When Fraud Hits the Floor in a Receivership
By Bill Lawrence
In the latest installment of our series Tales from the Receivership Trail, I wanted to share a case study which confirms that crime, especially when a court-appointed receiver gets involved, does not pay. Here’s how it all went down — literally and figuratively.
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 the financial affairs. Owner A was a silent partner and was not involved in operations. He was, however, responsible for financing the venture.
Suspecting that something nefarious was possibly taking place, Owner A had hired a private investigator and forensic accountants to investigate. He also filed a motion to appoint a receiver to take control of the business and help determine if the fraud had actually occurred. Seattle-based Revitalization Partners was selected and confirmed by the court shortly thereafter.
The Plot Thickens
The receiver immediately took control of the business, managed the operations and began investigating if the allegation of fraud could be substantiated. Initial work focused on evaluating which contracts were viable as well as managing the completion of various projects, collecting retainers and payments from the general contractors involved.
In its role as receiver, the firm uncovered a number of instances suggesting that the alleged fraud had actually occurred and began to verify those facts independently. It soon became apparent that the flooring company’s bookkeeper was aiding Owner B in perpetuating fraudulent activities.
For example, 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, a practice that was essentially the equivalent of withdrawing cash. There were also close to fifty checks that were issued in the same amount and subsequently deposited in the bookkeeper’s bank account, which went to paying her personal mortgage. The bookkeeper was paid a regular weekly salary, so these disbursements were outside of her approved compensation 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. Additionally, there were cash transactions in the form of checks or ATM withdrawals — totaling close to $145,000 — that were taken by Owner B or by the bookkeeper at his direction.
From Bad to Worse
Probably the most egregious fraudulent action we found related to the bookkeeper, who at the direction of Owner B, applied for 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 several loans and was approved 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 the loan documents and provided the required picture identification. The one fatal flaw in this scheme, however, was that the individuals involved superimposed someone else’s picture on Owner A’s identification, which happened to be of a different ethnic origin than Owner A. This, along with the forged signatures, was clearly a blatant act of fraud and relatively easy to document.
The FBI Gets Involved
Armed with this information and documentation of the fraudulent activities, the firm provided information to the authorities for action. The FBI decided to investigate. The receiver cooperated by providing information as well as the company’s computers to assist the bureau’s fact-finding activities.
Ultimately, charges were brought against both Owner B and the bookkeeper. That in turn led to one of the receiver’s principals testifying when the case was eventually brought to court. In the end, Owner B pleaded guilty to fraudulent charges and the bookkeeper was convicted by a jury of wire fraud, aggravated identity theft and conspiracy.
Following are a few edited excepts from the press release sent out by the FBI upon the bookkeeper’s conviction:
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’s 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.
Justice was definitely served. While the developments were not what one would encounter in a typical receivership, this particular case shows how court-appointed receivers can use their influence — and independence — to achieve a good outcome.
Bill Lawrence is a Principal at Seattle-based restructuring and corporate advisory firm Revitalization Partners, which has served as a receiver in more than 30 cases in the Pacific Northwest. He and his partners write regularly about the operational and financial challenges in successfully restructuring companies. Learn more in the firm’s blog as well as its e-book, “Insights to Grow, Build or Save Your Business!”
