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Fraud Crime Scene Investigated. San Diego County Treasurer Fraud Prevention Seminar July 2011 Presented By: Christy White, CPA Erin Sacco Pineda, CPA Ben Leavitt, CPA, CFE Christy White Accountancy Corp. 619-270-8222 Web: cwacpa.com. How Prevalent is White Collar Crime?.

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fraud crime scene investigated

Fraud Crime Scene Investigated

San Diego County Treasurer Fraud Prevention Seminar July 2011

Presented By:

Christy White, CPA

Erin Sacco Pineda, CPA

Ben Leavitt, CPA, CFE

Christy White Accountancy Corp.

619-270-8222

Web: cwacpa.com

how prevalent is white collar crime
How Prevalent is White Collar Crime?
  • 2008-09 Integrity Survey by KPMG
    • 74% of employers reported instances of fraud
    • 46% of employees reported they knew of “serious misconduct that would result in a significant loss of public trust if discovered!”
    • Government was 2nd to the automotive industry in total number of reporting instances of fraud and 3rd in the seriousness of the crimes committed
just last week in the news
Just last week in the news…
  • Lee Farkas, the ex-chairman of Taylor, Bean & Whitaker Mortgage Corp., sentenced to 30 years in prison for a $3 billion fraud involving fake mortgage assets to keep his bank afloat while pocketing over $40 million in personal funds!
  • GaryFoster, a mid-level CitiGroup accountant with a $100,000 annual salary owned six luxury homes, had a $500,000 entertainment system and bathroom mirrors that turned to video screens when touched, plus a MaseratiGranTurismo, BMW 550xi and a Ferrari was on order!
    • He moved $900,000 from Citigroup’s interest expense account and about $14.4 million from Citigroup’s debt adjustment account to the bank’s main cash account. Then, on eight separate occasions, he wired the money to a personal account at Chase.
the fraud triangle or how trusted people can steal
The Fraud Triangleor “How Trusted People Can Steal”
  • Pressure – a perceived “non-sharable” financial need (e.g., unable to pay one’s debt, unable to admit personal failures, business reversal, need to “keep up with the Jones” or be ousted from the group)
  • Opportunity – perceived ability to perpetuate fraud
  • Rationalization – why it is OK (e.g., underpaid/overworked, a temporary loan, a one-time incident)
rationalization expanded
Rationalization Expanded
  • Not ex post facto justification but rather a necessary component of the crime before it takes place
  • Common rationalization: “borrowing”
    • At crossroad when in too deep, either:
      • Come clean, make wild attempts to regain amounts, or even commit suicide; or,
      • Go the full criminal route!
how employers are unwitting accomplices
How Employers Are Unwitting Accomplices
  • Placing too much trust in key employees
  • Lax controls:
    • Lack of proper authorization procedures
    • Lack of background checks
    • Lack of segregation of duties
  • Tone at the top and supervision problems
    • Inattention to details
    • Open access to assets and records
    • Lack of clear lines of authority
    • Lack of effective internal audit
  • Not paying attention to red flags
three cases
Three Cases
  • Superintendents misplace TRUST in a Central California Nonprofit
  • TONE AT THE TOP drags this governmental agency down
  • RED FLAGS IGNORED in largest California school district fraud case
case 1 the problem with trust

CASE #1: The problem with TRUST

What can happen when sub-recipients and vendors are not monitored?

