Quackwatch Home Page
The owners of Metabolife International, the leading marketer of ephedra-containing "diet pills," are under investigation for massive tax evasion. According to an affidavit signed in 2002 by an Internal Revenue Service criminal investigator:
- Michael Blevins, Michael Ellis, and William Robert Bradley skimmed millions of dollars in cash from the company and hid money in offshore accounts.
- Metabolife failed to account for $93.7 million in income between 1996 and 1999, when the company sold Metabolife 356 through a network of independent distributors who were encouraged to pay cash for wholesale supplies of the product.
- Former employees said the company maintained multiple sets of books to disguise its true financial activities, as well as "off-the-books" bank accounts that helped disguise the skimming activities.
In September 2003, Blevins (who was convicted in 1988 of conspiracy to manufacture and possess methamphetamine with intent to distribute) and his his wife Danica were charged with conspiracy to illegally obtain firearms and three counts of illegally possessing firearms. [USAO news release, Sept 15, 2003] The tax investigation affidavit was unsealed in November in connection with the firearms case. No tax-evasion charges have been filed, but about a week after the affidavit was unsealed, Metabolife's outside accountant Michael Compton was found dead in his home, apparently of a self-inflicted gunshot wound. [Crabtree P. Documents link Metabolife, offshore banks: Kickbacks also paid, affidavit alleges. San Diego Union-Tribune, Dec 2, 2003]
STATE OF CALIFORNIA
COUNTY OF SAN DIEGO
I, Thomas Martinez, Special Agent, Internal Revenue Service (hereinafter referred to as the "IRS"), being duly sworn, depose and say:
1. I have been employed as a Special Agent with the IRS since November 1995.
2. I am presently assigned to a Criminal Investigative group in the San Diego Field Office. During my approximately six years as a Special Agent, I have investigated numerous cases, including tax evasion, wire fraud, money laundering and mail fraud.
3. Prior to becoming a Special Agent, I was employed by the IRS for approximately 12 years. During this time, I worked as a Revenue Officer, a Group Manager, an Assistant Branch Chief and a Branch Chief. During this time, I worked on -- and supervised -- numerous fraud and tax cases.
4. During the last 8 years, 1 have received specialized training in the investigation and prosecution of criminal and civil tax violations. While at the IRS Academy in Glynco, Georgia, I also received extensive training in conducting complex investigations and the preparation and execution of search warrants.
5. Prior to working with the IRS, I was employed as an Accountant with the Department, of Defense. In that capacity, I audited payroll records.
6. I have participated in the execution of approximately 15 search warrants as an IRS Special Agent. On virtually every occasion, I sought financial records, business records, ledgers, customer records, computer discs and computer-generated data.
7. Based upon my training and experience, a review of documents and other relevant information I believe to be reliable, and discussions with other IRS special agents, I believe that there is probable cause that Michael Joseph Ellis, William Robert Bradley and Michael Lee Blevins, among others, violated federal laws, including: (I) tax evasion in violation of United States Code, Section 720 I; and (2) conspiracy to defraud the United States in violation of Title 18, United States Code, Section 371.
8, Based upon my training and experience, a review of documents and other relevant information I believe to be reliable, and discussions with other IRS Special Agents, I believe that there is probable cause to believe that now located at 7583 Saint Andrews Road, Rancho Santa Fe, California 92067 (more particularly described in Attachment "A") are fruits, evidence, and instrumentalities of criminal offenses against the United States (more particularly described in Attachment "B").
9. Michael Joseph Ellis, William Robert Bradley and Michael Lee Blevins are principals in Metabolife International, Inc. (hereinafter referred to as "Metabolife" -- the company responsible for the production and distribution of a widely used dietary weight loss supplement. It is my opinion that these individuals utilized Metabolife to commit millions of dollars in tax evasion during the years, 1997, 1998 and 1999. Among other things, it is my belief that these individuals failed to declare substantial amounts of cash that were received at Metabolife's will-call counter. Moreover, a comparison of Metabolife's gross receipts and its tax returns appear to reveal mi1lions of dollars in deposits that are not reflected as income on the Corporate tax returns.
10. In total, Metabolife appears to have failed to account for $93,721,847.46 in total deposits on their 1996, 1997, 1998 and 1999 corporate tax returns. Based on my experience and training, discussions with other federal agents, and the facts uncovered in the investigation to date, it is my be!ief that Metabolife failed to declare these deposits as income during these years in an effort to evade the payment of tens of millions of dollars in federal income tax.
A. Criminal Records
11. A review of Treasury Enforcement Communication Systems ("TECS ") records reveals that Michael Lee Blevins has a criminal history. On June 21, ] 973, Blevins was charged with battery on a police officer in violation of California Penal Code Section 242, The disposition of this charge (due to its age) is difficult to discern with precision.
12. On February 19, 1975, Blevins was arrested for conspiracy to distribute cocaine, This charge was dismissed.
13. On March 5, 1975, Blevins was again arrested for cocaine distribution. It appears that this charge was reduced to simple possession. On July 30, 1975, Blevins appears to have received a three year suspended sentence and been placed on probation for one year.
14. On May 6, 1976, Blevins was charged with drunk driving in San Rafael, California. It appears that Blevins pled guilty to the lesser charge of reckless driving in violation of California. Vehicle Code Section 23103. On January 4, 1977, he was placed on probation for two years and fined $315.
15. On November 1, 1988, Blevins and Ellis were arrested for conspiracy to manufacture methamphetamine with the intent to distribute. [Footnote: Prior to his arrest, Ellis had been employed for a brief time by the Chula Vista Police Department.] According to stories appearing in a number of newspapers, Ellis and Blevin rented a house located at 17150 Los Morros, Rancho Santa Fe for $4,500 per month. They then outfitted the residence with lab equipment and enough chemicals to make at least 50 pounds of methamphetamine.
16. Due to his considerable cooperation with Government authorities, Ellis was placed on five years probation after being allowed to plead guilty to a "phone count" in violation of Title 21, United States Code, Section 843(b). Blevins, on the other hand, was sentenced to five and a half years in prison. He also received a supervised release term of five years. [Footnote: Blevins was released from federal custody on April 8, 1996.]
17. In 1989, Ellis (according to information published on the company website) claims to have developed the dietary supplement Metabolife 356 as "an herbal blend to enhance his father's energy while [his father was] combating terminal bone cancer." According to the story, the blend proved so beneficial that Ellis' father -- prior to dying -- made his son promise to market the blend "so that others could reap its benefits."
18. Various court records and Ken Dix -- in-house. legal counsel for Metabolife from October 1999 to October 2000 -- paint a different picture of the origins of Metabolife. [Footnote 3: It should be noted that Dix refused to discuss any information that he deemed privileged. In this regard, he stressed that he never represented Ellis, Bradley, Blevins or Compton, but acted only as counsel to the corporation] According to these sources, the original formula was developed in the early 19905 under the direction of Michael Ellis and Jay Hansen. Ellis and Hansen (along with William Bradley and others) formed two companies, Foslip Pharmaceuticals, Inc., and Foslip of California, Inc., to market and distribute their supplement. At that time, Ellis and Hansen referred to their dietary supplement as "Nepegen."
19. In terms of capturing a market, Nepegen was not a blockbuster supplement. After a while, Hansen and Ellis parted ways prior to Nepegen enjoying any significant financial success. The corporate status of Foslip Pharmaceuticals, Inc., was simply allowed to lapse, From that time forward, the fortunes of Ellis and Hansen moved in different directions.
