Employees Gone Wild – A Plethora of Fraud Cases

parks employees and other fraud cases photo by http://www.flickr.com/photos/nicholas_t/

Park Ranger, Pastor and Professor the Subject of Fraud Cases

Despite our faith in human nature, the reality is that fraud is committed by individuals in all types of professions, even by professionals that typically garner trust and respect.

In this week’s Fraud Solutions blog, we focus on a number of professions which caught our attention and one might not necessarily associate with fraud: a college professor, two parks district employees, a pastor, an audit director, an advertising director, and an architect.

One of the core concepts in most fraud cases is trust, or the violation of trust, and there are elements of lost trust in every one of these cases. Interestingly, trusting your employees is a theme I’ve written about in the past (The Revenue Drain – That “Sucking Sound” is Lost Revenue: Trust Your Employees…But ALWAYS Verify).

So Much for Higher Education

An Iowa State Professor, who was the principal investigator on a National Science Foundation grant, submitted false reimbursement expenses claiming that he traveled to work on a grant research experiment and additionally, requested reimbursement for $20,000 in laser rental costs.

The college fraud:

  • Traveled for personal reasons – no research involved.
  • Had access to a laser for free – spent money on personal expenses.

The result:

  • Guilty Plea, Sentence and Restitution Pending.

Your Tax Dollars at Work

Dynamic Management submitted invoices for materials and services to the City of St. Louis Parks Division for $475,000.

The public works fraud:

  • Dynamic Management was a “shell company” set up by two Parks Division employees (the head of the Park Rangers and  the former Deputy Commissioner of the Parks Division).
  • Invoices submitted were false: the funds used for personal expenses.

The result:

  • Convictions, prison, court ordered restitution.

Whatever Happened to # 8: Thou Shalt not Steal?

A pastor solicited $5,000,000 from 100 investors around the country for use in a program where significant profits (200 to 1000%) would be generated through the trading of European medium term notes.

The religious fraud:

  • If it sounds too good to be true… No returns were paid to investors: funds were used for personal purposes.
  • The pastor was operating a large Ponzi scheme.

The result:

  • Guilty plea, prison, court ordered restitution.

Auditor by Day – Inside Trader by Night?

The Corporate Audit Director for Chicago based Allscripts earned $286,000 in profits from stock transactions associated with his company’s performance.

The (alleged) fraud:

  • Using “inside information.”
  • Conducting stock transactions during blackout periods in advance of your company’s poor financial performance announcements is a big “no-no.”

The result:

  • Indictment filed, arraignment pending, additional civil enforcement action filed by SEC.

Here’s a New Twist: It’s not Advertising Fraud but Rather, Fraud Committed by the Advertising Director

The reputable grocery retailer Raleys wasn’t engaged in “false advertising” but instead found themselves the victim of frauds committed by their Advertising Director and several co-conspirators.

The smorgasbord of fraud:

  • (Pick one): Kickbacks, submitting false invoices, price fixing, unauthorized reselling of corporate inventory.
  • Losses at more than $3,000,000: funds used for personal gain.

The result:

  • Convictions, prison, court ordered restitution.

Finally! We Might Have Someone to Design the New Prison Library

Architects and construction firms regularly work with public officials to bid on and obtain contracts on public construction projects. However, the federal government alleges that an architect, a construction company, a lawyer and a plumbing and electrical supply company in McAllen, Texas stacked the business deck in their favor when it came to doing business with the school district.

The (alleged) fraud:

  • Businesses paid bribes and kickbacks to public officials to secure public works contracts, which constituted an unfair business advantage.
  • Public officials solicited bribes and kickbacks to award contracts to individual vendors.

The result:

  • Indictments against individuals and public officials.

The Decade-Long Paper Trail

An interesting theme in these cases involves the amount of time and duration in which these frauds occurred. Quite a few of these cases took place over the past five years but at least one involved a fraudulent pattern of behavior which commenced approximately 10 years ago.  

Certainly, there’s a considerably lag time in many cases between the time of the offense and the indictment. However, one thing’s certain: there’s a paper trail in every fraud case. While the government’s anti-fraud watchdogs may not pick up the scent right away, the trail never disappears. Eventually, what goes around comes around and investigators have time to pick up the scent, which often explains why we see these types of case made a number of years after the fact.

Internal Controls Prevent Fraud Cases Like These

There are a number of factors which are commonplace in most fraud cases, and one of those is internal control failures. While not all fraud cases involve internal control failures, a number of the cases referenced here do and those were directly contributory in the fact that these frauds occurred.

I’ve written about internal controls periodically in the past and there are a number of steps that entities can take to prevent victimization. (Fraud prevention: Improving internal control)

No One is Immune to Fraud Cases

As we’ve seen in these cases, and many others, there aren’t any industries which are immune to fraud. Fraud touches every business or public agency in one way or another. To reiterate the point I made in opening this blog, despite our faith in human nature, the reality is that fraud is committed by individuals in all types of professions, including those in the religious arena. This is a fact we simply cannot ignore, or turn a blind eye to. Nor can we blindly trust our employees to always do the right thing, no matter what their title is or how long they’ve worked for us.

While it’s not completely foolproof, it’s our experience that solid due diligence consistently beats villainous intent.