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Federal warrant lays out tax evasion allegations
SoVaNow.com / August 07, 2014An IRS investigator has told a federal judge there is “probable cause” to believe former cigarette executive Kathy Farley was involved in tax evasion, wire fraud and money laundering as president of Firebird Manufacturing LLC and Cherokee Tobacco, both based in South Boston.
IRS Special Agent Robert Martens detailed alleged schemes by Farley to falsify records and avoid payment of excise taxes on the sale of cigarettes in a 24-page filing submitted in August 2013 in U.S. District Court, Western District of Virginia, in Roanoke.
Martens’ request for a search warrant and supporting affidavit were filed in court one day before agents with the IRS and USDA Office of the Inspector General raided the corporate offices of the South Boston tobacco companies on Bill Tuck Highway.
The search warrant and affidavit were unsealed this Tuesday in Roanoke, nearly a year after the search took place in South Boston. Farley was president of both Cherokee and Firebird at the time of the Aug. 22 raid; her employment there ended around the beginning of this year.
Brian McGinn, spokesman for the U.S. Attorney’s Office, declined to comment on the investigation or the rationale for unsealing the search warrant, but he noted that no charges have been lodged against Farley at this time.
“As a general rule we do not comment on the status of an investigation. All matters before a federal grand jury, by law, are secret until, and if, charges are filed,” McGinn wrote in an e-mail message Wednesday.
Martens, who is assigned to the tax division that oversees the heavily-regulated cigarette industry, stated in the affidavit that there is probable cause “to believe that Kathryn C. Farley, President of both Firebird Manufacturing LLC and Cherokee Tobacco Company LLC … is involved in a conspiracy to commit wire fraud, conspiracy to commit money laundering, and conspiracy to violate the Contraband Cigarette Trafficking Act” (CCTA).
The trafficking act requires cigarette manufacturers and wholesalers to keep detailed records of sales of tobacco products and pay federal excise taxes that account for slightly more than $10 of the price of each carton of cigarettes sold.
Martens’ affidavit states that the search warrant request was based “upon personal knowledge, information obtained from the review of official records, public records, and information filed with TTB” — shorthand for the Alcohol Tobacco Tax and Trade Bureau, the IRS’s enforcement arm for the collection of cigarette taxes.
Martens also cited accounts by industry insiders — listed on the affidavit as Cooperating Witness #1 and Cooperating Witness $2 — who offered information on a pair of alleged plots by Farley to skirt federal and state laws. In addition to the federal excise tax, cigarette manufacturers must make payments to state governments under the Master Settlement Agreement, the deal reached in 1998 to compensate states for the costs of smoking-related illnesses.
Together, the federal tax and the state MSA fee total at least $15.86 a carton, according to the affidavit.
Cooperating Witness #1 tipped off investigators to an alleged attempt by Farley and Firebird to claim federal tax refunds on cigarettes that never reached the market. In September 2011, the TTB authorized Firebird to destroy 3,792,800 sticks of tobacco that the company said did not meet its quality standards, among other issues. Firebird subsequently placed a claim for $190,891.62 in tax refunds, which the federal government may grant for products that are taxed but subsequently withdrawn from sale or destroyed, either intentionally or accidentally.
Although the TTB made a small reduction in the company’s tax bill, an audit team denied its request for a refund due to insufficient documentation. Following the product destruction, the tax bureau was contacted by Witness #1, who claimed Farley had intended to mislead authorities by replacing the cigarettes slated for destruction with older product obtained from a different manufacturer and therefore ineligible for refunds.
Firebird was the manufacturing operation for Cherokee Tobacco, which sold brand-label cigarettes to wholesale and retail outlets in the region. Firebird took over for Virginia Brands after the 2010 purchase of that company.
Witness #1 provided materials to investigators indicating that Firebird sales invoices were altered beginning around October 2011, according to the affidavit by Martens. He also alleged that tax payments made by Firebird after November 2011 did not match up with monthly sales reports that the TTB was able to generate following a civil audit of the company’s books.
From November 2011 to July 2013, one month prior to the IRS-USDA raid in South Boston, Firebird shorted the TTA of an estimated $10.8 million in tax payments, according to Martens.
The IRS special agent observed in his affidavit that Firebird’s erroneous monthly tax reports were “filed and signed, under penalty of perjury by Kathy Farley, and report manufacture and removal information for the manufacturer.”
