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August 2, 2014

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Clubs’ cash flow probed at top

In raid of nightclub mogul’s home, IRS looked for trail to velvet rope

Beyond the Sun

Internal Revenue Service agents have executed search warrants at the home of a top Strip nightclub executive as part of a criminal investigation into what they say were cash kickback schemes aimed at concealing income from the federal government.

The Feb. 20 raid on the home of Steve Davidovici, a managing partner of Pure Management Group, came the same day as the widely reported raid at Pure Management’s offices and on-site investigations at two of the nightclubs the company operates: Pure, in Caesars Palace, and LAX, in the Luxor.

The search of Davidovici’s home is an indication agents had reason to suspect he was involved in income-concealing schemes, legal experts said. The home of Pure Management’s other major partner, Robert Frey, was not searched.

The nature of the IRS investigation was disclosed in a copy of a seven-page search warrant obtained by the Sun that was executed at Pure Management, at 2121 Industrial Road.

Agents with the IRS’ criminal investigation division, the search warrant said, were seeking evidence of a “currency distribution scheme,” a “coat check scheme,” and a “fraudulent deduction scheme” — all of which may have stretched up the company’s management chain.

The warrant, signed by U.S. Magistrate George Foley Jr., cited three possible criminal violations agents were investigating — tax evasion, filing false individual tax returns and conspiracy to defraud the government of taxes.

Agents did not explain in the warrant how the alleged schemes worked. And sworn affidavits submitted by agents to obtain permission from Foley to conduct the raid remain sealed.

But the investigation is said to center on the lucrative Strip practice of doormen soliciting cash from patrons waiting to get inside a nightclub, in which other employees also take cash in exchange for offering special treatment. The money is then shared with other club employees and managers. Insiders say tens of thousands of dollars in “entry fees” and other tips can be split among club employees most nights.

Pure, a 36,000-square-foot establishment that can accommodate more than 1,500 people, claims to be the nation’s top revenue-producing nightclub.

The court-authorized searches of Davidovici’s home, the management group and Pure nightclub were simultaneous on Feb. 20. Investigators also showed up at LAX to interview tip earners.

One of the IRS’ primary missions was to identify tip earners at Pure and LAX, sources close to the investigation said. As many as a dozen Pure employees were read their criminal rights before being interviewed by agents, the sources said.

Agents, the sources added, seized documents and computer records from Pure Management during the raid.

Although Frey’s home was not searched, IRS agents said in the search warrant that they wanted records of “personal living expenditures” for both men. Among the items sought from the two men were receipts from “gambling establishments, travel itineraries or jewelry stores.”

Criminal defense lawyer David Chesnoff, who represents Davidovici, declined to comment. So did attorney Richard Wright, who represents Frey. The IRS has refused to discuss the investigation.

Pure Management issued a statement after the raid last week saying it was cooperating.

The investigation has shaken the casino industry and caught the attention of state gaming regulators. Top regulators have told the Sun they hadn’t seen the IRS conduct a raid inside a casino since the 1980s, when the mob still wielded influence on the Strip.

According to the search warrant, agents wanted an array of Pure Management bookkeeping and financial records, including income statements, evidence of gross receipts and invoices documenting expenses paid in cash or by check.

They also sought employee personnel records, including records of payments to workers and independent contractors.

And they looked for “documents that can be used to establish the number of paid admissions to Pure nightclub, including customer receipts, cash register tapes and credit card tapes.”

Agents sought calendar books, daily planners and personal organizers that might reveal any corporate information about the three cash kickback schemes they allege have been taking place at the club.

They searched for correspondence “identifying the possible disposition of the unreported cash receipts.”

And they sought envelopes bearing names and the amount of tips collected “pertaining to the currency distribution scheme,” as well as contracts and invoices showing the collection and distribution of coat check fees.

Agents were authorized to seize any computer equipment or software they believed may have furthered the tax schemes, including software or security data meant to “hide or booby-trap” protected information.

Defense lawyers familiar with the way the IRS works said that because of the large number of records seized, agents are likely to spend months sorting out the information before deciding whether to file charges.

Steve Johnson, a former IRS in-house attorney who teaches tax law at UNLV, said criminal IRS agents usually get involved in cases in which there is “a pattern of criminal behavior at the top” of a company, rather than for the purpose of auditing individual taxpayers.

For a business to be raided, Johnson said, “the service would have to believe that there’s documentation that not only wouldn’t be shown to them (during a typical audit) but would somehow disappear if they went sniffing around for it.”

Sun reporter Liz Benston contributed to this story.

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