Richard Schultz wove a web of complicity to hide millions from creditors. But Schultz was snared alongwith six lawyers, including Tampa Bay area attorneys Domenic L. Massari and Warren A. Wilson.
Deceit & Co.
Richard Schultz wove a web of complicity to hide millions from creditors. But Schultz was snared along
with six lawyers, including Tampa Bay area attorneys Domenic L. Massari and Warren A. Wilson.
By Peter Aronson
National Law Journal
Richard D. Schultz may have dug his own small niche into the landscape of white-collar crime.
Schultz, a highly successful businessman from Columbus, Ohio, was never accused of bilking investors of tens or hundreds of millions of dollars, like executives of Tyco, Enron, WorldCom and the like.
Instead, he distinguished himself by enlisting a bevy of lawyers to aid him in a series of scams to hide millions of dollars of his own money from a court judgment. He then turned state's evidence against members of his legal team, leading to their indictment and what even prosecutors acknowledge was a "very good deal" for himself.
So far, one attorney has pleaded guilty and been sentenced to federal prison for helping Schultz hide $9 million from creditors and the federal government. Three others and an accountant have pleaded guilty and are awaiting sentencing. A fifth attorney is awaiting trial in January. A sixth, Warren Wilson III of Palm Harbor, committed suicide the day after he was indicted.
A government source said the federal grand jury in Columbus continues to investigate and more indictments are possible this year, though whether other lawyers are under investigation isn't known. The Schultz case is part of the federal government's increased efforts, in light of recent corporate scandals, to go after the "gatekeepers," the lawyers and accountants who advise executives.
"I think the message is clear," said Gregory G. Lockhart, U.S. attorney for the Southern District of Ohio, where the case is being prosecuted. "There is a line between being an advocate for your client and giving advice for legitimate business purposes and you becoming aware of the fraudulent nature of the transaction, then crossing the line from being a counselor to being a conspirator."
Ross H. Brown, a special agent with the Internal Revenue Service, which played a key role in the case, was more blunt, saying that attorneys will violate their code of ethics and the law if there is money to be made.
"They didn't do this for free," he said.
A brilliant mind
By virtually all accounts - even that of the prosecutor who oversaw the case -Schultz was a brilliant businessman.
As a student at Eastern Michigan University in the early 1970s, he planned to become a lawyer. That desire vanished when he realized how much money he could make in the debt-collection business, according to "The Entrepreneurs," a book by Robert L. Shook. Subtitled "Twelve Who Took Risks and Succeeded," it devoted a chapter to Schultz.
In 1972, the 22-year-old Schultz started National Revenue Corp. in Columbus with $5,000 and the then-novel idea that creditors would rather pay a collector a flat fee than a percentage of the amount collected.
By 1978, National Revenue was a multimillion-dollar debt-collection agency with more than 150 employees and swanky offices in Columbus, plus another 600 independent contractors around the country. Schultz, with boyish good looks, was seen as a master salesman and motivator - and a generous one.
"He gave me a 1977 Cadillac Seville," Robert N. Shamansky, his lawyer at the time, said of his hunter green gift. "It was simply, as far as I could tell, a generous gesture on his part."
In 1994, Schultz sold National Revenue, receiving $11.3 million. In 1998, he started a new company, IntelliRisk Management Corp., which quickly became a $250 million business and the third-largest collections agency in the country.
A debt problem
By then, however, Schultz was in debt himself. In a lawsuit, he had tried to recoup $290,000 from a failed investment in a Kentucky horse farm. The litigation spun out of control and ended with his owing $5 million in attorney fees to three sets of defendants.
Years later, his criminal defense lawyer, Terrence Grady of Columbus, called the case an example of "perverse and twisted jurisprudence."
"[H]is thinking was certainly impacted by the fact that you're suing for $290,000 and you wake up and now you owe $5 million," Grady said at Schultz's sentencing in 2002.
The 9th U.S. Circuit Court of Appeals upheld the decision, and Schultz owed the $5 million, plus interest, because he had originally sued under Ohio's Racketeer Influenced and Corrupt Organizations Act (RICO), which allows a successful defendant to sue for attorney fees.
