Duplicitous duality

What happens when a CFE’s friend falls into fraud? This veteran interviewing expert grapples with the duality of a young Jekyll and Hyde who became a fraudster, next an informant and finally back into deep deception.

The stage is the federal courthouse in Asheville, North Carolina. The date is Feb. 24, 2011. The scene is a sentencing hearing before the Honorable Richard L. Vorhees, U.S. district court judge. Before Vorhees stands a well-educated, highly intelligent young man named Alex Klosek, 33. Alex is slated to be sentenced for his part in the illegal diversion of more than $7 million from more than 100 people.

He had been charged with and convicted of one count of conspiracy to commit mail and wire fraud involving Certified Estate Planners (CEP) of Hendersonville, North Carolina, a firm he owned with his partner, Bryan Noel.

Alex, together with Noel, had solicited more than 100 investors to invest large sums of their retirement savings with CEP by promising a conservative investment strategy. Then without their clients’ knowledge they diverted several million dollars to Noel’s start-up lumber composite company. Alex and Noel continually misrepresented the value of the clients’ assets on the quarterly statements so they wouldn’t know the true diminished value of their assets.

In Alex’s fraudulent wake were ruined lives and dreams that will never be realized and the evaporation of lifetimes of savings made possible by extraordinary personal sacrifices. People who have scrimped, saved and done without to be able to pass onto their children and grandchildren the opportunities for better lives, now had little or nothing left.

Victims were present in the courtroom that day for Alex’s sentencing. Some would speak, and others would remain silent. All were waiting for some remnant of justice as it remained for them. Many victims — those there, those choosing to stay away and those lives limiting them to a nursing home — would be disappointed.

During the investigation, Alex had seemingly revealed to the federal investigators the fraudulent activities that he and his co-conspirator had undertaken over the course of several years. Alex appeared to assist the federal authorities by wearing a body mic during conversations with Noel in addition to recording some of their subsequent phone conversations. (Authorities later discovered that Alex hadn’t told them everything.)

At his sentencing, Alex asserted:

“I’m truly sorry for everything that has happened here, for the losses the clients have experienced, the life change, and everything that has happened. I know there have been serious negative repercussions. And it was never my intent to lose anyone’s money or divert anyone’s money or scheme anyone out of anything.”

Is that really the case? Did Alex indeed find himself facing a federal judge ready to impose sentencing for nothing more than a series of unintentional actions on his part? Why would Alex plead guilty if he had never intended to “lose anyone’s money, divert anyone’s money or scheme anyone out of anything”?

Approximately four months later on June 30, 2011, Alex reported to federal prison in Memphis, Tennessee.

On that last day of June 2011, Alex walked through a life portal. With a single step he crossed a threshold. The door on that threshold would lock behind him and would not unlock for seven years. While admittedly at a country club of the federal prison system, Alex’s confined life would not be his own. For seven years he will be told when to get up, go to sleep, eat and work. At the end of that seven-year period, when they return his clothing and personal belongings to him, they will hand him one more item to carry with him — a $10 million restitution.

(Noel was tried and found guilty of 23 of 24 charges in March of 2010. The charges included “mail fraud, money laundering, conspiracy and bankruptcy fraud.”)

How did this all come about? A young man with no intention of doing wrong is faced with seven years’ imprisonment and $10 million of restitution. Is this a gross miscarriage of justice? Perhaps, but not in the way you might expect.

The intersection of two lives

I have spent more than 30 years working my way into and around the minds of people who deviated from the norms of society. I have investigated and interviewed murderers, kidnappers, pedophiles, fraudsters and most crimes in between. People — what they do and why they do it — have been and continue to be a source of intriguing study for me.

The ability to develop rapport with people whose behaviors flow against the tide of acceptable behavior and learn how “things” operate in their world has allowed me to pass along insights, skills and understanding to thousands of investigative and other related personnel who must deal with aberrant behavior on a daily basis as a function of their profession.

In my separate — though equally satisfying — personal life, the interviewing, investigative and discourse analysis related skills lie dormant. I enjoy my family and friends and never think of parsing their words, looking for subtle changes in behavior or evaluating their veracity.

In 2006, a passageway connecting the two distinct dimensions of my life suddenly opened. Alex Klosek, an acquaintance and member of the Sunday Bible study class I teach, asked me to meet him for lunch at Kelsey’s Restaurant in Hendersonville, North Carolina.

At the time I was serving as deputy director for the Larry T. Justus Western Campus of the North Carolina Justice Academy, a division of the North Carolina Department of Justice, and was a year away from my 30-year retirement. For 20 years prior to my promotion to deputy director, I had been privileged to be the manager of the academy’s Investigations Center. That was the best job I ever had.

In the course of our lunch, Alex informed me he had recently met with representatives of the FBI to admit his and his business partner’s (Bryan Noel) fraudulent activities. This fraud had taken place over a number of years through their operations of CEP and a local investment firm, as well as multitude of other companies and financial entities they had formed as vehicles to divert monies.

