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Catching Your CPA Stealing From You Redhanded Must Be Oh So Satisfying

Posted on by Caleb Newquist
cpa caught red-handed

If you’re an accountant and you plan to steal from a client or your employer or whomever, one thing is certain: You are confident. Why else would you try to embezzle money unless you were sure you wouldn’t get caught? As noted criminal Sam Antar has said, “It’s a calculated risk. Everybody takes precaution against failure, but nobody ever plans on actually failing.”

Here’s a story of Joseph Stevens, CPA, who’s been charged with bank fraud. Allegedly, he stole nearly $500k from a client who trusted him to “handle all his bookkeeping for his business,” including “paying vendors, employee payroll and business and personal tax return preparation.”

Stevens had access to the client’s bank accounts, including the routing and account numbers. You see where this is going. Stevens must have felt confident about this. It was the perfect combination for an uninterrupted gravy train of fraud.

But trains derail, from time to time.

[I]n September 2016 the business owner realized that monthly bank statements were no longer being received at his office. He went to the bank on March 24 to review his accounts’ activities and found that two checks, both made to Joseph Stevens, had been forged with his signature

All right, so the jig is up. But the actual end of the story is much more enjoyable:

He then received a call on April 4 from the bank, telling him that someone was trying to negotiate a $5,000 check drawn on his account […] The business owner told the bank that the check was not authorized and to freeze the accounts.

While still on the phone with the bank, Stevens called the business owner to tell him his accounts had been frozen.

Ah yes, the dutiful accountant calls his client to alert him to something strange is going on with his bank accounts. Bank accounts that he allegedly treated as his personal piggy bank. He must have thought that his client would be the last person on Earth responsible for freezing the accounts. What an incredible moment that must’ve been.

Client: Hello?

Joe: Hey, did you know that your bank account was frozen?

Client: Hi, Joe. Let me answer your question with a couple of my own: Did you know that someone made two checks out to you and forged my signature? Did you also know that someone is trying to pass an unauthorized $5,000 check on my account right this second?

Joe: ….

Client: You’re busted, Joe. [Slams phone down]

It was probably less cordial than that. Plus, no one slams phones down anymore because there isn’t an app for that (a decent one, anyway). Still, it had to feel good catching that guy.

[TDN]

Image: iStock/joxxxxjo

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Even as the Doors Were Being Busted Down, Tom Petters Was Sure Everything Would Be Fine

PettersSmile.jpgThe trial of Cocker Spaniel/Ponzi boy Tom Petters is moving along as more and more witnesses are giving testimony that pretty much solidifies Petters’ statement that his business was “one big fucking fraud”.
Testimony on Tuesday (there were no proceedings yesterday due to the holiday) included that of James Wehmhoff, an accountant for Petters Company Inc. (“PCI”).
Wehmhoff said that Petters and Robert White — Petters’ CFO — were taking money out of a subsidiary for personal use. In addition, he also testified that Petters was panicking about an audit and was desperate to stonewall them:

In an email Petters sent to Wehmhoff and other insiders, Petters allegedly wrote, “We need to send the auditors something every day no matter what and keep them from coming to Minnesota. We must pacify them.”

Yet when the Feds were raiding his businesses last September Petters thought everything was hunky-dory, allegedly telling one investor, ‘everything would be fine’. This despite Petters’ fear of getting clipped and, you know, having to explain just where the hell $3.5 billion went.
We’ll keep you updated until they find this guy guilty.
Accountant Testifies Petters Panicked Over Audit [KSTP]
Accountant: Petters execs misused investor cash [Minneapolis Star-Tribune]
Earlier: Ernst & Young and McGladrey & Pullen Both Have a Petters Problem

Madoff CFO to Be Charged

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U.S. to File Charges Against DiPascali, Ex-Madoff CFO [Bloomberg]

Ernst & Young and McGladrey & Pullen Both Have a Petters Problem

In last Tuesday’s Preliminary Analytics we mentioned the case of Tom Petters, the Minnesota businessman accused of running a multi-billion dollar Ponzi scheme.

The trial is in its first week and already there has been testimony from the star witness — Petters’ former office manager — that included a recording of Petters saying ‘This is one bi his own defense counsel comparing him to a cocker spaniel:

[Defense counsel, John] Hopeman countered that while Petters was an accomplished salesman, he didn’t have the corporate skills necessary to run companies.
“He has the attention span of a cocker spaniel — about 15 seconds,” the defense lawyer told the 10-woman, six-man jury. “He couldn’t read a whole book if his life depended on it.”

