Dumb but Premeditated Fraud – Stephanie L. Mayer of Simpsonville, SC Pleads Guilty

As I leave Pittsburgh, PA from a speaking engagement on ethics and fraud, I couldn’t help but stop when I read about a 38 year old Simpsonville, SC woman and her attempt at fraud.  A “Bernie Madoff” she isn’t as her fraud lacked creativity and ended quickly.

Every choice has a consequence.  That is a statement that I speak often as I address groups nationwide.  Whether it is Bernie Madoff, his accountant (now charged with fraud), Robert Stanford, Gordon Grigg or a host of others, the reality is whether the fraud lasts for some time or is short lived – in the case of Stephanie L. Mayer – there is a consequence for choices that we make.  If those choices are unethical, then the consequences can’t be good.

According to the US Attorney’s office:

In February 2008, Meyer opened accounts at four brokerage firms including the ultimate victims, The Vanguard Group and Ameriprise Financial.  Meyer then deposited worthless checks into the accounts, which resulted in fictitious or “phantom” balances.  Meyer then withdrew $175,000 from the credited Vanguard account and $130,000 from the Ameriprise account before the fraud was detected.

Without intending to sound judgmental, the “real impact” of the current recession wasn’t felt till late summer ’08 or certainly the fall ’08.  Therefore, the question is – what motivated Mayer to take such radical action.  She had to know that passing worthless checks to set up brokerage accounts was a venture that had a short life.

Of course – as reported in the Greenville News – “Until June 2008, Meyer deposited $5.4 million in checks spread across the firms from bank accounts that didn’t have sufficient funds to cover the checks, according to the charges.  She also pleaded guilty to mail fraud charges for mailings to Minnesota and Pennsylvania, according to the charges.”

BACKGROUND OF A FRAUD:

Frauds, regardless of type, need three things in order to take life – (1) Need; (2) Opportunity and (3) Rationalization.  The question related to the Mayer fraud is what was her (1) need and (2) rationalization?  The obvious opportunity was the method of execution of the fraud – which was amateurish and dumb.  How Mayer effected her fraud shows her lack of experience and hopefully will be taken into account in her pre-sentence report.

Her guilty plea could result in a penalty of up to 20 years in prison and a fine of up to $250,000.00 on each of the two counts to which she pled guilty.  While, I would suspect that Stephanie L. Mayer is an amateur fraudster, in the current environment, I would not be surprised if she received a prison sentence of well over three years.

If you know Stephanie and might comment on her motivation – please know that YOUR COMMENTS ARE WELCOME.

Bernie Madoff Will Plead Guilty! Fraud Prevention Expert Chuck Gallagher Speaks Out

In what will likely become the biggest investment fraud in US history, Bernie Madoff is set to enter a plea of guilty at a US District Court in Manhattan on Thursday.    According to Assistant U.S. Attorneys Marc Litt and Lisa Baroni a plea hearing is scheduled for March 12, 2009.

According to a CNN report:

Madoff’s attorneys Ira Sorkin and Daniel Horowitz confirmed to CNN that Madoff is waiving his right to a grand jury indictment and that there have been ongoing negotiations regarding a possible settlement.

“We obviously have talked to the government,” said Horowitz. “And we have been professional with each other.” The U.S. attorney’s office in Manhattan had no comment.

Frankly, it would make sense that Madoff would enter a plea.  Anything beyond that would likely result in a sentence or punishment that would be less favorable to Madoff.  Let me, however, say, I don’t think the punishment will be anything to laugh at.  Madoff’s alleged crime is substantial enough that it will earn him many years in federal prison.  Based on his age, I have stated on more than one ocassion that Madoff may never see freedom again.  But, that is just speculation.

PERSPECTIVE:

As many of my readers know, I have been through what Madoff is facing now.  Here’s a reality check – if you fight the federal government, you will likely end up with a substantially longer sentence.  The government (for the most part) will do whatever is necessary to gain a “win”!  The governments role is not to make the victims whole or even to discover who or how many people have been victimized.  The role of the government is to bring those who break the law to justice.  And the easier you make it for them to “win” the more likely one is to receive a moderate to light sentence.

Now, having said that, I also know that there are victims who get angry when they discover that the government doesn’t really care about their loss or their plight.  If a victim can help the government win, then the government is interested.  But, when the US Attorney has sufficient evidence to win or gets an admission of guilt on a plea agreement (which is exactly what Madoff – through his attorneys – will enter on Thursday) they are done.  The rest of victims claim will come in other legal suits that will be brought against a multitude of organizations.

In Madoff’s case – gaining a guilty plea should be easy since Madoff basically admitted guilty publically.  CNN reported:

It was “basically, a giant Ponzi scheme,” Madoff said, according to the government’s criminal complaint. “There is no innocent explanation,” Madoff told two FBI agents, according to the complaint, which states Madoff expected to go to jail.

With a statement like that – it’s an easy win for the goverment.  The issue in the plea agreement is not guilt, but what Madoff will plead guilty to and what sentence has basically been agreed to in advance.  The government will get it’s win, but will the sentence be sufficient to satisfy the victims?  By the way, starting at 10:00 a.m. victims will have a chance to be heard by the judge.  Not that it matters all that much as I would guess that it’s pretty well decided.

REALITY CHECK:

Having been through it, (wish I could say other wise) the process will likely be fairly straight forward.  Madoff pleads guilty to “securities fraud”.  The judge hears from the victims.  The judge accepts Madoff’s guilty plea.