case 1 the situation
Case #1: The “Situation”
  • A small nonprofit agency is the sub-recipient of federal grant funds through a local educational agency
    • The nonprofit’s Board is made up primarily of superintendents from the local educational agencies (LEAs)
    • The Executive Director (ED) of the nonprofit identifies a federal program and convinces one of the LEA superintendents that they should apply for the grant.
      • The ED says she will be the program director
      • The Superintendent and his District staff just have to draw funds and pass them through to the nonprofit.
case 1 the crime
Case #1: The “Crime”
  • The Executive Director allegedly used the nonprofit’s (and therefore, Federal) funds as her personal bank account
    • She charged up the credit cards with personal food, transportation, and personal care expenses
    • She used petty cash at will
    • She had the nonprofit pay for her family’s cell plan.
    • She reimbursed herself for college tuition and fees.
    • She put her daughter on the payroll.
case 1 how did this happen
Case #1: How did this happen?
  • The Sales Pitch
    • The ED wrote the grant application,

put herself in the “trusted” program director position, and allegedly told the school superintendent that his staff wouldn’t have to do anything but pass the funds through to the nonprofit.

    • The nonprofit Board met irregularly (with the ED) who gave satisfactory reports about the organization’s activities and finances.
case 1 how did this happen cont
Case #1: How did this happen (cont.)?
  • The follow through (or lack thereof)
    • The LEA processed draw requests from the nonprofit without any supporting documentation
    • The LEA’s CBO didn’t even realize they were the grantee on the Federal grant until their auditors pointed it out
    • Even after their auditors notified them of their responsibility to monitor the nonprofit, no changes to draw procedures were made
case 1 how was she caught
Case #1: How was she caught?
  • Greed got the best of her…
    • The agency grew large enough that the ED’s dictatorial style inhibited operations
    • She made inconsistent and unpopular personnel management decisions
    • She didn’t “share the wealth”
case 1 how was she caught cont
Case #1: How was she caught (cont.)?
  • The BLOW UP
    • A group of current and former employees filed legal action against the ED and the nonprofit for illegal personnel policies and back pay
    • A separate group of employees filed a grievance through the channels provided for in their employee handbook.
    • One or both claims was sent directly to the Board of Directors, the LEA, and the Federal cognizant oversight agency.
case 1 csi conclusions
Case #1: CSI Conclusions
  • Approximately ½ of the nonprofit’s Federal funds were identified as questioned costs in their first A-133 audit
    • And, the LEA (the grantee) is likely on the hook if the Feds require return of the funds!
  • The current superintendent and staff of the LEA are left to “clean up” the mess caused by the policy of his predecessor.
  • All Federal grantees who use sub-recipients/sub-contractors should be mindful of their responsibilities and be very careful about the sufficiency of their sub-recipient monitoring policies and procedures
case 2 tone at the top

CASE #2: Tone at the Top

The Dangers of an Executive Team in Collusion to Steal!

