A jailed Lexington attorney is under federal investigation for his alleged financial interest in a Thoroughbred and a Lexington bar and restaurant.
Civil court records filed in U.S. District Court in Lexington allege that a significant amount of fraud proceeds or laundered funds were spent by Seth Johnston, who is jailed on criminal charges involving synthetic marijuana. That investigation led federal officials to Johnston's alleged holdings.
Among the items subject to forfeiture if Johnston is convicted are a horse, Woodland Dream, and its foal, which has been ordered to be sold at the Keeneland November Breeding Stock Sale. Also subject to forfeiture is the Glenn's Creek Beer Exchange on East High Street, and the Glenn's Creek Brewer's Union on McCracken Pike in Woodford County, according to court documents.
A federal court order says the horses and businesses won't be affected by the court action for now.
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"Our business is going to continue to operate. We look forward to a bright future," Glenn's Creek co-owner Travis Gordon said. He declined to comment further, but he said the co-owners could have a statement later.
An affidavit filed Tuesday by an FBI agent attempts to establish probable cause that Johnston engaged in mail fraud and wire fraud, and money laundering. Johnston has not been indicted on those charges.
The federal court filings are the most recent criminal and civil problems for the attorney.
In a separate criminal case, on Feb. 7 a federal grand jury returned an indictment against Johnston charging him in part with using $100,000 to finance a conspiracy to buy and resell synthetic marijuana. Johnston, who has pleaded not guilty, is in jail on those charges.
"It appears just from the federal agent's affidavit that we are in a he-said-she-said contest," Johnston's attorney Bernard Pafunda told the Herald-Leader on Thursday. "Unfortunately, while the civil action was ongoing in state court, Mr. Johnston was not able to testify pending federal charges."
As for the synthetic marijuana case, Pafunda said Johnston "has put up a high-level defense that goes to the very heart of whether the DEA has exceeded its authority in scheduling certain compounds as controlled substances."
In that case, Johnston is charged with attempting to corrupt a potential witness. His brother and his ex-fiancée also were accused of conspiracy to destroy or conceal documents related to the charges against Johnston.
Johnston's ex-fiancée, Stacy Birden, has pleaded guilty to obstruction of justice and is to be sentenced in September. Johnston's brother Ben Johnston has pleaded not guilty.
In the affidavit filed Tuesday, FBI special agent Joseph Moutz provided details about Johnston's alleged efforts to embezzle money from Lexington attorney Angela Ford, who was Johnston's client.
Moutz said he interviewed Ford, and she told him that she hired Johnston to create three limited liability corporations and set up bank accounts for the corporations. Ford deposited $3.5 million into these accounts, and Johnston had no authority to transact business on the account without Ford's further instruction, Moutz said. Johnston was supposed to bill Ford for time spent creating the LLCs. According to the affidavit, Johnston later showed Ford a bank document with a balance of $3.5 million, but the account had a $350,000 balance.
Johnston told Moutz that he used most of the money Ford gave him in various investments at her direction. Johnston also told Moutz that Ford was supposed to give him $900,000 in attorney fees for his work. He was supposed to return the remainder of the money in three years at 4 percent interest.
The affidavit said Ford denied both of Johnston's assertions.
Moutz said in the affidavit that he tracked money that Ford entrusted to Johnston, and it had gone to businesses associated with Johnston.
Ford said Thursday in an interview that she had filed a lawsuit last summer against Johnston in Fayette Circuit Court, and the criminal investigation followed.
In July, Ford won a $2.1 million judgment in that lawsuit against Johnston, according to court documents. Ford has filed garnishments against Johnston at banks, court records show.
The federal court affidavit said federal authorities are investigating whether Johnston inappropriately took money from other clients.
Investigators say Johnston used hundreds of thousands of dollars to make several investments.
The affidavit in the forfeiture action said Johnston had control of Woodland Dream. The affidavit said Johnston made a number of expenditures on Woodland Dream from accounts used "during the course of fraud and into which fraud proceeds were deposited."
Woodland Dream has been cared for at a farm in Bourbon County, the affidavit said.
In regard to the businesses, Glenn's Creek Beer Exchange is a bar on East High Street in Lexington that has multiple owners, the affidavit said. A company called Glenn's Creek Brewer's Union owns a dormant barbecue restaurant and land in Woodford County where the owners plan to eventually operate a brewery, according to the affidavit. The brewer's union is owned by the same owners as the bar, the affidavit said. The affidavit said financial records disclose that Johnston made a number of expenditures, totaling about $520,000, to and on behalf of the bar and the brewer's union company from accounts "used for fraudulent purposes and into which fraud proceeds were deposited."
Johnston told the FBI agent that he had no financial interest in Glenn's Creek. But the affidavit said owners of the beer exchange and the brewer's union told Moutz that they think Johnston has an "ownership interest" in the two businesses, "even if such interest is not disclosed on public documents."
A Glenn's Creek Beer Exchange worker's compensation insurance application dated July 2012 lists Johnston as the sole owner. The affidavit said Johnston had significant involvement in establishing Glenn's Creek and that he is a personal guarantor on the lease of the High Street building.
Also subject to forfeiture, according to court documents, are vehicles and an engagement ring that Johnston gave to his former fiancée.