US Fidelis brothers indicted on conspiracy and tax fraud charges
St. Louis, MO - The United States Attorney’s Office announced today the unsealing of an indictment involving the auto warranty company, US Fidelis. The indictment alleges that company founders, Darain and Cory Atkinson, routinely used company funds for personal multi-million dollar homes in St. Charles County, Lake Tahoe and the Cayman Islands; numerous luxury vehicles and boats, and other personal living expenses of both themselves and relatives.
DARAIN ATKINSON and CORY ATKINSON, were indicted on March 29, 2012, by a federal grand jury on one felony count of conspiracy to commit mail and wire fraud and two felony counts of filing false tax returns.
According to the indictment, the brothers jointly owned and operated National Auto Warranty Services, Inc. which was structured as a privately held company with each brother owning 50% of the business. In January 2009, National Auto Warranty changed its name to US Fidelis, Inc. National Auto Warranty/US Fidelis (NAWUS) routinely conducted business using the fictitious name of Dealer Services. The brothers also operated related businesses using some form of the name US Fidelis, and owned a direct mail business, which was known as DS Direct.
The primary business of NAWUS was marketing and selling vehicle service contracts (VSCs) throughout the United States. Typically, NAWUS acted as a broker/seller of VSCs on behalf of other VSC administrators. In some cases, NAWUS sold VSCs on behalf of and in connection with one of its affiliated businesses, namely US Fidelis Administration Services. They used a variety of techniques to market and sell VSCs, including direct mail to consumers, media advertisements and unsolicited telephone calls. A VSC was not a warranty or an extended warranty, and NAWUS had no affiliation with an automobile manufacturer, no authority to provide an automobile manufacturer's factory warranty and no authority or ability to alter or extend a factory warranty, according to the indictment.
The indictment states that a VSC covered specified types of vehicle repair costs. The VSC administrators were responsible for paying covered claims under a VSC. Typically, a VSC administrator's obligation to perform under the VSC was insured by a reinsurance group or a risk retention group. The cost and availability of a VSC depended on a number of factors, including the type, age and mileage of the vehicle in question, as well as the term of the coverage. NAWUS made a profit and attempted to make a profit by marking up the price of the VSC, which was often more than $1,000. The total purchaser cost for a VSC was often greater than $2,000.
Some VSC purchasers financed the cost of the VSC, although some paid in full at the outset. NAWUS had contracts with Mepco Finance Corporation (Mepco), Chicago, IL. A typical VSC sale involved at least four parties: NAWUS as the seller, a VSC administrator, Mepco and a VSC customer/purchaser. NAWUS typically received the largest percentage of the total sales price of a VSC, approximately 60%. The VSC administrator received the next largest percentage, about 30% and Mepco received approximately 10%. When a VSC purchaser financed its purchase, NAWUS typically received its percentage up front from Mepco, after the customer made an initial down payment and the first installment payment. The VSC administrator was also paid its share by Mepco.
The indictment alleges that as part of the conspiracy, Darain Atkinson directed NAWUS personnel to fraudulently withhold substantial portions of refunds due to customers who cancelled their VSC and were owed a full or prorated refund. NAWUS routinely fraudulently withheld approximately 40% of the total refund due to customers who legitimately cancelled and attempted to cancel their VSC. Often, only customers who complained or threatened action were provided a full refund to which they were entitled. NAWUS personnel routinely made the cancellation and refund process difficult to discourage purchasers from being able to obtain refunds to which they were entitled.
The indictment states that between 2006 and 2008, Darain and Cory Atkinson received distributions totaling more than $71 million from NAWUS, a substantial percentage of which funds were used to pay for their personal expenses. Records from NAWUS indicate that in 2006, Darain Atkinson received distributions in excess of $13 million and Cory Atkinson received in excess of $14 million. In 2007, they each received distributions in excess of $8 million; in 2008, in excess of $13 million. For the tax years 2006 and 2007, Darain Atkinson and Cory Atkinson failed to report the taxable distributions as income.
"With the April 17 tax deadline looming, it is important for people to have confidence that when they pay their taxes, their neighbors and business competitors will do the same," said Stephen Boyd, Special Agent in Charge of IRS-Criminal Investigation, St. Louis Field Office.
"Postal Inspectors want postal customers to know they can trust the offers they receive in the mail. Concerns about some of the claims made by NAWUS in their mailings led Postal Inspectors to join in this investigation," said J.R. Ball, Assistant Inspector in Charge for the St. Louis Field Office of the U.S. Postal Inspection Service.
If convicted, the conspiracy count carries a possible penalty of five years in prison and/or fines up to $250,000. The tax counts each carry a possible penalty of three years in prison and/or fines up to $250,000. In determining the actual sentences, a Judge is required to consider the
U.S. Sentencing Guidelines, which provide recommended sentencing ranges.
This case was investigated by Internal Revenue Service-Criminal Investigation, United States Postal Inspection Service, Federal Bureau of Investigation and the Missouri Attorney General's Office. Assistant United States Attorney John Bodenhausen is handling the case for the U.S. Attorney’s Office.
As is always the case, charges set forth in an indictment are merely accusations and do not constitute proof of guilt. Every defendant is presumed to be innocent unless and until proven guilty.