In our continuing series, Tales from the Receivership Trail, we are sharing an interesting story that shows for sure that crime does not pay.
Situation: A 50% owner (Owner A) of a flooring contracting business suspected that the other 50% owner (Owner B) was committing fraud and wanted to appoint a receiver to take control of the business and determine if, in fact, fraud had been committed.
Owner B was in charge of operating the business, including managing its financial affairs. Owner A was not involved in operating the business; however, he was responsible for financing it.
Owner A had hired a private investigator and forensic accountants to investigate his claim that fraud was occurring. He also filed a motion to appoint a receiver to take control of the business and investigate if fraud had actually occurred. Revitalization Partners was selected to be the receiver and was confirmed by the court shortly thereafter.
INSTANCES OF FRAUD DETECTED …
During the Receivership, RP immediately took control of the business, managed the operations as well as began investigating if the allegation of fraud could be substantiated. We immediately evaluated what contracts were viable and managed the completion of various projects and collected retainers and payments from the general contractors involved.
Regarding the fraud allegations, we found a number of instances that suggested fraud had occurred and worked to verify the facts.
We learned during the process that the bookkeeper was aiding Owner B in perpetuating fraudulent activities. For example, we found that the bookkeeper had a signature stamp from Owner B and was allowed to sign checks on behalf of the company.
There were close to a hundred checks that were made payable to the company’s bank for various amounts. There were close to fifty checks that were issued in the same amount and subsequently deposited in the bookkeeper’s bank account and went to paying her personal mortgage.
The bookkeeper was paid a regular weekly salary, so these payments were outside of her salary and were not authorized. Furthermore, the purpose of each check was altered in the company’s records to make them appear as a legitimate business expense.
We additionally found that there were cash transactions in the form of checks or ATM withdrawals amounting to close to $145,000 that were taken by Owner B or by the bookkeeper at the direction of Owner B.
THE MOST EGREGIOUS …
Probably the most egregious fraudulent action we found related to the bookkeeper, at the direction of Owner B, applying for a merchant cash advance loans in Owners A’s name.
Merchant cash advance loans are relatively easy to obtain and are funded within a matter of days after the application is completed online. The bookkeeper applied for a number of loans and was approved for by two different lenders for loans totaling $200,000.
These types of loans require information and identification from the loan originator, along with pictures of the individual’s photo identification.
Owner A’s name was used to apply for the loan and included a personal guarantee. The bookkeeper forged owner A’s signature on all of the loan documents and provided Owner A’s picture identification.
The one fatal flaw in this, however, is that they superimposed someone’s picture on Owner A’s identification, which happened to be a different ethnic origin than Owner A. This along with the forged signatures was clearly a blatant act of fraud and was relatively easy to document.
FBI ALSO INVESTIGATES …
We were successful in confirming and documenting the fraudulent activities and providing information to the authorities for action.
As a significant part of the investigation, the FBI decided to investigate, and RP cooperated by providing information and the company’s computers as part of their fact-finding activities.
Ultimately charges were brought against both Owner B and the bookkeeper. One of the RP principals actually testified when the case was brought to court.
In the final windup, Owner B plead guilty to fraudulent charges and the bookkeeper was convicted by a jury of wire fraud, aggravated identity theft and conspiracy.
The following are a few edited excepts from the press release sent out by the FBI upon the bookkeeper’s conviction.
CONSPIRACY DISCOVERED …
According to records filed in the case and testimony at trial, the bookkeeper conspired with Owner B to steal from the company and defraud the silent partner who had put up the money for the business.
In the jury trial, prosecutors detailed how both defendants carried out the scheme by embezzling more than $400,000 from the commercial flooring business.
Between 2011 and 2016, they raided the company accounts to pay for everything from a home mortgage to luxury vacations, to Nordstrom bills.
The two not only raided company funds, but they also defrauded financial institutions by taking out loans without the knowledge or permission of the company’s co-owner.
The lies and deceit in this scheme involved forged signatures, forged documents, altered records, secret bank accounts, secret credit cards, false bookkeeping entries, and false statements in declarations and court filings.
So, at the end of the day, the two defendants learned the hard way, that “Crime Doesn’t Pay” and they will eventually get caught.
Revitalization Partners played a significant role in bringing these two individuals to justice. And while this was not a typical receivership, this case shows how court-appointed receivers can use their power in many different ways.
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