Schultz had the $5 million to pay it off.
Instead, he took another route.
Using his pocketbook and powers of persuasion, Schultz persuaded his long-time corporate attorney and a disparate group of lawyers in different locales to put together a series of scams that could have come out of an Elmore Leonard novel. They included a sham lawsuit filed in Pinellas-Pasco Circuit Court, fake business transactions and surreptitious purchases of judgments against himself. They also included a bewildering series of offshore money transfers that led to Schultz's downfall. He can thank his ex-wife, the mother of their two children, for his discovery.
His marriage of 17 years to Marva was legally dissolved in 1993. A year later, the ex-wife filed suit, trying to prove that Schultz had concealed assets from her. Marva Schultz's attorney, Columbus' Eugene R. Butler, uncovered documents showing that Schultz's money was transferred to offshore accounts.
Butler reported it to the Internal Revenue Service. The IRS, the U.S. Customs Service and the Justice Department then set out to unravel Schultz's schemes.
Staged suit, phony letter
As the government describes it, the plots began to take shape in the summer of 1994, after Schultz realized he had his huge debt. Schultz and his corporate lawyer, Larry K. Carnahan, a partner at Columbus' Kegler, Brown, Hill & Ritter, met with Tampa attorney Domenic L. Massari III.
Schultz "was working with lawyers who ostensibly were specialists: Massari was a specialist in representing debtors and Carnahan specialized in tax law," Grady said in an interview, acknowledging that Schultz admitted to spearheading the fraud.
According to court documents, Massari suggested that Schultz hide $5 million in an escrow account in someone else's name. From this idea, a far-fetched plan was hatched that, of all things, involved a staged lawsuit between Schultz and his father. The idea was to make it appear that Schultz was entitled to only half the $11.3 million from the sale of National Revenue.
According to the documents, here's how it worked: Massari drafted a phony letter from Schultz to his father, Delbert A. Schultz, backdated to 1973 when the business was founded. The letter purported to transfer half of National Revenue's stock to the elder Schultz for work on the company's behalf.
Wilson, an old law school friend of Massari's, was brought into the case to represent the father in a suit against the son to enforce the promise. Massari represented the son.
From the sham suit, duly filed in the Pinellas court, they proceeded to sham mediation and agreed to settle. Schultz put $5 million into a trust, supposedly for his father but actually still controlled by him, according to an indictment of several of the lawyers.
Schultz's father died in 1999 and was never charged.
On June 20, Massari, 50, pleaded guilty to one count of conspiracy to defraud Schultz's creditors and the U.S. government for his role in the suit and other Schultz scams
Why did he do it? "It's a long story," said his lawyer, Columbus' Terry K. Sherman. Massari had lost more than $1 million in the racing car business and was led to believe that Schultz could help him get a commercial racing sponsor. The sponsorship never materialized. According to court documents, Massari received $17,600 for his work on behalf of Schultz.
Massari may have been the one known bad apple in Schultz's circle. In 2002, he was disbarred for stealing a client's $30,000 settlement.
His friend Wilson, however, had a stellar reputation in Pinellas, where he was a partner with his wife at Wilson, Wilson & Long. According to his colleagues, he was a well-respected family law attorney.
For his role in the Schultz case, he was indicted on Oct. 3, 2002, charged with wire and mail fraud, money laundering and conspiracy to defraud Schultz's creditors.
The day after being indicted, the 50-year-old attorney sat by a tree overlooking Tampa Bay and committed suicide by shooting himself in the head with a 9-mm Smith & Wesson.
"Warren had nothing to fear. Nothing to hide," said his defense counsel, Gary Trombley of Trombley & Hanes of Tampa. Trombley said Wilson was unaware that his client's suit was part of a crooked scheme. "I think he felt just the fact of being indicted was just as bad as being convicted because of his position with the bar," Trombley said.
Long-time business lawyer
Carnahan, Schultz's corporate attorney for almost 20 years, had a good reputation and a sophisticated corporate practice with a mix of clients from Columbus and elsewhere.
