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I wasn’t going to cover this. I usually don’t cover tax fraud, but this is closer to garden variety fraud committed as part of a tax case. The irony of the IRS committing fraud in a tax case is simply too good to pass up.

This gets technical so hang on, it’s worth it. Congress created “syndicated conservation easements” in the 1980’s. Essentially land owners could donate development rights on a piece of land to a qualified charity in exchange for a tax deduction. Essentially this is a tax break for not covering every piece of land in concrete.

Unsurprisingly, the easements have become big business. Companies buy up land, have it appraised for its foregone developmental value, and then sell stakes to investors who receive the tax benefit. Unsurprisingly, some people don’t like this aspect and the IRS started cracking down on inflated land appraisals.

There’s just one hiccup. The federal tax code requires an IRS supervisor to approve in writing the initial determination of a penalty. It told you this would get technical. In the case of Lakepoint Land II LLC v. Commissioner that didn’t happen in 2016 like it should have. The company presented emails in the case which showed the IRS didn’t get a supervisor’s written approval for a $15 million penalty.

Okay. Somebody made a mistake. No harm, no foul, the company gets off on a technicality, right? It happens. Wrong. They say the problem is not the crime but the coverup and boy did the IRS appear to engage in a coverup.

The supervisor backdated her signature by seven months. This wasn’t a case of forgetting to sign on Friday so she signed on Monday and back-dated it. Seven months is not an honest mistake. Additionally, IRS attorneys swore to the accuracy of the date and continued to mislead the court even after the lie was discovered.

This paragraph is too good not to quote:

“A judge in U.S. Tax Court had sanctioned the IRS in the case, ripping the agency’s counsel for acting in “bad faith” and having “multiplied the proceedings in this case unreasonably and vexatiously” by failing to tell the court that documents it used to assess a penalty had been backdated.”

The IRS agreed to settle this case without any penalties to Lakewood, IRS attorneys were sanctioned, read fined, and the IRS was ordered to pay Lakewood’s attorney fees and costs.

The Wall Street Journal opinion article alleges that there are other cases like this. This is still fraud and monkey business like this goes on in non-governmental organizations as well.

Occasionally there are scenarios where all the players are villains and you hope everyone loses. This isn’t quite that…but for some people it’s going to be close.

Many, many people hate their Homeowner’s Association (HOA). It’s not unusual for this hatred to come from petty tyrants on the board or petty snitches reporting their neighbors. As a simple example, a lot of years ago we put up our Christmas tree early. Like the first of November early. We were going to be traveling a lot during the holidays and options were early or late, so we put it up early. This was the Christmas tree INSIDE our house. It was visible in the front window, but it was in our house. Someone complained to the HOA board. My wife happened to be at the meeting. Long story short, the Christmas tree stayed up as a giant middle finger symbol of the holidays.

There is no evidence that David Efrem Katz, 56 was trying to stick it to the HOA, but boy did he do it on a grand scale. Katz was the CFO of Durand and Associates  (D&A), a property management company that primarily serviced HOAs. Between 2012 and 2017 Katz stole $3 million from his company and customer HOA’s.

Katz started as an accountant in 1998 eventually rising to CFO in 2012. Katz’s base salary was a miserly $47,500 so Katz went a head and paid himself $6,500 every two weeks. Essentially more than tripling his salary.

I have to give Katz credit. Once he was in, he was all in. Katz opened credit cards in the company’s name and put personal expenses on them. He took out a loan in the company’s name. He reimbursed himself for expenses never incurred. All of this was done with company funds, and according to the indictment, client HOA funds as well.

Katz hid the expenses with false entries, no surprise. I do want to stop and look at this. Katz committed payroll fraud, loan fraud, credit card fraud, expense reimbursement fraud. He really went all in. This is up there Myeong-se Oh from ABB South Korea who factored company receivables to get more money to steal.

I wasn’t able to find out how he was caught, but the fraud lasted through 2017 and Katz finally plead guilty in 2023.

We head to northern Pennsylvania this week. From North Penn News comes the story of Judith Butt, age 73. Butt is accused of embezzling $375k from the Gwynedd Office Condominium Association (GOCA). From the article:

“GOCA is a group of tenants that occupy suites at 311 Sumneytown Pike, and they hired Butt as their accountant in 2009 to maintain their account and pay bills for sewer, electric, landscaping, cleaning, and other expenses.”

So we have an office building made up of condos. They have an association to manage shared costs. Butt was hired as the bookkeeper. Simple enough.

