Baby formula case brings guilty pleas
Brookfield brothers accused of warehousing stolen goods at New Berlin business
What started with federal agents raiding a Waukesha County warehouse four years ago and seizing more than 81,000 cans of suspected stolen baby formula culminated Tuesday when a prominent Milwaukee-area businessman and his brother were charged with conspiracy and hiding income to avoid taxes.
Rassem "Russ" Kaloti, 50, owner of Kaloti Wholesale of New Berlin, and his brother and partner in the business, Ishaq "Isaac" Kaloti, have agreed to plead guilty to the tax and conspiracy counts. In addition, Isaac Kaloti, 45, will plead guilty to knowingly receiving stolen baby formula.
Federal prosecutors laid out a complicated scheme in which the brothers hid millions generated by their grocery distribution company and a hotel they owned using secret bank accounts and secondary computer systems. They also paid illegal immigrants in cash to sort and relabel baby formula - and to iron the brothers' clothes and wash their cars, according to the charging document filed Tuesday.
"These charges reflect our continued commitment to investigate and prosecute criminal conduct occurring at the highest levels of business, no matter how complex the case, and to bring to justice wrongdoers regardless of their stature, office or position," U.S. Attorney James L. Santelle said in a statement.
Under the sentencing guidelines, the brothers - who both live in Brookfield - each face a minimum of three years in prison, but prosecutors agreed to recommend 30 months behind bars for each and allow the terms to be "staggered" so one brother is always out to run the business.
Ray Dall'Osto, an attorney for the Kalotis, said the plea deal was the best option for the brothers and allows a way for them to continue running the New Berlin business, which he said employs about 200 people and generates $100 million a year in sales.
"It was determined it was in their best legal interest for a global resolution," he said. "This will resolve all the legal matters and put them in a position where the company will be able to continue operations."
The maximum penalty on the stolen infant formula charge is 10 years in prison and a $250,000 fine; on the conspiracy charge, five years' imprisonment and a $250,000 fine; and on the 2005 tax charges, three years' imprisonment and a $100,000 fine, according to the office. As part of the plea agreement, the brothers agreed to pay back taxes, a penalty and interest.
U.S. District Judge J.P. Stadtmueller will have the final say on sentencing. No court dates have been set.
The case went public in February 2007 when FBI and IRS agents raided the Kaloti warehouse in New Berlin and seized, among other things, more than 81,000 cans of suspected stolen formula. A battle followed in court between the Kalotis and the government over the formula. As part of the plea agreement, the Kalotis have agreed to forfeit the infant formula to authorities.
The Kalotis' attorney argued that the government did not understand the resale business. Dall'Osto said that position has not changed and the seized formula was legitimate. However, during the investigation other shipments of formula came to light that were what Dall'Osto called of "questionable origin."
Besides the grocery wholesale business, the Kalotis are also in the hotel business. In 2006, Russ Kaloti bought a vacant parcel at the southeast corner of N. Mayfair and W. Watertown Plank roads in Wauwatosa and developed a 198-room Crowne Plaza Hotel. That $32 million hotel, which is adjacent to the Milwaukee County Research Park, opened in March 2008.
Kaloti also owned a Howard Johnson Inn & Suites in downtown Milwaukee that was used to house, feed and transport new military recruits under a $2.8 million contract, according to court documents.
According to the charging document filed Tuesday, Russ Kaloti was president and co-owner of four companies while his brother was co-owner and vice president.
The brothers had secret bank accounts they used to conceal income, including rebate checks they received as part of a grocery wholesale cooperative, from December 2000 to April 2008. The government reported that more than $1 million was diverted into the concealed accounts during this time.
The brothers also transferred money for so-called business expenses when, in fact, they were for personal expenses, the charging document says. They did not report this income to the IRS. In total, the Kaloti brothers diverted about $2.2 million to themselves and $103,000 to family members, it says.
The brothers also moved funds designated as "purchases" when they were really cash payments that would go to Kaloti warehouse employees in the country illegally. The workers were responsible for the dirty and sometimes dangerous work of sorting and cleaning cans of baby formula. These illegal residents also were used to clean the Kalotis' house, to wash and vacuum their cars and to iron their clothing, according to the charging document.
From 2001 to 2004, the brothers failed to report more than $1 million in income generated at their Howard Johnson hotel downtown. They did this by using a second computer system at the hotel to hide sales of more than 40 of the hotel's 142 rooms, the charging document says.
The seizure of baby formula from the warehouse in February 2007 highlighted a lucrative and sometimes illegal trade in formula - sometimes called "liquid gold" because of its value. Thieves will steal the formula, strip it of price tags and other markings and then sell it to other stores that often sell it in exchange for government food aid vouchers.
In an affidavit to search the Kaloti warehouse in 2007, investigators alleged that Kaloti Enterprises reached across state lines to take in $4 million in suspected stolen baby formula in one year.
Isaac Kaloti admitted to receiving $5,000 worth of stolen formula in May 2005. No other details were provided. Russ Kaloti was not charged in that count.
Tom Daykin of the Journal Sentinel staff contributed to this report.
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