In a lengthy statement he gave in prison as part of a civil suit against him, Carnahan, 54, depicted himself as having been duped by his client. But when he pleaded guilty in September 2001, he admitted to playing a major role in the sham lawsuit and two phony business deals designed to help Schultz hide another $4.5 million, according to a court transcript.
In October 1994, Carnahan admitted, he prepared a contract for Schultz's purchase of $5 million in stock in a Canadian holding company, Kennedy Northern Inc., which was controlled by one of the other lawyers in cahoots with Schultz.
Schultz made a $2.5 million down payment and was obligated to pay the balance within a set period of time. He failed to pay the balance and supposedly forfeited the down payment.
"However, in truth and in fact, as defendant Carnahan knew or learned before the end of 1994, the down payment was not forfeited," IRS Special Agent Neil Doppes told the judge when Carnahan pleaded guilty. Instead, he explained, the money went to an account in the Caribbean controlled by Schultz.
Carnahan admitted to helping concoct a similar scheme built around the supposed plan to buy an office building in Nashville, Tenn. He wrote the first draft of a contract for Schultz's father, acting as Schultz's nominee, to buy the building.
According to Agent Doppes, Schultz's father paid $2 million down, with a $7.75 million balance due. As in the Canadian deal, the down payment was purportedly forfeited for the purpose of transferring most of the $2 million offshore to accounts controlled by Schultz.
At various points, Carnahan said in his prison statement, he became suspicious that there might be "chicanery" going on but felt that his hands were tied.
"I was really, at this point, trying to figure out how not to acquire additional knowledge," he said. "I mean, I'm not trying to look for sympathy, but I thought over 100 times, in the alternative, what can you do? Well, you can run out and tell everybody he has done this.
"Well, at that point, you might as well quit practicing law, because there's not a client in the world that will ever have anything to do with you, because it looks like you are breaching the privilege. And if you don't, you end up being, you know, sort of tarred and feathered."
Carnahan is serving a 27-month sentence at a federal prison camp in Ashland, Ky.
"It's been a mystery to me as to why he did what he pled guilty to doing," said Melvin D. Weinstein, a former colleague of Carnahan's at Kegler Brown. "As far as I know, nobody else has a sense as well." Several Columbus lawyers said Carnahan had a fine reputation and couldn't explain his behavior.
A possible explanation
An explanation for Carnahan's crimes might lie in the fact that Schultz and his debt-collection company were major clients. According to a 1999 suit by National Revenue against Kegler Brown and Carnahan over legal bills, National Revenue had paid the firm $500,000 for work from 1994 through 1997.
Jack Prizzi, a New York banker who said he raised millions for Schultz's National Revenue, describes the relationship as one in which the persuasive Schultz had the upper hand.
"I thought Carnahan was generally weak," said Prizzi, owner of New York-based CoE Associates. When the pair disagreed about contract language, Schultz got his way, Prizzi said. "Carnahan didn't fight Richard on issues."
Richard R. Kennedy, 52, of Toronto, the businessman-lawyer who, according to a company prospectus, controlled Kennedy Northern, was one of two foreign attorneys mixed up with Schultz. On March 7, he pleaded guilty to wire fraud and tax fraud for helping Schultz and Carnahan assemble the Kennedy Northern and Tennessee office building deals. Among other things, Kennedy admitted that he, along with Toronto accountant Ronald J. Bogart, helped funnel millions of Schultz's money from these deals through bank accounts they controlled in Toronto to offshore accounts in the Cayman Islands. Bogart pleaded guilty as well.
Kennedy, who had been involved in breeding thoroughbred race horses since the 1970s, also admitted to having helped Schultz conceal his ownership of race horses to shield them from creditors. He and Bogart were paid about $286,000 for their role in the fraud, according to a transcript of Kennedy's plea. Both are awaiting sentencing. Neither they nor their attorneys could be reached for comment.
Going to trial
Martin W. Elson, a debt-collections attorney in Cleveland, is the only lawyer who wants to go to trial. He is accused of aiding Massari, Kennedy and Bogart pull off one of the more inventive schemes.