case 2 meet dr jekyll frank a tassone
Case #2: Meet Dr. [Jekyll] Frank A. Tassone
  • Beloved Superintendent
    • Led Roslyn School District, Est. 1860s
      • Affluent Long Island, NY Suburb
      • 3,300 Students, 95% Graduation Rate
    • Strong relations with students, parents, teachers, religious leaders, senior citizens, real estate agents!
    • Ran a Charles Dickens book group
      • But, led a double life!
case 2 meet mr hyde frank a tassone
Case #2: Meet Mr. [Hyde] Frank A. Tassone
  • Tone Setter
    • Unlawful board-granted authority
      • Allowed to make unlimited amounts of unlimited $$ funds transfers
    • Numerous cash-advance enabled credit cards
      • Obtained for himself and business office staff
    • Questionable Hiring Practices & Lack of Segregation of Duties
      • Selected a CBO who hired her niece as an accounting clerk
      • Selected a personal acquaintance to be the district’s Internal Auditor
      • Chose his domestic partner to be a paid consultant to the district
      • District’s treasurer rarely attended board meetings and/or reported on the budget
      • District warrants signed by Dr. Tassone’s Secretary (in place of the district’s treasurer)
    • Financial controls disregarded
      • Anti-fraud controls in financial software were not activated
case 2 the fall out
Case #2: The Fall Out
  • $11.2M of district funds lost!
    • Supt. Tassone - $2.4M, CBO Gluckin - $4.6M
      • Luxury vacations, art, jewelry, clothing, lavish automobile allowances, gambling, mortgage payments (primary & vacation homes), college loans, dry cleaning bills
    • Supt. domestic partner Signorelli - $219K
    • CBO niece - $780K
    • CBO son McCormick - $187K
    • Internal Auditor - $6,200
    • $1.1M in CC ATM cash withdrawals
    • $1.5M in CC payments coded to laboratory supplies vendor
    • $900K in CC payments coded to special education vendor
case 2 how did this happen
Case #2: How did this happen?
  • A Troublesome Tone
    • Culture of abuse & extravagance
    • Exhausted budget line items were reloaded with funds from alternate accounts without oversight
    • Lack of records maintained resulted in $ millions unaccounted for
    • Outside accountant was complicit in the scheme and manipulated records to disguise blatantly illicit expenditures
  • A Troublesome Duo
    • Collusion between Tassone (Supt.) and Gluckin (CFO)
      • Gluckin went down first, Tassonecovering up his role in the scheme
case 2 how did this happen cont
Case #2: How did this happen (cont.)?
  • Gross Collusion = IC Meltdown
    • 26 “additional beneficiaries”
    • No review/discretion over legitimacy of CC expenditures
    • Warrant listings were not adequately reviewed by internal auditor prior to issuance or maintained subsequent to issuance
    • Dr. Tassone’s secretary signed in place of the district’s absentee treasurer
  • Perfect Fraud Triangle
    • Dr. Tassone was quoted as saying “Look at the CEO of IBM—they’re making zillions and we’re making $200,000.”
    • “Look at my contract,itcovers all ‘reasonable expenses.”
case 2 how was it stopped
Case #2: How was it stopped?
  • Tips, student reporting, Home Depot…
    • Anonymous tip letter – lit a spark
    • Beacon Newspaper – fanned the flame
    • Store clerk – noted an purchasing irregularity
    • State Comptroller – conducted audit, generated convictions
case 2 hard lessons
Case #2: Hard Lessons
  • Tassone serves 4-12 year sentence and ordered $2 million in restitution
  • The Board’s authority should stay with the board
    • Important budgeting and expenditure decisions and information should be made and relayed in the public forum
  • Disbursements should be closely reviewed by independent persons (those without custody or recordkeeping functions)
    • Highly liquid disbursements such as credit card activity should be closely monitored
    • Warrant listings should be thoroughly reviewed and consistently maintained for subsequent analysis
  • Communication pathways such as fraud hotlines and the internal audit function should be open and maintained with direct access to the board a must!
case 3 red flags go unheeded

CASE #3: Red Flags Go Unheeded!

The Single Largest Fraud Case in California School District History

case 3 the situation
Case #3: The “Situation”
  • Newport-Mesa Unified School District, an approx. 20,000 pupil school district with a $91 million budget at the time
  • Stephan Wagner, with 21 years at the district, rose from ranks of accountant to Chief Financial Officer
    • Considered a financial wizard before he became known as a crook!
case 3 the crime
Case #3: The Crime

Absconded with nearly $4 million over a 6 year period!

