Ex-Client: Michael Avenatti Operated His Law Firm Like a ‘Ponzi Scheme’

Ex-Client: Michael Avenatti Operated His Law Firm Like a ‘Ponzi Scheme’

A former client accused attorney Michael Avenatti of running his firm like a “Ponzi scheme” by using clients’ settlement money to pay off debts, The Daily Beast reports.

Gregory Barela made the allegation in a statement of claims filed with the private arbitration group Judicial Arbitration and Mediation Services. Avenatti has denied the claim.

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

Avenatti disputed the allegations as “completely fabricated, bogus, and fraudlent.”

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

According to the claim, Avenatti and an unnamed third party secured a settlement payment and the third party began to send the money to an account managed by Avenatti to send to Barela. But Barela says Avenatti told him the third party was never paid the money.

According to the claim, Avenatti later offered to lend Barela the money he needed to get by. Instead, Barela hired a new lawyer who found out the third party had been making payments to the Avenatti account.

Law firm confirms Barela’s claim:

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

Experts say Barela’s claim is “extremely serious”:

Gabriel Chin, a law professor at UC Davis, said that the allegation is a “big, big problem” for Avenatti if it is true, comparing it to a postal worker stealing mail.

“They’re guilty of theft. They’ve stolen that money. It’s the same principle,” Chin told The Daily Beast. “The lawyer has the money for a particular purpose, but if they use it for something other than that purpose, then they’ve stolen it.”

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

Allegations against Aveantti continue to mount:

"Last October, The Daily Beast revealed Avenatti was living the high life while his former businesses owed millions in judgments—including $10 million to former colleague Jason Frank—and unpaid state and federal taxes," The Daily Beast reported. "Meanwhile, one of Avenatti’s bygone companies, Global Baristas, which operated the beleaguered coffee chain Tully’s, owes hundreds of thousands to creditors and faces a $5-million federal tax lien. Creditors have filed a petition to place the Washington-based firm into involuntary bankruptcy. It’s unclear who’s in charge of Global Baristas, as Avenatti claimed he sold it for more than $27 million to a new ownership group."