20. On January 23, 1995, Ellis formed Metabolife -- as a California corporation -- to pursue the marketing of Metabolife 356. Ellis assumed the position of President, Blevins (upon his release from prison) was named Vice-President, and William Bradley was named Chief Executive Officer. [Footnore 4: According to Dix, Ellis received $15,000 from Bradley (who had been a principal in Foslip) to start-up Metabolife. At the time, Bradley was operating Bradley's Towing, Inc. - a towing business in San Diego.] All three also occupied positions on Metabolife's Board of Directors (along with Metabolife's Chief Operating Officer, Larry Miller).
21. According to Jay Hansen, Metabolife 356 is simply Nepegen under a different name. Unlike Nepegen, sales of Metabolife 356 have been very successful, with annual sales in the hundreds of millions of dollars. [Footnote 5: On June 4, 1998, Hansen brought suit in the Iowa District Court for Clay County against Ellis, Bradley and others alleging, inter alia, the theft and misuse of Nepegen's dietary supplement formula. Although that suit was settled for four million dollars in the fall of 1998, Hansen again sued Ellis and Bradley in November 1999. In this suit, Hansen argued among other things that the settlement was procured by fraud as Ellis "had grossly misrepresented the sales of Metabolife during 1997. . . ." According to Hansen, Metabolife's sales in 1997 amounted to several hundred million dollars -- not the $27 million claimed by Ellis. Interestingly, Metabolife's tax returns suggest that the company had gross sales of $31,568,807.] According to corporate records, William R. Bradley was originally listed as Metabolife's President. On the records, Bradley provided his then residence as his business address.
22. Regardless of its similarity to Nepegen, it is clear that Metabolife 356 is primarily a blend of various vitamins, minerals and herbs. [Footnote 6: The active ingredients of Metabolife 356 include Guarana, Ma Huang, Bee Pollen, Ginseng, Ginger, Lecithin, Bovine Complex, Damian, Sarsaparilla, Golden Seal, Nettles, Gotu Kola, Spirulina, Algae, Royal Jelly, Methocel, silica, croscamellose sodium, magnesium stearate, Vitamin E, Magnesium, Zinc and Chromium.] Corporate materials indicate that the supplement raises a user's metabolism -- reducing appetite and helping the body more rapidly burn calories. In so doing, it results in "an energetic feeling" and allows the user to reduce "excessive pounds of fat brought on by overeating and lack of exercise."
23. According to various health sources, the active ingredients Guarana and Ma Huang appear to account for much of the supplement's claimed potency as a weight loss tool. Guarana contains caffeine and Ma Huang is an herb that contains ephedra -- a form of ephedrine. Ephedra is a naturally occurring herbal stimulant that acts on the nervous system increasing the metabolic rate.
24. At present, the sale of Metabolife 356 is legal, as it is classified as an herbal supplement not subject to regulation by the Food and Drug Administration ("FDA"). However, the FDA has proposed restricting the amount of ephedrine a dietary supplement could contain due to health-related concerns. [Footnote 7: Between 1993 and 1996, the FDA received reports of about 40 deaths and 800 adverse reactions to ephedra supplements. This number, however, is believed to be fewer than the actual number of cases (the Texas Department of health alone received reports of about 1,400 adverse reactions and 11 deaths). Common side effects of the substance include nervousness, insomnia. rapid heartbeat, stroke and seizures.] The company has vigorously opposed such restrictions asserting that the naturally occurring ephedrine [in Metabolife] seem to be less harsh to the system. . , and [doesn't] seem to cause the problems."
25. Metabolife 356 proved to be an almost instant success. In 1995, the Corporation (according to news articles) sold approximately 4,752 bottles and generated (according to corporate tax returns) $115,024. However, by 1998, Metabolife sold (according to news articles) approximately nine million bottles annually and generated $186,895,354 in sales (according to corporate tax returns), By 1999, the corporation was declaring over $350 million in sales.
26. Metabolife remains one of the fastest growing companies in the United States. Indeed, from 1996 through 1999. the company reported a sales increase of approximately 46,000%. The company now claims to have assumed the position as the top retailer of weight management products in the United States.
B. Distribution System
27. According to statements made by Michael Ellis, Metabolife initially declined to distribute its dietary supplement through the traditional channels of health-food stores and specialty retailers. Instead, the company decided to sell the product directly to the public from their San Diego Offices (located at 5070 Santa Fe Street) through a system of multi-level distributors. Ellis also gave away the product to radio disc jockeys to promote the product on the air.
28. Metabolife's multi-level distribution system operated by allowing distributors to directly purchase Metabolife 356 that they could sell to the public. In other words, the distributor would purchase the product from Metabolife at a wholesale rate (around $23 per 90 pill bottle) and then resell it to the general public for the retail rate (around $49 per 90 pill bottle). Distributors could purchase individual cases (12 bottles) for approximately $275 or "master" cases (J44 bottles) for approximately $3,300. [Footnote 8: Although the overwhelming bulk of Metabolife's sales was composed of Metabolife 356 bottles, the company also sold a variety of other products, ~, photographs, shirts, cookies, , vitamins and other promotional materials.]
29. The majority of Metabolife's distributors sold the supplement through a wide-variety of channels, including homes, businesses, swap meets and over the Internet. The company' 5 largest distributors were referred to as "Premier" distributors. These distributors had to undergo an approval process and were allowed to set up exclusive kiosks (where they would not face competition from other Metabolife 356 distributors) at malls and other venues.
30. Distributors were also able to make money by sponsoring other distributors. The company would pay a commission for all of the dietary supplements purchased (from Metabolife) by their down-line distributors. The normal commission was $20 for every case of Metabolife 356 that was purchased by the down-line distributor. [Footnote 9: It appears that Ellis, Bradley and Blevins received (through companies they owned) commissions on the majority of sales made by Metabolife to their distributors. In other words, they acted as first-line distributors that were paid commissions on most of the company's sales. For example, in 1998, Metabolife paid out $41,627,574 in total commissions -- of which companies owned by the three principals received $15,416,960 (approximately 37% of all commissions).]
31. Distributors could obtain Metabolife 356 by ordering the supplement over the phone or by using the company website. In addition, Metaboljfe allowed distributors to personally pick up orders at their main facility located at 5070 Santa Fe Street, San Diego, California 92109. [Footnote 10: In late 2000, Metabolife moved its main facility to 6138 Nancy Ridge Road, San Diego, California 92109. In late 2001, Metabolife's main facility was switched to its present location at 5643 Copley Drive, San Diego, California 92111.]
C. Cash Deposits
32. According to Raphiella Adamson, Director of Retail Operations for Metabolife (from April 1998 through April 1999), the corporation sold approximately one million dollars (300 to 400 master cases) per day of Metabolife 356 from its "will call" counter at 5070 Santa Fe Street. Adamson recounted how distributors from around the country would queue at the company facility waiting for their orders to be filled. [Footnote 11: According to a former employee, fist fights occasionally broke out among the distributors who were waiting in line to purchase Metabolife 356. In addition, many of the distributors would just fly into San Diego for the day in order to purchase the dietary supplement.]
33. Adamson noted that the distributors were encouraged to pay with cash or credit card, and customers who paid by check were surcharged an additional three percent. Adamson estimated that as much as 50% of the will-call sales were made with cash. In other words, by Adamson's estimates, Metabolife would receive up to $500,000 per day in cash during the 1998 and 1999 time frame.
34. Ron Taylor, Metabolife's Director of Operations (from December 1998 through May 1999) confirmed that the corporation received huge quantities of cash at their wiII-cll counter. Although his estimates were significantly lower than Adamson's, Taylor believed that the company received over $125,000 in cash on some Business days. On one occasion, Taylor recalled observing $750,000 in cash located in a company safe located at 5070 Santa Fe Street.
