11. Now That Is Criminal

In previous chapters, we have discussed the importance of clarifying murky information; what you do when the problems are not glaring, but rather nuanced. But what happens when you find something in a person’s background that is a blatant problem? We don’t just mean a little white lie or an exaggeration—we’re now talking about criminal behavior.

The Situation: The Criminal Connection

Sam Surprise headed to the university student center after his anthropology class. Like he does every Wednesday, Sam bought a turkey sandwich and a Mountain Dew and headed to check his mailbox. As he sifted through the letter from his grandmother and the leaflets and advertisements about events at the school lecture hall, he found his bank statement. Because this month, October, was an unusually rowdy month at the bars with his friends (who could resist celebrating Oktoberfest?), he decided to double-check his statement to make sure he had not overdrawn. His eyes widened as his saw his balance: $200,343! There was a $200,000 deposit from Oversight Commerce. “What the hell?” he thought. He quickly gathered his lunch, looked around him to see if anyone was watching and shoved the bank statement in his backpack. He hurried back to his dorm room, shut the door and called his father, Mike Surprise.

Mike and his wife Cynthia were from a low-income neighborhood in Maryland. Mike had worked earnestly in a factory for 15 years and had struggled to save money to send Sam to college. Since Sam had left home, Mike and Cynthia had their problems, but had managed to stay afloat. Of course, when Mike got the call from Sam he initially felt overwhelmed with relief. Their money troubles were gone. Maybe Sam was named in someone’s will? Maybe Sam had entered a contest and won? Within minutes, Mike’s reality sensors kicked in; something wasn’t right. He told Sam to keep the money a secret and hung up the phone.

Now Mike was not your average factory worker. Before he had moved to Maryland and married Cynthia, he had gotten caught up in a scandal and spent several years in federal prison for his direct involvement in a money-laundering ring with some high school buddies. When Mike was released from prison, he had, as you can imagine, a very challenging time finding a job and an even harder time erasing the reputation he had earned as a convict. After Mike hung up the phone with Sam, the memories of his earlier years were flashing through his mind like a ticker tape. Mike had two choices: Question the origin of the cash or spend it and hope no one would notice. Mike (and Sam) chose the latter.

Three months went by, and at this point Sam was getting rather comfortable with his monthly bank statements. Every month he would receive another $200,000 installment from Oversight Commerce. And as quickly and randomly as the money came in, so it went. As the Christmas holidays approached, neighbors began to notice that the Surprise family was living quite lavishly. Four days before Christmas, Cynthia Surprise was at home making dinner when she received a call from an investigator: “Hi, I am George Buzzkillberg, a private investigator working for a financial institution, and I would like to speak with your son, Sam. Is he home?” Cynthia’s face froze. In fact, her entire body froze. Cynthia could not get any words out. She hung up the phone. But Mr. Buzzkillberg was persistent. He called two more times that day and three times the next day. Cynthia told Mike about the call, but Mike seemed almost arrogant about it. “Screw the pest,” he kept telling Cynthia. Finally, Cynthia’s judgment skills got the best of her. She could no longer ignore the calls. She answered one of Mr. Buzzkillberg’s calls and told him to meet Sam and Mike at the local diner in 30 minutes and came up with some nonsensical reason to send Sam and Mike to the diner.

Mr. Buzzkillberg knew right away who Mike and Sam were: the two who pulled up to the diner in a black Rolls-Royce Phantom. Mike was dressed in an expensive suit and was wearing multiple gold chains, and when he stepped out of the car, two Doberman Pinschers followed him. Mr. Buzzkillberg approached them.

“You don’t have a warrant? Well, then you don’t have a conversation,” Mike Surprise told Buzzkillberg. Sam stayed silent.

Buzzkillberg leaned into Mike and said, “I believe you of all people can understand how making one mistake as a youth can impact your entire life.” Mike looked at his son, looked back at the investigator and said to Sam, “Tell them what you know.”

Sam told Buzzkillberg exactly what happened. Sam reiterated that he had no idea where the money came from or why it went to him. Buzzkillberg asked if Sam or Mike knew anyone who worked at Oversight Commerce or had ever done any business with the firm. No and no.

Oversight was aware that money was being fraudulently transferred to the Surprise bank account and had hired Buzzkillberg to figure out who was responsible. Buzzkillberg reported back to his office and spoke to his client, the officers of Oversight Commerce. While Oversight was pleased that Buzzkillberg had dug up some information on Mike Surprise, the leverage that coerced Mike and Sam Surprise to talk, the interview with Sam Surprise did not really shed any light into the investigation.

Buzzkillberg then began looking into the backgrounds of the four people who were responsible for wire transfers at Oversight. While sifting through archived media articles, Buzzkillberg noticed a high school picture of one of the Oversight employees, Ryan Catch. In the picture, Ryan Catch was standing in a high school auditorium with members of his basketball team. The caption read: Ryan Catch and Sam Surprise show off their dunking skills. Ah-ha (as they say)!

