Monthly Archives: June 2018

Fraud Friday: Catch Me If You Can, or How I Learned the Value of Hard Work From The Best Confidence Man Of All Time

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Greetings, fellow fraud-nerds! Today, as it is midsummer, and ’tis the season for travel, family vacations, and stolen tourists credit cards, I thought that rather than highlight current news in the fraud investigation and audit universe, we could take a fun look back at one of the true characters in the long and storied dance between the perpetrators and the investigators who doggedly pursue them.

Most of you are at least passingly familiar with the remarkable story of Frank Abagnale, Jr., aka “The Catch Me If You Can Guy,” aka the highly successful business fraud consultant, aka the greatest check washer of all time. For those of you who are unfamiliar, or if you want to do a deeper dive and read a great book, we highly recommend Frank’s autobiography (with co-author Stan Redding). It’s an entertaining and revealing read, if a bit dated in terms of fraud scheme logistics, but the social engineering principles remain as relevant as ever. They don’t call them “Confidence Men” for nothing!

Of course, Abagnale’s big break into pop culture came when Steven Speilberg and Tom Hanks adapted the autobiography into the hit film of the same name. It’s a highly stylized, gauzy retrospective look back at the idealized jet set of the 1960’s. Leonardo DiCaprio plays our antihero with relish, and Tom Hanks is perfectly cast as the stereotypical tireless gumshoe investigator, playing a human game of cat-and-mouse across the globe. It’s worth owning the blu-ray for the extras – including additional background and some cool FBI investigative documentary footage. But the book and movie are not what I want to focus on today. Rather, I want to highlight the value of persistence, determination, and plain old hard work.

I’ve attended a couple of lectures with Abagnale. These talks are Abagnale’s bread-and-butter, and you can video of many of them online. His “Talks at Google” episode is particuarly good. What’s interesting about Abagnale, and what makes him so different from a lot of the “reformed fraudster” lecture set is that he openly admits that he’s not “reformed” or “cured” in any way. He’ll straight-up tell you that he’s not necessarily a changed person, he just chooses not to use his talents for illegal activities. It’s remarkable when you see him tell a room full of fraud investigators, attorneys, and law enforcement that he’s still the same con man he always was.

But what is also remarkable, and sets Frank Abagnale, Jr. apart is his sheer work ethic. When he was washing checks, it was all he did. Nothing else. He set out to become the best check-washer in the world, and by most accounts he was. He was obsessive about learning and mastering the details of his craft, illegal though it might have been. This is one of the things that the movie gets correct, in my opinion. DiCaprio’s Abagnale is obsessive to the point of madness, which, though it may not be mentally healthy, did create a form of excellence in him.

That’s one of the key takeaways of Abagnale’s talks – if you work incredibly hard at something, you WILL get good at it. You may not be the best, but you’ll eventually become competent. He said that the only reason the FBI caught him was that he was finally pitted against an agent who was as obssessed with catching his man as Abagnale was in staying on the lam and living large. (Note: Carl Shea – Hanks’ version of Shea in the film is Carl Hanratty – is the real life FBI agent, and him and Abagnale are now friends and sometimes do seminars/speeches together).

There’s no shortcut: If you want to master anything, you have to be a bit obsessive about it. That may not go over well in the era of “work/life balance” and the foreign (to me) concept of “self-care.” If you put in the hard work and the long-term effort, nobody will be able to catch YOU.

Have a great weekend!

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Fraud Friday: Fyre Festival Fraud, Bumblebee Tuna Price-Fixing, Barclays Bank’s $2-Billion Fine

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Lots to get to on the first Fraud Friday of the summer, so let’s get to it…

Fyre Festival Founder Billy McFarland Has Been Arrested Again on Additional Fraud Charges

The promoter of a failed music festival in the Bahamas who is awaiting sentencing on fraud charges was arrested on new fraud charges Tuesday, leading a judge to order his detention.

Billy McFarland, 26, will remain behind bars until a judge, who is scheduled to sentence him next week in the festival case, decides whether he can be freed on bail.

McFarland pleaded guilty to wire fraud charges in March in a deal that called for him to serve between eight and 10 years in prison, although he has requested leniency with no incarceration. The plea pertained to the bungledspring 2017 Fyre Festival on the Bahamian island of Exuma that cost over 80 investors a total of $26 million.

The festival was anything but the ultra-luxurious event promoted as “the cultural experience of the decade” and touted on social media by Kendall Jenner, Bella Hadid, Emily Ratajkowski and other models and celebrities.