Butt was paid a little more than $4k a year to manage the account using her own computer and equipment. So about $350/month to write some checks and collect condo dues. Unsurprisingly given what we talk about here, Butt wrote checks for her own use including checks to Diamond Appaloosa Ranch where Butt is a partial owner.

She was caught in March 2023 when the sewer authority came looking for $22k in payments dating back 3 years. GOCA checked the bank account and found all kinds of suspicious payments, so they went to Butt. Many folks roll over immediately when confronted, but not Butt. She doubled down.

Butt denied GOCA access to Quickbooks claiming her computer was working. She wrote them a check for $7k saying it was for mistakenly writing checks from the GOCA account rather than her personal account. Butt had previously changed all billing and account information for the bank and vendors to her house, making it more difficult to research. If that wasn’t enough:

“She later provided 11 sealed envelopes containing check records from the account to GOCA, however police said 10 of the sealed envelopes were faked to appear as if they were sent via USPS, and the checks inside did not match with the account records provided from the bank, according to police.”

That’s dedication. Creating fake checks and bank records after you’ve been caught is a bold move. Unfortunately for Butt it wasn’t bold enough. She was arrested and charged with felony counts of dealing in proceeds of unlawful activities, receiving stolen property, thefts by unlawful taking, theft by deception, access device fraud, theft by failing to make required disbursement of funds, and 1,302 counts of forgery. The thefts are alleged to have occurred between 2016 and 2023 but bank records were only available back to 2016. Butt started work in 2009 so the actual theft could be higher.

Often we see charges of guilty pleas of wire fraud or mail fraud in cases like this. Those frauds are easier to prove. Thirteen hundred counts of forgery mean the prosecution is mad. Even without any kind of segregation of duties here a simple independent bank rec would have caught this much earlier.

Buckle up everyone. Previously we looked at an individual who stole to pay back a previous employer he had stolen from. Today we have Mandy Deann Urban, 47. According to the indictment, Mandy was a senior staff accountant for an unnamed company in Charlotte, NC. She is accused of stealing $1.1 million.

Urban was responsible for general ledger entries and financial statement preparation, along with reconciling AP, AR, and bank accounts. From 2019 to 2022 Urban pulled the unsophisticated, but reliable ploy of transferring data to bank accounts she controlled and making fraudulent entries to cover her tracks. Basic SOD blocking and tackling was missing here. One person managing the GL, moving funds, and performing reconciliations is problematic at best.

Urban allegedly made 245 transfers for just over $1.1 million. It alleged that she used the funds to pay personal expenses, including tens of thousands of dollars for mortgage, car, education, and vacation expenses, and to buy cryptocurrency. Additionally, it is alleged that Urban transferred significant amounts of embezzled funds to family members. It is not alleged that she used any of the money to pay restitution due in previous cases.

There are some important unknowns here. The indictment says she did this from January 2019 to June 2022. Based on a Ft. Myers News Press story from May 2022, she was arrested in Charlotte in early 2021 on an outstanding fugitive warrant. I haven’t been able to find clarification for the date discrepancy. I’m giving the unnamed company the benefit of the doubt that she didn’t continue to work there for another year. I assume someone has their dates wrong. Still, that’s a heck of a way to get caught.

Prior to her stint in Charlotte, Urban worked for Quigley Eye Specialists (operating as Eye Health of Fort Myers) and St. John’s Surgery Center. They fired her after noticing “bookkeeping irregularities”. From 2013 to 2017 she wrote herself 108 business checks totaling $267k. While working in Charlotte, she was supposed to be paying more than $283k in restitution.

How did she get caught in Ft. Myers? The company found out she had a prior conviction for stealing $135k from a previous employer using fraudulent credit card transactions.

There’s not much information on the earliest case, but in Charlotte and Ft. Myers, it was outside influences like an outstanding warrant or finding a previous conviction that got her caught. Without those, Urban could have kept stealing.

This is why you should do background checks. I’m all for giving people a chance to turn their lives around just don’t do it through the accounting department.

In this fraud series, I’ve tried to avoid companies that are complete frauds from the beginning. If someone just creates a pump-and-dump stock scheme, it doesn’t make this list because there are no lessons to learn there, other than don’t do fraud. FTX and Celcius both seem to have started as more or less legitimate enterprises that devolved into significant frauds through hubris or laziness. My take for now is that those organizations were so poorly run that they became fraudulent, but they didn’t start that way nor did they intentionally turn fraudulent.

The Bigmotor case is similar, but so much worse. Bigmotor was absolutely a legitimate organization, except that it seems to have intentionally devolved into fraud. Like many things in Japan, it is completely over the top.

