Greedy company president sinks family-owned firm

In early 2013, employees of a trucking company were trying to use their health care benefits, but their doctors and hospitals were rejecting them. Their insurance carrier was denying their claims. Their paychecks showed their employer had been deducting their shares of medical insurance premiums, but their insurance cards were worthless.

The employees notified the police who discovered a broad pattern of fraud and embezzlement in the company — going back to mid-2010. Eventually, 584 theft-related counts — including 382 felony charges — were filed against the company's president. The health insurance coverage issue was just the tip of the iceberg.

During an extensive investigation, a state trooper from the Bureau of Criminal Investigations found employees' paychecks that showed the company was withholding funds for a number of items, including medical insurance, 401k contributions and 401k loan repayments. The investigation found that the company actually was taking this money and stashing it in a company checking account and using it for other expenses. This misallocation, of course, caused a lapse in payment of insurance premiums, shortages in individual 401k funds and non-payments of 401k loans.

The investigation determined that the company president's dishonest actions affected 131 victims. This payroll scheme was his last desperate effort to shore up company finances because he'd been siphoning off company funds since 2010.

Call for assistance

The state trooper and the county district attorney contacted our firm to assist them in determining how much the president diverted from the company (that he'd inherited from his father) for his personal use and to document evidence of how and when these transactions occurred. They also engaged us to review the police investigation.

Our procedures documented that between June 1, 2010 and Dec. 31, 2011, the president diverted — primarily through wire transfers — more than $677,000 to his personal checking account and an additional $143,000 to a contractor.

Based on discussions with the state trooper investigator, the company president had recently remarried. His new wife enjoyed owning horses, so the president used some of the diverted funds to construct a $300,000 horse barn on his property.

The state trooper investigator brought to our offices five banker boxes of bank statements and other documents plus downloaded CDs of information from the company computer. In the investigator's synopsis of the case up to that point he explained that the company president and his CFO were both serving time in federal prison for a check-kiting scheme related to a different company in Ohio.

According to a personal "Statement of Financial Condition" dated Dec. 31, 2011, the president personally owned 100 percent of this other company in Ohio. This Ohio company owned three transportation brokerage subsidiaries.

We weren't involved in the Ohio case, but our investigation did detail more than $3.8 million in transfers from the Ohio company to the bank accounts we were examining. The trucking company repaid the Ohio company approximately $2.5 million during the period we were asked to detail.

Surprisingly cooperative president

In the police investigation of our case, the trooper investigator interviewed the president in the Ohio prison in mid-2014 — shortly after he entered prison — and told me he was surprised that the president hadn't "lawyered up" but freely spoke with him at length. We later found out why. During our search of records, we found that a sizeable check to his Ohio attorneys bounced, which also further explained why he was in prison. Can't lawyer up if your lawyers have left you.

The trooper also explained in his synopsis that he found that the nonpayment of 401k contributions and 401k loan repayments began in 2011, and the medical insurance scheme began in 2013.

When the employees first confronted the president with the medical insurance issue, he agreed to pay back their 10 percent withholding that he had kept, claiming that now "made them whole." Obviously, this didn't make them whole. They still needed their health insurance coverage.

While working closely with the trooper investigator, who had very little accounting background, I was impressed with his depth of knowledge about what had occurred and the excellent way he detailed the dollar amount of damages for each of the 131 employees. (The county district attorney had hired us — based on a few emails and the word of the trooper who had worked with our office on a different case.)

As we were wrapping up our work, the trooper and I explained over the phone and via emails our findings to the DA who concluded that we had a good case. He requested that we send him a sample of our work product to see if it could be used in exhibits.

The DA made the six-hour drive to our offices to meet me in early September 2014. He challenged me with questions about the evidence and my experience. The trooper investigator later told me the DA was really testing me to see if I could keep cool under questioning. Numerous attorneys I've worked with have told me that crucial meetings with their expert witnesses helps them decide if they'll appear knowledgeable and persuasive in courtroom settings.

Exhibits A through D

Our evidence included a chronological listing of amounts diverted — with supporting bank account statement documents for each transaction — and copies of detailed invoices from the contractor for payments to him for the personal construction of the president's home and horse barn.

The next step was to fully prepare four exhibits that were to be submitted in the trial. Exhibit A was a compilation of examples that demonstrated the pattern used to siphon corporate funds for personal use. We presented eight different examples with detailed support, including bank statement and canceled check copies. The originals were available if needed in court.

Exhibit B gave a broader picture of the immense volume of wire transfers to the president from the company operating bank account. This exhibit with all attached documentation was approximately three inches thick.

Exhibit C was a two-page listing of denied insurance claims prepared by the health care provider. The insurer canceled coverage in 2013 because the company was no longer paying the monthly premiums.

Exhibit D was a summary of 401k plan transmittals from 2009 through 2012. The summary demonstrated that beginning in 2011 the company didn't send employee contributions and loan repayments to the plan manager even though the company had withheld them from employees' pay.

During our investigation, we wondered how the company financial statements, which a CPA firm had prepared, dealt with these transactions. Also, how could the company controller CFO not notice any of these transfers? Our work uncovered a non-payroll check to the CFO for more than $52,000 in August 2010. He's the same person, sitting in the Ohio prison, who was CFO of the Ohio company.

I requested and received the company financial statements for 2008, 2009, 2010 and 2011. The financial statements included an "Independent Accountants' Review Report" that explained that no audits had been performed in any of the four years. The 2008 and 2009 balance sheets indicated that there was less than $500 in cash at each year-end.

Liabilities were more than $28 million in 2008. In 2009, capital lease obligations were in default. During the refinancing process, the bank settled for less than the total obligation due, which resulted in income of approximately $2.3 million to the company for debt extinguishment.

The 2010 balance sheet showed less than $3,000 in cash and approximately $22.8 million in debt with net income of under $175,000. The balance sheet also listed more than $880,000 of related-party receivables owed to the company. The balance sheet for 2011 again showed little cash, huge liabilities and negative equity at year-end. The statement of income reflected a loss of more than $1,350,000. A CPA should be able to recognize these huge red flags of a company's inability to continue to operate. We tried to follow up with the CPA firm to no avail.

The DA focused the criminal complaint on the more than $329,000 of misappropriated funds taken from the victims. The exhaustive work of the state trooper investigator detailed the harm to each of the 131 employees. A U.S. Department of Labor investigator also became involved. The non-payment of 401k loans triggered problems with the IRS, which claimed that the loans were now considered taxable distributions.

The president pleaded guilty to the offenses, and the DA didn't pursue any further issues. The company discontinued operations in December 2013. Now the employees had zero medical benefits and no jobs.

In mid-2015, the president was sentenced to eight to 32 years in state prison, which he'll begin serving once he's completed his sentence in the federal prison in Ohio. He was also ordered to pay restitution.

The president's selfish actions destroyed the company his father passed down to him and his innocent brother and also devastated the lives of all the company's employees and their families.

Robert J. Gunderson, CFE, is a director of Buffamante Whipple Buttafaro, PC. His email address is: RJG@bwbcpa.com.