Did Talking Ban in Strip Clubs Leads to Tax Evasion?

January 13, 2011

In March 2004, the Detroit City Council was in a lather about the proliferation of adult entertainment and passed a law requiring that

dancers be registered voters, or have a green card, and it prohibits them from mingling with patrons - no more lap dances, guys, no chats when a dancer is not onstage. Bars can no longer audition dancers during business hours. And all-nude dancing at non-alcoholic clubs is now a no-no.

"Sex and Violence at City Hall" (Metro Times, March 31, 2004).  

I don't know about you but these days, when I hear about strippers, I immediately wonder whether it's another juicy Wall Street scandal involving some middle-aged executive and his arm-candy - and, as the stories seem to go, his pillow talk involves giving the object of his affection insider trading tips.

It was only in March of 2010 that I wrote these titillating lines about a then developing Securities and Exchange Commission case involving a Detroit strip club, a dancer, and a Wall Street exec:

[S]hortly after he co-founded AA Capital in 2002, Orecchio began spending lavishly on travel and entertainment. Among my favorite parts of his business plan was the SEC's claim that in August 2003, Orecchio began a relationship with a woman who performed at a Detroit strip club.

When the SEC says that she "performed" at the club, I'm not exactly sure what to infer. Perhaps she performed audits, but I'll have to look into that question further.  Apparently ever the civic-minded man, between 2003 and 2006, Orecchio spent substantial amounts of money on his mistress and her family. Although the SEC doesn't exactly spell-out how the strip club performer transitioned from an entertainment professional to Orecchio's mistress, I suspect that I can leave that transformation to your imagination.  

Alas, the cost of maintaining mistress-strippers seems to be plagued by inflation (now, c'mon! get your mind out of the gutter) because starting in 2004, Orecchio allegedly began siphoning money from client trust accounts to fund his lavish lifestyle. I don't know about you, but I've always wanted a lavish lifestyle.  There's just something about that opportunity that has an enticing ring to it.  Maybe there are some available on Craigslist? 

See: "Yet Another Wall Street Stripper Case" (BrokeAndBroker.com, March 2, 2010).  

So Bill, you have my attention. I'm intrigued. Where you goin' with this stripper stuff.

Hey, calm down, don't be in such a rush. Gimme a second here to weave this tale.

Remember that Detroit City Council adult entertainment industry legislation in 2004? Well, in response to the passage of the restrictions, one local strip club owner offered these choice comments:

"The City of Detroit is telling us dancers can't mingle with customers," says Nicholas J. Faranso, owner of Tycoon's in Detroit and BT's in Dearborn. "That's unconstitutional. How can you tell me a dancer can't talk to a customer?"

"Sex and Violence at City Hall" (Metro Times, March 31, 2004).

Frankly, I think Mr. Faranso put it quite eloquently.  More to the point, maybe he was right about the no mingling thing being unconstitutional.  After all, dancers are human beings. They have a right to talk to their customers. What's this country coming to when a stripper in Detroit can't talk to the guy who's jamming a ten-dollar bill in her g-string?

Bill, c'mon already. I'm dying here. Where you going with all of this?

Okay, okay - here's the deal.

It seems that our budding constitutional scholar Nicholas J. Faranso owned two strip clubs:   BT's in Dearborn, Mich., and Tycoon's in Detroit.   From 2001 through 2004, both establishments used a computerized point of sales system which produced guest checks and electronically tracked and recorded sales.  

In 2001, Faranso purchased a computer software program called Journal Sales Remover from Theodore Kramer, a self-employed computer software salesman.  Journal Sales Remover was specifically designed to remove a portion of the actual sales from computerized point of sales systems  - which, hey, how incredibly convenient, Faranso's clubs just happened to have such a system.  

Faranso directed Kramer to put the Journal Sales Remover program onto his businesses' computer systems, which he did. The program made it appear that Faranso's clubs received less income than they actually did.   Which allowed him to pay less taxes on the lesser income - well, maybe not legally allowed him but at least the program did what it was supposed to do. 

From about 2001 to about 2004, at Faranso's request, Kramer periodically visited Faranso's clubs to run the Journal Sales Remover program, which removed a substantial amount of the actual sales from the computerized sales systems.   Faranso then provided the reduced sales figures to his accountant.   As a result, Faranso falsified the clubs' tax returns by understating their gross receipts by more than $500,000.

On April 9, 2010, Faranso was indicted on charges of conspiracy to defraud the Internal Revenue Service and three counts of filing a false tax return, signed under penalties of perjury. Theodore Kramer was also charged with conspiracy to defraud the IRS.

Kramer pleaded guilty to one count of conspiracy on Nov. 17, 2010 and faces a maximum sentence of five years in prison.

On January 12, 2011,  in U.S. District Court in Michigan, Faranso pleaded guilty to one count of conspiracy to defraud the United States. He faces a maximum sentence of five years in prison.

What's the point? I dunno - maybe there isn't any.  Let's just call it a blistering commentary on life in America. One by one they're either outlawing our nation's vital strip joints or they're putting in place rules that take all of the fun out of the experience. It's putting so much pressure on adult entertainment entrepreneurs that they're cheating on their taxes just to make ends meet - hmm, maybe not the best of metaphors? Then there's the other dark, looming cloud.  If there are no more strip clubs, will any Wall Street deals get done?