Okay, a couple things before we get to the crux.

• Most cocker spaniels we know have attention spans exponentially longer than fifteen seconds. It would be much more believable if defense counsel had said, “He has the attention span of a pomeranian and you can’t leave him home alone or he’s eats the furniture.”

• Petters couldn’t read a whole book if his life depended on it? Are we talking classic literature? Because if we are, then he’s got company. What about children’s books? Do magazines count? He strikes as a guy that could at least make it through the pro football season preview.

Moving on…

Now that the trial is underway we’ll be following the more interesting developments in the case but we’ll be especially interested in the litigation involving the auditors of the hedge funds that cycled funds to Petters’ businesses.
There is pending litigation in Texas that involves both Ernst & Young and McGladrey & Pullen related to the audits the two firms performed for feeder funds for Petters’ businesses.

These feeder funds received purchase orders for high-end electronics from Petters’ businesses that were seemingly made by big-box retailers such as CostCo. The feeder funds then solicited money from investors, including the plaintiffs in the case, in return for promissory notes for Petters’ businesses. The merchandise on the purchase orders secured the notes. Allegedly, there was no merchandise and Petters used the money received to pay off other investors who were looking to get out and so on and so forth.

The feeder funds that are the defendants in this case are Arrowhead Capital Partners II, L.P. of Minnetonka, Minnesota, Palm Beach Finance Partners, L.P. and Palm Beach Finance Partners II, L.P. of Palm Beach Gardens, Florida, and Stewardship Credit Arbitrage Fund, LLC of Greenwich, Connecticut. The general partners and investment managers of these funds are also listed as defendants.

E&Y served as auditors for Stewardship while M&P served as the auditors of Arrowhead. A small Florida firm, Kaufman, Rossin, & Co., P.A. served as the auditors for the two Palm Beach funds. The firms are being sued, naturally, for not detecting the alleged fraud. In this case, however, the firms may have it coming since the fraud was run by someone with the alleged attention span of a canine.

We spoke with Guy Hohmann, who is representing the plaintiffs in this case, and according to Mr. Hohmann, M&P has the most significant exposure in the Petters case as they also served as the auditor for Lancelot Investors Fund and Colossus Capital Fund, L.P. both Oak Brook, Illinois based hedge funds. M&P also faces litigation from the investors of those funds in Illinois.

Lancelot’s Vice President of Finance was Harold Katz, who just pleaded guilty last month to one count of conspiracy to commit wire fraud. Mr. Hohmann was recently informed that before taking the job at Lancelot, Katz was a senior manager at M&P that worked on the Lancelot audit. M&P would not comment. It has been speculated now that Katz — who pleaded guilty September 2nd — is cooperating with authorities in the cases against Petters and Lancelot founder, Gregory Bell.

In another strange twist, Mr. Hohmann told GC that Lewis Freeman — the forensic accountant that is under federal investigation that we told you about last week — was appointed as the Chief Restructuring Officer of the Palm Beach funds. The Palm Beach funds are not currently listed as an active case on the forensic firm’s website.

We reached out to all the firms named in the lawsuit, McGladrey & Pullen declined to comment while calls to E&Y, Kaufman Rossin & Co., and Kenneth A. Welt, the current receiver listed on the Lewis Freeman website, were not returned.

According to the complaint, the amount lost by the plaintiffs was $24 million dollars, however, according to a October 6, 2008 Bloomberg article, the two Palm Beach Funds were responsible for approximately $1.1 billion of the alleged $3 billion the scheme while the Lancelot funds held approximately $1.0 billion with Petters. Mr. Hohmann’s understanding was that the Palm Beach funds had provided approximately $1.0 and that Lancelot held approximately $1.6 billion. Because of the complex web of companies in this case, the final dollar amounts may not ever be known.

So regardless of the fact that the case in Texas is in its early stages, future lawsuits from other investors could arise, and all three firms could continue to face significant litigation.

We’ll continue to keep you updated on any developments in the cases involving these accounting firms and will be following any noteworthy developments involving the Petters trial.

The case is SSR v. Arrowhead et al., District Court of Dallas County.
SSRvArrowhead.pdf