Today, we honor one of my and Adrian Lurssen’s, co-founder of JDSupra, favorite musician’s – Earl Scruggs. January 6 would have been his 95thbirthday. How big was Earl Scruggs in the world of bluegrass? Last Friday, Google’s homepage paid homage to Scruggs with a colorful “Google Doodle” featuring an animated depiction of the North Carolina native’s lightning-fast digits plucking banjo strings. (So big even my daughter texted to tell me Google had honored Scruggs.) Scruggs was a legendary banjo picker and Country Music Hall of Fame member, who revolutionized the three-finger style of banjo picking. He played with Bill Monroe and later paired with Lester Flatt to form one of the most beloved bluegrass duos, Flatt and Scruggs. He later formed the Earl Scruggs Revue and played with musicians as varied as Bob Dylan to Johnny Cash to Doc Watson. See the end of this blog post for my top five Earl Scruggs playlist.

In a special five-part podcast series, I interview John Gill, Vice President for Education at the Association of Certified Fraud Examiners (ACFE). In this series, John discusses five well-known fraudsters, including what caused them to engage in fraud, the fraud scheme they employed and how they were caught. More significantly, we tie this to what compliance professionals need to have in place to detect and prevent corruption.

In episode 1 we consider the case of Nathan Mueller. Mueller embezzled nearly $8.5 million from his employer, ING Group (ING), over four years and three months. When he was caught, he was sentenced to 97 months in jail. We use Mueller as an introduction into and explanation of the fraud triangle. Each leg of the triangle must be satisfied in any fraud so it is an excellent introduction into an incessantly fascinating topic. Pressures to commit fraud can arise from a variety of areas and compliance practitioners and fraud examiners must remain ever vigilant. Finally, never forget to maintain robust anti-fraud controls before, during and after the mergers and acquisition (M&A) process.

In episode 2, we consider Mark Whitacre, the whistleblower from Archers Daniel Midland (ADM) who was made famous by Kurt Eichenwald in his book The Informant and was played by Mark Damon in the movie of the same name. Whitacre was the president of ADM’s BioProducts Division and was the highest-level corporate executive in U.S. history to become a Federal Bureau of Investigation (FBI) whistleblower. For three years, Whitacre acted as an informant for the FBI, which was investigating ADM for price fixing. Unfortunately for Whitacre, at the same time he was embezzling some $8.5 million from ADM and went to prison for 8.5 years for those crimes.

We use Whitacre to explore how and why tone at the top does matter, in both anti-corruption compliance and in fraud prevention. The very top of ADM made short shrift of price-fixing legal violations as well as other laws and even at Whitacre’s level, ADM employees took their cues from this attitude. Fraudsters as well as those engaged in bribery and corruption can rationalize their behaviors based upon the conduct of senior management.

In episode 3 we consider the matter of Andrea Baxendale. What makes her fraud so interesting is that she is not famous but her fraud was just as illuminating as the others for the fraud prevention expert and indeed the compliance practitioner. Her case illustrates why institutional fairness and justice are not only critical for a good work environment but are also a part of a fraud prevention program and anti-corruption compliance regime as well. Baxendale worked for a family owned manufacturing business. She was passed over for promotion several times when the promoted candidate did not have her credentials, work and professional experience. The last straw was when she found out her pay was lower than several other similarly situated employees.

This unfair and disparate treatment worked to undermine Baxendale’s individual integrity and lead to her to commit fraud against her employer. This means that your employees may not be as loyal as you think as loyalty runs down a two-way street in most employees eyes. It also is another reminder that the basic fraud prevention controls such as segregation of duties should always be employed.

In episode 4 we consider the case of James Brandolino, who was a financial services advisor. He ran a $5 million Ponzi scheme which defrauded 60 investors. He also had futures trading losses of $850,000 and, equally importantly, misappropriated more than $2 million, using the money to purchase a BMW, Rolex watch and a piano. This Ponzi Scheme bilked about 60 investors, many of them family and friends, according to a statement released by the US Attorney’s Office. The statement went on to say, “He lured investors with promises of healthy returns and principal safety, and he fabricated account statements showing steady gains, convincing investors to keep their money with him and to invest additional funds.”

Before there was the massive Ponzi Scheme of Bernie Madoff there was James Brandolino, albeit on a much smaller scale. He was a financial services provider who ran an elaborate scheme but, unlike Madoff, he did not create an entire set of false documents to hide what he was doing. He went in the other direction and simply never provided any documentation. The clear lesson is that you must be vigilant or as Gill said, “a little trust can be a dangerous thing.”

Finally, we take up the case of Joseph Grmovsek, a securities trader in Canada. He ran an insider trading scheme for over 14 years, netting himself more than $9 million in ill-gotten gains. As reported in 2009 by  CBC News, “Grmovsek and a law school classmate Gil I. Cornblum exchanged confidential information on numerous corporate transactions between 1994 and 2008… The pair tried to disguise their activities by using numerous brokerage accounts in the Bahamas before repatriating their illicit profits back into Canada, the regulator says. In total, Cornblum tipped Grmovsek to material in advance of news releases on 46 separate publicly traded companies.”

Grmovsek’s fraud is an excellent reminder that confidential information must be protected. This was true when he was actively engaging in fraud and even more so now with the penalties under GDPR and other data protection laws. As a fraud examiner and compliance professional, have you assessed your data controls to protect sensitive data. If you do not, the cost could be a huge fraud perpetrated or it could be the situation that the UK company Morrisons Supermarkets plc now finds itself in. It is facing a class action suit for a disgruntled employee’s release of confidential information to a UK newspaper, which actually returned the data without accessing it. Yet that alone is enough to bring potential civil liability to Morrisons.

Finally, the Grmovsek case is a cautionary tale about the human cost of fraud. The lawyer Grmovsek was in league with committed suicide over his actions in this matter.

All of the episodes are currently available on iTunes,YouTube and Megaphone and will be released daily this week on the FCPAComplianceReport and JD Supra. Check them out, they are rollicking fun and great lessons for both fraud prevention specialists and compliance professionals.

Tom’s Top 5 Earl Scruggs’s playlist (all from YouTube):

  1. Foggy Mountain Breakdown;
  2. Love is Just a Four-Letter Word;
  3. Rollin’ in My Dreams;
  4. If I Was a Carpenter and
  5. Bleeker Street Rag.

For Rolling Stone’s take on Scruggs’ top five, check out this great article by Stephen Betts, Earl Scruggs: Five Great Performances.

Leave your top five playlist in the blog’s comment section. 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2019

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