Fraud experts have seen it all before: the lure of high returns, the covering up, the impeccable résumé, the generosity of the individual, all elements present in the case of the late Clay Stephens and Novato-based Warren Capital Corp. and Warren Equipment Finance now being investigated by a team of forensic accountants under the jurisdiction of a San Francisco court.
“It amazes me how people do Ponzi schemes even today and people fall for them,” said Nancy Young, a Portland, Ore.-based CPA who heads up fraud investigations and forensic accounting for Moss Adams.
“If somebody can promise you returns that nobody else can get,” said Ms. Young, who has investigated fraud for 19 years, and at Moss Adams for the past 8 1/2 years, “you gotta sit back and say, really? No one else can get these returns? People can become victims really quickly because we all like the idea of winning the lottery.”
When prospective fraud victims are presented with too-tempting interest rates, “we want to believe that this person, who is a pillar of the community, is trustworthy, and would never, ever, ever hurt me,” she said.
Ms. Young recalled a 2008 case she investigated where Pamela Rowley-Butcher, former executive financial officer of Estacada fire district in Clackamas County, Ore., was charged with aggravated theft of nearly $2 million. The woman, who wore fine jewelry and adorned her modest home with extravagant Christmas lighting, was convicted and sentenced to 10 1/2 years in a prison term ending at the earliest in 2016.
The district had two sets of checks, one for payroll and another for vendor payments. Ms. Rowley-Butcher, whose salary was about $5,000 a month, “wrote herself $25,000 to $35,000 per month on payroll checks and then hid it on the vendor side,” Ms. Young said. “She confessed to perpetrating her fraud for at least 15 years.” She would double the cost of invoiced items from vendors to cover her fraud.
“The judge didn’t fall for her ‘I’m-so-sorry-I’ll-never-do-it-again,’” Ms. Young said.
“This was her way of life,” Ms. Young said. “It was egregious. She was the big spender in town. She was buying love.” The court ordered the convicted felon to repay part of the amount stolen by giving up some of her PERS retirement account and selling her $178,000 home.
In a false show of generosity and benevolence, Ms. Rowley-Butcher would pay other people’s car and house payments when they could not, spending more stolen money on others than on herself. “She wasn’t living lavishly,” Ms. Young said, though she was bringing home an extra $25,000 to $35,000 a month. “She was the grandma of the community,” there to help everybody.
“If someone is throwing money around, it doesn’t make sense,” Ms. Young said.
In one of her statements, Ms. Rowley-Butcher suggested she didn’t see what the big deal was, “nobody got hurt.” But there was hurt. The fire chief, stressed by the ongoing investigation, had a heart attack. Fire trucks continued to run despite bald tires; there was no money to buy new ones. Employees received no raises for years. “There was no money because she was perpetrating a fraud,” Ms. Young said.
Ms. Rowley-Butcher embezzled money so long that she became arrogant, Ms. Young said, and that led to her undoing. A bank teller who had recently gone to fraud-awareness training noted that Ms. Rowley-Butcher came into the bank two or three times a week and cashed checks, for cash, without depositing them to her personal account. “The teller blew the whistle.”
Sometimes clues to fraud are tricky to spot. Concocting and running a fraud does not necessarily show up as stress in the perpetrator. “There was no sense of stress,” said Larry Brackett, former owner of Frank Howard Allen Realtors, a 20-year friend of Mr. Stephens and an investor of $300,000 in Warren Equipment Finance at 9.75 percent. He made the investment in the summer of 2014.
In the year before Mr. Stephens died, “I picked up absolutely nothing,” Mr. Brackett said. “There was nothing that would have been a clue. I had breakfast with him on a Wednesday morning, and he died on Monday.” The two men talked about their health, exercise regimens. “There was nothing, five days before he died,” Mr. Brackett said. In terms of Mr. Stephens’ apparent health, “he was close to the top of his game. He was not overweight.”
“For 14 years, he was capable of dealing with meeting people” as investors and selling them allegedly fraudulent promissory notes, Mr. Brackett said. “I can’t imagine how any individual for 14 years” could fool so many people so effectively. “I would like to think that I would have been a judge of character after that length of time.” But many people didn’t spot the pathology.
“Deceiving your friends, that’s a major one. Deceiving the community that has been so supportive of you, that’s a major one,” Mr. Brackett said. “But really major, it shows something really off, is the fact that he would have his son invest to try and keep his scam going. It’s amazing. And he was so proud of his son. It is so sick. It is so beyond me to understand.”
“I’m not a naïve person,” Mr. Brackett said. “The thought of anything being amiss with Clay Stephens did not cross my mind.”
Prior to her work at Moss Adams, Ms. Young led the investigations team for the Oregon Secretary of State audit division. In such investigations, she looks for evidence to support each transaction. She conducts interviews, often starting at the periphery. “You interview people who were the least affected and you work in to the people most affected,” she said. She may or may not interview the suspect. Often the evidence is so overwhelming that guilt is already established. “Take Pamela Rowley-Butcher. I never interviewed her,” Ms. Young said. “I didn’t have to.”
To establish fraud, she must prove two things: the fraudster had to personally gain, and have intent to deceive. “Bad bookkeeping is not against the law. It should be,” she said, chuckling. Routinely falsifying information shows intent to deceive.
