2nd guilty plea in call-girl ring case

Charlotte businessman James Smith – accused of claiming payments to a high-priced call-girl ring as advertising expenses on his corporate income taxes – pleaded guilty Thursday to tax fraud.

Smith, identified in court papers as the owner of Red Clay Aggregate, is the second businessman to plead guilty in the federal government's investigation into HushHush, a lucrative prostitution ring based in Charlotte.

Smith, 41, is free on $50,000 bond pending his sentencing. He faces up to three years in prison and a fine up to $250,000. He did not respond to reporters as he left the courtroom.

Smith is accused of using the services of Soft Touch Promotions and SW Associates from 2002 through October 2007. According to court documents, those were the shell companies used to operate the Internet-based escort service.

The federal charge accuses Smith of falsely characterizing his transactions with Soft Touch and SW Associates as, among other things, advertising expenses on his construction company's tax returns.

“In truth and fact, the expenses were personal in nature, and the false treatment on the corporate tax return caused the understatement of income to defendant James Smith,” the charge alleges.

Prosecutors allege that Smith reported income of about $455,935 on his 2006 tax return. But Smith, according to the charge, knew his income was substantially more.

During Thursday's court hearing, Assistant U.S. Attorney Thomas Cullen told the judge that Smith owes an additional $19,543.66 in taxes over a five-year period.

Smith's guilty plea comes just five days before the scheduled sentencing of Sallie Saxon, who ran www. hush hush.com from her home in southeast Charlotte. She made millions of dollars arranging sex for affluent clients.

Saxon, 58, had more than 500 clients and charged as much as $700 an hour for her prostitutes. She faces two to four years in prison.

In June, Dr. Kenneth Friedman, a cardiologist who practices near Raleigh, became the first “john” to be charged in connection with Saxon's prostitution ring.

Friedman pleaded guilty to conspiring to entice an individual – identified only as “SJ” – to travel from North Carolina to Las Vegas to engage in prostitution. He faces up to five years in prison.

Staff writer Steve Lyttle contributed