Fraud Archives

Resources for information about fraud

Fraud is defined as any act, expression, omission, or concealment calculated to deceive another to his or her disadvantage. Fraud can be committed through many methods, including mail, wire, telephone, written instruments, and the Internet. State and federal statutes criminalize fraud, but not all cases rise to the level of criminality. Prosecutors have the discretion in determining which cases to pursue. Victims may also seek redress in civil court. Fraud must be proved by showing that the defendant’s actions involved five separate elements: (1) false statement of a material fact, (2) knowledge by the defendant that the statement is untrue, (3) intent by the defendant to deceive the alleged victim, (4) justifiable reliance by the alleged victim on the statement, and (5) injury to the alleged victim as a result.

Below are several Web sites that provide information about various types of fraud, including tips for protecting yourself and filing formal complaints.

|Educational Series, Fraud|

Regional religiosity and financial scandals

A July 2, 2010 article in the Nashville Business Journal and other publications reported that a study by accounting faculty members Sean McQuire, Thomas Omer and Nathan Sharp at the Mays Business School of Texas A&M University revealed that the more religious the state, the less chance there is of financial malfeasance. The researchers concluded that for every 10% increase in the population’s religiosity, the odds that a firm headquartered there will be sued over accounting issues decreases by 49%. According to a Gallop poll of residents who said that religion was important to them, Mississippi, at 86% was number one, followed by Alabama at 84%. New York was last, at 44%.

The study also found that small and medium-sized firms tend to use religion as a self-regulating mechanism in the absence of more formal external monitoring. Sharp cautioned that the study is more a measure of an overall accounting approach among multiple firms of various sizes in the Bible Belt and cannot predict massive frauds such as those at Birmingham-based HealthSouth Corp., Clinton, Miss.-based WorldCom and Houston-based Enron. “We would view them as anomalies,” Sharp said. “We focused on smaller, systemic aggressive accounting occurring as almost a part of doing business. On average, when you hold everything constant, accounting practices are less aggressive in areas with high religiosity.” Sharp added that the study did not account for people using religion itself as a means to defraud.

|Criminal Activity, Educational Series, Fraud, Research|

Do you know how to spot online scams?

To educate consumers about online scams, the Federal Trade Commission (FTC) set up a Web site for Esteemed Lending Services, an online company that looks reliable and reputable, and promises easy advance-fee loans to anyone. But the company and the site are fictitious, designed to tip you off to the signs of loan scams. The FTC also has other “phony sites” for scam awareness for products such as diet aids (FatFoe) and made-up diabetes treatment (Glucobate.) Remember that as part of our investigation strategies for business transactions, SI includes Web site reviews to detect incredulities, too-good-to-be-true statements, boasts of unrealistic investment returns, and even wording that is unfitting for the particular industry.

|Educational Series, Fraud|

A career in fraud

A prospective client investigation was ordered on a company and its president, but the preliminary information on the president was enough to reject the subject or any company under his direction from the possible business engagement. Initial court searches uncovered a 2001 criminal misdemeanor conviction for possession of a false identification to be used to defraud. The index did not provide much information and the file was destroyed by the court, so SI’s analyst turned to media sources to dig deeper. Sure enough, one article referenced guilty pleas entered in 2002 by the subject and his business partner for hiring imposters to take the Series 7 securities brokers’ examination for them. Each was sentenced to a year of probation and fined $5,000. Other articles from 2002 reported three civil cases for fraud in locations where the subject appeared to have no residential history, and further disclosed that the subject and his partner had been statutorily disqualified from working for a broker licensed by the National Association of Securities Dealers, ordered to disgorge profits and interest totaling $4,649,125 and each were fined $15,000 in civil penalties in 2006. Articles also linked the subject to a con artist who had admitted to defrauding Jewish organizations and individuals of $80 million during the 1990s. Most recently, the FDIC had executed a written agreement with the subject and (the same) business partner after they allegedly failed to seek FDIC approval before making an investment in an unregistered bank holding company. On the whole, this company president had been engaged in fraudulent behavior for nearly a decade and no amount of legal or regulatory action appeared to change his mode of operation.

|Fraud|

Updating investigations as part of your risk management strategy

As part of its standard risk management program, our client requested background investigations of two individuals in connection with an engagement continuation. SI had conducted investigations of these subjects three years prior when our client initially began its consulting engagement with them. No negative information was located in the previous investigations; however, our client quickly learned the value of conducting periodic updates.

