Investigating Fraud and Overcoming Roadblocks: Some Observations from the Trenches
by Steven R. Neuner
Bankruptcy Trustee and Certified Business Bankruptcy Specialist; Marlton, N.J.
Too often in my role as a trustee or as the trustee’s attorney, I run into a debtor, defendant or witness who will claim the information I need is missing, or make a dubious claim not to remember key facts. This article distills some of my thoughts and observations on how to deal with these situations.
Expand the “Web of Lies”
Fraudulent behavior or concealment is rarely done in a vacuum. There are always friends, family, coworkers or others who are involved with, or can vouch for or debunk the dubious claims. When faced with a dubious story, I have often found it very useful to pursue the linkages that exist in all human relationships. Thus, I want to know who else was involved or knew what was going on. Who else was present at each of the central events? Who kept records? A debtor, for example, may lie to you about why money was transferred or paid. However, if you then take the investigation further, and bring in family members, friends, present or former employees or business associates, you are requiring each of these individuals to lie for or vouch for the implausible story. When you do this, in my experience, one of two things will happen. Either the story will begin to fall apart with the mounting inconsistencies or the original prevaricator will come forward with an offer of settlement or a more plausible and verifiable story.
Find Missing Records by Looking for Duplicates
A corollary of this is to look for missing records among all the sources that may have duplicates. In one recent case, I was investigating a fraudulent transfer whereby a large sum of money was paid to the shareholders of a privately held company with nationwide operations. I had to prove insolvency at a time that was several years back. However, all of the business records that had been in a storage trailer had been destroyed and disposed of without my knowledge by the successor company that had purchased the debtor’s assets. At first, this presented serious obstacles to our attempt to prove insolvency for the period covered by the now-missing records. However, the loss of a trailer load of business records turned out to be a boon. Remembering that accountants have an institutional habit of never throwing anything out, I inquired of the new owners whether they still had any of the original desktop computers or servers from the target debtor corporation. This simple inquiry yielded a computer which, although not used for the current business, contained, intact, all the business records of the debtor, including spreadsheets and cash flow projections. Better yet, I was put in touch with a very cooperative former employee who had a detailed knowledge of those records. Instead of a mountain of paper records to sort through, we had a much more workable compilation of all the essential data, and a way to establish its reliability.
Thus, you should assume that somebody has a copy of any key record. Ask your target prevaricator whether or not she had records at one time, how they were kept, where they were kept, what they looked like and who maintained them. Press for details how these records were disposed of, by whom, and when. Ask if any of them were sent or transmitted elsewhere, or to other people.
The Best Evidence of What Somebody Really Owns is What They Tell Their Bank When Applying for a Loan
No normal, sane person would understate the value of their assets when applying for a loan. Debtors or defendants under investigation, however, have every incentive to do just the opposite. You should consider requesting from your target, and if not supplied, pursuing directly from the lender, documentation of that parties’ previous credit applications, at least in those cases where the person’s assets or financial condition are directly at issue (e.g., fraudulent transfer cases where insolvency is in dispute, or a debtor in bankruptcy or receivership.) Very often, these have proved fruitful not only in showing what a person owned at a previous point in time, but also providing valuable admissions on key facts. Thus, in several cases where the debtor contended that a particular asset was of diminished value, I was able to find their credit applications where they placed a much higher and much more reasonable value on the particular asset. When issuing subpoenas for these records, I would be careful to avoid violating the privacy rights of unrelated third parties by putting the original applicants on notice of the subpoena and specifically requesting redaction of Social Security numbers of unrelated persons and the identity of minor children.
In drafting these requests, it also helps to ask for all parts of the file that contain any notes, including the insides and outsides of any file jackets. On several occasions, the more pertinent leads have been notations on file jackets.
Do Not Accept Ignorance or Forgetfulness as an Excuse
And, of course, there is always the witness who claims they do not know or cannot remember. The questions to ask include the following:
a. Did you previously remember or know the answer to my question?
b. If so, did you write it down or record what you knew at the time?
c. Did you tell anyone else?
d. What happened to those records?
e. [If the records were disposed of] Did you dispose of them under any policy or at the request of someone else? [Then ask for verification of that policy or direction (see point 1 above).
Use Institutional or Public Records
I was surprised some time back to learn that banks and depository institutions regularly keep not only copies of customers’ checks, but also copies of checks or items that are presented for deposit. Subpoenaing or requesting these documents has been fruitful in many cases where tracing money through an account was important to my case. Even when dealing with cash deposits, the bank will have some record such as a deposit ticket. Some banks may also have records of identification presented by the depositor or presenter. Check-cashing agencies are usually highly regulated and may have detailed records. A subpoena to these sources may produce fruitful results.
Casinos keep detailed and extensive records of gambling activities by their patrons. Especially this is so for the “high rollers.” Therefore, you should ask your target whether he or she had gambled, and, if so, when and where. Ask to see driver’s licenses and make a clear copy if possible. Attach this or another photo to your subpoena to the casino. Ask for all records of gambling activities, analyses of gambling patters, loans or markers and “comps.”
Finally, an amazing amount of public record information is available free of charge over the Internet. A “Google” type search for “public records in [county]” or “Secretary of State of [state]” can lead you to public records available online directly from the recording offices of states or localities, at minimal or no cost.