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."
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.
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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.
Kirk served four years in federal prison in the early 1990s after being convicted of possessing a pipe bomb. Since his release, he has become a prominent tax defier, hocking DVDs and offering seminars in Washington and Nevada through a company called Indian Nations Advocate Law Office. Kirk's teachings have raked in some $8 million for more than 30 clients through erroneous IRS refunds. In 2011, the U.S. attorney in Seattle sued Kirk to enjoin him from further promoting his tax-fraud scheme.
Equipped with Kirk's methods, Ruiz and Mendoza returned to Southern California ready to strike out on their own—they formed Old Quest Foundation in August 2008 and started selling "land patents" to homeowners who were in default on their mortgages and trying to avoid eviction.
The land-patent program, which Mendoza and Ruiz launched with a meeting at a church, involved little more than the sale of laminated signs warning that the homes displaying them were "sovereign kingdoms" on which trespassing would be considered an "act of war." Homeowners who purchased the signs for $12,500 on installment plans—$2,500 up front, then $1,000 per month—hung them in their windows, believing they invoked precise legal language that would keep bank officials and Sheriff's Department deputies off their property and unable to evict.
The land-patent program never saved anyone's home, but the venture was still so lucrative that by March 2009, Old Quest subleased a two-story office building in Fontana, hired a number of full-time employees, motivated recruiters through healthy commissions, and began offering almost daily Spanish- and English-language seminars that introduced potential customers to what they called their "special program."
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"The United States government took certified copies of all our birth certificates and placed them in the United States Department of Commerce . . . as registered securities. As collateral for our loans. Since you are the only one who gives 'value' to the birth certificate because of your labor, you are the only one who can go to the 'bank' and redeem and regain control of the [your] birth certificate. They took the 'title' to your body, the birth certificate and borrowed money against it. That is exactly what a birth certificate is, A TITLE."
Such imaginative claims were exhibited on PowerPoint slides at every Old Quest presentation. They stem from a decades-old conspiracy theory called Redemption Theory, the brainchild of a white supremacist named Roger Elvick.
A fixture in the militia movements of the '70s and '80s, Elvick is still regarded as a folk hero by many "sovereign citizens" who declare themselves "free" from the jurisdiction of the federal government. He posited that with the birth of every citizen since sometime during the Great Depression, the government has borrowed money against their future labors and deposited that money into a secret account. Adherents often call this account a "straw man"—a fictitious legal persona used by unscrupulous bankers to commoditize every American's life.
Elvick identified a Jewish banking cabal as the administrator of the secret accounts, but more recent incarnations have carefully stepped back from the rabid anti-Semitism associated with the earlier movement. Still, proponents across the country maintain your life is regarded as no more than a traded security controlled by one of several possible bogeymen: a Jewish cabal, the Federal Reserve, the International Monetary Fund, English banks, the New World Order.
Elvick ended up applying redemption theory to a bogus check scam in Ohio that landed him back in prison in 2005. Most of his original compatriots also served lengthy sentences for their attempts to "liberate their straw man" through various pseudo-legal redemption maneuvers.
But the secret-accounts assertion has become a central tenet of many simpatico anti-government movements whose followers believe in its truth with a religious zeal. They call themselves redemptionists, or sovereign citizens, or freemen on the land, and they insist that through filing obscure tax forms and elaborate legal ploys, they can reclaim what is rightfully theirs. Essentially, they want to cash out.
Old Quest presenters would recount at seminars the standard redemptionist historical narrative: In 1917, Congress created the Federal Reserve, surrendering the country's financial system to a few wealthy families. Then, in 1933, President Franklin D. Roosevelt took the United States into bankruptcy. That same year, Congress and Roosevelt abandoned the gold standard and seized all gold held by private citizens. At that point, something happened in which real money ceased to exist, all debt became meaningless, and without knowledge or consent, American citizens became slaves to the corporation that replaced the U.S. government.
"The idea was that a national peacetime emergency was declared in 1933, and it never ended," says Walker Todd, a research fellow at the American Institute for Economic Research.