Cooperating Witness #2 pointed investigators to a separate violation of the Contraband Cigarette Trafficking Act — an alleged kickback scheme that the witness, a tobacco wholesaler, took part in with the knowledge of federal authorities. The affidavit notes Cooperating Witness #2 “has been providing documentary evidence as well as conducting consensually monitored phone calls on our behalf. Additionally CW #2 has met face to face with Farley in a monitored situation.”
According to the witness, Farley offered to sell cartons of Cherokee cigarettes to his wholesaling firm for as low as $15 per carton — less than the minimum levy of $15.86 in federal excise taxes and MSA fees. Farley then would create false documents to hide the true price of each carton, the affidavit claimed, citing an example: invoices that showed a sale price of $19.95, further discounted to $18.25, but sold to the witness at the hidden price of $15 a cartoon. To carry out the false invoicing scheme, Farley drafted payments out of the witness’s bank account, then wired a portion of the amount back to him.
From August 2012 to June 2013, the affidavit alleges, Farley created “at least 32 false invoices for a total of 210,600 cartons of cigarettes and drafted CW #2’s account for a total of $4,201,470 and wired CW #2 return wires totaling $1,033,842.”
The affidavit does not make clear how the alleged underpricing scheme allowed Firebird, Cherokee or the participating wholesaler to lower their tax payments to the federal government or to the states under the MSA.
Martens, a ten-year IRS veteran who was assigned to the agency’s tobacco tax bureau some three years ago, wrote in his affidavit that Cooperating Witnesses #1 and #2 proved to be reliable sources of information to federal authorities.
The search warrant contained a broad list of items that investigators planned to seize in the August 2013 raid at Cherokee: company computers and storage media, financial and sales records, tax documents, correspondence, emails, bank records, the company safe, even Farley’s cell phone and other electronic devices.
Efforts to reach Farley for comment were unsuccessful. A home number for her and her husband listed in the telephone book has been disconnected.
The search warrant
CommentsI'm so happy the TRUTH is finally out! I hope justice is served because she never thought about all of the employees and their families of Cherokee when she was stealing and how the company could have been closed JUST so she could afford her lifestyle!
- By Sherry on 08 / 07 / 14
CommentsGreed is an ugly word but so many spend their time chasing after it no matter what the cost. Looking down your nose at others and saying rude things and thinking you are untouchable is a world you're living in by yourself. Sooner or later your cheating, lying, stealing and mistreating others will show it's head and there's nowhere to hide.
- By Darlene on 08 / 07 / 14
CommentsThe Coffee was bad also. Looks like she would have had a better laundry than a little coffee shack. Evil Woman.
- By JavaJoe on 08 / 07 / 14
CommentsCherokee Tobacco Company and Firebird Manufacturing has promoted Kathy Farley to the position of president of both businesses, announced CEO Willie Barker. Farley joined the Cherokee Tobacco Company and Firebird Manufacturing team in 2004 as an operations manager and has worked her way up through the ranks as the vice president and senior vice president, officials said when making the announcement. Her work ethic and ability to be a team player has been integral to our success,” Barker said. Farley is highly regarded by customers and those in the industry, continued. She has a vast wealth of experience both in manufacturing and sales, he added. While she was a newcomer to the tobacco industry when she arrived in 2004, she was not new to management. Farley was former plant manager and owned and operated two other companies. “We are excited to have her at the helm, as she has proven to be a leader in sales, innovation and community service,” Barker said.
- By time to on 08 / 07 / 14
CommentsI have to wonder if she has seen the Netflix series "Orange is the New Black"? I bet she won't be sporting her ugly, flashy designer crap in the pokey. Maybe she can buddy up with a seamstress who will stitch her a big TB on her jumpsuit..you know..make her feel more at home.
- By JESSICA HALL on 08 / 07 / 14
CommentsGlad the truth is out too! Also glad her high living life style has ended. The way she flaunted all over town was just a big old joke! All those trips she has taken I hope she enjoyed them because she won't be taking anymore except for a trip to the Federal prison!
- By unknown on 08 / 07 / 14
CommentsThe facts are pretty clear and are in black and white. Maybe Robin Leach can do an interview of her in prison. Lifestyles of the BUSTED and ONLY in her own mind famous!
- By anonymous on 08 / 07 / 14
CommentsThe comments here are a little overboard, given nobody has been charged or convicted of anything. Try to be nice.
