ROCK ‘n’ ROLL FRAUD
Dire Straits once sang, “get your money for nothin’ and your chicks for free.” The song, Money for Nothing, was about the easy life and excesses of being a rock star. I was reminded of this lyric while reading the bank fraud story, Rock ‘n’ roll rip-off: Failed rockstar, big spender, about Rob Mawhinney, former lead singer of the not so popular rock band Lights over Paris (LOP).
The basic story goes like this: Mawhinney wanted to live the rock and roll lifestyle, but he had two major problems: little commercial success and a band that most people weren’t listening to.
Financing a rock and roll lifestyle lifestyle requires pop culture, real talent, and musical success: like Glenn Frey and Don Henley of the Eagles achieved by cranking out mega hit after mega hit after mega hit in the 70’s. But since not everyone can be Don Henley or Glenn Frey, making money through musical artistry success, Mawhinney tried another way. His rock and roll lifestyle was supported with bank fraud: walking into banks, applying for loans, lying about music industry income, using loan proceeds to live the rock ‘n’ roll dream.
According to CNBC:
“Mawhinney handed the underwriters forged Charles Schwab documents that put his existing personal account at more than $7 million when he actually had only $10,000. He also provided documents that listed his personal net annual income at $5 million and told bankers that he had personal assets of $7.5 million, including a recording studio that did $12 million annually in sales.”
The fraudulent documents submitted by Mawhinney resulted in approximately $6 million in loans from the banks over a three year period. Coincidentally, he used part of the illegally obtained funds to buy a luxury condo in Los Angeles, while other proceeds were used to purchase a lavish LOP tour bus.
But to keep in the good graces of the financial institutions you’ve borrowed money from, you have to pay loans back. But if you’re Charles Ponzi, or Mawhinney, you simply pay early loans back with the proceeds from later bank fraud schemes. He was able to keep it up until the entire house of cards crumbled because the expenditures were significant and there were no new sources of income coming in.
There are a number of other interesting takeaways from this fascinating story of rock and roll bank fraud.
DON’T BLAME THE VICTIM
There are often analogies made between physical crimes and fraud. More specifically, we see comparisons to the crime of rape where victims feel violated and embarrassed, as it is not uncommon for suspects to “blame the victim” for being attacked. “If she wasn’t wearing such a short skirt or her blouse was too revealing.” Of course, we all know that blaming the victim is ridiculous and not a justification for either attacking or ripping anyone off.
I watched with disbelief as Mawhinney’s attorney came out and admitted that while his client knowingly submitted fraudulent documents, the blame for the fraud was really at the feet of the underwriting departments who failed to conduct the proper due diligence into the documents or information submitted. I guess this is the classic “if they hadn’t been derelict in their duties my client would have never committed fraud” argument (AKA: Deflecting responsibility – It has to be someone else’s fault other than my own).
Again, while there may be evidence that someone wore a short skirt or an underwriting department’s verification practices were lax, that does not exonerate the criminal from their responsibility, or even justify the crime for that matter.
PERFORM ADEQUATE DUE DILIGENCE
Mawhinney’s lawyer stated that the banks were contributory in the fraud. Were they? It’s hard to know because we don’t have the four banks’ loan, underwriting and document review processes in front of us to review.
However, we do know that while applying for bank loans, Mawhinney claimed to own a recording studio in support of the story he was weaving and the income he generated from the music business. CNBC reports: “When the underwriters asked to see the studio, which was actually owned by two of Mawhinney’s friends, he gave them a tour of the facility.”
This might lead you to wonder whether there was anyone else involved in the fraud. While CNBC does not say anything about that, the U.S. Attorney’s Office does indicate that the two brothers who owned the recording studio recently plead guilty to a similar bank fraud scheme to fund their music business as well.
And this was the studio that Mawhinney showed underwriters.
Despite the studio tour, increased due diligence through publicly available records and underwriting verification interviews would have likely determined that Mawhinney had absolutely no financial ownership interest in the studio at all. Additionally, verification of the tax returns through the CPA listed would have determined that he never heard of Mawhinney and that Mawhinney was not a client. These would have been major underwriting red flags indicating that further due diligence was needed before any money was ever lent.
NEVER FORGET: FRAUDSTERS ARE BRAZEN
So, you’ve just plead guilty to fraud and are released on bond, what are you going to do now? The answer: walk into another bank and attempt yet another bank fraud. Really. To the amazement of everyone including the U.S. Attorney’s Office, that’s exactly Mawhinney tried to do at a bank in Orange County California. Incredulous as that sounds, that’s a perfect barometer for the boldness and commitment to deceit that is common among fraudsters.
The level of boldness indicated in this story is nothing new. In fact, it’s pervasive in almost every fraud case investigated. To receive a financial benefit that one would otherwise not be entitled to, the individual has to be brazen enough to tell a believable story and back it up with information or documentation that supports their story to the detriment of the victim.
In this case, the documentation took the form of altered documents, with purported income from the music industry, and a tour of a music studio, but the reality is that you don’t have to be a fake rock star to commit similar fraud crimes. This same type of fraud occurs every day, with similar fraudulent documents and other types of occupations listed as the source of income.
Fraud is often detected through red flags, and this story highlights the need for financial services companies to review their underwriting policies, practices and procedures on a regular basis.
One might suggest that these types of frauds only happen at small institutions lacking the personnel, resources or sophistication to verify the information provided. The reality is that size has nothing to do with it as fraud is indiscriminate.
The only thing that fraudsters are after is some type of financial, data or information advantage. So, if your company has money, then there’s the potential to be victimized, no matter how large or small your company may be.
With the 7 year prison sentence Mawhinney received, he may not be a “gangsta” as his song was titled but he’s now a convicted “fraudsta.” Now that his bank fraud days are done, he has enough time on his hands to learn to play the guitar at the La Tuna Federal Correctional Institution (FCI) in Anthony, TX. Wonder if he’s singing the blues?