As with most good conspiracy theories, it's the kernels of truth that make it appealing—that make it possible for intelligent, often-well-meaning people to convince themselves of preposterous notions.
"They'll pick something that has a germ of truth in it, and they'll build some huge, confabulated theory around it," Todd, an expert in tax-fraud schemes, explains.
The truth is that the United States did go off the gold standard in 1933, and ever since then, all public debt has been guaranteed by the full faith and credit of the United States government. The country has citizens who pay taxes, and this dependable base of future tax revenue is what allows the U.S. government to promise those to whom it owes money that it will be able to pay them back sometime in the future.
Where redemptionists start to go off the rails is in taking this promise to not be a deadbeat, backed by the collateral of human capital, quite literally. And in their worldview, not only is every American life treated as a financial instrument, but a record of the transaction is hidden in plain sight, as well. It's called your birth certificate.
The evidence offered for this can be laughable—something about names entered in all capital letters, birth certificates printed on bond paper, someone once claiming he found his social security number on a stock-tracking site.
Elvick tabulated a very precise dollar amount for the initial birth bond offering: $630,000. Apparently, that is the amount that an average American citizen will pay in income tax over the course of his or her lifetime.
But if you're making up numbers, why stop at just more than half a million? Greg Adkins, Old Quest's Orange County manager, sent an email to several customers on July 6, 2009: "Yes, your birth cetificate [sic] is a traded stock. I found mine. My birth Cetificite [sic] is worth 24.8 Million right now."
And that is the source from which you can rightfully reclaim, from the government treasury, which really is just a private corporation, money that is really yours, if you learn the secret of how to go about doing so, which the IRS does not want you to know. And the secret often has something to do with an Original Issue Discount.
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On its face, the IRS form 1099OID is a rather ho-hum document, which specialized accountants will explain to you involves something about declaring interest income derived from certain types of zero-coupon bonds upon their maturity. But properly invoked, the 1099OID is purported to hold nearly mystical powers. The Old Quest presentation explained the Original Issue Discount as something quite extraordinary: money, created from your signature. You are the issuer of the money.
Ruiz and Mendoza claimed the OID process was the "remedy" Congress was forced to provide citizens after it confiscated all their gold. The process has been known to the elite since 1933, they told customers, but not until 1954 did the IRS implement it for the rest of us. Not that the IRS wanted us to know about that.
The manner in which Old Quest went about misusing the 1099OID, however, is actually a fairly recent innovation, first cropping up in various noteworthy tax schemes around 2005. Since then, true believers and profiteers alike have confidently stated they have finally discovered the true, proper, legal, effective method of achieving what Roger Elvick failed to.
"These kinds of scams have the pattern of growing very large, very fast," Todd says.
It's hard to say exactly why the 1099OID form was deemed the proper vehicle to access secret accounts. If there is a logical train of thought, it is one predicated on conspiracy upon conspiracy. Sensible and knowledgeable tax professionals would have to presuppose too many absurd facts to make sense of it.
But the way the process actually works isn't too complicated at all—you just enter some numbers in the wrong boxes on a tax form, make up others, add them up to a huge refund, and then have your client sign on the line at the bottom.
Old Quest's founders hardly invented this scheme or the sinister, quasi-historical narrative that provides its intellectual underpinnings. But Ruiz and Mendoza proved extremely savvy businessmen, implementing their operation in an extraordinarily efficient, organized and entrepreneurial manner. With aplomb, they built a thriving business that employed a considerable staff of presenters, sales associates, tax preparers, regional managers and recruiters. They also introduced customers to a number of faux tax professionals—all claiming to be tax attorneys, former IRS staffers and CPAs—which spoke to the program's validity.
Once Old Quest signed up a new client from a seminar, staffers would follow a detailed process sheet that outlined each step in shepherding the account from return to refund. The taxpayer's documents would proceed through multiple departments handling stages of the sophisticated process designed to bypass IRS safeguards.
At trial, Assistant U.S. Attorney Joshua Robbins described the Old Quest operation as "like a factory, an assembly line of false statements that defendants put in place."
