Case #4: Misplaced Trust Can Be Devastating
In July 2009, after an advance plea deal arrangement allowed the defendant to plead guilty to 10 of 108 felony charges that she faced, this former 14-year finance executive of a woodworking company received a sentence of 18 years in prison for the embezzlement of $9.9 million from her employer. According to a Probation Department report prepared for the sentencing, the defendant was previously arrested 13 times on drug and prostitution charges between 1985 and 1988. No further arrests were cited.
The defendant blamed addictions to gambling and prescription drugs for her insatiable appetite to embezzle millions of dollars from her employer. However, the sentencing judge strongly rejected that explanation, chastised the defendant, and brought-forth his beliefs that a selfish love of pleasure and pretty things including regular shopping trips to New York and Europe, and the purchase of 160 designer purses, 400 pairs of designer shoes and four guitars worth $100,000 were primary motivators. Investigators had also said she used the stolen money to finance a gambling habit that saw her win and lose as much as $42 million in local casinos over seven years.
The Alleged Scheme:
Allegedly, the defendant wrote 582 checks amounting to $8.7 million on her employer’s bank account to cover personal credit card payments and cash advances between 2001 and 2007, and that she used a company check card to cover approximately $1.3 million in personal expenses.
Investigators reported that the defendant hid her theft by forging accounting spreadsheets and destroying bank records. They also said bank records only dated back to 2001, so that was as far back as the investigation went; it is unknown whether any thefts occurred prior to 2001.
The Scheme’s Downfall:
Unfortunately, it took an “outsider” coming forth with valuable information to bring down this devastating six-year scheme. In February 2008, a bank’s credit card investigator notified the company’s president that the defendant was making weekly payments of about $22,500 to her personal credit card balance using company checks.
- Case after case continues to show that “past behavior is an excellent predictor of future behavior”. This defendant was hired in 1995. Had a criminal records check have taken place, it would have revealed that this applicant was previously convicted on drug and prostitution charges. A thorough background can provide valuable information, especially when a candidate is applying for a position of trust.
- Oversight: Most glaring was that this defendant had sole oversight of the company’s finances, and no one ever scrutinized her books during this six-year period.
- Warning signals: One of management’s worst nightmares can come to life when they find out that they had overlooked or ignored a glaring red flag indicating that a potentially disastrous or highly costly internal fraud may be underway. Few cases provide a better example to show why a potential warning signal must never be ignored than in this highly costly case.
Here we have a 14-year executive whose husband also worked for the same company as a cabinet installer, yet no suspicion arose concerning this executive’s extravagant lifestyle when she took regular shopping trips to New York and Europe, and always dressed like a million dollars. In court, prosecutors announced that the defendant’s designer apparel, 160 designer purses, and 400 pairs of designer shoes alone were valued at over $1 million. This estimate did not include four highly expensive guitars valued at $100,000, a fine home in an exclusive neighborhood and two luxury vehicles. Investigators also said that the defendant used the stolen money to finance a gambling habit that saw her win and lose as much as $42 million in local casinos over seven years. Yet again, not one of these “red flags” appeared to have ever raised even a remote possibility that an internal embezzlement scheme could be underway within the financial area during this six-year period.
Unfortunately, the above case is not a rare example—one simply used to describe how easily management can miss or ignore a warning sign that an internal fraud could potentially be taking place within the organization. To the contrary, obvious warning signals or red flags are often overlooked in all types of operations. Chapter 7 of Business Fraud: From Trust To Betrayal provides a variety of shocking case histories, including one in which a government employee was able to embezzle $48 million over a period of 18 years from that agency.
Experiences show that when confronted with a questionable situation indicating that an act of internal dishonesty may be underway, there is a high probability that a huge number of management personnel will choose to ignore that warning signal. What will you do?
Be informed – learn from the experiences of others. Get involved – and YOU will be prepared.
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