WHAT’S NEXT:

Hum…now that’s a good question.  Thus far Madoff has been under – shall we call it – “house arrest.”  Whether he’ll be allowed to continue that form of confinement or whether the judge will require him remanded to some form of federal prison awaiting sentencing remains to be seen.  Certainly this is public outcry for Madoff to be imprisoned.

There is little chance that Madoff will be sentenced on Thursday.  If this hearing is true to form, it will only be an admission of guilty.  Once entered and accepted, Madoff will have more time to wait until his sentencing hearning.  In my case I had to wait almost six months before being sentenced and then another four months before being required to report to federal prison.

I doubt it will take that long for Madoff, but it will likely take time.

According to the New York Times:

If Mr. Madoff does plead guilty on Thursday, it could nevertheless be several months before he is sentenced, several former prosecutors said. The single count of securities fraud that he faces now carries a prison term of up to 20 years.

The one thing I do find interesting in this case if that the government is only seeking an admission of guilt on ONE count of securities fraud.  With so many victims, it would seem that the government could easily win multiple admissions of guilt on items other than just ONE count of securities fraud.  It makes one wonder if the government isn’t being cooperative due to the backlash that could come if Madoff exposed the incompetence of the SEC?

Just a thought!

QUESTION:

1.  Assuming Madoff Pleads guilty – how much time do you feel he should serve for his crime?

2.  Should Madoff’s sentence be reduced if he helps locate available funds to help with restitution?

3.  Should charitable organizations get preferential treatment when it comes to restitution?

YOUR COMMENTS ARE WELCOME!

Bernie Madoff, Allen Stanford – Tell Tail Signs You’re Being Conned! Comments from Fraud Prevention Expert Chuck Gallagher

I saw a great article in Time today entitled: How to Spot a Ponzi Con Artist? Follow the Yachts by Robert Chew.  (see article here.)   I must admit after talking recently to many of the folks who were scammed by Gordon Grigg, I would hear similar tales of loss and lifestyle – their loss and his lifestyle.

While many of my readers are regulars I am constantly reminded of the new faces who read this blog for the first time.  Knowing that, this blog entry will be less about others and more about my past.  From the past one can learn much about the future.  You see, I, too, was a fraudster.  That is not something I am proud of – in fact, it is a fact that I wish were not there.  However, I cannot change my past, so over time I have come to embrace it, share it and learn from those mistakes.  My openness is designed to bring awareness and hopefully prevent others from falling prey to those who would defraud.

THE TIME MAGAZINE ARTICLE:

The article starts with these paragraphs:

With so many Ponzis and so little time to know if you’ve been hoodwinked, there are some red flags even the most trusting investors can bank on: yachts, mansions, jets and women. If your investment adviser is dabbling in any of the above, there’s a good chance you’ve been Ponzi-ed or are about to be.

Creating the illusion of fantastic success, of course, is Chapter 1 in the Scammer’s Handbook. But many among the most egregious alleged billionaire bamboozlers, like R. Allen Stanford and Bernie Madoff, are taking the art of thievery to the next level. Some don’t even bother opening an investor account when new monies come in; they just go shopping. It’s enough to make Gordon (“Greed is good”) Gecko blush.

Arthur Chew is dead on when he says, “Creating the illusion of fantastic success is Chapter 1 in the Scammer’s Handbook.”  Actually there, of course, is NO Scammer’s Handbook.  But, Chew is right about the illusion.

As a ethics and fraud prevention speaker, I openly discuss the steps that led up to the choices I made to enter into the world of fraud.  At first I stuck my toe into that world when I was behind on my  house payment.  I stole money from a client – tricking myself into believing I was only “borrowing” money.   That was foolish – borrowing is borrowing and theft is theft, and when you take money that isn’t yours without anyone’s knowledge – it is theft.

That said, when I repaid the stolen money I also learned it was easy.  I  took again, with minor repayment and again and again.  But to Chew’s point, the stolen funds were invested into my lifestyle.  Now, I didn’t live like Bernie Madoff, but I did live well, especially for the community that I was living in.

The Time article goes on to say:

The charge alleges Walsh and Greenwood gave themselves $8.2 million in employee “advances” and another whopping $160 million for personal expenses. The complaint detailed funds’ being used for buying rare books at auction, purchasing expensive horses, laying down $80,000 for a Steiff teddy bear and providing the ex–Mrs. Walsh with a $3 million residence.

Also last week, North Hills Management, a New York City–based $40 million investment fund run by Mark Evan Bloom, was charged by the same agency with “misappropriating for personal use” more than $13 million from its clients’ fund.

While my lifestyle was nothing like that – everything is relative.  I lived in an upscale home.  While there I was building another home which would have been in the top 1% in my community.  I drove a BMW, then a Jaguar, then a Mercedes, and finally a BMW.  I purchased rare “autographs” that I deemed to be collectibles.  Our clothes were top of the line and we wanted for nothing.  The “illusion” was appropriate for where I lived and the level of my fraud.

As I write this I am saddened by the words.  It is difficult to state what I did, knowing that I knew better all the time.  I created an amazing illusion and got caught up in it myself.  Having talked with many victims of frauds, just like the one I committed, I know that the fraudster, just like the victim, can be caught up in the illusion.

