Operation Stolen Treasures

Amid the nation's economic meltdown, financial-conspiracy theories fueled a tax-fraud case for the ages

Operation Stolen Treasures

On a mild August day in 2009, as the country continued to struggle with an unprecedented home-foreclosure crisis, Greg Adkins presented an unusual seminar to a roomful of nervous homeowners at a Holiday Inn just off the 405 freeway in Costa Mesa.

Adkins, the Orange County regional manager of an Fontana-based tax preparation firm called Old Quest Foundation, explained the unique service his company was offering through a series of PowerPoint slides. One of them read, "Credit lenders cannot legally support their claims when they foreclose. The monetary system has been designed expressly for creating default, foreclosures and bankruptcies."

The following Sunday, Adkins' associate, Linda Wilson, delivered a similar presentation at the same Holiday Inn to more people hopelessly underwater on their mortgages. One of her slides read, "When a mortgage is created, your signature on the promissory note creates the funds. They did not exist before then."

Evidence seized in September 2009, when federal agents raided 
Old Quest’s headquarters
Evidence seized in September 2009, when federal agents raided Old Quest’s headquarters
Binders of victims
Binders of victims

Seminars such as these took place on an almost daily basis that summer, with thousands flocking to ad hoc meeting spaces Old Quest rented throughout Orange, Riverside, Los Angeles and San Bernardino counties.

The company's founders, chief executive officer Arturo Ruiz and president Francisco Mendoza, brought together a network of recruiters to lure potential customers from across Southern California with promises of financial salvation. At the time, there was no shortage of people looking to save their homes.

These were no ordinary, get-out-of-debt workshops—attendees learned the United States government, a long-bankrupt entity secretly owned by English banking interests, held hidden bank accounts in their names. Such dubious statements were presented in English and Spanish along with a dizzying array of flow charts, fine points regarding arcane legislation and esoteric monetary policy, references to obscure historical events related to centralized banking, and so much tax jargon it could make your head spin. But the basic idea was simple: The government owes you money.

For people ready to try anything to avoid foreclosure, the message had an obvious appeal. Old Quest enlisted some 250 customers who were swayed by the offer to negate their home loans simply by signing off on special tax-return forms that would be filled and filed on their behalf in exchange for "donations" to the company.

At one such event at the company's headquarters on Sept. 25, 2009, an Old Quest presenter named Harry Farquharson delivered the usual pitch to an attentive audience: "The government has an obligation to pay your debt, dollar for dollar."

Farquharson assured one attendee that no Old Quest customer had ever had his taxes audited. The company had former Internal Revenue Service (IRS) employees on staff to avoid such pitfalls, Farquharson told the man he believed to be a prospective client, but who in fact was an undercover IRS agent recording the presentation with a concealed camera.

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Old Quest was remarkably successful—at its peak of operations, the company was taking in hundreds of thousands of dollars per month. By the time federal agents swooped on the Fontana office with a search warrant in September 2009, the company had netted $1.9 million from its customers and millions more in fraudulent tax refunds.

Last month, Ruiz and Mendoza stood trial in District Court in Santa Ana on charges of defrauding the U.S. government as ringleaders of one of the nation's largest 1099OID scams—a type of tax fraud named after the IRS form abused by its purveyors. Operation Stolen Treasures, as the IRS dubbed its investigation, led to the indictments of 55 people associated with Old Quest and an offshoot company, most of whom still await trial in Orange County.

OID fraud is deeply rooted in pseudo-legal conspiracy theories such as the ones espoused at Old Quest seminars—bizarre claims that have circulated for decades among fringe groups of anti-government radicals. The ideas gained traction with the collapse of the mortgage industry in 2007, triggering a nationwide crime wave that has defrauded American taxpayers of perhaps hundreds of millions of dollars. The Justice Department is currently prosecuting dozens of 1099OID cases from Florida to Washington, and nearly everywhere in between.

Ruiz and Mendoza, both immigrants with little in the way of formal education, seem unlikely masterminds of an attempted quarter-billion-dollar tax scam. But federal authorities say the two men built from the ground up one of the best-organized, most-professional operations in the country.

Ruiz immigrated to the United States from Honduras in the 1970s and worked his way up as a food-service manager at several hotels in Orange County. He began dabbling in real estate in the 1980s. Mendoza, who hails from Mexico, was a truck driver with his own business specializing in delivering materials for the construction industry. Neither man possessed a college degree or any specialized tax training. Both were hit hard by the collapse of the housing market.

The two friends had known each other for a long time, originally meeting through their wives, but they had drifted apart over the years. The financial crisis served to reunite them. Both were struggling to pay their mortgages; together, they went out seeking solutions.

For a year, Ruiz and Mendoza extensively researched a loosely affiliated network of right-wing entrepreneurs, radical tax protestors, anti-government crusaders, self-help gurus and professional fraudsters who constitute a cottage industry specializing in debt solutions that exists on the periphery of the law. The two friends traveled the country, making at least half a dozen trips to attend seminars from Iowa City to Albany. It was after studying under a so-called "sovereign citizen" named John Lloyd Kirk in Seattle that Ruiz and Mendoza concluded they had come across the right business model.

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