35. A conservative figure -- based on Taylor's estimates -- suggest that Metabolife was generating at least $ I million per month in cash, However, if Adamson's estimates are accurate, the company would have been generating well over $5 million in cash each month (during April 1998 to April 1999). However, a review of Metabolife's known bank accounts at Bank of America and Grossmont Bank fails to reveal cash deposits commensurate with even the lower estimate. [Footnote 12: According to Jeff Anderman, Vice-President in charge of Corporate Development and later Chief Financial Officer, Metabolife utilized both Bank of America and Grossmont Bank to conduct its banking activities.]
36. A review of records subpoenaed from these financial institutions show only $400,788,91 in cash deposits during all of 1997. In other words, the corporate bank accounts do not appear to reflect millions of dollars in cash payments presumably made by distributors in exchange for Metabolife 356 during the 1997 calendar year.
37. Significantly, a review of records subpoenaed from Bank of America reveals that the amount of cash being deposited by Metabolife increased generally from January through July of 1997. [Footnote 13: A month-by-month review of the cash deposits during the first seven months of 1997 reveal the following amounts: January - $36,790.41; February - $34,391.84; March - $42,926,88; April - $71,692.94; May - $73,209.48; June - $64,170.80; and July - $62,084.59.] However, the amount of cash being deposited abruptly drops to $12,087.32 in August, and only $356.38 in September 1997. This pattern continues with cash deposits averaging less than $500 per month from October through December 1997.
38. Beginning in 1998, the amount of cash being deposited by Metabolife began to rapidly , increase. During January of 1998, the cash deposits mysteriously rose from $91.43 (in December 1977) to over $100,000. [Footnote 14: It should be noted that the government has been unable, to date, to obtain complete records from Grossmont Bank. Accordingly, we will frequently refer to Currency Transaction Reports ("CTRs") filed by the bank as a better estimate of the amount of cash being deposited by Metabolife. Unfortunately, this figure also underestimates the amount of cash received as CTRs are not required for cash transactions less than $10,000 and are occasionally missing even when a cash deposit may exceed the threshold amount.] [A review of the CTRs for 1998, reveals that Metabolife's cash deposits exceeded $500,000 a month by August 1998, This level appears to have been generally maintained for the rest of 1998.
39. During the remainder of 1998 and 1999, Metabolife continued to make substantial cash deposits to both Bank of America (account no, 11325-02757) and Grossmont Bank (account no, 11-014356-1). These deposits eventually exceeded over $850,000 in cash deposits during May 1999.
40. Despite the more significant nature of the cash deposits claimed in most of 1998 and 1999, they still would not appear to completely account for all of the corporation's cash receipts as outlined by Adamson and Taylor, In particular, the deposits do not appear to reflect the increasing amount of cash that I believe the corporation received from its distributors (and direct purchasers) in 1998, 1999 and 2000. [Footnote 15: In the summer of 2000, Metabolife modified its business plan to include selling to major corporate retailers - such as Casto and Long's Drugs. Due to the low prices that these large chains were charging their customers (as they purchased and sold on huge volumes), it no longer made sense for smallish distributors to sell Metabolife 356 (as their profit margin was too small).]
D. Cash Skimming
41. A number of former employees, including the Chief Financial Officer, JefT Anderman offer an explanation for the company's failure to declare all of its cash receipts. According to Anderman, during 1997 and 1998, Ellis, Bradley and Blevins were "skimming" large amounts of cash from the operation (before the cash receipts were deposited into the corporation's bank accounts). Anderman explained that the three principals were able to siphon off the cash because the company's accounting was closely controlled by Bradley. [Footnote 16: Amazingly, Metabolife's banking statements were sent not to corporate headquarters, but directly to Bradley's personal residence. This practice continued up to and including January. 1999. Subsequently, the statements were sent to Metabolife corporate headquarters.]
42. Even though Anderman was the Chief Financial Officer, he professed to have no knowledge about the exact procedures utilized to track the cash coming into the operation through the wiIl-call counter. The tracking of cash was directed by Bradley and Pat Vella -- the head of the Accounting Department and the company's Controller. Vella was aided in tracking cash receipts by the Accounting Manager, Mara Morrison-Lettau, and another accountant, Mary Ellison.
43. Anderman added that Bradley had bragged about setting up a bank account in Switzerland to hide the cash skimmed from the corporation, Bradley indicated that he had used a Beverly Hills attorney. Howard Fisher, to set up the overseas bank account. A review of Martindale Hubble reveals that Howard S. Fisher has a legal practice located at 315 S. Beverly Dr., Beverly Hills, California.
44. Anderman also indicated that Ellis and Blevins had examined the possibility of setting up off-shore bank accounts in the Cayman Islands. He also stated that Ellis, Bradley and Blevins believed that they could make money "untraceable" by using a web of Limited Liability Corporations ("LLCs") set up by the owners. [Footnote 17: My review of public records, individual tax returns and corporate 10995, confirmed the presence of a large number of corporations (many of which received substantial payments from Metabolife) connected to Ellis, Bradley and Blevins. These corporations included: ANJ Inc., Area Holdings LLC, Area 8 Company, Area 8 LLC, Area 52 LLC, Auto Auction Auto Center, Auto Storage Auction Pool, BCHP Holdings LLC, BE Marketing Voluntary Employees Beneficiary Plan and Trust (C), Biocrave Health Products LLC, The Bradley Foundation, Bradley-Present.ElIis Properties, The Canyon Holding Trust, Carol Canyon Properties, Charter World International Ltd., Crown China Trading Ltd., Crystal River Development LLC, Crystal River Development II LLC, Eagle heart Trust, Eastern Nutrition Solutions LLC, The ENS Trust, Foslip of California Inc., Great Giant Holdings Ltd., Hacienda Vallecitos, lOTS LLC, Ironhorse Land Company LLC, ISM of Tucson Inc., The La Playa Trust, MBM Distributors LLC, Metabolife Health Food Development Co. Ltd., Metabo!ife International LLC, MLB PRC, The Michael L. Blevins Foundation, The Mike Ellis Family Irrevocable Trust, MI Guaranty Corp., Mohawk Street Properties LLC, NAJ Distributors, NJA Distributors, 588 Productions LLC, Quality Manufacture Ltd., Real Women Publishing LLC, Ricardo Center Properties LLC, Roaring Fork River Holdings LLC, Sagestone Entertainment LLC, Sagestone Inc., Sagestone Music, SDCH Trust, SO Canyon Holdings LLC, Sentenac Cattle, Company LLC, Sino Fields Investments Ltd., Solidus Property Systems Inc., Tita Inc" Tatanka Resources LLC, Tumbleweed Ventures LLC, Tumbleweed Ventures Trust LLC, Via Del Mar LLC, War Paint LLC, War Paint Trust LLC, and WRB Management LLC.]
45. Ken Dix (former in-house counsel) heard "rumors" around the Metabolife office that Ellis, Bradley and Blevins had skimmed large quantities of cash from the will-caIl counter. Dix also noted that Ellis and Bradley paid for their houses and other items with large amounts of cash. According to Dix, Bradley hated to pay taxes and Metabolife maintained multiple sets of books to disguise its true financial activities. [Footnote 18: Dix also noted that the owners had previously destroyed corporate books and records to cover up their activity. Furthermore, he believed that if served with a subpoena they would again destroy any incriminating documents rather than turn them over to the Government.] Dix also stated that all three owners had off-shore bank accounts -- Bradley in Switzerland and Ellis and Blevins in the Cayman Islands.