The new investigation revealed recently filed federal indictments charging both subjects with aiding and abetting in the evasion of taxes owed on their salaries between 2006 and 2008, amounting to more than $450,000 each. The government also charged that subject #1 directed his wife to evade income taxes on her salary between 2004 and 2007 by claiming as many as 99 exemptions on her W-4. Additionally, searches of the State Real Estate Board disclosed a pending disciplinary action against subject #2 for “misstating a material fact” that “included fraud.” Both subjects had filed personal Chapter 7 bankruptcies in December 2008 and had been named as debtors in multiple judgments and tax liens for amounts ranging from $35,000 to $2,300,000. The subjects had begun their start-up company three years earlier with clean records, but in short-order they had become a liability to our client.

|Educational Series, Fraud, Taxes|

Background investigation reveals untruth in advertising

SI was engaged to investigate a national company along with two of its principals as part of our client’s risk management program. The company’s ads have appeared almost daily in major newspapers and on the Internet, and the merits of its consumer services (for confidentiality, we can’t say what they are) have been touted in the professionally scripted testimonials of “real” customers. But SI’s investigation found media reports and court documents showing that the claims were not so credible. There is a pending federal class-action lawsuit against the company and its principals alleging several fraudulent business practices, including the misleading advertising of a service guarantee that “is riddled with restrictions, waivers and limitations” and service enrollments without authorization. Six additional lawsuits for similar causes of action are pending in various county-level courts.

Further, SI’s investigation uncovered the checkered backgrounds of the two principals behind the company. Searches of bankruptcy records revealed that both subjects had filed for protection from creditors – and in the co-founder’s case, had filed multiple times. Also missing from the company’s pitch was that the co-founder’s previous career in a similar business culminated in a federal judge’s order barring him from “promoting, offering for sale, performing or distributing any product or service related to

[consumer] services.” Had our client’s decision-makers relied on the company’s presentation of itself and its principals, they would not have been able to realistically assess the risk of engaging in business with the subjects. While a search of media stories might reveal complaints against a potential client, it’s a full in-depth investigation that brings all the pieces together.

|Bankruptcy, Criminal Activity, Fraud|

The not-so-good deeds of a charitable organization director…

As part of a business transaction for an accounting firm, SI was engaged to investigate one of the most respected charitable organizations in the US. The organization itself showed many years of humanitarian service, but among its countless good deeds, SI uncovered the not-so-charitable actions of a former chapter director. In 2008, this individual was sentenced to six years in a federal prison following his conviction on 15 counts of fraud, money laundering and interstate transportation of stolen property. The fraud charges involved swindling an Ohio man out of more than $9 million in a bogus investment scheme.

Additionally, in 2006, the Utah Division of Securities had fined the subject $60,000 and obtained a default cease-and-desist order barring him from future acts of securities fraud in an unrelated matter. Court records also revealed that the subject had convictions for grand theft and forgery dating back to the 1980s. By employing a risk management strategy like our client’s, the charity would have avoided its association with a felon, and thus prevented significant expenses and continuing embarrassment.

|Criminal Activity, Fraud|

Consider the source…of the funds

A holding company’s claim that it “had the funds and network to take the action necessary to complete business deals” was put to the test in an SI background investigation. Searches of civil records located a lawsuit filed in 2008 in which the holding company sued the United States of America, the Drug Enforcement Agency, and Internal Revenue Service for return of approximately $24.5 million seized from bank accounts in Florida. The government’s response to the holding company’s claim disclosed that there was an ongoing criminal investigation in Arizona involving drug trafficking and related international money laundering enterprises. The seizure of the funds resulted from evidence gathered during the investigation.

In addition to the foregoing, the government stated that it was still investigating whether there were any victims of fraud because the investigation made it apparent that many of the entities associated with the seized accounts had no legitimate business activity, are shell companies, and have failed to comply with reporting requirements in Florida regarding their purported operational activities. The government specifically noted that the holding company’s Web site appears to promote an investment scheme with unrealistically large interest returns which typically is consistent with a fraudulent investment operation and, in fact, agents have received statements from individuals reporting that they have invested in a program that promised incredibly high rates of return. The government’s investigation led it to conclude that the holding company failed to establish it is an entity of substance and not composed of a series of shell companies simply moving money around in a money laundering exercise to conceal the ownership, source, and control over the funds.

|Fraud|

One of the largest employment tax-fraud cases in IRS history

Our investigation, which included manual civil and criminal record searches and searches of media sources, revealed that the subject company and four of its subsidiaries are under federal indictment for conspiracy and wire fraud as part of a multimillion dollar tax fraud scheme orchestrated by the companies’ founder. This individual recently was sentenced to over 20 years in prison and ordered to pay restitution of $180 million to the Internal Revenue Service after pleading guilty to five felonies including failure to collect and pay payroll taxes and obstructing a federal investigation. It is reportedly one of the largest employment tax-fraud cases in IRS history. Before the sentencing, the individual attempted to justify his actions by claiming insanity.

The subject company and its subsidiaries also were defendants in dozens of lawsuits for fraud and breach of contract with damage claims totaling over $220 million, in addition to filing for Chapter 11 bankruptcy. Several motions had been filed to dismiss the bankruptcy proceedings, one of which was made by the company’s former accountants who were sued for professional negligence. In court papers, the accountants asked that the case be dismissed or converted to a Chapter 7 because “the only reason the debtor filed the petition was in an effort to help (the founder’s) criminal case.” The motion to dismiss also argued that the company has no chance to successfully reorganize because it is a “sham company used only for illegal activities,” has no remaining employees and no income.

|Bankruptcy, Fraud, Taxes|