Between 1986 and 1992

case 3 how did it happen
Case #3: How did it happen?
  • In about 1986, a health insurance account “closed” and another opened
    • Auditors confirmation process deceived by forgery and closed account was truly open
  • Cozy bank relationship abetted the crime and two signature requirement not enforced
  • Secret account used to siphon funds from unexpected revenue sources
  • Phony businesses used to move money to personal accounts, including the Cobbler Express
case 3 how was he caught
Case #3: How was he caught?
  • Tip reported Summer 1991 to the DA’s office
    • Accountant handling bank reconciliations found the secret account and checks written to Cobbler Express
      • Notified District Attorney’s office whose staff reportedly went to Wagner directly!
      • Went to the Orange County Grand jury in Spring of 1992
  • A full year later the Deputy Superintendent was contacted by the DA’s office who was not aware of the investigation
    • On Oct. 13, 1992 she personally went to the bank, inspected the records and found the soon to be confirmed fraud
case 3 red flag ignored living beyond his means
Case #3: Red Flag Ignored! Living Beyond His Means!
  • According to a Los Angeles Times Article by Gregory Crouch, on Nov. 15, 1992 LA Times article, Newport Schools Official Enjoyed Life of Opulence:
    • Few questioned Wagner's parade of Mercedes-Benzes, his Rolls-Royce, seven different properties including a $975,000 Newport Beach house or extravagances like a fur-lined bathrobe. He even regaled colleagues with a story--now known to be untrue--about owning Nevis, a Caribbean island.
  • He drove a gold-color Mercedes with license plate “Just Cus”, had a 1964 burgundy Rolls Royce Silver Cloud III and his wife had a 1990 Mercedes 3000TE.
    • Everyone knew Wagner's $79,848 salary couldn't support his lifestyle but he spoke of successful businesses he had on the side--stocks, real estate, gemstones, even a limousine service and a pair of shoe repair companies.
  • He favored mink coats, showing up at a district 25th anniversary event in a mink tuxedo and at art festivals with his wife in mink coats
  • He explained his riches by “painting himself as an astute businessman and savvy investor.”
case 3 red flag ignored bosses in denial
Case #3: Red Flag Ignored! Bosses in Denial
  • Quoted to the LA Times:
    • “My only interest was in the work he did for us and I was perfectly satisfied with that," said Newport-Mesa Supt. John W. Nicoll. "If I got nervous about all the Maseratis and expensive cars I see in Newport Beach, where would I be?"
    • Something of a mentor to Wagner, Nicoll was a bit chagrined by his colleague's expensive tastes. "I saw him at one party last year wearing a mink jacket. I was sporting a brand new tuxedo. . . . I felt kind of shabby after that.”
    • "You can bury $500,000 a year in a $90-million budget real easy," Godley said who was the Assistant Supt. of Business to the LA Times in Oct. 1992
case 3 red flag ignored auditor s warning
Case #3: Red Flag Ignored! Auditor’s Warning
  • Audit firm in 1990 noted lack of controls over the health insurance bank account
    • The District’s response was that they were too short staffed to implement controls
    • The District responded in 1991 thatcontrols had been implemented!
      • But, the person that supposedly tightened controls was Wagner!
case 3 csi conclusions
Case #3: CSI Conclusions
  • Wagner was fired on 10/25/92 for writing four checks totaling $175,357 from the health fund to Cobbler Express Corp. between June, 1991, and April, 1992
    • Ultimately the loss neared $4 million!
  • Plead guilty of theft in 1992 and failure to pay taxes on stolen income
    • IRS had $2.4 Million in liens, they were watching his bank account and found money in excess of reported income deposited since 1987.
  • Found guilty 3 counts of wire fraud and 1 mail fraud in March 1994
  • 6 year prison term, died of AIDES in prison
case 3 csi conclusions cont d
Case #3: CSI Conclusions, Cont’d
  • Settlement received from bank and audit firms: $1.1million from Wells Fargo and $.5 million from audit firms (Lemke and McDade and KPMG)
    • The bank for breach of its contract to carry out its fiduciary duty to properly supervise the Newport-Mesa accounts or to notify the district of repeated unauthorized and improper withdrawals
  • District laid off 200 employees to fix the budget deficit that resulted, in part, from the loss
  • Three of four top administrators lost their jobs!
  • Wagner filed bankruptcy, personal assets sold at auction for far below FMV
what employers can do to prevent fraud
What Employers Can Do to Prevent Fraud
  • Set the proper tone at the top
  • Don’t ignore Red Flags
  • Don’t rely on trust
