Vermilion Man Charged with Operating Financial Schemes That Resulted in Nearly 100 Clients Losing $4.4 Million
|U.S. Attorney’s Office April 23, 2013|
A Vermilion man was charged with financial crimes that resulted in nearly 100 clients losing more than $4.4 million over a decade, law enforcement officials said today.
Richard A. Zakarian, age 47, is charged with two counts each of wire fraud and mail fraud and one count of making and subscribing false income tax returns. Zakarian was a certified financial planner and a self-employed tax preparer who owned and operated several business ventures.
The five-count information details two schemes by Zakarian—one to defraud investment clients (many of whom were also clients of his tax-preparation business), another to defraud clients whose payroll taxes he handled through a company known as Ben Franklin Payroll Service.
Many of the payroll tax victims were churches, charities, and other non-profit organizations that Zakarian lured as clients through purported grants from charity he claimed to operate. The information further details Zakarian’s falsification of his tax returns to conceal his fraudulently generated income from the investment scheme.
“This defendant is accused of taking advantage of trust of dozens of clients, which ranged from homeless shelters and nursery schools to retirees and those with disabilities,” Steven M. Dettelbach, United States Attorney for the Northern District of Ohio, said. “The conduct laid out here is as outrageous as it is predatory.”
Stephen D. Anthony, Special Agent in Charge of the Federal Bureau of Investigations’ Cleveland Office, said, “Zakarian orchestrated multiple financial schemes that all had one common thread, monetary benefit to him. Authorities will continue to bring those to justice that choose to unlawfully violate the trust of their clients.”
“Investment fraud schemes are often described as a house of cards. The underlying structure can fall apart at any time and expose the individuals responsible,” said Kathy A. Enstrom, Acting Special Agent in Charge, IRS, Criminal Investigation, Cincinnati Field Office. “Investment schemes that seem too good to be true should be a signal to investors to stay clear.”
The information filed in U.S. District Court details the following schemes:
The Investment Scheme
From September 2002 through August 2012, Zakarian devised a scheme to defraud investment clients by inducing them to invest their retirement funds, and occasionally other savings, through him as their account representative through false and fraudulent misrepresentations. He primarily targeted clients from his tax-preparation business when they received their tax refunds or sought his financial advice.
Zakarian misled clients to believe their funds would be placed in safe, guaranteed-return investments when, in fact, he diverted the funds to pay personal and business expenses and invested in risky investments for which he had a consistent history of incurring large losses.
Zakarian recruited 25 investment clients, often targeting tax preparation clients who he knew to have available funds and to be vulnerable to his pitch through their lack of financial sophistication and/or prior relationship of trust in him.
While some received a return on part or all of their investment, 23 clients incurred combined out-of-pocket losses of more than $1 million. In addition, the clients did not receive the hundreds of thousands of dollars of gains on their investments that Zakarian falsely reported to them during the scheme.
A number of clients were retired, out of work, or nearing retirement. Most invested through Zakarian by moving their money from traditional, relatively safe, and dependable stocks, bonds, and mutual funds.
In one case, Zakarian convinced a recently retired client to pay an early withdrawal penalty to move money from a certificate of deposit purchased upon retirement. He induced another client to redeem a life insurance annuity to generate investment funds and talked her out of using the money to pay off her home mortgage or car loans.
Until mid-2009, Zakarian obtained use of clients funds primarily by having them place their investments with companies offering self-directed IRA services and then having those companies transfer the funds to Zakarian as investments in promissory notes he issued. Zakarian initially issued the notes personally, as Zakarian Tax Consultants, but later issued them through a shell real estate company, Viewcrest Properties. Zakarian touted the IRA companies to his clients and misled many clients into believing that they were investing in those companies or that the use of the companies would assure the safety of their investments. Due to Zakarian’s misrepresentations, many clients did not realize their investments involved promissory notes.
The Payroll Tax Scheme
Zakarian began his separate payroll tax scheme in 2010 that continued through August 2012.
He induced clients to retain Ben Franklin Payroll Service, which he owned and operated, leading them to believe the company would and did file the client’s required employment tax returns and reports and pay the clients’ federal, state, and local tax obligations.
The funds should have been forwarded to various taxing authorities to pay the income taxes of his clients’ employees. In reality, he failed to file many of the returns and diverted substantial portions of the clients’ funds to pay his own personal and business expenses and invest in highly leveraged, risky investments with a consistent history of sustaining large losses.
Zakarian devised the scheme in hopes of raising money to be able to pay victims of his investment fraud scheme described above. He hoped to generate large, quick profits, which he would use to cover his operating expenses, repay his investment clients, pay his clients’ employment taxes and have money left over; instead, he consistently lost money.
He attempted to solicit for-profit clients by offering services well below market rates and below his own operating costs, such as a rate of $1 per employee per pay period. Later in 2010, after this failed to generate as many clients as he envisioned, Zakarian developed a new plan to solicit churches, charities, and other non-profits through a purported “grant” program. These organizations were targeted as they typically had tight budgets sensitive to payroll costs. Zakarian’s primary objective was to gain access to their operating accounts.
Zakarian began marketing Ben Franklin Payroll Service as being affiliated with Zakarian Charities and the Benjamin Franklin Foundation, organizations established “as an effort to give back to the community.” He offered payroll grants from the Benjamin Franklin Foundation to non-profit organizations to cover two years of free payroll service through Ben Franklin Payroll Service.
To make the grant process appear legitimate, the application required the applicant to submit a one- or two-page narrative history and mission statement, a copy of the IRS tax-exempt determination letter, a list of the Board of Directors, an IRS Form 990 and an annual report, if available. About two weeks after receiving the client’s application, Zakarian sent a congratulatory letter announcing that the Benjamin Franklin Foundation had awarded a two-year renewable grant.
Rather than forwarding the money withdrawn to from his clients’ accounts directly to taxing authorities, Zakarian instructed his employees to transfer the tax funds to a Ben Franklin Payroll Service operating account. Clients were sent false quarterly employment tax returns and payroll summaries, giving the false impression that their payroll taxes were being properly handled.
In total, Ben Franklin had at least 72 clients who incurred combined losses of more than $3.4 milllion from Zakarian’s fraudulent diversion of their employment tax funds entrusted to his company. Just over half of the losses were incurred by at least 29 non-profit organizations, with the rest being incurred by at least 43 businesses.
Zakarian also filed false federal income returns for the years 2006 through 2009, failing to report the income he received from the investment scheme. He filed the 2006 through 2008 returns deliquently in December 2009 after the Ohio Division of Securities requested copies. On the 2006 and 2007 returns, Zakarian also falsely claimed substantial losses on the investments he made with the fraudulently obtained client funds and used those losses to offset other income he earned those years.
If convicted, the defendant’s sentences will be determined by the court after review of the federal sentencing guidelines and factors unique to each case, including the defendant’s prior criminal record, if any, the defendant’s role in the offenses and the characteristics of the violations.
This case is being prosecuted by Assistant U.S. Attorneys Robert J. Patton and John M. Siegel, following an investigation by the Federal Bureau of Investigation, the Internal Revenue Service-Criminal Investigation, the Lorain Police Department, and the Lorain County Prosecutor’s Office. The investigators also received assistance from the Ohio Department of Commerce, Division of Securities.
An information is only a charge and is not evidence of guilt. A defendant is entitled to a fair trial in which it will be the government’s burden to prove guilt beyond a reasonable doubt.