If a company falsifies its financial statements in order to show shareholders that revenue is greater than it actually is, it’s tough to prove personal gain, she said; it’s more that the company gained.
In a Ponzi scheme, “they’re promising higher returns than you can get anywhere else,” she said. The average investor will not check to see if the investment is based on reality.
Stock trading or other investments can easily be manipulated for fraudulent purposes, she said, such as shaving pennies or fractions of cents off prices per share, then accumulating those tiny slivers by the millions in an account that gradually grows to large sums. If a price ends in 0.1109, for instance, “you’re still charged that,” she said. “Where do you think that money goes, that 0.0009?” The company may round up and charge the customer $0.12, then pocket the fraction of a cent on each share purchased. “For one company, shaving off the cents equates to millions of dollars,” she said. “It is so easy to do.”
Though she is not involved in the Stephens investigation, she said a fraud of this scale could easily have been committed by one person with no accomplices. “The average fraudster works alone 70 percent of the time,” she said, according to the Association of Certified Fraud Examiners. That organization’s 2014 report on global fraud stated that a typical organization loses 5 percent of revenue each year to fraud, and 22 percent of cases involve losses exceeding $1 million.
In large or long-term fraud, somewhere along the line someone else in the organization might witness the deception and demand a cut of proceeds in exchange for not blowing the cover. “Here’s the problem with bringing in an accomplice,” she said. “Pretty soon, they want more of the take. If you don’t give them their cut of the take, they threaten you with going public.”
Where does the money go if it’s not spent on parties and lifestyle? “Generally they will move money offshore to a Belize account or Swiss bank account,” Ms. Young said. In one of her recent cases, the perpetrator agreed to a $35 million settlement with multiple plaintiffs and she found secret money outside the country that helped to pay them.
“There can be jewelry and loose gems and CDs (certificates of deposit) that have all been moved to Belize,” she said. “When you’re dealing with big dollars like this, you have to consider that there’s an account overseas.”
Some fraud artists may set up hidden or dummy companies in which to stash fraud proceeds then “slowly siphon off the money from that other company,” she said. They might place assets in children’s accounts to conceal the money. “The children might not even be aware of it,” she said.
Perpetrators of fraud “actually convince themselves that what they are doing is OK,” she said, telling themselves that they deserve the money or plan to pay it back. “We all rationalize,” she said, such as going over the speed limit because “everybody else is doing it.”
“They keep lying to themselves to make what they’re doing OK,” she said, “even though deep down in their hearts they know it’s not OK.”
Barry Ben-Zion, a forensic economist based in Santa Rosa, testifies in cases of all kinds to determine the value of a business, a pension, a life (in wrongful death cases) or a hidden asset. “In order to attract additional capital from additional investors,” Mr. Ben-Zion said, “you sweeten the pie to the investors you have.” Some of the money went to investors who received excessive returns on capital already invested.
A Ponzi scheme is a form of pyramid scheme, said Mr. Ben-Zion, who taught economics for several decades at Sonoma State University. He points to Bernard Madoff, who pleaded guilty in 2009 to what may be the biggest Ponzi scheme in U.S. history, some $65 billion stolen from clients of his wealth-management business. “You need to recruit more and more people to keep the scheme going,” he said.
Because certain businesses make above-average returns, “it’s not inconceivable if somebody showed you a set of numbers” that even sophisticated investors would go along with the scheme, especially because Warren Capital indicated that the investments were collateralized with equipment. “I’m not surprised that even rich people who are relatively sophisticated will presume that they can make above-average returns,” Mr. Ben-Zion said. “It’s a lure.”
Many investors who lose money in a Ponzi scheme put in only a small portion of their total wealth, he said. “It’s actually more common for rich people to fall into” such fraud schemes because they are less likely to scrutinize what they consider to be a modest investment. “They put in $100,000, $200,000. If it yields 10 percent, that’s very nice,” he said.
In fraud cases, Ms. Young would examine all documents relevant to the alleged crime before interviewing any other employees in the company. “When you get down to your main suspect or the second or third in command, you already have your answer,” she said. “But it’s fun to watch the blood drain out of their faces as you are asking them the question. You’ve got ‘em.”
Usually she can establish guilt in such an investigation. But even more compelling, she seeks to know why, and then to establish what should be done. Sometimes she will talk to a suspect about possible restitution – paying back stolen funds. Often such discussion serves to confirm the crime even when it had not previously been admitted. “You don’t need their confession anymore,” she said, “because now they are talking about how to restore this. Why would you make them whole if you didn’t do anything wrong?”
Fraudsters rarely save money. “They’re spenders,” Ms. Young said. “They’re not savers at all. A saver has some self-control. They are willing to put boundaries on themselves, willing to give up what they want right now for what they want eventually. A fraudster is not known for that. Those are not their traits.”
People tend to trust and don’t verify. “That’s our failure,” she said. “Not that you shouldn’t trust. But you should verify that that trust is appropriate,” she said.
The impact on victims can be sad, Mr. Ben-Zion said. High returns can be irresistible. “People are always looking for a deal,” Mr. Ben-Zion said. “It happens often, over and over and over.”