46. The failure of Metabolife to report large amounts of cash receipts was also noted by Al Golden -- a Certified Public Accountant hired to value the company. After being hired by Metabolife, Golden became friends with Metabolife's outside, corporate CPA, Michael Compton. Compton confided a variety of concerns regarding Metabolife to Golden. These concerns included the fact that the corporation was not declaring all of the cash that it received from distributors.
47. Compton told Golden that Bradley, Ellis and Blevins each had over $1 million in unreported cash concealed in safes within their homes. According to Compton, he had personally seen the cash (prior to mid-1998) in the safes at both Bradley and Ellis' homes.
48. Compton also related how he traveled to New York City along with Bradley, Ellis and their attorney, John Lauer, to set up off-shore bank accounts and trusts. Compton also told Golden that this group also made a trip in December 1997 (or early 1998) to the Cayman Islands to set up off-shore accounts. [Footnote 19: A review of information from the Treasury Enforcement Computer System reveals that both Bradley and Ellis did, in fact. travel to the Cayman Islands in December 1997. These records also show that Bradley traveled to Europe in November 1998. It should also be noted that Blevins would have most likely been unable to lawfully leave the United States at that time (without prior approval) as his supervised release term did not end until April 7. 2001.]
49. Compton also told Golden that he had prepared Bradley's personal and business tax returns. These returns included Bradley's Towing, Inc. -- a towing company located at 6980 Mission Gorge Road. # C. San Diego. California. According to Compton. Bradley was also skimming large amounts of cash that he received through the sale of cars by Bradley's Towing.
50. In approximately early 1998, Compton asked Golden his opinion on Compton's potential criminal liability based on his knowingly preparing corporate tax returns which did not reveal all of the cash received by either Metabolife or Bradley's Towing, Golden advised Compton that he thought he might be criminally liable.
51. Mike Rothmiller (former Public Relations Officer) also heard around the office that millions of dollars in cash were not properly accounted for on Metabolife' s official books and records. On one occasion. Rothmiller indicated that he observed a flow chart on the desk of the company controller. In addition to the name of Ellis. Bradley and Blevins. the chart also contained the names of the Chief Operation Officer (Larry Miller) and the Chief Executive Officer of Metabolife Beijing. LTD China (Steven Eng). Rothmiller noted that the chart appeared to trace the flow offunds from the principals through the British Virgin Islands (and a number of other small countries) to the Republic of China. [Footnote 20: Rothmiller also stated that he observed a similar chart contained in Larry Miller's computer files on the Metabolife network. He indicated that he was able to access the computer files of other directors as he was sufficiently high up in the company hierarchy.]
52. The illegal siphoning of cash from Metabolife was also raised in three separate anonymous letters. The first anonymous letter was sent in the fall of 1998 to the IRS Criminal Investigative Division in Laguna Niguel, California. This letter indicates that its author lIoverheard two sources" discussing how "an accountant by the name of Michael Compton" assisted Ellis and Blevins "divert cash from Metabolife , . . ." The letter also indicated that both individuals had large amounts of cash in their home safes.
53. This first letter also detailed how Compton had assisted several clients (including Ellis and Blevins) in evading the payment of taxes, hiding income, and "protecting their assets through the use of off-shore trusts in the Cayman Islands, Mauritius and the Isle of Man." According to the letter, Compton and Ellis traveled to the Cayman Islands, but Blevins could not go because he was on probation.
54. The letter also discusses how: (1) AI Golden started to work with Compton, but . stopped because of concerns regarding Metabolife; and (3) an attorney named John accompanied Compton and Ellis to the Cayman Islands.
55. The second anonymous letter was received by the IRS on November 18, 1998. This, letter indicated that the author had "first hand" knowledge that a tax fraud was being committed by Ellis, Blevins and Bradley. The author indicated that the letter was being written anonymously because "[w]e" have concerns about the safety of "our families" and had "already been told that [someone would] get hurt."
56. This letter indicated that Ellis and Blevins were felons who had failed to report approximately $6 million in cash revenue. In particular, the letter states that Ellis, Blevins and Bradley "did it by using separate bank accounts in 1997. They would deposit into the first account the reimbursement payments for advertising from the distributors; then replace the cash deposits by check transfers from the other accounts to match the deposits into tbe first account for Metabolife and Auto Donations Auto Auction (changing the sales contract). [Footnote 21: The third anonymous letter was sent to Congressman Brian Bilbray, Senator Barbara Boxer, Senator Dianne Feinstein, the Department of Labor, Office of Labor Racketeering, and the Internal Revenue Service on October 12, 1999. The author of this letter indicates that he/she currently worked for Metabolife and would not share their name because of "fear of extreme retaliation." The letter than goes on to generally describe a tax fraud amounting to "many millions of dollars.]
E. Concealment or Cash Skimming & Undisclosed Bank Accounts
57. The scheme generally outlined in the November 18, 1998 anonymous letter was also alluded to by Metaboife's former Chief Financial Officer. According to Anderman, Michael Compton alerted him to the fact that cash was being skimmed from the Corporation sometime in 1999, Compton explained that it was not possible to take randomly cash from the will-call counter because it was necessary for Metabolife to keep an accurate record of the amount of money it was receiving from individual distributors. Moreover, it was imperative for the company to know how much money it received from individual "down-line" distributors as that was the only way it would be able to know how much in commissions to pay each "up-line" distributor. [Footnote 22: As previously discussed, Metabolife distributors were entitled to commissions for sponsoring other distributors, Under the company's marketing plan, sponsoring distributors were entitled to a commission of$20 for every case of Metabolife 356 that was purchased by "down-line" sellers that they had brought into the Metabolife fold. Therefore, it was possible for distributors to make sizable amounts of money simply by signing up new distributors.]
58. For example, if a ("down-line") distributor purchased 10 master cases (120 cases) of Metabolife 356 for $33,000 - the sponsoring ("up-line") distributor would be owed $2,400 ($20 per case x 120 cases). This commission system rendered it imperative for Metabolife to record scrupulously the amount of Metabolife purchased (and thereby the amount of money paid) by individual distributors who paid cash at their will-call counter.
59. As a result, cash could not be skimmed from the system (thereby decreasing the amount of sales credited to a distributor) unless sellers were still somehow credited with the full amount of their sales, Anderman related that Bradley was able to siphon off large amounts of cash without short-changing the distributors by substituting the skimmed cash with checks totaling an equal amount.
60. In order to have a supply of unaccounted for checks (to use as a substitute for the skimmed cash), Bradley maintained two different "off the books" bank accounts at Bank of America: Metabolife's "Clearing Account" (# 11320-09954) and Metabolife's "Primary Account" (# 11322- 11395). These accounts were classified as "off the books" by the corporate CPA, Michael Compton. [Footnote 23: A review of records obtained from the Bank of America revealed that all correspondence related to these accounts were sent directly to Bradley's personal residence.] The accounts were funded with checks sent to Metabolife from individual distributors who wanted to run specific advertising targeted at their local markets. [Footnote 24: Metabolife prohibited individual distributors from originating their own advertising. As a contractual matter, Metabolife insisted on running all ad campaigns on the distributors' behalf. The distributors would then have to reimburse Metabolife for the cost of the advertising that they had requested.]
61. Anderman stated that he had no knowledge of these accounts (even though he was Metabolife's CFO) until he later was told of their existence by Compton. After learning of these off- the-book accounts, Anderman confronted Bradley and Ellis. In response, they claimed that the accounts were set up for the purpose of hiding money from potential litigants. [Footnote 25: According to a review of COUJ1 records, it appears that Metabolife continually faced a variety of product liability and other lawsuits.