Bigmotor was the largest used car dealership and repair company in Japan. Kaneshige Hiroyuki started the firm in 1976 and grew to 300 dealerships with a valuation of nearly $1 billion. For comparison purposes Japan has roughly the same area as California, but roughly 2.5 times the population.

Thirty-five years after starting the company he hired his son Kouichi. Sales took off and Kouichi was promoted to Vice President of the firm. Sustained insane growth eventually led to questions and in 2023 a number of significant fraudulent items came to light.

First, Bigmotor was caught on video showing employees how to falsify repairs. For example, a training video showed how to pop a tire and say all four needed to be replaced. That initial leak led to more allegations including charging for oil changes not performed, extending scratches to increase repair costs, inflicting intentional damage, and more. But that’s just ripping off customers.

Kouichi used to work for Sompo, one of the three big car insurance companies in Japan. When he came to Bigmotor he brought more than 30 of his Sompo colleagues. They helped train the staff on how to take photos to increase insurance payouts by making the damage look worse. They also showed how to use chalk to simulate damage that didn’t actually exist. Sompo eventually found out and decided it didn’t care. Sompo was the 2nd largest shareholder after Bigmotor’s founder. Plus, Bigmotor would recommend and sell Sompo insurance for cars sold off their lots. The new insurance sales more than offset the insurance fraud losses.

For comparison, imagine if this was Carmax and State Farm. The outcry would be ridiculous.

Additionally, Kouichi was way over the line when it came to meeting sales numbers. One of the items that came to light was that dealerships were killing trees if they blocked views of a dealership from the street. This happened enough that multiple Google Street View cars captured employees poisoning trees. It happened enough that it inspired cosplay in Japan. I mean, how many trees do you have to kill to inspire cosplay? This is also a bigger deal in Japan than it would be in the US, but it would still be a problem in the US.

Kouichi became famous for berating and mocking salespeople and managers who didn’t make their sales numbers. A visit by Kouichi to a dealership took a multi-day preparation effort to avoid getting fired. Finally, as a new employee, you were also expected to buy a car. One example included a 10-year car loan at 9% interest for a new employee. Yikes.

The leaking training video, questions from other insurers, dead trees, and more finally brought the scandal to a head in July of 2023. As a result of the scandal, Kaneshige Hiroyuki and Kouichi resigned. Profits plummeted. Two other competitors have admitted to committing similar fraud trying to keep up with Bigmotor. The CEO of Sompo also resigned.

This is worse than just tone at the top. This wasn’t just a CEO hinting at impropriety to make quarterly numbers, this was taking a successful business and burning all remaining ethics to the ground. I also thought it was interesting that competitors felt they had to commit fraud to keep up. It’s interesting that Sompo got pulled into this fraud. The rot wasn’t contained to a single firm but spread to other firms around them.

Just a little bonus today from the Wall Street Journal:

A researcher at Two Sigma Investments adjusted the hedge fund’s investing models without authorization, the firm has told clients, leading to losses in some funds, big gains in others and fresh regulatory scrutiny.

The researcher, Jian Wu, a senior vice president at New York-based Two Sigma, was trying to boost his compensation, Two Sigma has told clients, without identifying Wu. He made changes over the past year that resulted in a total of $620 million in unexpected gains and losses, according to people close to the matter and investor letters. Two Sigma has placed Wu on administrative leave.

The Securities and Exchange Commission is examining the matter. …

Wu’s changes led to gains of $450 million in total for some Two Sigma funds—including those in which the firm’s own executives and employees invest, as well as those available to clients. But they also led to a total of $170 million in losses for other funds compared with how they otherwise would have fared—losses largely borne by clients. Two Sigma has made them whole.

People familiar with the situation said Wu was trying to improve the firm’s performance, which would have benefited his career and potential pay.

We’ve all felt underpaid at various times. This feeling of being underappreciated is a little miserable and can motivate people to act. They find a better job, go back to school for a new degree, or just steal.

Our story today looks at another law firm. In March of 2022, Christiane Irwin pled guilty to stealing $1.48 million from her employer.

Irwin worked as the controller for the law firm Simon Greenstone Panatier. Her salary was reportedly $140k a year and part of her job was submitting payroll details to the firm’s payroll provider. Starting in 2019 Ms Irwin began inflating her own salary, first by $30k/month rising to $49k/month by the end. These amounts were direct deposited as part of her payroll every 2 weeks. In total she is alleged to have received improper payments of $1.48 million over 3 years.

