26 Feb 2014

On 26 Feb 2014, the Patriot Ledger reported that a trusted employee of GateHouse Media allegedly stole funds.  The employee ran a business office that collected sale proceeds from six daily and roughly 100 weekly newspapers in New England.  After allegedly stealing the funds, the employee deposited the same into her personal account.  To cover the alleged theft, the employee purportedly manipulated records.  The police began investigating the employee after another employee found a tampered-with bank deposit bag.  The amount of the alleged theft: $279,000.  (http://www.patriotledger.com/apps/pbcs.dll/article?AID=%2F20140226%2FNEWS%2F140227497).  Employees can takes small amounts of cash from employers without detection.  To take $279,000, however, reflects a breakdown of internal controls, assuming GateHouse had internal controls.  Starting with the basics, the business office likely collected cash, checks and credit cards from customers.  Those customers received something as part of the exchange.  As a first step, Gatehouse should have matched products delivered with cash received.  Even with a breakdown in an accounting internal control system, a matching mechanism between billings and work performed should detect records manipulation over the long-term.  Also, from the gist of the article, it appears that Gatehouse properly matched payments with billings, but some of those payments never made it into the bank.  A simple comparison by someone that does not have anything to do with applying cash or depositing it, could have rolled forward activity and matched that activity to the deposit.  This methodology will not catch small thefts, but lowering thresholds for errors will at some point catch consistent and large thefts.  At the very least, the bank would have reported that the deposit amounts would have differed from the amount reported and Gatehouse had to make entries to its cash to account for the difference, most likely a write off.  Unfortunately, many organizations do not employee procedures which not only detect theft, but also serve to deter theft. 

18 Feb 2014

On 18 Feb 2014 the Montreal Gazette reported the arrest of a man for allegedly defrauding 41 people out of tens of thousands of dollars.  The Defendant placed classified ads placed in local papers with an offer to loan money.  The rub, the potential borrower had to pay between $300 and $2,000 to open a file.  The Defendant also convinced some people with really bad credit to allow the use of their bank accounts to deposit other victims’ money orders under the guise that having a higher bank balance improves credit ratings.  The respondents never received the promised loans.  (http://www.montrealgazette.com/news/Sorel+Tracey+alleged+have+defrauded+people/9521078/story.html).  It should go without saying that prior to parting with cash to borrow cash, a person needs to ensure the legitimacy of the counter-party.  At the very least, a person should see some sort of documentation from a government agency that the lender has the proper licenses to make loans if the lender does not operate out of a financial institution.  The next question to ask, if you have doubts, where did the lender obtain the funds for lending.  Finally, most legitimate lenders have an application and will ask for some sort of social security number.  If you do not trust giving this person your social security number, you surely do not want to give them your cash.



3 February 2012

On February 16, 2010, the Montreal Gazette reported that Bertram Earl Jones pleaded guilty to defrauding 158 clients of $50 million in a Ponzi scheme he operated for more than two decades.  A judge handed him an 11-year sentence.  (http://www.montrealgazette.com/news/Earl+Jones+gets+years+Ponzi+scheme/2567329/story.html).  In one instance, according to the Montreal Gazette, it appears that Mr. Jones used a power of attorney to take out a loan in one of his victim’s names, secured with the victim’s home.  The victim sued the creditor and a notary.  What makes the case interesting is an argument the notary’s attorney made.  On February 3, 2012, the Gazette reported that the attorney questioned the victim’s credibility arguing that the victim "put all her eggs in one basket with Earl Jones."  (http://www.montrealgazette.com/news/Victim+Earl+Jones+wants+loan+annulled/6095091/story.html).  In effect, the lawyer argues that you need an expert to investigate your expert or else you had better diversify.  Incredible!  The lawyer blames the victim for not being an expert.  Before giving anyone a significant amount of cash, a power of attorney with authorization to borrow money and take mortgages, or even buy a home, stakeholders should obtain an independent attorney or other expert opinion.  For about $1,000, this particular victim could likely have avoided the imbroglio in which she now finds herself had she performed her due diligence prior to giving a reprobate access to her assets.

11 January 2012

On January 11, 2012, the Folsom Telegraph reported that a 29-year old man from Folsom, CA, plead guilty to one count of wire fraud and one count of aggravated identity theft related to a $19 million fraud scheme.  According to a complaint filed in the United States District Court of the Eastern District of California, Docket No. 2:09 MJ00046KJM, one part of the scheme involved offering investors a real estate vehicle in which the investors served as nominees for the purchase of real estate.  The Complaint specifically references Citimortgage and the falsification of mortgage materials Citi relied upon to fund three mortgages.  The investors did not serve as nominees, but actually owned the real estate and Citi thought the mortgagees intended to occupy the home whereas the investors thought they had simply invested in real estate managed by another.  The most interesting part of the Complaint, however, concerns the attachment the government included in which the writer discusses how the writer: (a) became a fraudster; (b) beat the regulatory system; and (c) how to change the system to prevent people like the writer from beating it.  The fraudster proposes combining Freddie, Fannie and other governmental entities as well as creating an information verification center.  The writer also notes that investors like Citi did not verify the data that supported the loans such as credit reports, W-2’s and paystubs.  When an investor did catch a fraudulent loan, the writer claimed the loan an anomaly, fired the person that generated the mortgage and replaced the fraudulent loan with another loan.  Investors, in turn, packaged these loans into mortgage-backed securities.  According to the writer, the writer’s firm generated $810 billion dollars in mortgage-backed securities in which most of the underlying mortgages had some sort of material fraud made in order to fund the loan.  The writer also asserts “[t]hese investors, who were securitizing these assets as AAA rated were not even verifying anything in the files? I am sure that their investors were assured everything from correspondents was being audited.”  As a stakeholder, investors needs to conduct their own due-diligence.  Firms like The Witan Group can help in this regard.

30 December 2011

On December 30, 2011, the New York City field office of the Federal Bureau of Investigation reported on the successful prosecution for bank fraud, among other things, of the CEO of GDC Acquisitions, a holding company.  (http://www.fbi.gov/newyork/press-releases/2011/former-chief-executive-officer-of-construction-supply-company-convicted-in-bank-fraud-scheme).  GDC apparently inflated the value of its accounts receivable to the detriment of GDC’s asset based lender.  As in most cases involving fraud, the fraud only came to light after a GDC accountant turned himself in to the FBI.  According to the FBI press release, GDC reported to its asset-based lender a receivable value of $25.2 million when the value actually amounted to $9 million.  GDC achieved this feat through creating fake sales.  This particular issue begs the question as to why the asset-based lender’s field exam missed such a brazen overstatement of assets.  A field exam usually employs the sample testing of invoices comprising a borrower’s accounts receivable in order to verify the existence assertion.  A field exam will not likely catch small over-billings, but field exam should catch a 280% overstatement of accounts receivable.  This case illustrates the need for banks to use competent field examiners for proper due diligence in order to monitor credits.