62. Bradley and Ellis told Anderman that jt was originally Compton's idea to set up the Primary and Clearing accounts. They assel1ed that it was also Compton's idea to fund these accounts by using money generated from advertising reimbursement checks, Rather than book the reimbursement checks as income (or an offset to advertising expenses) the funds were just transferred to these off the books accounts. [Footnote 26: On June 26,2002, Golden left a message at Compton's present offices located at 2423 Camino Del Rio South, Suite 202, San Diego, California. Compton returned Golden's call a short time later. In their subsequent discussion, Compton admitted knowing what Ellis, Blevins and Bradley were doing with the off the books accounts, but denied taking an active role, However, he told Golden that he believed that their conversation was being monitored by other people.
63, A review of deposited items from the Primary and Clearing accounts reveal hundreds of individual deposits between August 19, 1997 and February 17, 1998, In total, Metabolife deposited approximately $1,3 77,791.45 in advertising reimbursement checks from approximately 25 of their larger distributors.
64. A review of withdrawal items from the Primary and Clearing accounts reveals that approximately $808,602.98 in checks were deposited into Metabolife's main ("on-the-books") bank account. An analysis of these deposits reveals that they begin exactly when Metabolife's cash deposits begin to decline mysteriously. Furthermore, they appear to offset roughly the amount of cash that Metabolife would be expected to have deposited in any given month.
65. For example, as previously noted, in August 1997, the amount of cash deposits into Metabolife's main account dropped from to $12,087.32 from over $60,000 (in July 1997). At the same time, Bradley and Ellis wrote $60,571.64 in checks from the clearing account that were deposited into Metabolife's main corporate account. Similarly, in September 1997, when the amount of cash deposits falls to only $356,36, the amount of checks deposited from the clearing account increase to $105.621.26. This trend continued through the end of ]997. [Footnote 27: In October 1997, only $338.80 in cash was deposited. but $151,968.39 in checks were deposited from the clearing account. For the next two months the figures break down as follows: in November 1997, only $656.05 was deposited in cash, but $205,678.77 was deposited in checks; in December 1997, less than $100 was deposited in cash, but $143,226.47 was deposited in checks.]
66. In 1998, the amount of cash deposited into the Metabolife corporate account increased significantly. Nevertheless, for the first two months of the year, Ellis and Bradley deposited $139,058.45 in total checks from the clearing and primary accounts. This activity would have been consistent with the increasing amount of cash taken in at the will-call counter over the course of 1998.
67. Therefore, a review of the records substantiates both the allegations contained in the second anonymous letter and the scheme outlined by Jeffery Anderman. These records show how checks (signed by both Bradley and Ellis) were drawn from the off-the-books accounts and deposited into Metabolife's main corporate account. Further, they show how the amounts of these checks corresponds with similar amounts of cash deposits that appear to be missing based upon the typical amount of sales and cash deposits made by Metabolife in prior periods, Indeed, in my opinion, it appears from my review of the subpoenaed records, that substantially more than $1,377,817.56 (the amount of checks deposited from the primary and clearing accounts) in cash may have been skimmed from the corporation.
68. In short, the above activity allowed Metabolife to conceal a significant portion of their income from the IRS and any potential creditors, It is my opinion that Metabolife -- utilizing the above scenario -- failed to report as income on their books and records a significant amount of the cash received at its will-cal! window. Further, the corporation disguised its siphoning off of cash by transferring advertising reimbursements that would have otherwise been picked up as income - but for their being placed temporarily in off-the-books bank accounts.
F. Cash Skimming & Bradley's Towing
69. As previously indicated, Michael Compton also prepared tax returns for Bradley's Towing, Inc. According to Anderman, Compton told him that Bradley was also skimming large amounts of cash that he received through the sale of cars by Bradley's Towing.
70. Similarly, Golden stated that Compton admitted knowingly preparing returns for Bradley that failed to report all of the cash from his towing business. In particular, Compton stated that Bradley sold many cars for cash that he did not put on the company books. According to Compton, these sales generated a large amount of undeclared cash. [Footnote 28: In his June 26, 2002 conversation with Golden. Compton also stated that the skimming of cash by Bradley's towing was just hearsay. Once again, it should be noted that he also told Golden that he believed that their conversation was being monitored by other people.]
71. A review of withdrawal items from the Primary and Clearing accounts appears to corroborate Compton's statements to Anderman and Golden, In addition to the checks written to Metabolife. approximately $484.468.16 in checks were also written from these accounts to Bradley's Towing. Auto Storage Auction Centre ("ASAC") and Auto Storage Auction Pool ('"ASAP"). [Footnote 29: A review of IRS records reveal that ASAC and ASAP are businesses owned by Bradley related to his towing company.] Based on my experience and training and a review of the information obtained in this case, it is my opinion that BradJey was using the checks drawn on the primary and clearing accounts to cover his siphoning of cash from his automobile businesses.
72. Such a conclusion is also suggested by two of the anonymous letters. The first anonymous letter specifically stated that Compton helped Bradley "run double books to hide transactions," The second anonymous letter discussed the use of separate bank accounts by Ellis, Blevins and Bradley to evade taxes in 1997. Among other things, this letter stated that "[t]hey would deposit into the first account the reimbursement payments for advertising from the distributors; then replacing the cash deposits by check transfers from the other accounts to match the deposits into the first account for Metabolife and Auto Donations Auto Auctions (changing the sales contract)." (emphasis added).
G. California Creative and B.E. Marketing
73. California Creative is an advertising and marketing agency located at 7830 Clairemont Mesa Blvd., San Diego, California 92111. Its President (and sole shareholder), Stephen K. Horn, is a long-time friend of Michael Ellis, A review of partial bank records of California Creative, reveals that the agency deposited numerous checks that were issued by D.E. Marketing.
74. According to Anderman, B.E. Marketing was one of Metabolife' s holding companies. In this capacity, it functioned as the company which owned most of Metabolife's capital assets. RE. Marketing would then lease these assets back to Metabolife. [Footnote 30: On September 8, 2000, RE. Marketing merged with Metabolife and ceased operation as an independent corporation. ]In other words, B.E, Marketing appeared to have been basically a "shell corporation" acting to hold assets belonging to Ellis, Bradley and Blevins.
75. Among other things, Ellis, Bradley and Blevins utilized B.E. Marketing to pay for MetaboIife's considerable advertising expenses. My review of subpoenaed bank records revealed that between March 24, 1997 and June 23, 1999, Metabolife issued over $86 million in checks to B,E. Marketing. In turn, B.E Marketing paid millions of dollars of these funds to California Creative. [Footnote 31: In addition to checks to California Creative Enterprises, Inc" I observed checks to California Productions, Advanced Advertising and California Creative. According to bank records, the latter three concerns are simply other names under which California Creative Enterprises, Inc. conducted its business.] For example, in 1998 alone, B.E. Marketing issued over $25 million in checks to California Creative.
76. Ken Dix also indicated that California Creative served as the main advertising firm utilized by MetaboIife. According to Dix, California Creative both prepared the advertising copy and purchased the radio time (through brokers), It was Dix' belief that the amount of money that Metabolife paid (to California Creative) for the radio time far exceeded its actual cost. It was Dix' opinion that California Creative must have been "kicking back" part of this overpayment to Ellis, Bradley and Blevins.
77. Dix also noted that Metabolife Controller, Pat Vella, could supply further information on overbilling by California Creative. In particular, he believed that because of his position, Vella would have been aware that the actual advertising costs could not be reconciled with the actual advertising tickets. According to Dix, advertising tickets were generated each time an advertisement was actually run on the radio. However, these tickets did not match the amount of radio time for which Metabolife was billed by California Creative.
