funds, and entering into a business relationship with the client via a loan—“strikes me as a serious enough offense that it could lead to disbarment,” Wertlieb said.

Wertlieb said getting to the truth of the controversy should be easy, as attorneys are obligated to keep careful and detailed records on their client-trust accounts. The state bar could demand Avenatti share his bank records with respect to the client trust account to see if and when he received any settlement payout.

If Avenatti had persuaded Barela to borrow money from him—instead of a third party, for example—“it further evidences an inappropriate business relationship with a client,” Wertlieb said.

“It may be evidence that [Avenatti] is trying to protect himself or hide the facts and not expand the number of people involved,” Wertlieb continued. Business transactions between lawyers and clients aren’t prohibited, Wertlieb added, but the terms of the deal need to be clearly described to the client and agreed to in writing, and the client should be advised to seek independent legal advice.

“The gravity of the offense, if true, combined with all of these other elements may make this a very serious claim against Mr. Avenatti,” Wertlieb said.

Avenatti catapulted to fame early last year as attorney to Stormy Daniels, who is suing President Trump and his former fixer, Michael Cohen, over the infamous “hush agreement” she signed before the 2016 election. Daniels received $130,000 in the deal, which she claims is invalid because it lacks Trump’s signature, among other reasons.

Cohen pleaded guilty to violating campaign finance law by orchestrating payouts to Daniels and another alleged Trump paramour, former Playmate Karen McDougal. He was sentenced to three years behind bars for this crime and others, including tax evasion and lying to Congress.

Next month, Cohen is set to testify before Congress about his decade in Trump’s employ. Once Cohen’s scheduled questioning made headlines, Avenatti jumped in to declare he and Daniels were delighted to attend.

“I am pleased to announce that @StormyDaniels and I will attend the congressional hearing when Cohen testifies. Which is only appropriate seeing as it would have never happened but for @StormyDaniels,” Avenatti tweeted on Jan. 11.

It won’t be the first time Daniels and her lawyer watch Cohen from the gallery. They appeared in Manhattan federal court in April, when Cohen attempted to block prosecutors from viewing his attorney-client materials seized in an FBI raid.

Afterward, they held their own briefing outside the courthouse, with Daniels railing against Cohen for behaving “like he is above the law.” With Avenatti beside her, Daniels told reporters, “He has never thought that the little man, or especially women or even more, women like me, matter. That ends now.”

But as the brash litigator’s profile rose, with ubiquitous TV spots and endless Twitter salvos targeting Trumpworld, so did his apparent legal controversies.

Last October, The Daily Beast revealed Avenatti was living the high life while his former businesses owed millions in judgments—including $10 million to former colleague Jason Frank—and unpaid state and federal taxes.

Frank claims he was cheated out of millions in profits and denied copies of tax returns during his stint at Avenatti’s former law firm, Eagan Avenatti, which was recently evicted from its Newport Beach suite for allegedly failing to pay more than $200,000 in rent. (Asked about the eviction in December, Avenatti said the firm was “already moving” and that the real estate company was run by “a GOP/Trump lackey” who “wants to make a spectacle out of this because I am a threat.”)

This is apparently how a firm with virtually no money in its operating accounts is able to fund hundreds of thousands of dollars in expenses each month.
Jason Frank

Separately, a Los Angeles Superior Court judge has entered a $4.85-million judgment against Avenatti on Frank’s behalf. After the legal victory, Frank’s attorney, Eric George, told reporters that Avenatti has “managed to delay this for ages.”

“It will be important to keep an eye on him and sources of money that are coming in,” George added of Avenatti. “See what his assets are and take it from there.”

Avenatti previously told The Daily Beast he intends to appeal the $4.85-million judgment and that he’s “confident it will be overturned.”

In November, Frank filed papers in U.S. District Court accusing Avenatti of funneling “tens of millions of dollars” from the Eagan Avenatti firm to other companies he controlled—all to avoid paying his debts to Frank.

