"More than four years later, Client 1 is still waiting to receive his portion of the settlement", U.S. Attorney Nick Hanna said at a news conference in Los Angeles.
The case is separate from another involving Nike that says Avenatti tried to extort $20 million from the sportswear giant.
Avenatti shot to overnight fame previous year as the counsel for Stormy Daniels, the adult film actress who claims to have had sexual relations with President Donald Trump, and his bulldog approach to taking on the president and his legal team helped garner him endless spots on cable TV news shows.
The indictment also accuses Avenatti of having failed to file multiple individual income tax returns, saying the last such return he filed with the IRS was in 2010.
Avenatti became a prominent critic of Trump and a frequent cable TV guest while representing Daniels, whose real name is Stephanie Clifford. Avenatti even dangled the prospect of entering politics himself, even as a 2020 presidential contender, before abandoning the idea.
Avenatti's two law firms are Eagan Avenatti and Avenatti & Associates.More news: Emilia Clarke is attached to her Game of Thrones character
"Any claim that any monies due clients were mishandled is bogus nonsense".
Following Avenatti's arrest last month, The Washington Post's Devlin Barrett and Elise Viebeck reported that it marked "the latest and most remarkable chapter in the odd public saga of the California lawyer". But when Johnson was in escrow to purchase the property, Avenatti falsely said he had not received the settlement funds, the indictment said.
The indictment said Avenatti made false statements in bankruptcy proceedings by submitting forms under penalty of perjury that under reported income his firm received.
Embattled California attorney Michael Avenatti will be named in an indictment at noon EST on Thursday.
Avenatti used another $2.5 million in settlement money belonging to another client to help pay for a private jet, the indictment said.
Federal agents confirmed with Fox News that they had seized a Honda HA-420 twin-engine jet-worth $4.5 million-on April 10 after a federal judge issued a warrant. The failure to respond led to Johnson's disability benefits being cut off in February.
Under State Bar of California rules of professional conduct, a lawyer must promptly notify a client of the receipt of any funds they are entrusted to hold for the client and turn over the money at the client's request.
According to the indictment, Johnson's efforts to buy a house failed because Avenatti withheld the settlement money, and Avenatti lied to the U.S. Social Security Administration about the settlement to hide the embezzlement, leading the agency to cut off Johnson's benefits.