Now I need to be careful with what I say here – for fear that my readers might think I am trying to shift blame – I am not!  But, the truth is, my crime – or the crimes of Madoff, Stanford, Grigg and others in the news today – could have been cut short if those closest to them might have been alerted by their lifestyle.  In my case, I was tax partner in a CPA firm.  It is fairly obvious that my partners knew what I was making from our firm.  I knew their income and they knew mine.  So a fair and reasonable question is – how could I live a lifestyle far more lavish than they?  If we all knew our incomes, unless I had a vast inheritance – which they knew I didn’t – then the question would be where is the money coming from?

Let me repeat the question:  Where is the money coming from?

When that question is asked – then there is a chance that unethical – if not fraudulent – behavior could be uncovered or discovered.  So there is no misunderstanding, I am not faulting my partners for my poor choices.  I made them.  I am responsible and accountable for them.  I paid the price for them.  That being said, had anyone – my family, my partners, anyone – questioned my income or income source, I would likely have been stopped in my tracks.

OUTCOME:

Today as I speak to groups nationwide I state: “Every choice has a consequence.”  I live that daily.  The choice I have made over the years have all had consequences – some good and some bad.  In my case, even though I made complete restitution plus interest to those I defrauded, I did spend time in Federal prison for my crimes.  Again, I am not proud of that outcome or my past choices.  But I am living proof that ILLUSION is a grand part of the fraud scheme.

AS ALWAYS – I AM OPEN TO YOUR COMMENTS:

Robert Allen Stanford – Stanford International Bank and Stanford Capital Management – Fraud In the News! What Motivates Fraud?

It seems that the flood gates are open with no hope of shutting – at least any time soon – with investigations and indictments of fraud!  Madoff, Dryer, Grigg and now Stanford.  Every where you turn there is another fraud or investment scam being reported.  I’ve seen a lot over the years as a business ethics and fraud prevention speaker, but this is a profound season for fraud discovery.  So the question – what motivates fraud? 

To address a question like that you need to look at the scope and magitude of the frauds being reported.  And, make no mistake in this economic climate this is the tip of the iceberg.  As I write this, no doubt, there are frauds taking place that will be discovered in years to come.  Not a great comfort.  And, in this environment, the time is ripe for people to be scammed or victimized.

Before, however, look at the motivation, let’s examine what Stanford is being accused of.  According to the Dallas Business Journal:

A Houston-based broker-dealer and investment advisory firm with an office in Dallas has been charged in an $8 billion investment scheme that centers around a CD program and involves false promises to investors.

The Securities and Exchange Commission out of its Fort Worth Regional office alleges in a lawsuit filed in Dallas that Robert Allen Stanford through three of his companies — Antiguan-based Stanford International Bank, Houston-based Stanford Group Co. and Stanford Capital Management — were involved in orchestrating a fraudulent investor scenario where the parties made false promises to investors and fabricated return data on investments, the SEC stated.

“As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement. “We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors.”

Rose Romero, regional director of the SEC’s Fort Worth office, called the scheme “a fraud of shocking magnitude that has spread its tentacles throughout the world.”

This was originally reported on February 17, 2009.  Since that time there has been a massive ripple effect related to Stanford’s SEC investigation. Investors have found that their assets have been frozen as Stanford’s assets were frozen to protect investors.  This fraud expands far beyond the boundaries of the US.

The Jamaica Observer states: His is a household name in the tiny Eastern Caribbean island of Antigua & Barbuda.

Likewise, the New York Times reports: Having seized control of Robert Allen Stanford’s two banks in recent days, Antiguan government officials are now pledging to work closely with American regulators to investigate their banking system, long suspected by federal officials of being a center for laundering money from around the region.

Now…as the Stanford saga unfolds so does the mystery.  Keep in mind, fraud – to be successful – has to be based on illusion.  And, as we have seen, the grander the illusion the more plausible the fraud – Bernie Madoff – master illusionist.  So in Stanford’s case the illusion is mystified by a story of an “undisclosed island.”

Again, the New York Times reported on February 20, 2009 – In an October 2008 article, Mr. Stanford told Forbes that he was planning to build an elite resort on what the magazine described as an “undisclosed island in the Caribbean.” At the time, Mr. Stanford said that he was working with 17 architectural and engineering firms to build 30 mansions for a development to be called the Islands Club.

Scheduled to open in 2011, it would have featured the largest private aviation complex in the world, Forbes said, with enough room to park 100 private jets as well as a jumbo marina with enough dock space for 30 massive yachts. The super-exclusive resort would require members to shell out a $50 million deposit, which would be refunded if they left the development. That was on top of the $15 million annual membership fee.

The foundation of a scam is based on three components:  Promises – something that people want and most can’t get; Illusion – the grand scheme that allows people to believe in something unseen as truth; and Trust – the belief that all is right, that somehow the government is overseeing the illusion and that if others do it – well then so should I.

BUT WHAT MOTIVATES A FRAUD IN THE FIRST PLACE?

That’s a good question and one that is not easy to answer.  However, one thing is true – a fraud usually has three distinct components: (1) Need; (2) Opportunity; and (3) Rationalization.  While I am not qualified to speak at this time as to each of these critical components, I can safely say that his NEED was driven by emotion (likely first) and (direct need perhaps second).

Note the following reported by chron.com:  With a net worth north of $2 billion, he owns glitzy homes in and around Miami, the Virgin Islands and Antigua, and in them he has entertained powerful American politicians from both sides of the aisle.