The first stage involved creating a file for the new client containing past mortgage statements, tax returns, financials and deed of trust. The processor would then walk the file to Old Quest's OID Department, where a so-called "OID Technician" would begin preparing 1099A and 1099OID forms by inputting financial information in accord with the company's inverted guidelines.
The preparer would list the client as the lender on all the loans, and the financial institutions that issued mortgages as the borrowers. Old Quest customers, many of whom earned just above minimum wage, were represented as having loaned hundreds of millions of dollars to major banks and subprime lenders.
The process sheet instructed the tax preparer to enter the original amount of all the client's loans into the Original Issue Discount box—the amount of interest income supposedly earned on an investment bond—and then to subtract $100 from that amount and enter the slightly reduced value as federal income tax withheld by the payer of the bond.
After a series of final verifications, an Old Quest processor would log into the IRS FIRE (Filing Information Returns Electronically) website, enter the unique Transmitter Control Code and upload the two forms. The following day, the processor was to log back into the system and check the status of the documents.
"The 1099OID will always come back BAD and be highlighted in red," the process sheet reads.
Because almost the entirety of reported earnings were claimed withheld, the uploaded document would trigger the FIRE system to automatically send a 1099OID Fraud Warning. But all it took to get the ball rolling again was for Old Quest to reply with a standard email, which under penalty of perjury verified the submission and requested the tax agency "please process that file." With the problem resolved, days later, the customer would be called in to sign a 1040X amended return (the operation got into swing after the April 15 tax deadline) claiming the sizable refund.
Old Quest's representatives assured nervous customers their methods were a legitimate interpretation of tax law. According to the IRS, however, the company placed those people in frivolous positions that exposed them to $5,000 fines.
When Old Quest customers brought the frivolous filing letters they received from the IRS to the Fontana office, Ruiz, Mendoza and other employees appeased their worries with a variety of explanations: The IRS just wanted to intimidate them, the letter was a mistake, the warning simply did not apply to the Old Quest program.
* * *
For homeowners such as Lamberto Trinidad, the process was so convoluted, so impenetrable it just sounded plausible. In his testimony at trial and in statements to investigators, the Seventh Day Adventist pastor said he first heard of the Old Quest program at a meeting of religious leaders in 2009, when a fellow pastor told him he knew of a person who claimed he "could set his mortgage to zero."
Trinidad, a college-educated immigrant from the Philippines, attended a seminar Linda Wilson and Greg Adkins presented at the Holiday Inn in Costa Mesa. They told him he was "an American citizen drawn into commerce by the government"—cryptic language typical of the Sovereign Citizens movement.
The Old Quest presenters told Trinidad every time he used his social security number as part of a financial transaction, he was "creating money," and that when he signed a loan document, the bank received nine times the amount he borrowed. They warned attendees to not try the OID process themselves because its complexity would get them into trouble. "Leave it to the experts," they said.
About a week later, the pastor went to Wilson's Costa Mesa home, where she calculated the balance on his mortgages and credit cards that would be claimed as withheld income. Trinidad wrote a $2,500 check that day.
The presenters made it sound as though Old Quest was working with lawyers and accountants. "Who in their right mind would think lawyers would do fraudulent things?" Trinidad told investigators.
It also didn't hurt that Old Quest was able to show him massive refund checks obtained for other customers.
Between March 2009 and February 2010, the IRS sent 11 Old Quest customers tax refunds totaling more than $5 million—payments on which the company got a 25 percent cut.
Those success stories were the crux of the defense Ruiz and Mendoza offered at their trial in January. The defendants interpreted the Treasury checks as "a validation of everything they had worked so hard to accomplish over the past year," said Leon Peterson, Ruiz's attorney.
Prosecutors conceded the IRS not only processed almost a dozen fraudulent refunds, but also did so long after the agency launched Operation Stolen Treasures, its investigation into the company. Robbins, the Assistant U.S. Attorney, characterized those payments as "slip-ups."
The slip-ups raised questions beyond the embarrassing communication failures between various divisions of the tax agency.
It's not a crime to fill out a tax return incorrectly, as long as it is done without intent at deception. Jesse Gessin, another attorney representing Ruiz, argued his client "had a sincere, good-faith belief in the OID program," something taught to him by people he trusted and validated by the IRS. "He didn't come up with the process. He didn't make it up," Gessin said.