This seems simple enough. Jacking up your salary when you have responsibility for payroll isn’t sophisticated. Any number of controls could have caught this. A review of payroll, a review of budget to actual for payroll. Even an independent bank reconciliation might have found some good questions to ask. By the end this was like hiring another 3 1/2 Christiane Irwin’s at her salary.

Most law firms are light on back office staff. Attorney’s are outwardly focused on clients and they put their money into staff that can be billed out. That’s why we’ve seen a couple of frauds related to law firms, but it’s not a good excuse for ignoring the basics of good controls.

Today’s fraud is a little sad. People have lots of motivations for committing fraud. Common ones include simple greed, a desire for nice things, consumer debt, gambling debt/losses, investment losses, living beyond one’s means, and feelings of being unappreciated/underpaid. We’ve seen plenty of these motivations this year.

The story of Manjit Singh is different. Singh, 60, fell victim to a romance fraud. She stole from her employer to give money to a boyfriend, Ravi Jani, who didn’t exist.

In 2019 Singh went to work for Lei Dat and Baig Solicitors. By 2019 she was trusted enough to work on cases. assist with accounting, transfer funds within the company, and pay third parties.

In 2021 the law firm’s owner, Naeem Baig, checked the bank balance expecting to find about £800k. Instead, the balance was closer to £40k. He looked through the bank transactions and found repeated transfers to a Patricia Flannery. They totaled £958,180.

Ms Singh initially claimed the transfers had been properly made by the firm. Then she changed her story and claimed it was a mistake and sent a picture of a check (or cheque, it is the UK after all) for £945k. The next day, Ms. Singh claimed the money should have come from her personal account and she would pay it back from £2 million she had in a Malaysian bank account. She then put Ravi Jani on the phone with Mr. Baig. Jani promised the money would be back that day.

It must have been an interesting conversation because Baig immediately called the police.

Singh met Jani via an online dating service. Jani claimed he lived in Dubai. He told her she was beautiful. Singh was especially vulnerable. She allegedly has long-standing mental health issues and her husband left her for another woman in 2019, while Singh was battling cancer. Ouch.

Jani clearly manipulated Singh. It started with a request for a small amount and grew from there into a staggering sum of money. The court seemed sympathetic as well noting:

“The amount stolen by you is, in truth, quite staggering. Not only were you a fraudster, you were also the victim of a fraud that has rightly been called a romance fraud.

“You did not receive one penny for that which you did dishonestly. At the time, it is quite apparent you had been exploited.”

The individual posing as Ravi Jani has not been caught. Funds sent were immediately moved and have proven difficult to trace. Ms. Singh received a sentence of 2 years in jail for her crimes.

Good internal controls help prevent scenarios like this. Effective segregation of duties would likely have prevented this or at least mitigated the damage.

We’re going to stay in the UK for this next fraud. It goes back a little bit. Carillon, PLC was a construction giant in the UK that collapsed suddenly in 2018. In 2017 Carillon issued a profit warning indicating a decrease in the value of its contracts by £845 million. Later that year, the decrease stretched to more than a billion pounds. By the next year, Carillon was done with liabilities of £7 billion, but only £29 million in the bank. More than 3,000 people lost their jobs and hundreds of projects were impacted.

This was classic fraud at the top, but also in the middle and all the way down.

Carillon regularly used accounting estimates to misrepresent revenue. Carillon consistently overestimated the revenue they were generating. In a simplified example, Carillon found cracks in concrete columns on a large project. Remediation was estimated to result in a loss on the project of 12.7%. Instead, management overrode the estimate and recorded an expected profit of 4.9%. At some point, this is unsustainable.

Additionally, Carillon regularly recorded revenue that was “traded not certified”. This was revenue that clients had not signed off on yet. Often this revenue was in dispute and extremely uncertain. Carillon didn’t disclose the nature of this revenue in its financial statements. In 2016 this amounted to £294 million.

Carillon also used reverse factoring to hide debt in its supply chain. Essentially banks would pay the bills, Carillon would pay the banks at a later date. This allowed Carillon to hide longer-term debt as trade payables making the company’s financials look better. Carillon misclassified almost half a billion pounds this way.

Ultimately, Carillon failed spectacularly. KPMG was fined £14 million and severely reprimanded for its role as Carillon’s auditor. This was a fraud all the way down. Even as they were making up numbers Carillon was paying out huge dividends.

Kudos to Ian Grieve for his post with a SQL script to set vendors on hold when created in GP. This is a great way to ensure that any tax-related info is collected prior to releasing payment to a vendor. Once payment is made, all leverage is lost.

Limiting who can release the hold along with GP’s Vendor Approval workflow can be important tools to minimize the risk of vendor fraud.