He has an estranged wife, a girlfriend, former girlfriends and at least six children by four women. The monthly tab to support them all runs upward of $200,000, according to court records.

He loves to flash cash and to flaunt the toys that immense wealth can bring, be it yachts, private jets and helicopters, his own professional cricket team or a string of top-shelf pro golfers whom he pays to wear his logo.

An outstanding article appeared in the Wall Street Journal – a link to that article is here.

The flamboyant life style required money to fund the illusion, but more than that the emotional need to be larger than life is likely the key trigger to what and why this whole fraud began.

STANFORD’S JOURNEY CONTINUES:

The story will no doubt unravel.  So consider the following:

1. If you were an investor who was defrauded, consider making contact with me as I am doing research into how the fraud was carried out.  Your comments might help others avoid your plight.
2. What do you think should be Stanford’s consequence for the massive fraud he’s accused of?
3. If you did invest – did it cross your mind that the returns (far better than what the market provided) might be – well – shady?

AS ALWAYS COMMENTS ARE WELCOME!

Fredric “Rick” Dryer – Ponzi Scheme Fraudster Sentenced to 132 Years in Prison. Ethics and Fraud Prevention Expert Chuck Gallagher Comments

Forty-four felon counts faced Fredric “Rick” Dryer as the judge prounced his sentence. 

“Thinking about this case last night, I wondered what makes you different than the people who put guns to victims’ heads?”  Judge Mansfield said prior to giving out the sentence. “Are the victims any less hurt?”

That question is being asked alot these days.  “Are victims any less hurt?”  In one sense yes and the other no.  Yes, there was not a physical violation, but the emotional toll that theft creates is significant.  I know.  I unfortunately created that pain in people I victimized many years ago.  And just like Dryer, I faced a judge and was sentenced…to prison.

Today, things are not that different than in 1986 when my crime was committed.  But for a moment let’s look at what Dryer did and why.

Ordered to pay $3.4 million in restitution, Dryer was sentenced to 132 years in state prison.  Now, practically speaking the restitution is moot.  Dryer, with a sentence like that, will more than likely die in prison.  There is little to no chance that any restitution will be made.

According to the Denver Business Journal:

Mile High Capital Group, a real estate investment group,  purported to sell duplex rental units to investors, who could then resell them for a profit. The company also had several sister companies that specialized in tax-deferred real estate transactions and rental property management.

Dryer and his associates promoted Mile High and its offshoots at heavily promoted events at high-end hotels throughout the United States.

But despite generating more than 1,000 contracts and $44 million in sales, the Greenwood Village-based company completed only about 32 duplex rental units, prosecutors said.

The scheme cost some investors their life savings. Investors ranged from blue-collar workers and Chinese immigrants to flight attendants and Harvard-educated attorneys.

While Dryer’s attorney said he will appeal his sentence, Dryer is a convicted felon, who was charged with a bank robbery in 1971 and two other securities fraud cases in the early 1980s, he’s not eligible for probation.  While it is not my intend to be judgemental, as I’ve been in his shoes, it does appear that Dryer didn’t learn from his past choices.

Every choice has a consequence.  As humans we all make choices daily and the choices that we make today will determine our future tomorrow.  Dryer had the opportunity on, what appears to be several occasions, to make better choices.  He elected no to and the price or consequence for his most recent set of choices – life and/or death in prison.  Not what most would call a pretty end.

SO HOW DOES ONE GET SCAMMED BY A PONZI SCHEME?

Reality check is – it is easy.  The fraudster just sucks you into the PIT.  Now for those of you who follow my blog, I have reported on this before in entries related to Bernie Madoff.  But if you have not read those let me help you with understanding the PIT.

The first part of most any financial fraud starts with the PROMISE ( P ).  Fortunately I was not a Dryer investor, but in all cases the PROMISE is a return better than what the average investor could gain if investing in the open market.

Now think of it, if someone told you that he/she could get you a return that practically no one else could get and get that return for you consistently year after year, wouldn’t you be interested?  Sure you would!  So POINT OF ADVICE:  If you wish to avoid being scammed, understand – if it sounds to good to be true – it LIKELY ISN’T TRUE!

The second part of the fraud triangle is the ILLUSION ( I ).  Promoted at high end hotels, investors though that they were investing in real estate ventures that for all practical purposes didn’t exist.  The illusion was created by the marketing and promotion.  For real estate the setting created – the perfect ILLUSION.

This second component of being defrauded is actually the hardest to crack.  Why?  Well, think of it, if you were that good at investing you wouldn’t need someone like Dryer and his team.  That said, a great ILLUSIONIST should be able to fool you.  Dryers clients were fooled and my of them were experienced investors.

That leads to the third and final component of fraud – TRUST ( T ).  In order to effectively pull a fraud off, someone has to trust the fraudster.  Now, having been a fraudster (not something I am proud of), I understand the mentality.  It is much easier to defraud someone who is close to you and trusts you than it is to defraud a stranger.  It isn’t that fraudsters want to hurt those closest to them, rather, it is just easier to convince someone who is close to you to trust you.  Trust here was established by the sheer number of investors.  Once there were contracts, there was the illusion that if one or a hundred made the leap then – “so should I.”

To illustrate this point – TRUST

Among the victims listed in the superseded indictment were Lori Fuller, Dietz’s sister, who invested $680,000 into Mile High and invested in two Mile High duplexes in Milliken, which were never built, according to the indictment.