78. Anderman also believes that Ellis, Bradley and Blevins were receiving improper kickbacks from California Creative. According to Anderman, Metabolife hired an outside accounting firm to produce "audited financial statements." In preparing the company's financial statements, the accounting firm (Jossoy, Graff & Douglas) examined approximately $80 million of Metabolife's advertising expenses.
79. The initial review of these expenses revealed that Metabolife had been billed for tens of millions of dollars in radio time that was not supported by advertising tickets from the relevant media outlets. Because the auditors were not able to reconcile this discrepancy (and the fact that advertising was the company's single largest expense), the auditors withdrew from the audit. As a result, the company was not able to obtain audited financial statements.
80. Mike RothmiI!er also indicated that Metabolife principals may have been receiving improper kickbacks from California Creative. It was Rothmiller's opinion that the payments to California Creative were far larger than were necessary to support Metabolife's advel1ising expenses, Rothmiller also noted that there was something very suspicious about the nature of Stephen Horn's relationship with Mecabolife.
81. Based on the above and my experience and training, it is my opinion that Metabolife had entered into an agreement allowing California Creative to overcharge it for advertising expenses. In exchange, California Creative would kick back a portion of the excess charges to the owners of Metabolife. This would allow the owners of Metabolife to reduce Metabolife's taxes by deducting the inflated advertising expense. In addition, if the kickbacks were paid in cash (or in some other secretive manner), the owners could avoid paying personal tax on that amount. [Footnote 32: My review of Ellis, Bradley and Blevins' personal tax returns failed to reveal any income from California Creative.]
H. Corporate Tax Returns
82. As previously noted, a comparison of Metabolife' s bank deposits and its corporate tax returns (Form 1120S) for the tax years 1996, 1997, 1998 and 1999, reveals major discrepancies. Among other things, it appears that Metabolife is depositing into its bank accounts millions of dollars more than it is declaring on its tax returns.
83. A review of Metabolife's 1996 corporate tax returns (Form 1120S) reveals that the company declared $779,315 in receipts from the sale of Metabolife 356. However, a review of Bank of America records reveals that $909,547.14 was deposited into the corporate bank account. The returns do not indicate to what the extra $130,232.14 was attributable.
84. This pattern of total deposits exceeding total sales continues for che next several years. In 1997, Metabolife's bank records indicate that the corporation deposited approximately $36,206,010.84. My review of these voluminous records suggests to me that almost all of these funds are composed of cash, credit card, money order and check receipts from Metabolife's distributors and retail customers. However, a review of Metabolife's 1997 Form 1120S reveals that the company declared only $31,568,807 in gross receipts from its sales.
85. In 1998, Metabolife's bank records indicate that the corporation deposited approximately $206,433.265.61. However, a review of Metabolife's 1998 Form 1120S reveals that the company declared only $190,475,454 in gross receipts from its sales. The difference between the deposits and receipts for this year was $15,957,811.61.
86. In 1999, Metabolife's bank records indicate that the corporation deposited approximately $433,514,187,87. However, a review of Metabolife's 1199 Form 1120S reveals that the company declared only $360,517,588 in gross receipts fr'om its sales. The difference between the deposits and receipts in this year was $72,996,599.87.
87. In total, it appears that for the tax years 1996, 1997, 1998, and 1999, Metabolife deposited approximately $93,721,847.46 more than it declared as gross receipts on its tax returns. [Footnote 33: Due to the fact that Metabolife was being operated as a Subchapter "S" corporation, corporate profits should "flow through" to Ellis, Bradley and Blevins (the shareholders), A review of Ellis, Bradley and Blevins' Forms 1040 reveals that the income reported by the individual taxpayers is consistent with the amount of income being repol1ed by Metabolife. Accordingly, if Metabolife is understating its overall income, this would have the effect of understating the income appearing on the shareholders' individual tax returns.] My cursory review of the voluminous deposits appears to support the conclusion that almost all of the deposited items are attributable to the sale of Metabolife 356. However, it remains possible that this discrepancy may be attributable to other lawful explanations. To date, I have been unable to discern any other reasonable explanation for the corporation's failure to declare Income commensurate to the gross deposits. [Footnote 34: The fact that the declared gross receipts were far less than the total deposits might be attributable to, among other things, redeposits, one-time special deposits (e.g., franchise fees), investment income, lease income, foreign currency translation, refunds from vendors, sale of scrap, loans or investment in capital. However, none of these explanations would be likely to account for. a short-fall of over $93 million. Indeed, I believe that the only explanation for a discrepancy of this amount would be the failure of the parties to report large sums of income on Metabolife's corporate tax return.]
88. Metabolife's former Chief Financial Officer was unable to offer any explanation of the short-fall. When questioned about the discrepancy, Anderman simply stated that the reconciliation of the gross receipts with the tax returns would not have been within his duties. Anderman did, however, note that some of the company records (while he was with Metabolife) were closely held by Bradley. My review of the records reveals that Bradley had the Bank of America statements during this period sent not to the corporate headquarters, but to his residence.
89. As previously noted, Ken Dix stated that Metabolife maintained more than one set of books for their financial records. According to Dix, Metabolife would use different records depending on who was asking for information. Based all my experience and training, I know that it is not uncommon for corporations and individuals who are not reporting all their taxable income to maintain two sets of books. [Fotnote 35: It should also be noted that Ellis, Bradley and Blevins maintained dozens of Limited Liability Corporations ("LLC") to hold their assets. According to Anderman, Ellis and Bradley bragged that no one could trace their assets through their web of LLCs.]
90. A review of records obtained from the County of San Diego revealed that 915 Camino Del Mar, Suite 200, Del Mar, California 92014 was purchased by Tumbleweed Ventures LLC on June 15, 1999. According to records maintained by the California Secretary of State, Tumbleweed Ventures LLC is a limited liability corporation formed in the State of Delaware. These records list Michael Blevins as Tumbleweed's general partner.
91. According to Valli White (who was employed as an Administrative Assistant to Michael Ellis from February 2000 to July 200 J), Blevins maintained offices at 915 Camino Del Mar. She indicated that he utilized this office for a variety of business activity, including Metabolife business. Among other things, she stated that Blevins, Ellis, Bradley and others Metabolife employees regularly held meetings at Blevins' offices at 915 Camino Del Mar.
92. White indicated that these meetings were held every Wednesday at noon. They were styled as Metabolife Board of Director meetings and were usually recorded. Bradley's personal assistant, Barbara Teets, would then transcribe the meeting notes,
93. My review of mail sent to 915 Camino Del Mar, Suite 200, Del Mar, California indicates that Blevins appears to be receiving almost all of his business and personal mail at this location. This conclusion is also reinforced by the fact that V.S, Postal authorities have informed me that Blevins has no direct mail service at his Rancho Santa Fe residence. Moreover, he is receiving almost no mail at a Post Office Box (P.O. Box 675754) he maintains at the Rancho Santa Fe Post Office.
94. My review of mail sent to 915 Camino Del Mar, Suite 200, Del Mar, California, indicated that between March 4, 2002 and April 6, 2002, approximately 166 separate pieces of mail were personally addressed to Michael Blevins. In addition, many pieces of correspondence related to his various businesses were also sent to that address, including items addressed to Ironhorse Land Co., The Blevins Foundation, Sagestone Entertainment, and Tumbleweed Ventures.