  • Increase actual and perceived internal controls
    • Higher risk of detection = less likely to attempt fraud
  • How employees perceive management is key, there is more theft when:
    • Employees feel underappreciated
    • Employers don’t care about theft to take actions when it occurs
    • Employees abuse other company policies
a crime is reported what next
A Crime is Reported – What Next!
  • Safeguard records
  • Establish a chronology of events
  • Identify witnesses
  • Hire fraud auditor or conduct internal investigation if you have the expertise and resources (or some combination)
  • Work with legal, police and human resources
  • Covert investigations, such as surveillance and use of informants is best left to the experts!
    • Can use surveillance camera if in a public place where there in no expectation of privacy
  • Data analysis, specialized software helps to sort and discover data relationships (matches, duplicates, unexpected correlations)
preserving the evidence
Preserving the Evidence
  • “Documents do not make the cases, witnesses make cases. The documents make or break the witness.” 2011 Fraud Examiners Manual
      • Keep all documents as you don’t know what might become relevant and material to the case
  • Chain of custody is key (what received, by whom, source and where maintained)
  • Keep originals safe, seal, date and initial
    • Don’t handle originals, make working copies
types of evidence
Types of Evidence
  • Direct – i.e., a check from a vendor to the purchasing agent that shows a kickback
  • Circumstantial – i.e., cash deposits made to the purchasing agents account around the time the vendor received the contract award
  • Look out for phony documents, may need to bring in experts
    • Forgery
    • Alteration, erasures
    • Determining when prepared, if from same pad of paper
    • Looking for faint indented writing, inserted type
    • Identification of photocopy, mechanical impressions and printer inks
    • Counterfeiting – is too easy today with scanners, printers and computer software!
  • May need to hire fingerprint and handwriting experts
who can conduct an interview
Who Can Conduct an Interview?
  • Anyone, but don’t hold yourself out as an investigator if you are not and don’t infringe upon their rights
    • False imprisonment – don’t lock the door!
    • Recording interviews – check with legal first!
  • Tips when conducting interviews
    • One interviewee at a time!
    • Shake hands, don’t invade their space
    • Try to make them feel good
    • Assure confidentiality
    • People like recognition, sympathy, catharsis
    • Use non-emotional words (“paperwork problem” versus embezzlement!)
    • Guard your own responses (i.e., don’t be too cagey, don’t boast about what you know)
    • Be careful when taking notes
body language can show potential guilt
Body Language Can Show Potential Guilt
  • Backing away indicates unpleasantness/sensitivity
  • Avoidance of eyes indicates shame or confusion
  • Breathing unnatural, excessive perspiration
  • Touches their face
  • Covers their mouth when speaking
  • Blushing (increased blood pressure)
  • Playing with objects
  • Crossing arms or feet
  • Sitting is a fleeing position
are they lying you be the judge
Are they lying? You be the judge…
  • Change in speech – vocal cords constrict when tense
  • Repeating the question to gain time
  • Complains about the physical environment or length of interview
  • Selective memory
  • Emphasis on certain words, take oaths
  • Answers a question with a question
  • Overly respectful
  • Denials become weaker instead of stronger
  • Fails to deny event (qualified with to the best of my knowledge…)
  • Won’t use words like steal, lie and crime
  • Tolerates and justifies bad behavior
  • Reluctant to terminate interview
  • Will feign unconcern
admission seeking interview
Admission-Seeking Interview
  • Direct the accusation
  • Allow them to rationalize the crime
  • To diffuse alibis
    • Display physical evidence
    • Discuss witnesses (without identification)
  • Ask them to choose between a positive and negative admission
    • Did you get greedy or did you have financial problem?
  • Purpose is to get a confession, once they confess get as much information as you can, write it down and have them sign
other aspects of the csi
Other Aspects of the CSI
  • 4th Amendment Protections
    • Protects against unreasonable searches and seizures
    • In general, work computers, files and cabinets are not considered private and not protected
  • Best advice, work with professionals when fraud is suspected, such as: fraud examiners, forensic specialists, law enforcement and lawyers
questions comments

Questions? Comments?

Thank you for your participation!