According to the indictment, Fuller was promised returns of up to 12 percent on her investments. While Fuller received monthly payments for a “period of time,” the indictment states Dryer and Mile High didn’t return her principle.

Again, according to the Denver Business Journal:

While 35 investors are named in the indictment, records relating to Mile High’s Chapter 11 bankruptcy indicate that as many as 1,000 people nationwide could have lost as much as $35 million in the case.

AS A SIDE NOTE:

I have received many calls from investors who have been defrauded in other cases now being investigated or coming to light.  The investigators do not follow every lead and every person who has been defrauded.  They gain enough evidence to win the case.  Beyond that they understand that the likelyhood of loss recovery is slim and their role is to prosecute – not to make victims whole.

QUESTIONS:

1. If you were defrauded by Dryer and his partners, would you contact me please.  I am writing a book and would like to interview you about how you were scammed.
2. If you were scammed by Dryer, have you been advised that there is a provision of the Internal Revenue Code – Section 165(c)(2) which might help in your loss recovery?
3. If you were scammed, would you consider commenting on this blog regarding how you feel about Dryer’s sentence?

AS ALWAYS YOUR COMMENTS ARE WELCOME!

Bernie Madoff or Gordon Grigg Fraud Losses – Perhaps IRC Section 165(c)(2) Will Help…

There is nothing fun about fraud – especially if you are on the losing end.  Not only do you feel betrayed – your trust destroyed, but most of the time you find that you have also suffered financial loss that in many ways can’t be replaced. 

As a busines ethics and fraud prevention speaker, I believe in giving credit where credit is due.  Today I received a response to two blog postings I made by Moira Souza Shiver who reminded me about a provision of the Internal Revenue Code that, in many ways, is little known.  Her website can be found here and it states the following:

My name is Moira Souza-Shiver and I am the founder and President of MSS Advocacy Group, LLC (MSSAG).  I’m extremely proud to have established an organization whose main mission is bringing help to victims by attaining the assistance they deserve and were promised.  Working in the investment fraud industry for the past 10 years has created in me a passion to fight for what’s right and even more, has instilled in me a deep respect for victims and the suffering they endure.

My decision to establish MSSAG came from what I describe as a desperate need within the 165 industry.  After serving 6 years with JK Harris 165 Services, LLC, it was clear there was little being done in the form of victims’ advocacy and an organization was needed to help alleviate their suffering.   Believing that investment fraud victims deserve the same rights allotted to other victims, MSSAG was born.

MSSAG is committed to doing everything it can for this cause, including aligning itself with other organizations and advocates that can provide complimentary assistance through established programs.  By combining forces with these types of organizations, we intend to maximize all available sources of assistance and bring hope back to victim’s lives.

Now, before you assume that I have a financial interest in promoting Moira or Section 165, let me clarify that I do not.  But like Moira, I do have an interest in making sure that all aspects of ethics and fraud (including prevention and recovery) are explored.

I have talked with several of the victims of Gordon Grigg (who the SEC is actively conducting an investigation on) and I know and feel their pain.  So please read the following as it might help you understand the application of IRC Section 165(c)(2).

An excellent article was written in the Journal of Accountancy related to Section 165.  A portion of the article is reproduced below:

When a client is the victim of fraud or embezzlement, for example, CPAs can reduce the client’s ordinary income, recoup any previously paid taxes and minimize future tax obligations by using IRC section 165(c)(2).

Be aware that CPAs who prepare and defend an investment loss deduction under IRC section 165(c)(2) must meet numerous technical requirements and make certain determinations based on examining the circumstances. Section 165(c)(2) deductions also frequently prompt IRS oversight, and in many instances, the standard tax preparation software does not adequately address this deduction, since it’s generally geared to the more familiar section 1211 capital loss treatment. But while section 1211 is an appropriate treatment, using it may result in clients’ paying more taxes than are required.

If a client suffers an investment loss as a result of a fraudulent investment or unethical sales practice, probably the most prudent action a CPA can take, even though there is no requirement to do so, is to suggest the client first discuss it with his or her lawyer. Taxpayers are required to take reasonable action to recover a loss and not doing so disqualifies it for section 165(c)(2) treatment. If the lawyer feels there was malfeasance and it is not practical to pursue recovery due to a lack of recoverable assets, the cost of litigation or other reasons, the loss probably is deductible in the current period. Losses from embezzlement, blackmail, kidnapping for ransom, burglary, larceny, extortion and threats also may qualify for section 165 treatment.

While I no long provide tax advice, I do feel that providing information on fraud recovery options is a positive benefit.  Below are some links to articles on Section 165.  I do advise that that you give Moira a call.  Please note the following from her web site:

First and foremost, there is no guarantee you will ever recover any of your lost investment.  MSS165 will never be able to make you whole or guarantee a partial recovery of your money.  We can however promise to be truthful, try to help in any way we can and be available for questions as the needs arise.  With a combination of over 31 years experience in the investment fraud recovery industry, we’re confident that our ability, combined with our passion for helping victims will provide you with the best chance of recovery available.

*  MSS165 is compensated for its efforts by means of speaking engagements and donations to the company.  There is no charge to victims or their accounting professionals for our time, information or efforts on victim’s behalves.

HOPE THIS HELPS and as always – COMMENTS ARE WELCOME!

