Gregory A. White, United States Attorney for the Northern District of Ohio, announced today that a federal grand jury returned a 27-count indictment against Joseph H. Smith and Anton Zgoznik, charging them with conspiring to defraud the Catholic Diocese of Cleveland, conspiring to defraud the Internal Revenue Service, and other related charges. According to public records, Smith resides at 3996 Shireton Drive, Dublin, Ohio, and Zgoznik resides at 9495 Winterberry Lane, Kirtland Hills, Ohio. Smith is charged in 23 counts and Zgoznik is charged in 15 counts, as follows:

According to the indictment, Smith worked in the Finance and Legal Office of the Cleveland Catholic Diocese for several years through February 17, 2004, serving in the relevant time period as Treasurer, Chief Financial Officer, and eventually Financial and Legal Secretary beginning in mid-2000. The indictment alleges that from approximately June 1997 through February 2004, Smith and Zgoznik conspired to defraud and obtain money from the Diocese through a scheme by which Smith, in violation of his duty of honest service as a Diocese official, steered substantial outsourced business from the Diocese and its constituent organizations to companies controlled by Zgoznik in consideration for which and while receiving substantial undisclosed kickback payments from some of those companies. The indictment alleges that the Diocese paid approximately $17,533,330 to Zgoznik’s companies from 1996 through 2003 and that Zgoznik’s companies paid kickbacks totaling approximately $784,627 to Smith during 1997 through 2003. The two defendants allegedly disguised the kickbacks in part by having Zgoznik’s companies pay the kickbacks by checks payable to a golf paraphernalia business operated by Smith (Tee Sports, Inc.) and to another business name used by Smith (JHS Enterprises), as purported payments for legal, consulting, and other services not actually rendered by Smith, at times supported by fictitious invoices from Tee Sports and JHS. In addition to the conspiracy charge, the indictment charges Smith and Zgoznik with eight counts of mail fraud for executing the kickback scheme.

The indictment further charges that Smith and Zgoznik conspired to defraud the Internal Revenue Service through a scheme designed to conceal the income Smith received from the kickback payments and other funds Smith received from the Diocese and to conceal and disguise the tax consequences to Smith and Zgoznik’s companies. As part of the conspiracy, Zgoznik allegedly improperly deducted the kickbacks as consulting and other expenses, while Smith failed to report the kickbacks paid by checks to Tee Sports (through the year 2002) and disguised the kickbacks payable to JHS Enterprises as purported business income on his federal income tax returns. Smith further offset the purported JHS Enterprises business income by allegedly claiming improper business deductions against that income. To further conceal his kickback income, Smith deposited the kickback checks payable to Tee Sports into an account in his name, doing business as Tee Sports, which he opened using the Tee Sports corporate tax identification number but which he used as a personal account (the “DBA Tee Sports Account”). During an IRS audit of Smith’s 1999 return, Zgoznik, as his representative, allegedly provided false and misleading information to the IRS agent, indicating that Smith had earned the JHS Enterprises income as fees for legal and CPA services to a number of clients, and failing to disclose the kickback income paid by checks to Tee Sports. During a subsequent audit of one of Zgoznik’s companies, Zgoznik allegedly caused false information and some of the fictitious invoices used in the kickback scheme to be presented to the IRS agent in support of the false deductions claimed on the corporate returns.

In addition to the kickbacks, Smith, with Zgoznik’s assistance, allegedly received $270,000 above his regular salary in the form of two transfers from Diocese funds -- in 1996 and 1997 -- to an account maintained at Fidelity Investments in the name and tax identification number of the Diocese, but using Smith’s residence address (referred to in the indictment as the “DOC Fidelity Account”). Smith allegedly used the account as a personal investment account but did not report the income he received from the transfers and from subsequent dividend, capital gains, and interest income from the account on his federal income tax returns.

In addition to the tax conspiracy, the indictment charges Smith with making false personal income tax returns for the years 1999 through 2002, on which he failed to report or disguised his kickback income and failed to report his income from the DOC Fidelity Account. The indictment also charges Zgoznik with aiding and assisting in the filing of false corporation income tax returns (and one unsigned return submitted during an audit), which improperly deducted the kickback payments to Smith as purported business expenses. Additionally, the indictment charges Smith and Zgoznik jointly with corruptly endeavoring to obstruct and impede the administration of the tax laws involving Zgoznik’s presentation of false information and documents to an IRS Agent during an audit of Smith’s 1999 income tax return.

Finally, the indictment charges Smith with eight counts of money laundering involving his alleged use of the DBA Tee Sports account to issue checks for personal expenses in an effort to conceal and disguise, the nature, location, source, ownership, and control of mail fraud proceeds.

If convicted, each defendant’s sentence will be determined by the Court after review of factors unique to this case, including the defendant’s prior criminal record, if any, the defendant’s role in the offense and the characteristics of the violation. In all cases the sentence will not exceed the statutory maximum and in most cases it will be less than the maximum.

The government’s case is being prosecuted by Assistant United States Attorney John M. Siegel, and U.S. Department of Justice Trial Attorney John E. Sullivan, following an investigation by the Internal Revenue Service, Criminal Investigation Division, the U.S. Postal Inspection Service, and the Federal Bureau of Investigation, Cleveland, Ohio.

An indictment is only a charge and is not evidence of guilt. A defendant is entitled to a fair trial in which it will be the government’s burden to prove guilt beyond a reasonable doubt.