Raleigh’s The Castleton Group: Two years after closing, questions remain

December 16, 2009

For Raleigh’s business community, December marks a dubious anniversary: Two years ago, this month, the human-relations outsourcing firm The Castleton Group closed shop. The move followed a ruling by the state Department of Insurance that declared the company insolvent.

This wasn’t just any company, either. In 2007, The Castleton Group had landed on Inc magazine’s list of the 5,000 fastest-growing private companies in the U.S. That same year, it was also ranked the number one woman-owned business by Triangle Business Journal. But then, everything unraveled. Within months of closing shop, James McLamb, the company’s finance chief, was charged with tax conspiracy. According to authorities, from January, 2005 to January, 2008, McLamb collected and withheld federal taxes from individual employers on behalf of employees, then prepared false and fraudulent documents to mislead the IRS.

The fall-out? Devastating. The state Department of Insurance later determined The Castleton Group’s  liabilities exceeded its assets by $6 million. Meanwhile, at least $8 million in payroll taxes from client companies were never paid to the IRS. Translated into human terms: Approximately, 3,500 employees were left without health insurance coverage, and the companies who used Castleton’s services were left on the hook for unpaid taxes.

A few months ago, McLamb was finally sentenced to 2.5 years in federal prison and $8 million in restitution. McLamb may be behind bars, but questions remain — questions that demand answers. How is that Castleton’s owner, Suzanne Clifton — an entrepreneur who’d been named Enterprising Woman of the Year in 2007 — had no knowledge of this massive defalcation taking place? (Sidenote: Clifton has been sued by the company’s bankruptcy trustee who’s seeking to repay missing creditors by recouping money: $3 million that she reportedly withdrew as the firm fell into bankruptcy.)

I’m not saying Clifton knew anything about McLamb’s actions. But if you’re the CEO and president of a company don’t you at least have an ethical responsibility to have your finger on the pulse of your own company? With the two-year anniversary of The Castleton Group’s closing upon us, a moment of reflection wouldn’t hurt.

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

December 19, 2008

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.

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!