Assistant U.S. Attorney Kristy Greenberg called McFarland a financial threat to the community, saying he’d used the client list of the Fyre Festival to pitch a new ticket fraud that promised tickets to music, fashion and sporting events that he didn’t possess and had no way of getting…

Prosecutors said over 15 victims had been bilked since late last year of more than $100,000 as McFarland and his workers sold non-existent tickets to the 2018 Met Gala, Burning Man 2018, Coachella 2018, the 2018 Grammy Awards, Super Bowl LII and a Cleveland Cavaliers game that would include a team dinner with Lebron James.

Greenberg said McFarland was living lavishly with monthlong stays in luxury hotels and excursions to expensive restaurants. And he’d told his workers that he would flee if he is sentenced to over three years in prison next week, she said.

“The weight of the evidence here is quite strong,” Greenberg said. “He targeted the same victims who tried to attend his Fyre Festival.”

She said prosecutors were considering additional charges including bank fraud and an identity theft charge that would carry a mandatory two-year prison sentence upon conviction.

“Mr. McFarland is a serial fraudster, plain and simple,” Greenberg told Gorenstein. “Mr. McFarland is looking at a significant term of imprisonment.”…

Gorenstein, noting that McFarland would likely face an additional two years or so in prison if he is convicted in the new case, said that if he is freed on bail in the Fyre Festival case, he’ll face a $1 million bail on the new charges. – Associated Press via Time Magazine

“Nobody ever lost a dollar by underestimating the taste of the American public” – P.T. Barnum


Bumble Bee tuna price-fixing case, like Starkey fraud prosecution, could change white-collar prosecutions

When the roll call is sounded of business deals that looked like a good idea at the time but went massively wrong, special notice should go to the merger of the tuna packagers Bumble Bee and Chicken of the Sea, announced in late 2014.

The $1.5 billion deal would have created a canned tuna powerhouse¹ commanding nearly half of the U.S. market, swamping StarKist, which at the time was the No. 1 brand with 34.6 percent.

The deal never happened.

In conducting a routine antitrust review of the proposed deal, the Department of Justice unearthed what looked like a massive conspiracy among the three companies to fix canned tuna prices.

The parent of Chicken of the Sea, a Thai company named Thai Union Group, promptly bailed out of the merger and fessed up to the Justice Department in return for amnesty from prosecution. Its deal requires it to cooperate with the government’s investigation of the other two companies.

Two top executives of San Diego-based Bumble Bee and an executive of StarKist pleaded guilty to federal price-fixing charges in 2016 and 2017 and turned state’s evidence; their sentencings have been deferred at least to Sept. 26, when their cooperation can be assessed. Bumble Bee pleaded guilty to price fixing last year and agreed to pay a fine of at least $25 million and as much as $81.5 million (the higher amount if the company is eventually sold).

So far, 78 civil lawsuits have been filed against the three tuna companies and consolidated into a single proceeding before federal Judge Janis Sammartino in San Diego. They fall into four categories: three class actions for groceries and wholesalers, consumers, and food preparers such as delicatessens; and a fourth group of big tuna buyers such as Walmart and Sysco.

The Justice Department says the alleged collusion lasted from 2011 at least through 2013; some civil plaintiffs say it continues to this day. The lawsuits don’t specify how much the companies allegedly squeezed from consumers by colluding. U.S. canned tuna sales, however, come to between $1.7 billion and $2 billion a year.

Then, on May 16, came the federal indictment of Bumble Bee’s longtime chief executive, Christopher Lischewski.

The Lischewski indictment is what elevates the Bumble Bee investigation into a special category of white-collar crime cases, for he’s one of the rare CEOs to be brought to book in recent years for corporate wrongdoing.

Lawyers were monitoring the local prosecution of Starkey Technologies former executives for the same reason — a change in policy during the Obama administration making it easier to prosecute individual company officials.

Before, the Justice Department had moved away from prosecuting individual executives in favor of extracting criminal pleas, fines and civil settlements from their corporations. That policy reached its climax in the aftermath of the 2008 financial crisis, when top executives of big banks seen to have defrauded investors and customers averted prosecution.

Presumably responding to criticism about executives going free, the Obama-era Justice Department issued a new policy in 2015 over the signature of then-Deputy Attorney General Sally Yates. The “Yates memo” stated that it would henceforth be a priority in corporate misconduct cases to seek “accountability from the individuals who perpetrated the wrongdoing.”

Investigations should focus on individuals from the start, the memo said, and corporations wouldn’t get credit for cooperating with the government unless they fingered individual wrongdoers.

That was proper, because “almost invariably, white-collar crime comes from the top,” said William K. Black, a former bank regulator who brought cases in the 1980s against numerous individual executives in the wake of the savings and loan crisis.