LINKS:

http://www.mss165.com/whoweare.htm

http://www.journalofaccountancy.com/Issues/2005/Apr/MaximizeTaxBenefitsUnderIrcSection165.htm

http://www.traderstatus.com/section165theftloss.htm

http://www.taxreliefinc.com/165services2.htm

Gordon Grigg, ProTrust Financial and ProTrust Management – Fined $570,000 for (Say) Unethical Behavior?

Seemingly kicked out of one state some three years ago, it seems that action wasn’t enough for Gordon Grigg.   In a story I wrote several weeks back (read here) about an SEC investigation into the finacial actions of Gordon Grigg and ProTrust Financial, I stated that I would call him “mini-Madoff” as it seemed clear from published reports that Grigg was representing himself as a financial advisor, when it seems that all he was doing was operating a Ponzi scheme.  But, in our country all are innocent until proven guilty.  So, I began to explore whether there was any merit to what had been reported only days earlier.

Seems there is more…so here is the rest of the story – at least thus far.

On June 28, 2006 the State of North Dakota issued a Cease and Decist Order and fined Grigg, ProTrust Financial and ProTrust Management some $570,000 which, according to the State of North Dakota have not been paid to date.  Hum…seems that where there is smoke there is fire.  Let’s look further at the issues that the State of North Dakota felt warranted such a fine.

ISSUES:

• From 1990 to 2005 ProTrust Financial was registered in Tennessee as an investment advisor.  ProTrust Financial was NEVER registered in the State of North Dakota as an investment advisor.
• Likewise, ProTrust Management was NEVER registered in the State of North Dakota as an investment advisor.
• And, of course, Gordon Grigg as – you guessed it – NEVER registered in the State of North Dakota as an investment advisor.
• From June 2001 to August 2005, Grigg engaged in 30 transactions issued by ProTrust Management and affiliated with ProTrust Financial with a North Dakota resident.
• Those securities were NEVER registered with the Securities Department within the State of North Dakota.
• With respect to 13 of the securities sold, the State of North Dakota says that they were fraudulent in that they were described as CDs to the North Dakota investor.

THE OUTCOME:

Based on the investigation by the State of North Dakota, a civil penalty was assessed against Grigg, ProTrust Financial and ProTrust Management.

1. $350,000 was required to be paid into the North Dakota Investor Restitution Fund for the purpose of reimbursing the complainant for losses incurred as a result of investments with Grigg.
2. $220,000 was to be paid to the North Dakota Securities Department.

WHERE FROM HERE?

As I understand it, the SEC is busy with discovery.  The original report says that Grigg (mini-Madoff) had defrauded 27 investors of over $6.5 million.  From what I am finding there are many more than 27.   Likely the SEC (with egg on their face from the Madoff debacle) will do their do diligence – by dotting “i’s” and crossing “t’s” to bring this to an effective conclusion legally.  More than likely it will find its way into the hands of a federal criminal investigator and eventually Grigg will find himself spending time in prison.

But what about the investors?  Well, there may – I EMPHASIZE MAY – be some funds for restitution, but frankly, I doubt much.  Rarely do fraudsters keep excess funds around for a rainy day – say to make restitution.  But I suppose there is always hope.

PLEASE NOTE:  If you feel that you have been defrauded by Gordon Grigg, please contact me as I am actively working this story and would like to confidentially discuss with you how and when you were defrauded.   I can be reached at chuck@chuckgallagher.com.  Any communication will be confidential.

MORE TO COME…and your COMMENTS are welcome!

And the Fraud Begins – Gordon Grigg and his firm, ProTrust Management Inc. Charged with Securities Fraud – I Shall Call Him “Mini Madoff”

In tough economic times fraud will rise!  And with government funds flooding the markets to stimulate the economy, there is no doubt that some will see this as an opportunity to – well take advantage of an unregulated environment.  That seems to the be case with Gordon Grigg of Nashville and his firm, ProTrust Management Inc.

According to the Associated Press – “Federal regulators on Wednesday charged an investment adviser with securities fraud, saying he bilked clients of at least $6.5 million in the first scheme using the government’s $700 billion financial bailout program as a front to lure investments.”

Need, opportunity and rationalization – these are the three components of fraud – white collar crime.  And while a person is considered innocent until proven innocent, it would seem that there is enough evidence to cause the Securities and Exchange Commission to obtain a court order freezing the assets of Gordon Grigg of Nashville and his firm, ProTrust Management Inc.

It would seem that based on the information thus far that Grigg could be called “Mini Madoff.”  No he might not have yet created a Ponzi scheme, but it does seem it was headed in that direction.

The Associated Press reports:

Grigg represents himself as a financial planner and investment adviser, but neither he nor his firm is registered with the SEC or a state regulator, the agency said in its civil lawsuit filed in federal court in Nashville. The SEC said that Grigg, who obtained control over funds of at least 27 clients, falsely claimed to have invested their money in securities described as “private placements,” creating phony account statements.

BE AWARE:

One of the first indications of fraud is when the investment advisor says – he/she has something that is “private” something that no one else has – something that is special.  Madoff had something special – and now it seems so did Grigg.  Only in both cases it appears that neither was true.

According to the SEC, Grigg began falsely claiming that his firm could invest client funds in government-guaranteed commercial paper and bank debt as part of the federal TARP program. His claims also included that he had partnerships and other business relationships with several leading U.S. investment firms.