95. My review of the senders also revealed that Blevins' is receiving both business and personal mail at 915 Camino Del Mar, Suite 200, Del Mar, California. These senders include, American Airlines, America West Airlines, Bicycle Warehouse, Direct TV, Disneyland Resorts, Gary and Williams Dental Care, Hold Everything, Pool Systems, Visa Platinum, Project Wildlife, Sammy's Pizza, San Diego Culinary Institute, Self Realization Fellowship, Treasures Furniture and the Zoological Society,
96. My review also revealed that Blevins is utilizing Suite 200 to receive banking information and materials directed to some of his limited liability corporations, In addition, Metabolife is sending correspondence to Blevins and Ironhorse Land Company LLC at that address,
97. According to records maintained by the California Secretary of State, Blevins is utilizing 915 Camino Del Mar, Suite 200, Del Mar, California as the mailing address for most of his limited liability corporations, including Area Holdings LLC, Area 52 LLC, Carol Canyon Properties LLC, Eastern Nutrition Solution LLC, Ironhorse Land Company LLC, The Michael L. Blevins Foundation, Ricardo Center Properties LLC, Sagestone Entertainment LLC, Sagestone Inc., Sagestone Music, SD Canyon Holdings LLC, Tumbleweed Ventures LLC, Tumbleweed Ventures Trust LLC and War Paint LLC. 3CH Holdings LLC (a limited liability corporation tied to Ellis' wife, Monica) also receives mail at suite 200.
98. On May 29, 2002, the California Department of Motor Vehicles (on May 29,2002) indicated that Michael 1. Blevins registered his) 999 Porsche 911 (license number 4CKR818), his 2001 Toyota Sequoia (license number 4SED459), and his 2001 Mercedes SK600 (license number 4SDR736) at 915 Camino Del Mar, Apt. 200, Del Mar, California 92014. These same records also indicated that Blevins was presently utilizing this same address on his California Driver's License.
99. On May 29,2002, a review of IRS records revealed that Blevins utilized 915 Camino Del Mar, Suite 200, Del Mar, California as his address on his 2000 Form} 040. Similarly, a review of records provided by Pacific Bell indicate that Blevins' home telephone (located at 7583 Saint Andrews Road, Rancho Santa Fe, California) is billed to Danica Campbell (Blevins' wife) at 915 Camino Del Mar, Suite 200, Del Mar, California,
100. On May 29, 2002, I confirmed with Pacific Bell that (858) 350-0915 was subscribed to by the Ironhorse Land Company and located at 915 Camino Del Mar, Suite 200, Del Mar, California. At approximately 2:15 p.m., I called (858) 350-0915. The phone was answered by a female who informed me that I had reached the lronhorse Land Company. [Footnote 36: Mike Rothmiller has also confirmed that Blevins conducted his business at Ironhorse.]
101. During my conversation, I was informed that this was also the location of the offices of Michael Blevins, The receptionist told me that Mr. Blevins was in the office, but not presently available as he was in a meeting. She also informed me that Mr. Blevins did not need any assistance with his investments,
102. On June 13, 2002. IRS Special Agent Sara Brana walked into Suite 200 at 915 Camino Del Mar, Del Mar, California. Upon entry, Agent Brana was met by a woman who informed her that she was at the offices of lronhorse Land Co. Agent Brana (who inquired about renting office space), was also informed that the parking lot of the building was usually fairly empty, except for Wednesday's when Metabolife held their board meetings. Prior to leaving, Agent Brana noted the presence of a number of computers in the lronhorse office.
103. According to records maintained by San Diego County, Michael
Blevins: The Canyon Holdings Trust owns the property located at
7583 Saint Andrews Road. Rancho Santa Fe, California 92067. As
previously indicated, a review of records provided by Pacific
Bell indicate that phone number (858) 756-1752 is located at 7583
Saint Andrews Road. These records also indicate that this phone
is billed to Blevins' wife, Danica Blevins, at 915 Camino Del
Mar, Suite 200, Del Mar,
California. [Footnote 37: Records obtained from the San Diego County Tax Collector indicate that Michael L. Blevins is paying the property tax for the parcel located at 7583 Saint Andrews Road. Rancho Santa Fe, California 92067. These records also show that Blevins is using 915 Camino Del Mar, Suite 200, Del Mar, California 92014 as the billing address.]
104. On numerous occasions over the last several months (up to and including mid-June 2002), I have observed different vehicles that are registered to Michael Blevins parked in the driveway of 7853 Saint Andrews Road. My review of the trash being discarded from this address (including a copy oCthe couples prenuptial agreement) also confirms that it is the current home of Michael and Danica Blevins.
105. On May 10, 2002, I retrieved numerous items of trash which revealed that they had originally been sent to 915 Camino Del Mar, Suite 200, Del Mar, California. It is, therefore, clear that although Blevins receives his mail at his office, he does take specific items home. While these items appear to be mostly personal, I did observe items that appear to have been sent from Valley Financial and Downey Savings. [Footnote 38: As previously noted. Michael Compton (Blevins' accountant) told Golden that Blevins had over $1 million in unrepol1ed cash concealed in a safe located in his home.]
106. IRS Revenue Agent Michael Melaney has informed me that
he has worked as a
Revenue Agent for over 19 years. In this capacity he has audited literally hundreds, if not thousands, of tax returns. Based on his experience and training, Agent Melaney stated that individuals who have skimmed large amounts of cash (or otherwise committed tax evasion) frequently have large cash hordes contained at their residences. Such individuals also tend to keep personal financial records (such as foreign bank account information) at their home in order to conceal them from their business associates and law enforcement.
107. A review of IRS records confirmed that Blevins has utilized
large amounts of cash
during various business transactions. For example, on or about February 6, 1998, Blevins paid for $12,470 worth of furniture using cash. Similarly, on or about June 18,2001, Blevins purchased a 2001 Mercedes Benz S600V for approximately $129,222. In completing this transaction, Blevins paid the dealership $80,000, in cash.
108. Based on his experience and training, Melaney stated he
that in an extremely wealthy and sophisticated businessman such
as Blevins would also normally maintain at his residence documents
showing the receipt or disbursement of cash (including but not
limited to credit card statements and receipts), personal income
tax returns (including but not limited to: Forms 1040, and supporting
information documents such as 10995, 1065s, W~2s and K-1s), personal
bank records (including but not limited to: statements, check
registers, passbooks, deposit and withdrawal slips, canceled checks,
certificates of deposit, notes, wire tranfers, account applications,
negotiable instruments, safety deposit box records and keys; money
drafts, letters of credit, money orders, cashiers' checks and
receipts for same, bank checks and wire transfers), financial
related documentation), books, records, receipts and other items evidencing the obtaining, secreting, transfer and/or concealment of assets, receipts 'and invoices for expenditures, records relating to offshore banking (including but not limited to Switzerland and the Cayman Islands), and addresses, appointment and/or telephone books and/or papers reflecting names, addresses, telephone numbers and his meeting times.
109. On June 29, 2002, at approximately 12:02 p.m., I called (858) 756-1752 -- the phone number that Pacific Bell indicated was located at 7583 Saint Andrews Road, Rancho Santa Fe, California. Although the phone was not answered, a message machine announced that I had reached the residence of Michael and Danica Blevins.
110. Based upon my training and experience, I am aware that individuals involved in illegal activities maintain books, receipts, notes, ledgers and other records to conduct their illegal activities, even though such documents may be in code form. I am further aware that it is common for individuals involved in illegal activities to hide proceeds (including, but not limited to, currency, financial instruments, and other items of value and/or proceeds of the illegal activities, and records of illegal activities) in both their homes and offices.
111. Based upon my training and experience, I am aware that violators use and maintain records, documents, and files (written, printed, magnetic, and electronic) that are evidence of criminal acts and reflect the receipt and disposition of illegally obtained proceeds of income.
