Paybooks Owner Used Client Payments Intended for Taxes for Personal Expenses

ROCHESTER, N.Y. (May 5, 2010) - Attorney General Andrew M. Cuomo today announced that his office has obtained a court order and judgment for more than $2.2 million from a Rochester-based payroll company that defrauded hundreds of area businesses through an elaborate scheme where the owner kept money intended for taxes, using it instead for personal expenses.

Under a court order and judgment issued in State Supreme Court of Monroe County, Paybooks, Inc. and its president Jeffrey Sykes are permanently barred from the payroll business and must set aside $2 million for restitution for eligible consumers. They must also pay a civil penalty of $5,000 for each instance of a deceptive act (totaling $200,000) and $2,000 in costs. A court-appointed receiver is overseeing the liquidation of the companys assets as well as the distribution of restitution. Consumers have until August 31, 2010 to file a complaint with the Attorney Generals Office in order to be eligible for restitution.

This company was supposed to process payrolls and prepare taxes, not co-opt customer cash for personal expenses, said Attorney General Cuomo. Hundreds of small businesses put their trust in Paybooks only to be left with tax penalties, fines, and records that were in shambles. Today, Paybooks and its president are permanently out of this business and are being held financially accountable for the harm they caused.

In 2009, Cuomos office filed a lawsuit against the now-defunct Paybooks and Sykes over their failure to forward client payments to tax authorities, causing hundreds of local businesses to be subjected to tax penalties and interest. An investigation by the Attorney General found that Sykes used his customers money for personal and operating expenses when he should have been forwarding to governmental agencies as payroll tax payments.

Paybooks, formerly located at 595 Blossom Road in Rochester, provided payroll services to approximately 1,100 small businesses (with between 6-7 employees) in the greater Rochester area. According to its marketing literature, Paybooks assured our clients of accurate and timely payrolls each and every pay period…. No more missed deadlines and possible tax penalties. However, the Attorney Generals Office received several complaints in May 2009 from business owners regarding Paybooks failure to file federal and state withholdings and unemployment taxes, with some unpaid taxes dating back to the Third Quarter of 2008.

Cuomos investigation revealed that Paybooks illegally conducted business under a plan devised by Sykes to pay operating and personal expenses out of the money collected from the customers, and then pay the various taxing entities out of new money being withdrawn from the accounts of other customers. Similar to a Ponzi scheme, over time, the new money was not sufficient to cover the taxes when they were due, so Sykes failed to make payments on behalf of hundreds of customers or paid the authorities late, resulting in the assessment of interest and penalties against their customers.

In an effort to cover up the scheme and keep his customers, Sykes routinely misrepresented to customers the status of tax payments, the cause of the late payments and the health of the business. The investigation determined that Paybooks used the customers money to pay overhead expenses while creating insurmountable debt. Sykes also routinely paid his personal expenses and took large cash withdrawals out of the business accounts that contained money intended to pay customers taxes.

In March, Cuomos office reached an agreement with state and federal tax entities to provide special assistance to help area business owners defrauded by Paybooks. New York State Division of Tax and Finance and the Internal Revenue Service (IRS) indicated that, on a case-by-case basis, they may waive certain penalties and interest payments on penalties for these consumers. Both the IRS and the State Division of Tax and Finance have assigned dedicated personnel to assist businesses in dealing with their tax issues because of Paybooks alleged fraud.

To keep impacted business owners up to date on the matter, Cuomos office has set up a Web page dedicated to the Paybooks case:

The matter is being handled by Assistant Attorney General-in-Charge of the Rochester Regional Office Debra Martin under the supervision of Deputy Attorney General for Regional Affairs J. David Sampson.