As part of the Schultz conspiracy to hide his money, they were accused of using Schultz's money, funneled through three shell companies with names like Judgment Acquisition Corp., to buy the California attorney-fee judgments against Schultz. According to the indictment, they arranged for the purchase of three judgments totaling $7.1 million for $3.1 million. The result was an immediate $4 million discount on the amount Schultz owed.
But apparently Schultz had a second motive for buying the judgments, according to Thomas K. Bourke, a member of the defense team in Schultz's San Francisco suit who got part of the $3.1 million.
In a malpractice action, Schultz had accused the law firm that represented him in the original case of botching it. He was suing to recover the $7.1 million. And by keeping his purchase of the underlying awards secret - which the government said was part of the conspiracy to defraud Schultz's creditors - Schultz could still seek to recover the full amount from the law firm's malpractice insurance carrier, Bourke said.
If it had worked, Schultz would have parlayed a $7.1 million courtroom loss into a multimillion-dollar profit, Bourke said.
Steven Tigges of Columbus' Zeiger & Carpenter, the attorney for the law firm, Bricker & Eckler, refused to comment on the case, other than to say that it was stayed soon after it was filed in 1995.
Elson, 44, the lawyer implicated in the judgment-buying scheme, has pleaded not guilty to one count of conspiring to help Schultz hide money from creditors. He was with Cleveland's Keevicon & Weiss until early this year, according to a partner at the firm.
Elson's attorney, Larry Zukerman of Cleveland's Zukerman, Daiker & Lear, said his client is awaiting trial, which is to start on Jan. 12 in federal court in Columbus. He would not comment further. Elson could not be reached.
Jeremy A. Franks, 50, formerly a transactional lawyer and partner at London's Franks Charlesly, was the sixth attorney indicted with Schultz. In a guilty plea in 2002, he admitted, among other things, to helping Schultz hide $2 million in bank accounts in such places as the Virgin Islands and the Channel Islands in Jersey. Like Massari, Kennedy, Bogart and Schultz, Franks has agreed to cooperate with the government.
Schultz, 53, is in the early stages of a 30-month sentence at a minimum security prison in Morgantown, W. Va. Some of the defense lawyers in the case mocked his plea and the light sentence he received. Although he admitted in court to orchestrating much of the fraud, Schultz pleaded guilty to one count of willingly filing a false income tax return in 1994.
Massari's attorney, Sherman, said, "The irony of the whole thing is that Richard Schultz, who orchestrated this whole ingenious, complicated scheme so he could keep his $11 million" was caught. "And then he turns government witness and he ends up with a short sentence."
Schultz, in fact, was the first to agree to cooperate. Yost, the prosecutor, said at Schultz's sentencing that Schultz "was not always entirely truthful" in 80 hours of government interviews, but he was truthful enough with regard to the individuals who were eventually charged. His cooperation won him six months off his sentence.
Besides the lawyers, Schultz was also duplicitous toward his brother.
Thomas D. Schultz, who worked for Richard Schultz at National Revenue and was indicted, was advised by his attorneys to plead guilty. Thomas Schultz's response, his attorney, Columbus' William Meeks, told the sentencing judge, was that he wanted to plead guilty at the same time as his brother so he wouldn't "do anything to compromise Richard."
It turned out that Richard Schultz compromised his brother. He went behind his brother's back and copped a plea first, Meeks said.
Thomas Schultz's co-counsel, Columbus' Sam Shamansky, talked about Richard Schultz's actions in these terms: "If I take out a baseball bat and crush your kneecaps, how many different ways can you describe it? It speaks for itself."
Despite everything, Schultz has never lost his ability to make money. At his sentencing in September 2002, when the judge ordered $1.26 million in restitution and a $28,500 fine, it was revealed that Schultz was being paid $560,000 a year as a consultant for IntelliRisk Management, from which he resigned as CEO 13 months earlier when he was indicted.
IntelliRisk, a private company, did not return calls asking whether Schultz is being paid while he is in prison. Schultz refused a request for an interview.
"I believe - the government believes - that there is a role in society for someone who is as successful as Mr. Schultz can be in the business area," Yost said at Schultz's sentencing. "The challenge for Mr. Schultz, your honor, is when he doesn't agree with something, that he continues to play by the rules."