Oversight and Buzzkillberg discussed what to do next. Because it appeared Ryan Catch had been engaged in substantial fraudulent wire transfers, Oversight was obligated to contact the authorities. They had no intention of keeping Ryan Catch as an employee. With the help of the authorities, Ryan Catch would not only be arrested but also properly prosecuted, and Oversight could sue and recoup some of the stolen monies. With his client’s goal in mind, Buzzkillberg met with agents from the FBI, who told him that they had an interest in Ryan Catch.

At the Oversight offices, Buzzkillberg interviewed Ryan Catch and the three other employees who worked in the wire transfer department. The other three, of course, had no knowledge of the incident. When Buzzkillberg spoke to Catch, Catch denied any awareness of the incident. Every time Buzzkillberg presented Catch with the connection between Catch and Sam Surprise, Catch just repeated, “I know nothing. That is my story and I am sticking to it.” Buzzkillberg told Catch he had to make a phone call and excused himself from the room. In walked the FBI agents who had, by this time, gathered enough evidence (in this matter and an unrelated fraud) to arrest Catch. Catch is still serving time in a federal prison. As for Sam and Mike Surprise, they were both brought into the FBI investigation, and the FBI concluded that although Mike Surprise did go to high school with Ryan Catch, neither Mike or Sam had any idea of Catch’s scam and were not deemed accomplices by the FBI. Catch has been transferring Oversight monies to random bank accounts, including the Surprises, for no particular reason other than he was able to get away with it.

The Tactic: The Merits of Media

Yes, in this story, I (Ken) am Mr. Buzzkillberg (but I have been called worse). In the story of Sam Surprise and Ryan Catch, we relied on our research skills to find out about Mike Surprise’s background (without which Mike Surprise may not have spoken to us) and to make the connection between Ryan Catch and Mike Surprise.

Many people think that a quick Google search or a look at recent media articles will satisfy their due diligence needs. But you need to do a comprehensive search for media articles. We use four different media databases in addition to multiple search engines on the Internet. In doing so, we find articles from the 1960s that can be pertinent to an investigation. In the case of Mike Surprise, it was our media search that identified an old article that made the connection between Mike Surprise and Ryan Catch, the culprit. The major media sources we use are Westlaw (Thomson/Reuters and other publications under that umbrella), Factiva (publications owned by DowJones), Bloomberg (publications with a financial/investment focus), and LexisNexis (almost everything else).

In this case, because Oversight was regulated by state and federal banking departments, the company was obligated to inform law enforcement of the situation with Ryan Catch. Some firms have corporate policies that require them to bring in law enforcement (most companies regulated by state or federal agencies fall into this category), and other companies choose this route in order to send a message to employees that theft and fraud will not be tolerated.

The Situation: Employee Embezzlement

An employee of a corporation confessed that she had stolen money from the company. In her confession to the board of directors, the employee, Penelope Bucks, explained she only stole $100,000, but she had since gambled away all of the money she stole. Ms. Bucks expressed remorse to the board and said she would make all efforts possible to repay the money. The corporation, through outside counsel, hired us to determine how Ms. Bucks stole the money (to make sure neither she nor any other employees could repeat the offense), to determine if she acted alone, and to legitimize Ms. Bucks’ statements that she only stole $100,000, all of which she claimed she subsequently spent.

This case was rather complex. Because Penelope Bucks had already confessed to embezzling funds, the corporation told her that we were looking into the situation and told her she was to cooperate with us and had decided at the outset that they would not prosecute. Every week we would talk to Ms. Bucks and ask for bank statements from this or that account and then question the origin of certain funds. We employed our own internal intelligence analysts plus a few forensic accountants and a polygraph expert (more on that later).

Penelope Bucks had been at the company for many years and was considered a “trusted” employee. We found deposits made to Ms. Bucks’ personal bank account by some of the board members. We had to closely examine each of these relationships to make sure none of the board members were involved in Ms. Bucks’ theft. (They were not.)

Because we had a signed release from Ms. Bucks, we were able to review her consumer credit report. When we ran Ms. Bucks’ credit report, we found there were inquiries into her credit made by three casinos in Atlantic City: Harrah’s, Trump Taj Mahal, and Tropicana. When an individual at a casino seeks to play a game (poker, blackjack, roulette) and use “credit” to play, the casino, with the person’s permission, runs a credit report on the individual to make sure that person is able to pay back the casino. Every time an institution looks at a person’s credit report, there is an imprint, so to speak, left on the credit report. So when we saw that three casinos had run credit reports on Ms. Bucks, we knew she had gambled at these three places. This confirmed Ms. Bucks’ representation that she gambled quite often and helped us narrow down where Ms. Bucks actually gambled.