- By anonymous on 08 / 07 / 14
CommentsTry to be nice??? How about if you or someone you know worked there and may have lost there job due her greed?? There's more to this and you will eat your words!!
- By Rob on 08 / 07 / 14
CommentsShame on her! And she's still out acting like she's high and mighty.. Bye bye country club..hello cell mate. She's going down. Can y'all Hear??? Timber!!
- By kathy on 08 / 07 / 14
CommentsHalifax County loves to see successful people fail. Many sit around and wait just to bask in anyone's misfortune. All the failures in Halifax county sitting around unemployed waiting to point out fault. Easy to point at others but not at yourself.
- By karma on 08 / 07 / 14
CommentsJust like all the other greedy pigs around this place. Kathy Farley, vice president of Cherokee Tobacco Company LLC, was named 2009 Business Person of the Year by the Halifax County Chamber of Commerce at its Annual Meeting and Awards Farley was nominated for being an “outstanding businesswoman that has given unselfishly her time and expertise to further the mission of the chamber, the quality of life and business climate of Halifax County; for demonstrating leadership and cooperation in the achievement of community or civic enterprises benefiting individual citizens and Halifax County; for her outstanding public reputation and image; for serving on the chamber’s board of directors; for leading the initiative to create the business expo and chairing it since 2005; and for taking on the responsibility of chairman of the Virginia Cantaloupe Festival.”
- By LOL on 08 / 07 / 14
- By cheapcigs on 08 / 07 / 14
CommentsWhat is the link for?? I didn't see anything.
- By Confused on 08 / 08 / 14
CommentsGet a dictionary. Misfortune is bad luck. i.e. the employees that had a deceitful, greedy, self-serving leader who cared NOTHING about them or their families. She created this situation with no regards for anyone or anything but her showboat lifestyle and, of course, her blonde oompa loompa sidekick and their families. Pride cometh before a fall and I hope she bumps her head all the way to the bottom!
- By truthhurts on 08 / 08 / 14
CommentsI no longer live in Halifax County and still am so happy they found out the truth. This woman and her "oompa loompa sidekick" deserve exactly what has been coming to them for years. You can't live high on the horse very long when everyone already knew what they were doing when they started taking vacations everywhere and affording things they would have never been able to afford before. For the ones who are taking up for her, get a grip already! This woman deserves to be in federal prison for more than one reason!
- By Yourstruly on 08 / 08 / 14
CommentsIt's about time the TRUTH is out!! Stealing to buy cars, boats, not one but TWO campers, trips, coffee shops, clothing stores.....this news does not surprise me one bit!! Funny thing her "shops" shut down soon after she could no longer steal to afford them!! You people that defend her are stupid the ENTIRE town knew something was up but I guess her friends and family chose to ignore because she was GIVING away $$ that was not hers to give!!
- By anonymous on 08 / 08 / 14
CommentsMight this oompa loompa sidekick have some pretty fancy initials behind her name?? Hope she wasn't too attached to them. I bet she won't have those credentials much longer.
- By annonymous on 08 / 08 / 14
CommentsI'm not sure why people feel the need to make comments on this article, as there have been no formal charges filed against the woman in question. Also, brining in others into the comments is beyond petty, jealousy is an evil thing and apparently those in Halifax are equally as evil. Wishing harm to ones family or friends is beyond ignorant and those who have done so must remember that they may be in a similar situation at some point. Halifax newspapers have been quick to print information that has not been fully vetted in the past and not all that you read is true. If one seeks the truth do the appropriate research and make informed conclusions. Also "blond oompa loompa" is defamatory and slanderous as a statement about someone who was not named in the article nor has any current or future affiliation with the company in question.
- By This is silly on 08 / 08 / 14
CommentsBringing justice to Kathy Farley is saying it very nicely, she deserves to be held accountable for her actions, she walked around this town and around that plant like she was untouchable, downing everyone and then in public she acted as if she was so concerned with helping and giving to others, sure she gave to others with money that wasn't hers to give!!!!! While the greed got to good to her she couldn't even pay the bills and half the time forgot to pay the employees. While she slept so well at night then I hope she thinking now of the way she talked and treated others with her tight silky clothes and high heel stilettos and her halter tops that was highly inappropriate for a "business" women! Not to mention how she turned her nose up to others right in their face! Hope it was all worth it, how ever I do pray for her family who all she had fooled as well, and you may be sure that your sin will find you out.
- By May your sins find you out on 08 / 08 / 14
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