Immediately, my “focus on behavior” antenna began to go up. Concurrently, the interviewer-investigator dial in my head started toward the “on” position like a compass arrow moving toward magnetic north. In the opening moments of a professional communication event, commonly referred to as an “interview,” I, like most interviewers, transition into “the zone.”

At this point, the attention given to the interviewee’s verbal, vocal and nonverbal behaviors goes to the highest level. His words and mannerisms are evaluated in context. Each response is framed and leads to the next elicitation option. An interview-based outcome is identified or modified accordingly, and all of the interviewer’s stimuli are directed toward that goal. Once underway, it is like a large, oceangoing exploratory vessel — very difficult to stop on a dime.

I would be less than honest if I intimated that all capabilities had been shut down. Even in the conversational mode, my investigator knowledge that there is no coincidence in life caused me to reflect. I wondered, “Was Alex in my Sunday Bible study because of who I was and the position I occupied with the North Carolina Department of Justice?” Later, when he asked for a letter of reference for the judge to consider during the sentencing phase (which I did not submit), the dots were connected — at least in my mind.

What he had to say then and other times we met over the course of five years, on an irregular basis, varied from personal issues to particulars about the cases and the ongoing investigation. He did not ask for advice, and I offered none. When we met, I purposely avoided asking investigative-related questions. I did not need to. After the phatic phase of our communication transpired, off he went without any prompting on my part. I listened and responded as his Bible study teacher. I did note, however, that at no time in all our meetings did Alex express remorse for the grief and loss he and his business partner had inflicted upon so many people. The conversation always flowed to him and the prevailing circumstances, acting upon him, as he perceived it.

Years later, on Super Bowl Sunday of 2010, Alex asked if I would stop by his house after lunch. While at his house, Alex disclosed to me that he had deceived the federal agents and prosecutors from the beginning of his 2006 meetings and cooperative efforts with them, all while holding onto diverted assets. Noel’s defense team had discovered Alex’s continued deception and diversion, and they had made the federal prosecutors aware. As a result of his continued manipulations, Alex’s previous deals were taken off the table, and he now faced up to 20 years.

At his house that afternoon, I said to him, “Alex, in all of our meetings over these years you have never asked me for advice. I am telling you now, nevertheless, that you had better cooperate with the federal agents and prosecutors to the fullest.”

I made no effort to try and obtain a commitment on his part to do so, left, returned home and watched the game.

In the fullness of time, it became known publicly that Alex had indeed deceived the federal authorities from the beginning of his meetings with them and had subsequently kept possession of diverted resources. Far and away, his actions had certainly deviated from the “standard” of a fraud case of this category.

Now that an access between my professional and personal lives had been reopened by Alex’s most recent revelations, there was no closing it. I had to know. Of all the people I have known, interviewed, studied or investigated, Alex is one of the most enigmatic. He is highly intellectual, articulate and has a dry — one really has to look for it — sense of humor. But it was the duality of Alex’s life — the daylight “see you in church” side co-existing with the dark “continuing to deceive and steal side” — that compelled me to stay the course.

The duality of man

The duality of man is not in and of itself an uncommon occurrence. There is the good and bad in all of us. But with Alex, the circumstances were dramatically different.

For Alex, to continue to deceive and steal after he had obtained (in light of the circumstance) a generous offer from the federal prosecutor, set him far apart from the run-of-the-mill fraudster. Here was an individual who deceived his client-investors and his partner, and continued paddling deceptively up to and right past the federal authorities. A “morbidity deceiver” is one who continues to deceive when it would be in their best interest to tell the truth. But in light of the fraud-incentive, Faustian dynamic, the question is, “In their best interest as defined by whom?”

As Alex moved into deeper water, his story unfolds in a manner not unlike a Shakespearian tragedy. Classically, we wonder, who was the “real” Hamlet? Personally, I wondered, who was the real Alex? Was Alex just a bit of flotsam pulled out to a sea of fraud by a riptide over which he had no control? Or was Alex so diabolical that he had planned and carried out a deception within a deception? Why was his “deal with the devil” more attractive to him than his deal with the prosecutor? What incentive did the continued deception offer that was greater than that offered by the prosecutor? To help answer these questions, let’s look at the Fraud Triangle.

The Fraud Triangle and Alex

As many of us know, in the 1950s, criminologist Donald R. Cressey presented what has classically become known as “the Fraud Triangle.” He theorized that for the commission of fraud to take place, three components must be in place: pressure/motive, opportunity and rationalization.

Opportunity

Clearly Alex had the opportunity to commit the fraud all along. As the transcript from his testimony at Noel’s trial indicates:

“As Bryan was becoming more involved with Titan Composites [Noel’s start-up lumber composite company referred to at the beginning], and he actually moved his offices out of the CEP offices to become involved with Titan at their offices, I had to take on a more day-to-day role in the business in terms of overseeing the staff and making some of the decisions necessary for operating the business.”