112. Based upon my training and experience, I am aware that individuals involved in this type of illegal financial fraud activity often use aliases, fictitious names, or false identification cards to avoid detection. I am also aware that these individuals very often place assets in names other than their own (or in limited liability corporations, partnerships or other legal entities) to avoid detection of these assets by law enforcement agencies. I am further aware that even though these assets may repose in other persons' (or entities) names, these individuals act as the beneficiaries and continue to use these assets and exercise dominion and control over them.
113. Based upon my training and experience, I am aware that individuals involved in illegal financial fraud activities amass large proceeds from these activities, and that these individuals often attempt to legitimize these proceeds. I know that to accomplish these goals, these individuals utilize a number of vehicles and mechanisms, including, but not limited to: foreign and domestic banks and their attendant services, securities, cashiers' checks, money drafts, letters of credit, brokerage houses, real estate, shell corporations, and business fronts.
114. Based upon my training and experience, I am aware that it is common for individuals involved in illegal activities to travel to areas in which they can facilitate these illegal activities. I know that the methods of transportation include, but are not limited to: commercial airlines, rental and private automobiles, taxi and livery services, trains, busses, trolleys and subways.
115. Based upon my training and experience, I am aware that individuals involved in money laundering activities and other illegal financial fraud activities at times attempt to conceal substantial wealth from law enforcement authorities, and in particular the IRS, if they have acquired such wealth from illegal activities or are attempting to evade the proper tax liability resulting from such wealth.
116. Based upon my training and experience, I am aware
that unexplained wealth is .
probative evidence of crimes motivated by greed, including but not limited to, money laundering, mail fraud, and tax evasion.
117. Based upon my training and experience, I am aware that it is customary for people to retain financial records at both their homes and offices. Records and documents can be stored in electronic or hardcopy form, including but not limited to, computer printouts, computer disks, zip disks, hard drives, other memory storage media.
[Footnote 39: Based on my experience and training, and discussions with other federal agents, I know that to properly retrieve and analyze all electronically stored (computer) data, and to insure accuracy and completeness of such data and to prevent the loss of the data either from accidental or programmed destruction, requires both on.site and laboratory analysis by a qualified computer specialist. To effect such accuracy and completeness requires the seizure of all computer equipment and peripherals, the software to operate them, and related instruction manuals. It should also be noted that the software with the computer is almost always used to create the evidence and without manuals it may be difficult if not impossible to retrieve the data.
According to IRS Special Agent Roger Lange, searches and seizures of evidence from computers typically requires an examination by a qualified computer expert in a laboratory or controlled environment. This is almost always true because computer storage devices (like floppy disks, hard diskettes, tapes, CD-ROMs, DVDs, flash medium and others) can store the equivalent of thousands of pages of information. Especially when the user wants to conceal criminal evidence. he or she often stores it in random order with deceptive file names. This requires searching authorities to examine all the stored data to determine whether it is included in the warrant. This sorting process can take weeks or months, depending on the volume of data stored, and it would be impractical to attempt this kind of data search on site.
In addition. searching computer systems for criminal evidence is a highly technical process requiring expert skill and a properly controlled environment. The vast array of computer hardware and software available requires even computer experts to specialize in some systems and applications, so it is difficult to know before a search which expert should analyze the system and its data. The search of a computer system is an exacting scientific procedure which is designed to protect the integrity of the evidence and to recover even "hidden", erased, compressed, password-protected, or encrypted files. Since computer evidence is extremely vulnerable to tampering or destruction (both from external sources or from destructive code imbedded in the system as a "booby trap"). the controlled environment of a laboratory is essential to its complete and accurate analysis.
In order to fully retrieve data from a computer system, the analyst needs all magnetic storage devices as well as the Central Processing Unit (CPU). In addition, the analyst needs all the system software (operating systems or interfaces, and hardware drivers) and any applications software which may have been used to create the data (whether stored on hard drives or on external media). A member of the IRS's Computer Team will accompany the searching agents and, if possible. make an image of some or all of the computerized data storage devices will be done on-site to minimize the number of devices seized from the business.]
Records also include audio recordings, video recordings, telephone answering machine recording, memoranda, correspondence, diaries, notes, address books. day planners, calendars, appointment books, newspaper clippings, articles, books, financial institution records, checks, cashiers' checks, money orders, wire transfer records, deposit slips, A TM receipts, certificates of deposit, safety deposit slips, withdrawal slips, monthly and quarterly statements, stock certificates, bonds, bearer instruments, notes, money market account statements, negotiable orders of withdrawal, account documents; letters of credit, passbooks, drafts, title documents, mortgage and loan documents, property records, storage agreements and bills, storage locker keys, vehicle registration and ownership documents, asset ownership records, journals, ledgers, code sheets, financials, budgets, proposals, plans, contracts, agreements, bills of sale, delivery records, invoices, receipts, documentation of conveyances, deeds, and credit card bills and other papers, These records may be in many forms such as paper, electronic, or in code. I know from my experience that people use such software as Quicken to manage their finances and track their investments.
119. Based upon my training and experience I know that persons
who own laptop
computers, disks, zip drives, and zip disks transport them between work and home so that they are accessible at any time.
120. Based upon my training and experience I know that individuals who have failed to declare large amounts of cash frequently maintain books. records, receipts and other items evidencing the obtaining, secreting, transfer and/or concealment of assets, and the obtaining, secreting, transfer, concealment and/or expenditure of money. Similarly, I know that they also maintain records relating to their off-shore banking activity (if they do, in fact, have such accounts). In addition, I know that they maintain addresses, appointment and/or telephone books and/or papers reflecting names, addresses, telephone numbers and their meeting times.
121. Based upon my training and experience, discussions with other federal agents and the above listed facts, 1 believe probable cause exists that Blevins is maintaining: (1) large amounts of cash (and books, records, documents or receipts evidencing the obtaining, secreting, transfer, disbursement and/or concealment of assets); (2) bank records( either off-shore or domestic). Including but not limited to: statements, check registers. passbooks, deposit and withdrawal slips, canceled checks, certificates of deposit. notes, wire transfers, account applications, negotiable instruments, safety deposit box records and keys; money drafts, letters of credit, money orders, cashiers' checks (and receipts for same), bank checks, and wire transfers; and (3) addresses, appointment and/or telephone books and/or papers reflecting names, addresses, telephone numbers and meeting times at his home located at 7583 Saint Andrews Road, Rancho Santa Fe, California 92067.
122. Based upon my training and experience, a review of documents and other relevant information I believe to be reliable, and discussions with other IRS special agents, it is my opinion that Blevins has committed tax evasion.
123. Based upon my training and experience, a review of documents and other relevant information I believe to be reliable, and discussions with other IRS special agents, it is my opinion that the disclosure of the contents of this affidavit might lead to the destruction of evidence or interference with potential government witnesses.
124. Based on all of the above, my experience and training, a review of documents and other relevant information, discussions with other federal agents and all of the above facts and circumstances, it is my opinion that there is probable cause to believe that the following items set forth in Attachment "B" (which is attached to this affidavit and incorporated by reference herein) are present at 7583 Saint Andrews Road, Rancho Santa Fe, California 92067.
125. Based on all of the above, my experience and training, a review of documents, and discussions with other federal agents, it is my opinion that the items listed in Attachment B are fruits, instrumentalities or evidence of Tax Evasion in violation of Title 26, United States Code, Sections 7201, and Conspiracy to commit the above listed offense in violation of Title 18, United States Code, section 371.
Dated July 5, 2002.