Grigg and his firm “preyed upon investors’ desire for safety by claiming associations with reputable investment firms and the government’s TARP program,” Katherine Addleman, regional director of the SEC’s Atlanta office, said in a statement. “Investors should carefully check any purported affiliations. In this case, not only were such claims false, but there is in fact no program in which investors can buy debt guaranteed by the TARP program.”

THE VICTIMS:

As reported in the Charolotte Observer – “Davidson resident Steve Wieland has prayed with Gordon Grigg, invited the former Charlotte resident into his home and trusted him enough to let Grigg’s company invest his life savings.  Wieland, 59, a disabled former pilot who flew for US Airways for 25 years, said he lost $252,000, the bulk of his life savings.

“You read about this happening in the newspaper. But when it happens to you, you go, ‘Oh my God, how do I recover,’” Wieland said. “I can’t. I’m done.”

Grigg’s alleged fraud started in 2003 and according to reports – ProTrust also was subject to a cease and desist order in North Dakota in 2006 for allegedly selling nonexistent securities, records show.

THE PIT – THAT HOLE THAT INVESTORS FALL INTO (AND DON’T RECOVER FROM):

As a fraud prevention expert and business ethics speaker, I am often asked how is it that people get suckered into investments like this?  I wish I could say it was difficult.  But from experience that cost me time in prison – I have to admit it is easy.   More times that not the scammed investors fall into what I have referred to as the PIT.

But here is what Mr. Wieland had to say, “I gave my money to a ‘friend’ instead of doing my research,” Wieland said. “Never do that. I don’t want anybody else to lose any more money.”

P – first there is the “promise” that the investor can get something that is special – something that the average person can’t get.  That “something special” is the allure of a better return – or something that gives one a chance at the gold at the end of the rainbow.  The fraudster plays on that emotional need.

I – second there is the “illusion.” In Grigg’s case – he claimed to have “private placements.”  That was supported by false and fraudulent account statements reflecting client ownership of the non-existent securities.  The false information is part of the illusion.  When you see it on paper or on the web in a fake account, you are lulled into believing it’s truth.

T – the final part is the all important aspect of “trust.” As stated in the Charlotte Observer article – “Steve Wieland has prayed with Gordon Grigg, invited the former Charlotte resident into his home and trusted him enough to let Grigg’s company invest his life savings.”  Ah…there’s that word – TRUST. Bernie Madoff had it, Gordon Grigg had it and so did I.  And in each case the abuse of trust was a key factor in a fraud taking place.

THIS STORY ISN’T OVER:

There is more to this story and likely many more victims.  I feel for them and hope that this writing might alert others to the importance of due diligence when investing.  Grigg, if convicted, will spend time in Federal Prison where he’ll have ample opportunity to think about this choices and the consequences that follow.  As I speak nationwide on ethics and fraud prevention – the first words out of my mouth are – “Every choice has a consequence.”

YOUR COMMENTS ARE WELCOME!

Madoff Ponzi Scheme – Fraud Prevention Expert Chuck Gallagher Comments – Stay Out of the PIT

Splashed all over the media in every form one can imagine is the news of the massive Ponzi scheme that Bernard Madoff was able to perpetrate over the scope of decades.  A staggering $50 billion is being reported and the numbers seem to always rise as first estimates (for some reason) seem to be conservative.  Perhaps it’s just we don’t want to believe it can be that bad!

From the Wall Street Journal to Bloomberg to Time – all are reporting about what happen and now asking how?  Of course, it is becoming a field day for lawyers (trying to protect their client’s interests) as well as politicians (attempting to fix lax regulatory blame).  And the reporters – well they have questions (as they should).

How could it have happened?  How could we have known?  And, most importantly – how could it have been prevented?

Those are all good questions.  But the best question is – how best to find the answer?

In order to unravel this massive financial and legal mess one needs to understand the components and pattern of fraud in order to prevent it in the future.

Fraud consists of three primary components: (1) Need; (2) Opportunity and (3) Rationalization.  All three must exist for a fraud of this magnitude to take place, live and grow over time.   Without doubt…all three existed with Madoff.  The trouble is we may not know the exact details of “why” for some time to come – if ever.

However, the most important of the three is the OPPORTUNITY SEGMENT.  Without “opportunity” the three legged stool wouldn’t support the weight of the fraud or crime.  That’s where falling into the PIT comes in. Of course, the question is – what is the PIT and what does it stand for?

The OPPORTUNITY segment of the fraud goes like this:  The fraudster (Madoff) makes a PROMISE (P) to an unsuspecting investor, creating an ILLUSION (I) – generally something the investor truly desires – which is supported by TRUST (T) – most of the time something the fraudster already has with the unsuspecting investor.  That is the “PIT” and once one falls in it, it becomes easier for others to join.  In Madoff’s case the PIT had become so large that the slippery slope in was easy and the company impressive.  My guess is that folks wanted in.

O.K. – great, so there’s a PIT.  But the real question is how to avoid the trap?

I must say that there is no shortage of people from all walks of life who are easily, quickly and willing to call Madoff all manner of names and express outrage.  The fact is – getting caught in the PIT is easy and simple.  Avoidiance is unnatural for most. Think about it, most frauds take place with people you know and/or trust.  Trust is the key factor.  So how does one avoid the PIT?

Simple Avoidance Steps:

(1) Understand – especially in a down economy when temptation for financial performance is on the rise – anything this is proposed which seems too good to be true – isn’t.