“Opportunity” can be defined as, “a situation or condition favorable for attainment of a goal.” Within the business functions of CEP, Alex’s operational responsibilities were replete with opportunities for the commission of fraud. They had always been there.

Pressure/motive

The pressure/motive element, as it related to Alex, came forth as he gave testimony during Noel’s trial. At this ford in this stream, we will focus on the fraudulent activities related to this stock trading. Alex’s stock trading endeavors did not meet with a positive outcome — he was losing significant amounts of money. As the transcript of Alex’s testimony reveals:

Q. Now, when this stock trading program began to be offered in mid 2002 to CEP clients, how was the trading going?
A. The trading went well until about May or June, and then the trading was not so good after that.
Q. May and June of when?
A. May or June of 2002.
Q. And when you say after June of 2002 it wasn’t going so well, what’s that mean?
A. It means that losses were being generated. There were some gains that were being generated, but there were more losses that were generated than gains.
Q. So overall, after the summer of 2002, in a given quarter, were the trades net positive or net negative?
A. In most instances they were net negative.
Q. Did you tell the clients about that?
A. No, I did not.
Q. What do you mean by that?
A. The clients did not know their funds were losing money.
        ***
Q. So just to be clear, at least beginning the third Quarter of 2002, your Pinnacle trading program is losing money.
A. Yes it is.
Q. And you’re lying to clients about that.
A. Yes, I am.
Q. And you’re lying to Mr. Noel about that.
A. Yes, I am.
Q. And you’re sending false account statements out in the mail.
A. Yes.
Q. At this point, this fraud that you’re perpetrating, are you doing that by yourself or with someone else?
A. At that point that was by myself.

Rationalization

“Rationalization” can be defined, “To ascribe one’s acts to causes that superficially seem reasonable and valid but that actually are unrelated to the true, possibly unconscious and often less creditable or agreeable causes.”

While Alex was testifying, a question opened the door, allowing Alex to articulate his rationalization for his fraudulent behavior.

Q. What was going on in 2003 that would cause you to do something like this?
A. There were many circumstances in 2003, especially the latter part of the year where I had a bad breakup with an ex-girlfriend and I started drinking heavily, started smoking marijuana at some points from 2003 to 2004, and also even engaging in sexual activity at that time that I was hiding form my parents. Hiding many of those things from my parents.”

First, we have to put his response in context: Back to the question asked, “What was going on in 2003 that would cause you to do something like this?” We know “what was going on” as articulated by Alex, the pressure/motive of:

• Stock losses.
• Fear of telling clients, lest they withdraw their money.
• Fear of telling his partner.
• Loss of position.

Now, as to regarding the “cause,” i.e., rationalization for sending out false report, Alex responded:

Bad breakup with a girlfriend resulting in:

• Drinking heavily.
• Smoking marijuana.
• Engaging in sexual activity hidden from his parents.

The juxtaposition of pressure/motive with rationalization forms an “if-then” logic operation. Keep in mind that it is an idiosyncratic logic operation. Consequently, in Alex’s world, as he articulates it and we endeavor to understand it:

• IF someone is under pressure because of stock trading losses and fear of clients, partner and loss of position,
• AND subsequently there is a breakup in a relationship leading to drinking heavily, smoking marijuana and sexual activity unknown to parents,
• THEN the fraud becomes the optimal choice.

It’s not necessary to agree with Alex’s articulation of his reality. It’s only necessary to understand that is Alex’s articulation of how things “operate” in his world.

Comparing Alex and the Fraud Triangle to the classic fire triangle (fuel, heat and oxygen), we find that stock trading opportunity constituted the fuel, his articulated pressure/motive was the heat and his rationalization supplied the oxygen. Figuratively speaking, there was fire on the water.

Fatal crossroad?

Alex Klosek didn’t look like a fraudster. At the time, he was a young man in his early 30s, pale skin, slight build, with a tendency to turn his head slightly to the side as he spoke. His occasional smile was pleasant enough. His voice seldom deviated from quiet and monotone.

But to the more than 100 people from whom he helped to defraud at least $7 million, as well as to the federal government, who computed the financial harm at nearly $55 million, he looked every bit the fraudster.

Was there a fatal crossroad at which point Alex made a fraudulent turn? Perhaps the fraudster resided in Alex all along, patiently waiting for the precise set of circumstances to be released. Like a virus, patiently biding its time until something happens within the body — a trauma, a fever, a sudden stressor — allowing the virus to spring forth and take over.

Don Rabon, CFE, a longtime ACFE faculty member, has provided, for more than 33 years, instruction and investigative assistance to investigators around the globe. He has also trained federal, state and local criminal justice personnel; NATO counterintelligence personnel; and private sector investigative, audit and corporate security personnel. He’s written five books. His email address is: dwrabon@msn.com.

This article is excerpted and adapted from “An Endless Stream of Lies: A Young Man’s Voyage into Fraud,” by Don Rabon, © 2015, Highly Motivated Inc., Hendersonville, North Carolina (available in the ACFE Bookstore).  — ed.