At the time, Avenatti told The Daily Beast that Frank’s claims were “completely bogus and false” and accused his attorney of being “a big Republican backer” who “would love nothing more than to discredit me.”

In the court filing, Frank said he subpoenaed Eagan Avenatti’s primary bank, California Bank & Trust, for account statements as far back as January 2013. Frank alleges that he discovered a series of transfers between Eagan Avenatti’s operating accounts and its IOLTA account, which is a client-trust account used for the deposit of funds, including settlement checks.

In March 2018 alone, Frank claimed in the document, there were about 73 transactions—totaling $1.5 million—where Eagan Avenatti moved funds from the client trust account to the operating account.

“This is apparently how a firm with virtually no money in its operating accounts is able to fund hundreds of thousands of dollars in expenses each month,” Frank stated in the filing. “And by keeping the money stashed away in the IOLTA account, rather than transferring it to EA, Avenatti is able to prevent [Frank] from levying on these amounts as a judgment creditor.”

Meanwhile, one of Avenatti’s bygone companies, Global Baristas, which operated the beleaguered coffee chain Tully’s, owes hundreds of thousands to creditors and faces a $5-million federal tax lien. Creditors have filed a petition to place the Washington-based firm into involuntary bankruptcy. It’s unclear who’s in charge of Global Baristas, as Avenatti claimed he sold it for more than $27 million to a new ownership group.

Pleased that Michael and I have sorted shit out and we know the accounting is on the up and up.
Stormy Daniels

According to Frank’s court filing, since 2013, Eagan Avenatti transferred more than $8.6 million from its bank account to Global Baristas’ coffers, across 98 transactions.

Avenatti is also accused of owing his ex-wife $1.7 million in spousal and child support, according to documents filed in his divorce case. (His attorney, Saul Gelbart, claimed Avenatti has “no existing debt” to his ex, Lisa Storie-Avenatti.)

In her divorce petition, Storie-Avenatti highlighted the couple’s “very extravagant marital lifestyle” in the form of exotic cars, two private jets, and a home in Laguna which they bought for $7.2 million in 2011 before selling for $12.6 million four years later. She claims she had “unfettered use” of credit cards, racking up $60,000 to $70,000 on her American Express each month and paying her bills in full.

Barela’s complaint, too, refers to Avenatt’s “lavish lifestyle” which allegedly includes a $14,000-a-month luxury apartment in a Los Angeles skyscraper.

The lawyer faced another blow in November, when Stormy Daniels told The Daily Beast that Avenatti launched a crowdfunding site for her legal battle without telling her—and allegedly sued Trump for defamation in her name but against her wishes.

“For months I’ve asked Michael Avenatti to give me accounting information about the fund my supporters so generously donated to for my safety and legal defense. He has repeatedly ignored those requests,” Daniels said in her statement. “Days ago I demanded again, repeatedly, that he tell me how the money was being spent and how much was left. Instead of answering me, without my permission or even my knowledge Michael launched another crowdfunding campaign to raise money on my behalf. I learned about it on Twitter.”

Responding to Daniels’ claims, Avenatti said in a statement, “I have always been an open book with Stormy as to all aspects of her cases and she knows that. The retention agreement Stormy signed back in February provided that she would pay me $100.00 and that any and all other monies raised via a legal fund would go toward my legal fees and costs. Instead, the vast majority of the money raised has gone toward her security expenses and similar other expenses. The most recent campaign was simply a refresh of the prior campaign, designed to help defray some of Stormy’s expenses.”

Within a few days, however, Avenatti and his star client apparently made nice.

“Pleased that Michael and I have sorted shit out and we know the accounting is on the up and up,” Stormy tweeted on Dec. 2.

Avenatti shared a tweet of his own, minutes later: “Onward and upward. To all the people that want to divide us for their own agendas: It is not going to happen!”

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