(2) Know what you’re investing in.  If you don’t understand the investment or it is an area that is foreign (in other words you could easily be manipulated) avoid the investment.

(3) Check out the investment through reliable means.  In other words approach the investment with a healthy skepticism.  Trust no one completely and due your due diligence.

Fraudsters abuse the trust others have in them in order to effect their fraud.  I did and so did Madoff.

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For more information about my programs and consulting on business ethics and fraud prevention, contact me at www.chuckgallagher.com or call me at 828.244.1400.  My commitment to my clients: To evaluate and identify areas for fraud and help weed them out.  Fraud can be prevented!

Lawyer – Ted Russell Schwartz Murray – Guilty! White Collar Crime Speaker Chuck Gallagher Comments

As the time of decision grew near, the only thing that Ted Russell Schwartz Murray could likely have wished for is another storm.

The trial which began on Sept. 8, 2008, was interrupted by Hurricane Ike, and concluded with the return of the guilty verdicts yesterday.  A Houston federal jury has convicted Ted Russell Schwartz Murray, a lawyer licensed in Texas and Florida, of conspiracy to commit mail fraud and securities fraud in connection with the operation of Money Mortgage Corporation of America, a subsidiary of Premiere Holdings, LP, a real estate investment program.  Murray was also convicted Murray of making a False Statement on Tax Returns for the years 1999 and 2000.

Murray and co-defendants David Isaac Lapin and Jeffrey Carl Wigginton, Sr. were all charged by indictment in August, 2006. Lapin and Wigginton pleaded guilty in August 2008 to the conspiracy to commit mail fraud and securities fraud for their roles in the scheme and are pending sentencing in Nov. 2008.  Murray was charged separately in a second indictment with the tax offenses.

Every choice has a consequence.  As a business ethics and white collar crime speaker I have seen over and over the consequences of greed motivated actions.  For a fraud to exist three things exit: (1) need; (2) opportunity and (3) rationalization.  The verdict was guilty.  The question is what was the motivation of Murray and his co-conspirators.

According to the US Attorney’s news release:

During trial, the United States presented its evidence proving that between 1996 and 2001, Murray, 57, conspired to commit mail fraud and securities fraud in the promotion and marketing of the Premiere 72 or “P72″ mortgage investment program. Murray testified at trial and denied he had made false representations to investors when the program was promoted with promises of (1) 12% interest; (2) 1st liens on real estate; (3) 72 hour liquidity; and (4) 70% loan to value ratio. However, the evidence proved that so-called interest payments were actually set aside from a portion of the investor’s principle and returned to them as interest; many loans were not secured by 1st liens on real estate; and many loans were not based on a 70% loan to value ratio. Lapin, a co-conspirator in the scheme, testified that he and his co-defendants failed to disclose to investors the fact that loans on certain projects were actually in default at the time the funds of new investors were placed in these loans. An expert witness, qualified in forensic accounting, testified that the Premiere 72 program was conducted like a Ponzi scheme, where the money from new investors is used to pay earlier investors.

Mortgage Crisis – no wonder.  With practically free money and a country that seemed to believe that real estate had no ceiling, the opportunity was right the perpetration of such a fraud.  Likewise, in the current economic climate with fear leading the way, others will rise to fill the void.

While admitting that the above material facts were not disclosed to investors, Murray blamed his partners claiming Lapin had failed to live up to his fiduciary duties and both Lapin and Wigginton failed to disclose to investors that Premiere Holdings charged fees ranging from 15 -25% from investor funds. Murray denied any responsibility to disclose any material facts to investors.

With sentencing following in March 2009 the failure to accept personal accountability will no doubt play a role in the length of sentence.

Over 500 people invested in the fraudulent mortgage investment program promoted by Murray and his co-conspirators.  During the five year period the scheme operated, Premier Holdings, LP, Murray and his co-conspirators generated more than $200 million in gross receipts. Premier Holdings, LP, filed for bankruptcy in Oct. 2001 at which time the company had more than $160 million of investor funds tied up in the fraudulent scheme.  Murray filed for personal bankruptcy a short time thereafter.

The jury found Murray guilty of all 20 counts submitted to the jury arising from the scheme to defraud investors including the conspiracy charge, 14 counts of mail fraud, and four counts of securities fraud. The conspiracy conviction and each of the convictions for mail fraud carry a maximum statutory penalty of five years imprisonment. The securities fraud counts of conviction each carry a maximum penalty  of  10 years imprisonment.  Each count also carries a maximum fine of $250,000.

In addition to the scheme to defraud, Murray was also charged and convicted in a separate case with two counts of making a false statement on his tax returns based upon evidence which proved that Murray disguised personal expenses as business expenses and deducted a portion of those expenses on his tax returns, including a $29,000 Rolex watch, payments to casinos, a series of payments totaling over $5 million for return of principal to investors, payments for a $1 million ownership interest in the building where Premiere held its offices at 11451 Katy Freeway, and gifts to family members.  Murray faces a maximum of three years imprisonment and a $250,000 fine on each of two counts of conviction.

Considering where we are today – economically – I would not be surprised to see that the sentence would err on the heavy side.  For those who read this – if you know Murray perhaps you could give some clue as to what motivated his behavior.  Obviously, Murray was educated and hence would know the difference between right and wrong, between ethical behavior and unethical behavior.

Comments are welcome