But it did complicate prosecutions. That’s because “individual responsibility in huge corporations can be very diffuse,” says Henry Pontell, a white-collar crime expert at John Jay College of Criminal Justice and UC Irvine. “It’s possible in a large organization that a CEO may not know who’s doing what.”

Moreover, “going after individuals is harder — they will put up a defense because they face real consequences,” Anello said in an interview. By contrast, “companies look for ways to resolve cases.”

It took two years to build the cases against former Starkey President Jerry Ruzicka, who along with a business associate, was found guilty of fraud.

The number of white-collar cases as a whole has been decreasing since 2011, and the Trump administration has signaled a shift from corporate prosecutions to immigration cases in the federal system, making it likely that fewer of these types of cases will see the courtroom, according to an article in the New York Law Journal last February by white-collar defense attorneys Robert J. Anello and Richard F. Albert. Immigration charges have accounted for 53 percent of all federal prosecutions so far this year, according to TRAC, and drug charges an additional 32 percent.

The individual guilty pleas in the tuna cases, experts said, suggest that the government must really have the goods. Certainly, the circumstantial evidence is strong. According to the indictments and civil lawsuits, the three big processors had emerged from an era of ferocious competition for market share from 1985 to 1999, when more than half the canned tuna sold in the U.S. was subject to promotions that discounted prices by as much as 31 percent. – Minneapolis Star-Tribune

¹ “Canned Tuna Powerhouse” is an excellent name for a cover band. Just sayin.’


Barclays agrees to pay $2bn to settle US fraud case

Barclays has agreed a $2bn (£1.4bn) settlement with the US justice department over the sale of mortgage-backed securities in the lead-up to the 2008 financial crisis.

The settlement follows a three-year investigation into allegations that the bank caused billions of dollars of losses to investors by “engaging in a fraudulent scheme” to sell Residential Mortgage-Backed Securities (RMBS) between 2005 and 2007.

The British bank was said to have misled investors about the quality of the mortgage loans backing those deals.

The justice department alleged violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, based on postal, wire and bank fraud as well as other misconduct.

Two former Barclays executives have also reached a settlement. Paul Menefee, who served as the lead banker of its subprime RMBS securitisation unit, and John Carroll, who worked as the head trader for subprime loan acquisitions, will pay a total of $2m.

Richard Donoghue, US attorney for the eastern district of New York, said: “This settlement reflects the ongoing commitment of the Department of Justice, and this office, to hold banks and other entities and individuals accountable for their fraudulent conduct.

“The substantial penalty Barclays and its executives have agreed to pay is an important step in recognising the harm that was caused to the national economy and to investors in RMBS.” (Translation

The fine is less than City analysts had expected and less than the penalties paid by other foreign banks facing similar claims. In December 2016 Credit Suisse paid $5.3bn as a settlement and to consumers. Deutsche Bank settled at $7.2bn a month later. At the time Barclays said it would not settle and the justice department launched legal proceedings.

The department’s complaint involved 36 residential mortgage-backed security deals, which made $31bn of subprime and Alt-A loans tradable on the market.

The department alleged that the borrowers whose loans backed those deals were “significantly less trustworthy” than Barclays made them out to be. In addition, the mortgaged properties were “systemically worth less” than what had been presented to investors. 

Ultimately more than half of those loans defaulted.

Barclays said the settlement resolved “all actual and potential civil claims” by the justice department relating to securitisation, underwriting and sale of mortgage-backed securities in the period 2005-2007.

Jes Staley, its chief executive – who was not at the bank at the time of the RMBS sales – said: “I am pleased that we have been able to reach a fair and proportionate settlement with the Department of Justice.” (Translation: Really glad you suckers allowed me to pay you off with shareholder money and avoid any personal responsibility!)

The settlement comes nearly a month after Barclays confirmed a loss of nearly £2bn last year, after a string of hefty charges, including a £900m hit from Donald Trump’s corporate tax changes and £127m from the collapse of the outsourcing and construction firm Carillion. It also racked up £2.5bn of losses from the sale of Barclays Africa.

Pre-tax profits rose 10% to £5.3bn for 2017, but the bank reported an after-tax loss of £1.9bn. It made a profit of £1.6bn in 2016. 

Staley said: “The completion of our restructuring in 2017, and putting significant legacy matters like this one behind us, mean Barclays is well positioned to produce stronger earnings going forward, and to start returning a greater proportion of those earnings to our shareholders over time.”

As a result, Barclays still intended to pay a dividend of 6.5p for 2018, he added. Barclays shares edged down after the announcement.

What’s the line from the Talking Heads song? “Same as it ever was”

No food or music recommendations this week, because it just doesn’t feel right when there are kids locked in cages in the name of securing the Republic…

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