San Diego On November 15 at 8:54 p.m., certified public accountant Michael Compton died of a gunshot wound to the head. The county medical examiner's office ruled it a suicide.
Compton, who lived in Spring Valley, was the outside accountant for Metabolife, the diet-drug maker whose ephedra-based compound has engendered multiple personal injury and wrongful death suits, as well as government investigations.
Now it can be told: Metabolife and its three owners -- Michael Joseph Ellis, Michael Lee Blevins, and William Robert Bradley -- are also suspected of massively evading taxes through trusts in offshore tax havens.
In July of 2002, criminal investigators of the Internal Revenue Service raided Compton's Mission Valley office. At the same time, Blevins's palatial home in the gated community of Rancho Santa Fe Farms was also raided. Agents carted off reams of documents and computer data from both locations.
Very quietly on November 5 of this year, only ten days before Compton's apparent suicide, the application and affidavit for a search warrant was unsealed in U.S. District Court. It reveals that criminal investigators from the Internal Revenue Service believe that Metabolife failed to account for $93.7 million in income on its income tax returns from 1996 through 1999. Ellis, Blevins, and Bradley "utilized Metabolife to commit millions of dollars in tax evasions," says the affidavit by Thomas Martinez, special agent for the Internal Revenue Service. Also, it appears that the three skimmed cash from the company.
And, according to the affidavit, Compton knew about it. A poignant section of the affidavit describes how Al Golden, another certified public accountant, had been hired to put a valuation on Metabolife. Golden talked with Compton.
"Compton told Golden that Bradley, Ellis, and Blevins each had over $1 million in unreported cash concealed in safes within their homes," says the affidavit. Compton had personally seen the cash in the homes of Bradley and Ellis. (Ellis lives in a waterfront mansion on Nichols Street in Point Loma, according to a neighbor.)
The affidavit relates that Compton told Golden how he had traveled to New York with Bradley, Ellis, and their attorney "to set up offshore bank accounts and trusts." In December of 1997, the group went to the offshore haven of the Cayman Islands to set up secret accounts.
Then comes the punch line. In early 1998, Compton asked Golden if he (Compton) might be criminally liable because he knowingly prepared corporate tax returns that concealed cash that had come into the company. "Golden advised Compton that he thought he might be criminally liable," says the affidavit.
Through a spokesman, Metabolife made this statement: "The company and its principals were shocked and deeply saddened to learn of the loss of Mr. Compton. As to the IRS investigation, the company maintains it did nothing wrong, and is confident that when the investigation is completed, it will be fully vindicated."
The affidavit goes deeply into the backgrounds of Ellis and particularly Blevins. It has already been reported that in 1988, Blevins and Ellis were arrested for conspiracy to manufacture methamphetamine with the intent to distribute. They were doing it from a rented house in Rancho Santa Fe. Ellis was placed on five years' probation, and Blevins was sentenced to five and a half years in prison.
This affidavit has more. In 1973, Blevins was charged with battery on a police officer. Two years later, he was arrested for conspiracy to distribute cocaine. This charge was dismissed. The same year, he was arrested again for cocaine distribution. Apparently, that charge was reduced to possession, and in mid-1975 he got a three-year suspended sentence and was placed on probation for a year.
The next year, he was charged with drunk driving and pleaded guilty to the lesser charge of reckless driving. In 1977, he was placed on probation for two years. All that was prologue to the 1988 arrest and later imprisonment for the methamphetamine charges.
In the early 1990s, Ellis and others, including Bradley, formed two companies to market a supplement called Nepegen. It was not successful.
In 1995, Ellis formed Metabolife. On his release from prison, Blevins was named vice president. Bradley was chief executive officer. The product, according to the affidavit, was essentially Nepegen.
In 1998, one of the cofounders of the original companies distributing Nepegen sued Ellis and Bradley for misuse of the formula. The suit was settled for $4 million, according to the affidavit. Then the cofounder sued a second time, claiming that Ellis "had grossly misrepresented the sales of Metabolife during 1997." The cofounder said sales were several hundred million dollars. Ellis said they were $27 million. Tax returns indicated they were $31.6 million, according to the affidavit.
Metabolife is sold through multilevel marketing, often called pyramid marketing. Distributors were encouraged to turn in money to headquarters in cash. According to one source quoted in the affidavit, Metabolife would receive half a million dollars in cash a day during 1998 and 1999. However, the company turned in far less than that to its onshore banks, according to the affidavit.
A number of former employees, including a chief financial officer, say that 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)," says the affidavit.
The former chief financial officer told investigators that "Bradley had bragged about setting up a bank account in Switzerland to hide the cash skimmed from the corporation," according to the affidavit. A former in-house lawyer told investigators that "Ellis and Bradley paid for their houses and other items with large amounts of cash," according to the affidavit.
Internal Revenue Service records indicate that in early 1998, Blevins paid for $12,470 of furniture in cash. In mid-2001, he purchased a Mercedes-Benz for $129,222, and paid the dealership $80,000 in cash, according to the affidavit.
The former in-house counsel said that "Bradley hated to pay taxes, and Metabolife maintained multiple sets of books to disguise its true financial activities," according to the affidavit.
To facilitate Bradley's skimming, the company kept two sets of books, according to the affidavit. Compton willingly classified the accounts as "off the books."
The affidavit relates how, in 1998, the IRS Criminal Investigative Division received an anonymous letter indicating that "an accountant by the name of Michael Compton" helped Ellis and Blevins "divert cash from Metabolife." This letter charged that Compton helped the pair stash money in the secrecy-shrouded offshore tax havens of the Cayman Islands, Mauritius, and the Isle of Man. When they raided Blevins's home, federal agents sought offshore banking records from such havens as the British Virgin Islands, Switzerland, Hong Kong, and the Cayman Islands.
There was another ploy, according to the affidavit. Metabolife would send its advertising agency, California Creative, much more money than was owed. Part of that money was then kicked back to Ellis, Bradley, and Blevins, according to several former Metabolife officials. One auditor resigned the account because it could not reconcile the billings and actual advertising costs. This was not small change. "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," says the affidavit.
"It is my opinion that Metabolife had entered into an agreement allowing California Creative to overcharge it for advertising expenses," says Martinez in his affidavit. "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." If the alleged kickbacks were paid in cash or by some other secretive manner, the Metabolife owners would also avoid personal taxes, says Martinez in the affidavit.
The ad agency could not be reached for comment.
Hardly surprisingly, Metabolife and its owners have been lining the pockets of politicians. In 1997, the Texas health commissioner decided to restrict sales of dietary supplements containing ephedrine. But the industry threw money around, and the commissioner shortly changed course completely. Ellis and two colleagues gave $10,000 to then-governor George W. Bush. Shortly, Blevins popped with another $5000. Later, after Bush found out about the pair's past, he returned the money. After raking in $150,000 from Metabolife, then-governor Gray Davis vetoed a bill that would have mandated warning labels for ephedra. Metabolife was ranked seventh among all pharmaceutical companies for donating more than $600,000 to political campaigns in the year 2000.