FORMER VICE PRESIDENT OF 24 HOUR FITNESS AND
ADVERTISING EXECUTIVE CHARGED IN KICK-BACK SCHEME

According to the indictment, between December 31, 1996, and January 31, 2000, the defendants are alleged to have conspired to use the U.S. mail to defraud 24 Hour Fitness, a Pleasanton, California company that operates gymnasiums throughout Northern California.  The indictment alleges four specific occasions on which checks were mailed pursuant to the fraudulent scheme between November of 1999 and January of 2000.  According to the indictment, the defendants allegedly used the following scheme to commit the fraud:

– Ms. Powell, in her position as vice-president of marketing of 24 Hour Fitness, outsourced a portion of the print advertising accounts for 24 Hour Fitness to Mr. Johnston's Los Gatos graphic advertising and design company, Transcend Advertising and Design.

– As a part of the scheme, Mr. Johnston submitted falsely inflated invoices to Powell at 24 Hour Fitness for the production of print advertising material. 

– Ms. Powell used her position as a vice-president of marketing at 24 Hour Fitness to approve payment to Johnston for the falsely inflated invoices.  Johnston then deposited the checks received into his business checking account

– Mr. Johnston "kicked back" a portion of the falsely inflated costs to Powell by writing her third-party checks, making payments on her credit card bills, and making payments on her cellular phone bills.

The indictment further alleges that defendants Powell and Johnston conspired to launder the proceeds derived from the fraudulent scheme.

In addition to the mail fraud and money laundering charges, the indictment further alleges that Ms. Powell committed tax evasion by understating her taxable income for 1997 by $64,896.13, for 1998 by $49,335.72, and for 1999 by $81,301.00.  According to the indictment, Ms. Powell directed Mr. Johnston not to issue Forms 1099 for the kickback payments and directed Mr. Johnston to structure the kickback payments into bank accounts to avoid reporting requirements.  The indictment further alleges that Ms. Powell made false statements on her tax return regarding her income, and that Mr. Johnston knowingly aided and abetted Ms. Powell's presentation of the tax returns containing the false statements.

The maximum statutory penalty for the charged violation of conspiracy to commit mail fraud, 18 U.S.C. § 371, and for each violation of mail fraud, 18 U.S.C. § 1341, is five years imprisonment and a $250,000 fine, plus restitution for the amount of loss to 24 Fitness from the scheme.  The maximum statutory penalty for the charged violation of conspiracy to commit money laundering, 18 U.S.C. § 1956, and for each violation of engaging in monetary transactions in property derived from mail fraud 18 U.S.C. § 1957 is 10 years imprisonment and a $250,000 fine.  The maximum penalty for each violation of tax evasion, 26 U.S.C. § 7201, is five years imprisonment and a $250,000 fine.  The maximum penalty for each count in violation of false subscription of tax returns and aiding and abetting the presentation of a false tax return, 26 U.S.C. § 7206(1) and 26 U.S.C. § 7206(2) is three years imprisonment and a $250,000 fine.  However, any sentence following conviction would be dictated by the Federal Sentencing Guidelines, which take into account a number of factors, and would be imposed in the discretion of the Court.  An indictment simply contains allegations against an individual and, as with all defendants, Ms. Powell and Mr. Johnston must be presumed innocent unless and until convicted.

The initial appearances for Ms. Powell and Mr. Johnston have not yet been scheduled. 

The prosecution is the result of a multi-year investigation by agents of the Internal Revenue Service–Criminal Investigation.  Jeffrey D. Nedrow  is the Assistant U.S. Attorney who is prosecuting the case with the assistance of Susan Kreider.

All press inquiries to the U.S. Attorney's Office should be directed to Luke Macaulay at (415) 436-6757.