As did several former Old Quest employees who testified as government witnesses, the two defendants "believed in the program," according to their lawyers.
As further evidence of their true faith, the defense attorneys noted Ruiz and Mendoza both got their loved ones involved in the business, and they filed OID returns for their own family members, including a $2 million refund for Ruiz's mother. The defendants also wrote several letters to the IRS supposedly seeking clarification on their procedures, and they were never dissuaded by any court-ordered injunction.
"This wasn't something that they created. It was something they borrowed and tried to make work as best they could," Dean Steward, who represented Mendoza, told the jury.
Defense attorneys argued the numbers weren't fabricated; there was just a disagreement regarding the proper boxes in which to put certain figures on a tax form. The IRS has a "different understanding" of how to file an OID, said Peterson, and the dispute should be resolved in a tax court.
With any fringe belief system, it's often hard to discern between sincere believers and crass profiteers. But there was plenty of evidence the scheme's ringleaders always knew they were on shaky legal ground. When federal agents executed a search warrant at Old Quest's Fontana office on Sept. 30, 2009, they found a three-ring binder labeled "Kryptonite." Inside was a printout of the 1099OID Fraud Alert.
A number of emails between Old Quest executives expressed concern about the repeated fraud warnings, the frivolous filing letters and the government freezing their customers' bank accounts. Mendoza didn't help his cause by cashing out $281,000 from an Old Quest bank account on the day investigators searched his office. And to compound their problems with the IRS, Ruiz and Mendoza never declared the income they received from Old Quest.
Ruiz and Mendoza were both convicted of conspiracy and tax fraud on Jan. 30. They face roughly 10 years in federal prison.
Perhaps a jury would have regarded them as misguided believers seduced by a fantastic conspiracy theory if not for the sheer absurdity of the figures. On behalf of its mostly low-income clients, Old Quest claimed $344 million in investment income and almost $300 million in tax withholdings, and it sought some $194 million in refunds.
While much of the Treasury money was ultimately recouped, the customers, most already in dire financial straits, were left in the cold.
Jose Perez and his wife, Jesus, paid $12,500 on an installment plan for a land-patent sign that remained in their window as their house went into foreclosure. When Arturo Ruiz transferred the couple into the OID program, he told them, "It's so new your tax professional hasn't heard of it yet."
Both Jose and Jesus worked in a warehouse and together earned less than $50,000 per year. Their Old Quest returns declared $1.28 million in interest income for 2008, with almost every dime withheld as taxes. They testified that they signed their tax papers without much examination—neither spoke English nor seemed to have any understanding of what the forms conveyed about their finances, let alone the finer points of redemption theory.
The number was not entirely arbitrary—the couple was drowning in debt after taking several loans from subprime lenders, amounting to $1.28 million. The Perezes lost the money they paid Old Quest, as well as their house. Each was fined $5,000 by the IRS.
Jesus Zepeda went to an Old Quest land-patent presentation in a hotel in Rancho Cucamonga in 2008 after he failed to sell his house in a short sale. He originally thought he was attending a loan-modification program, but he knew something was amiss when a woman in the audience, who said she worked in a real-estate office, started yelling at Ruiz and Mendoza, calling them thieves and cheats. Ruiz and Mendoza laughed at that woman, according to Zepeda.
Hundreds of people were at the second meeting Zepeda attended in a warehouse in Rancho Cucamonga. After a third Old Quest presentation, Zepeda purchased a land patent for $12,500—a "special offer" he got on condition of bringing in more people to future seminars. He, too, was later transferred to the OID program.
The part-time construction worker's tax return claimed $822,100 in income derived from interest, almost all withheld in taxes.
"They went out and found people who were losing their homes, and they advertised to them," said Robbins, who described Old Quest's ideal customers as people who were desperate, uneducated and didn't speak English.
In hindsight, of all the slides Ruiz, Mendoza and their employees flashed before the thousands of men and women who came to hear what they had to offer, one stands out as perhaps the most surprising of them all:
"Never, ever LIE on your tax return."
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