William J. Edwards, Acting United States Attorney for the Northern District of Ohio, announced today that a federal court jury found Joseph H. Smith guilty of conspiring to defraud the Internal Revenue Service (IRS) and five related tax charges and not guilty of conspiring to commit mail fraud and eight related mail fraud charges. The jury returned the verdicts after six days of deliberations following a six-week trial before United States District Judge Ann Aldrich.

Smith is scheduled to be sentenced on October 3, 2008. Smith’s co-defendant, Anton Zgoznik, who was convicted on all counts against him following a separate jury trial in August and September 2007 – including the mail fraud conspiracy, mail fraud, and certain tax charges – is scheduled to be sentenced on September 26, 2008.

The jury acquitted Smith on charges that he and co-defendant Zgoznik conspired to defraud the Cleveland Catholic Diocese through a scheme by which Smith, who was chief financial officer and eventually the Financial and Legal Secretary of the Diocese, 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 exchange for substantial undisclosed kickback payments from some of those companies. In his defense, Smith argued that the payments from the Zgoznik companies were an authorized secret raise from the Diocese.

The tax charges included a conspiracy to defraud the IRS, four counts of making false personal tax returns for 1999 through 2002, and one count of corruptly endeavoring to obstruct and impede the IRS during an audit of Smith’s 1999 tax return. The government alleged that Smith and Zgoznik conspired to defraud the Internal Revenue Service through a scheme designed to conceal the income Smith received from the Zgoznik company payments to him and from other funds Smith received from the Diocese and to conceal and disguise the tax consequences to Smith and Zgoznik’s companies. The payments to Smith from the Zgoznik companies were made by checks to two business names used by Smith – JHS Enterprises, which he reported as a Schedule C business, and Tee Sports, Inc., a Smith-owned corporation engaged in the business of selling golf-related products and services. The government contended that Smith failed to report the personal income he received from the checks payable to Tee Sports, Inc, and concealed his income from those checks by depositing them 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”). The government also contended that Smith reported the payments to JHS Enterprises as Schedule C business receipts and falsely claimed business expense deductions against those receipts. The government argued that during the IRS audit of Smith’s 1999 return, Zgoznik, as Smith’s representative, falsely represented that Smith, doing business as JHS Enterprises, provided legal and consulting services on an hourly basis to clients throughout northern Ohio, and failed to disclose the income Smith received from Zgoznik through the checks payable to Tee Sports.

In addition to the payments through the Zgoznik companies, Smith 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 used the account as a personal investment account but did not report on his personal returns the income he received during 1999 through 2002 from subsequent dividends and capital gains from the account.

The government’s case is being prosecuted by Assistant United States Attorney John M. Siegel, and U.S. Department of Justice Trial Attorney Jerrod C. Patterson, with the assistance of the Internal Revenue Service, Criminal Investigation Division, the U.S. Postal Inspection Service, and the Federal Bureau of Investigation, Cleveland, Ohio.