Every time we reviewed Ms. Bucks’ bank statements, we discovered more monies were embezzled than she originally confessed. Week by week, we would continue on our forensic investigation of the bank statements she submitted to us, and every statement she provided led us to ask more questions and for more documents. If she gave us a Wachovia bank statement, we would find deposits made into a Citibank bank account that Ms. Bucks had not disclosed. We would call Ms. Bucks and ask about the Citibank account “oh right...,” she would say and then would send us the statements for that account. This happened on several occasions. Ms. Bucks was not a sophisticated embezzler: All of her transactions used a credit card or cash advances.

In the end, once we uncovered every credit card Ms. Bucks had (she had seven) and every bank and brokerage account she had (she had four), we totaled up the amount she embezzled from the company and it was much higher than the $100,000 she admitted to. In the end, we determined Ms. Bucks had actually stolen one million dollars.

Through our analysis of Ms. Bucks’ bank accounts, we also discovered that she had transferred a lot of money to Dough, a pizzeria owned by her ex-husband. This added another layer of research to the investigation. We did not have access to Dough’s bank accounts or to those belonging to her former husband, and as such, we were able to only track money that left Ms. Bucks’ bank account. We began to look into the lifestyle of Ms. Bucks’ ex-husband and the operations of Dough. In doing so, we reviewed vehicles and boats registered to her ex-husband and found he was driving a Mercedes and a BMW. We also conducted surveillance of Dough to determine whether the pizzeria was always busy (a possible sign of a profitable restaurant) or always slow. We found the latter. We also went to Dough, bought a few pies and charged them to a credit card so we could see what the charge showed up as on our bank statements. This allowed us to connect any line items on Ms. Bucks’ credit card statements to purchases made through Dough. From all of our research, we did not find any additional income for Ms. Bucks’ ex-husband to justify his ability to purchase two high-end vehicles.

Ms. Bucks also had a teenage daughter with her current husband. We found that during the eight-month timeframe that Ms. Bucks’ said she stole the money, her daughter transferred from a public school to a private boarding school. Last, when reviewing the books of the corporation, we found that Penelope Bucks’ mother, a 92-year old woman living in a hospice center, was on the company payroll (to the surprise of the board of directors).

With the information we gathered (the private school, the money transfers to Dough, the salary for her mother, and so on), we approached Penelope Bucks. We asked her if she would be willing to take a polygraph examination to determine the veracity of the initial statement she made to the board of directors and the subsequent admissions she made to us during the course of our investigation. We have a relationship with a retired FBI agent who is an expert at administering polygraphs. We called him for this investigation.

Generally, a polygraph exam is not admissible in court, although some states do allow it, depending on the circumstance. Nonetheless, we have found that a polygraph is a tool not to determine one’s guilt, but to confirm one’s innocence. The rules on administering a polygraph exam are very strict, and there are specific guidelines as to how questions must be asked. The process happens in three phases: First, you have a pre-interview in which the subject signs a consent form and agrees to be polygraphed and is then asked some broad questions (name, date of birth, address) and some specific questions, most of which are used in phase two of the polygraph. This first pre-interview basically gives the person a chance to know what the questions will be and gives the polygrapher a chance to determine whether the subject is capable of taking the polygraph (that is, mentally sound).

The second phase of the polygraph is when the subject is asked a number of control questions (most of which were rehearsed in the pre-interview), and the polygrapher then determines whether there is any deception in the subject’s answers to these questions. In the third and final phase, the subject is told how he or she did in the second phase and given the opportunity to explain some of the answers in the second phase (if the person had showed any indication of lying). This last phase is the most important because this is when most people confess to any crimes committed or acts of wrongdoing.

Penelope Bucks completed all three phases of the polygraph exam. In the second phase, our polygrapher found there were instances of deception and, when asked about these instances, Ms. Bucks kept repeating that she acted alone in the embezzlement of the money. She did, ultimately in the third phase of the polygraph, confess to putting her mom on the payroll in order to give her mother healthcare coverage while she was dying in the hospice center. But Ms. Bucks did not alter her story about spending all of the money she stole. When we presented Ms. Bucks with the information about the Dough bank accounts and her ex-husband’s affinity for German vehicles, Ms. Bucks then admitted she had initially given him money to keep him quiet because he knew what she had been up to. Ms. Bucks reiterated that since she had gambled all of the money, she had not made any additional payments to him. And when asked about her daughter’s private school, Ms. Bucks said she paid for the tuition up front in cash and that was the only way she was able to afford to send her daughter to private school. Ms. Bucks put us in touch with the dean of the school, who confirmed Ms. Bucks paid the full tuition in cash. The polygrapher picked up on these initial deceptions, and it was only during the last round of the polygraph exam that Ms. Bucks confessed to what we already believed to be true.

