Opinion ID: 4200472
Heading Depth: 3
Heading Rank: 1

Heading: Mail Fraud and Payroll Tax Schemes

Text: In 1998, an Arkansas state court issued a $73,000 judgment against Melton for his failure to pay an interior design firm for its work on his home in Little Rock. Some time after, Melton moved to Texas, having made no payments on the judgment. In September 2005, Melton became chief financial officer of ThermoEnergy Corporation, a publicly traded corporation headquartered in Little Rock, focused on licensing clean water technologies and water purification systems. Gary Mertins, the designer whom Melton had shorted, received word Melton was back in Arkansas and asked his brother and attorney, William Mertins, to help him collect the 1998 judgment. William Mertins filed a writ of garnishment regarding the 1998 judgment, which at the time had grown to over $127,000 with interest. In July 2006, two Pulaski County, Arkansas, sheriff deputies arrived at ThermoEnergy with a writ of execution for the garnishment of Melton’s wages. Melton was not in the office, and instead, the garnishment was served on David Cossey, ThermoEnergy’s chief executive officer. Cossey later approached Melton about the garnishment, and Melton told Cossey he would “take care of it.” Cossey assumed this meant Melton would deduct the payments toward the garnishment from his paycheck because, as chief financial officer, Melton controlled ThermoEnergy’s budget and payroll. Not long after, Mertins Law Firm began receiving checks for 3 The Honorable Billy Roy Wilson, United States District Judge for the Eastern District of Arkansas. -2- approximately $3,000 each month in service of Melton’s garnishment.4 Cossey and Melton did not discuss the garnishment again until 2009. In addition to managing ThermoEnergy’s payroll, Melton was responsible for “oversee[ing] all [the company’s] financial operations” and collecting, accounting for, and filing federal and state taxes related to payroll. In December 2008, an outside auditor from an accounting firm was conducting an annual audit when he noticed ThermoEnergy’s payroll tax liability was much higher than in the years 2005, 2006, and 2007. The auditor, Michael Barron, sent ThermoEnergy’s controller, Shelley Cline, an email about the liability. Cline sent Barron the details of the monthly entries into ThermoEnergy’s payroll liability account. Over the next three months, Barron worked with Cline as he tried, and failed, to obtain necessary documentation from ThermoEnergy. With an audit deadline approaching, Barron eventually reached out to Melton directly on two separate occasions. On April 6, 2009, Barron sent Melton an email concerning the payroll tax liability. To complete his audit, Barron needed some kind of documentation from the Internal Revenue Service (IRS), and he was becoming concerned about potential penalties and fines. On April 14, 2009, the day before the deadline for late filing with the Securities Exchange Commission, Melton sent Barron a memorandum. The memorandum represented that Melton had been in “several discussions with the IRS” and was negotiating a payment plan to become current with the payroll tax liability. At some point around April 15, Barron and his boss Bill Kemp went to ThermoEnergy’s office. Barron, Kemp, Cossey, ThermoEnergy attorney Gary Barket, and Melton met to address the payroll tax liability. Melton was asked to provide copies of IRS Forms 940 and 941, the forms used for filing payroll taxes, to verify he had paid and filed ThermoEnergy’s payroll taxes. Throughout the meeting, 4 The checks were sent by mail or by overnight FedEx or UPS. -3- Melton left and returned with a series of purported IRS forms that Melton claimed he had filed during the years 2006, 2007, 2008, and 2009. The documents, all signed and dated, were printed on forms that had the year 2009 scratched off in the upper corner. According to Barron, it was “very apparent” Melton was completing the forms “right then.” On May 21, Barron sent Melton an email asking why he could not find corresponding documentation in ThermoEnergy’s account for an alleged payroll tax payment. Melton responded and told Barron, “I gave you the wrong copy, there was no payment, I have correct copies for you.” On May 28, 2009, ThermoEnergy’s board of directors held an emergency meeting to address the payroll tax liability. The board authorized hiring an outside forensic auditing firm to investigate further and assess ThermoEnergy’s potential civil and criminal liabilities. Over the next two months, the board entered into a series of resolutions limiting Melton’s duties and authority, which included removing him from company accounts. Also on May 28, 2009, Barron was at ThermoEnergy working on the audit when he discovered a check for $9,350 issued to Mertins Law Firm. Barron scanned through the prior year’s audit and found eleven payments for $3,102.80 each made to Mertins Law Firm. One of the checks was marked “garnishment.” Barron asked Cossey about the payments, and Cossey told Barron about the garnishment on Melton’s wages. Barron looked into Melton’s payroll records, but found no indication of a garnishment. Barron discovered these routine payments to Mertins Law Firm were being classified as a legal expense of ThermoEnergy’s. The board of directors ultimately ordered Melton to resign from ThermoEnergy by August 3, 2009.