In the end, our client, the corporation that employed Ms. Bucks, was pleased that the situation had come to an end. They obviously terminated Ms. Bucks, and they had her sign an agreement stating she would pay back the money she stole over a certain number of years. In this instance, while Ms. Bucks did engage in criminal activity, the corporation did not refer the case for criminal prosecution because it did not want to get involved in litigation, risk losing control of the situation, or be the subject of unnecessary and unwanted publicity. The board felt that Ms. Bucks got ahead of herself and was not, by the classic definition, a “criminal.”

The Tactic: Combing Credit

We can only review an individual’s consumer credit report when we have a signed release from that individual. These are the legal limitations implemented under the Fair Credit Reporting Act. When we have a signed release from the subject, reviewing a consumer credit report allows us to see how many installment/revolving accounts the person maintains and the balances on those accounts. We can also see, as in the case of Penelope Bucks, what other institutions have looked at that person’s credit reports. These “inquiries” (as they are called) often tell us a lot about the person’s asset structure. With Penelope Bucks, the inquiries from casinos alerted us to her admitted gambling problem.

The Situation: Fraud in Flight

One of our clients was an investor in a start-up airline. The airline, Fraudly Skies, borrowed millions of dollars from investors. As proof of progress and to keep investors informed, Fraudly Skies would provide the investors with tail numbers of the airplanes that had been purchased.

Our investor tried to cash one of the payments received from Fraudly Skies, and the check bounced. The investor called us.

At first, we were simply going to track the tail numbers of the airplanes so the investor could, in the worst case, find or recoup the cost of the planes. The trouble spiraled when we discovered the tail numbers were fictitious and did not correlate to any plane.

We started our investigation by running a background inquiry on the owner of Fraudly Skies, a man in his mid-40s named Wally Wicked. Wicked spent the first ten years of his adult life like many other earnest people: He sold encyclopedias. Unlike other salesmen, however, he spent the next five years in a federal penitentiary for wire and mail fraud and theft. Once he served his time and was out on probation, Wicked filed for personal bankruptcy.

But that was all in the past.

Now Wicked was trying to reinvent himself as an honest man with a novel concept: a high-end airline, the Fraudly Skies. Wicked had big dreams for Fraudly Skies. In his private placement memorandum, he boasted of the network Fraudly Skies would rely on to execute its business plan.

The Fraudly Skies network included all of the following (the italics indicate information we discovered about each of these companies):

• DirtSky. A company that would provide technical support. This company was owned by Wicked’s brother, who had also served time for money laundering.

• CrookSky. A company that would provide Fraudly Skies with flight attendants and pilots. This company was owned by Wicked.

• FugiSky. A company that would assist in flight scheduling. This company was owned by Wicked’s brother.

• ThugSky. A company that would provide shuttle services to and from the Fraudly Skies’ hub airports. This company was owned by Wicked’s best friend—a guy Wicked met while serving time for fraud.

• Hooligan & Partners. The law firm for Fraudly Skies. Mr. Hooligan, Wicked’s attorney, had been sanctioned by the U.S. Office of the Comptroller of the Currency for fraudulent acts in connection with a collapsed savings and loan in Oklahoma and was under criminal investigation at the time the private placement was issued.

Of course, when an investor first read the private placement documents, there was no indication that Wicked or Fraudly Skies were at all connected to each of these other companies.

As if this convoluted scheme were not enough to keep a criminal busy, Wicked also found the time to pose as a broker-dealer. In this role, Wicked sold corporate notes to investors for fictitious entities (some of which were in this list) and promised investors returns on their monies.

Once we completed our investigation and figured out what Wicked was really up to, our investor client wisely hired an attorney. His counsel fed a lot of our research to regulatory authorities who, we learned, were compiling enough information on Wicked to bring criminal charges against him. There were countless investors who were taken by Wicked: private investors, publicly traded corporations, and well-known financial institutions. Yet, had any of these investors thought to check out Wicked’s past, they would have uncovered his previous fraud conviction and his connections to these conflicting companies described in the private placement memo. Ultimately, Wicked was handed one of the largest white-collar sentences at the time: a prison term of more than 29 years. A grand jury found him guilty of conspiracy, mail fraud, wire fraud, money laundering, and tax evasion. Now, that is criminal.

The Tactic: Connecting the Dots

This is really not such a secret, but it needs to be reiterated: Do your analysis. We cannot stress this enough. In all of the stories we discuss throughout this book, the analysis of the data is what enabled us to come to the logical conclusions in each case. Information is worthless when it is in a vacuum. Wally Wicked’s antics would have gone unnoticed had we not conducted a thorough analysis of his background and his connections to all of the other companies he had presented in the private placement memo.