In this special five-part podcast series, I interview John Gill, the 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 what compliance professionals need to have in place to detect and prevent corruption.  In this Episode 4, we discuss James Brandolino and the need for ongoing due diligence on those with whom you invest. Some of the highlights include:

  1. Always perform due diligence requisite to the risk.
  2. What are some of the red flags for investment professionals? Can you check the books?
  3. Due diligence is not a one-time exercise. It should be ongoing throughout the life of the business relationship.
  4. What if there are never any losses? SeeBernie Madoff.
  5. Never forget to listen to your gut and your instincts. If something doesn’t seem or feel right, it probably isn’t right.

For listeners of this podcast, the ACFE is offering a free Fraud Risk Assessment Tool. Check out this great offering by clicking here.

For more information on the ACFE, click here.

We continue our consideration of Shakespeare’s Problem Plays with today’s offering on Troilus and Cressidaas an introduction to problems in compliance. Yesterday we considered All’s Well That Ends Well as a way to introduce why a corporate compliance function must be resilient. Today, we consider Troilus and Cressida and how the title character was portrayed as a fool but the main action is around the death of other characters.

The title characters of this play are not the main story, which takes place during the Trojan War. Troilus loves Cressida, who are both Trojans. Unfortunately Cressida is exchanged for another Trojan who has been captured by the Greeks. This part of the play concludes with Troilus going into battle in a very frenzied manner. Shakespeare seems to portray him as a hot-headed fool in love, but he does not die.

The main action of the play involves the Trojans, King Priam and his oldest son, Hector. On the Greek side it is Agamemnon and Achilles, with minor appearances by Ajax and Patroclus. It is the story of both Hector and Achilles being lured out to an ultimate battle. Achilles only does so after his lover, Patroclus, is killed by Hector. There is a lot of death in this part of the play, yet most commentators do not see it as the anchor to categorize Troilus and Cressidaas a tragedy. Of course, there are many deaths, including Patroclus and Hector, yet these come in honorable battle. Perhaps the final word should come from Wisam Khalid Abdul Jabbar, who said, in The Subversive Homeric Reality in Shakespeare’s Troilus and Cressida, “Shakespeare sacrifices the tragic form, as it sets the characters in a normative direction, in favour of a tragedy of thought.”

This week we have seen how the tragedy of the victims of Larry Nassar go to a new level when Michigan State University (MSU) Interim President John Engler said (on the record) to the Editorial Board of the Detroit News, “There are a lot of people who are touched by this, survivors who haven’t been in the spotlight. In some ways they have been able to deal with this better than the ones who’ve been in the spotlight who are still enjoying that moment at times, you know, the awards and recognition. And it’s ending. It’s almost done.” Nancy Hogshead-Makar, Chief Executive Officer (CEO) Champion Women, an organization advocating for women and girls in sports and a civil rights lawyer, tweeted “Riiiiiigght, women get raped for attention — just another way victims are discounted”. Yes, the fool clothed as tragedy came out from Engler once again. As Dan Murphy, writing in ESPN.com, said, Engler’s tenure as MSU Interim President appears at an end, with the Board of Regents set to vote Thursday morning on his continued employment at the University.

This is not the first time Engler has played the fool in this horrific tragedy. He has consistently attacked, belittled and demeaned the victims of Nassar’s abuse. Kim Kozlowski, reporting in the Detroit News last summer, “Calls mounted Thursday for interim President John Engler to resign from Michigan State University in the wake of emails in which he suggested that the first gymnast to publicly accuse Larry Nassar of sexual abuse might get a “kickback” from her attorney for “manipulating” other victims.”

Engler has led the destruction of any goodwill MSU might have engendered by its commitment to compensate Nassar victims with a $500 million pool of money. Yet, as Matt Kelly wrote in a Radical Compliance blog post entitled “Another Compliance Lesson from Michigan State, “The crisis at MSU is, foremost, a crisis of mistrust. People tried raising alarm about Nassar for years, MSU leaders didn’t listen, and today everyone is skeptical that the university will start listening now. Considering the smear Engler made against a victim only a few months ago, the skepticism isn’t unfounded.”

But it is even worse than simply a fool making inane statements. MSU has fought the state of Michigan’s investigators who were tasked with getting to the bottom of the school’s mishandling of sexual abuse carried out by Dr. Larry Nassar, tooth and nail. David K. Li, writing in NBC.comin 2018,said, “Special counsel Bill Forsyth blasted MSU for allegedly trying to sabotage the state-ordered probe, which comes in the wake of Nassar’s conviction for decades of sex crimes he committed while working in East Lansing. “Their biggest concern was the reputation of the university,” Forsyth told reporters in Lansing. Forsyth’s report, released Friday as an update on the investigation, specifically accused the school of “drowning investigators in irrelevant documents,” “waging needless battles over pertinent documents” and “asserting attorney-client privilege even when it did not apply.” Both then and now, MSU has fostered a culture of indifference toward sexual assault, motivated by its desire to protect its reputation,” according to Forsyth’s report. The school employed a “protectionist tactic,” designed to slow the probe, prosecutors said. Requests for documents were often answered with papers — such as the school bed bug policy, local restaurant coupons and publicly available newspaper clippings — that had nothing to do with Nassar, the report claimed.”

When it comes to changing the culture at MSU, there was an even more complete failure. In another Radical Compliance blog post from 2018, entitled “Michigan State Reorgs Compliance Again”, Kelly wrote about the University’s effort to so obscure any compliance function as to make it basically non-functioning. “Engler said the ethics and compliance office would go away, swallowed into a new Office of Audit, Risk, and Compliance starting this week. Marilyn Tarrant, Michigan State’s head of internal audit since 2015, will oversee the new office and hold the title of associate vice president.” This meant ethics was downgraded into the Office of Audit, Risk, and Compliance. What does that tell you about MSU’s commitment to ethics? Unfortunately it tells you everything you need to know about the commitment to ethics and compliance.

Kozlowski wrote, again in the Detroit News after the latest comments by Engler, that MSU Trustees reportedly had the votes to fire Engler. We can only hope so. But the rot at MSU goes much further than simply the fool who occupies the Interim President’s office as there are still MSU regents who support Engler and think he is the right man for the job. The leadership of MSU must completely change its attitude and win back the trust of all stakeholders, the victims of Nasser, the current and future MSU students who MSU leadership has essentially thrown under the bus through its actions and the MSU graduates (of which I am one) who want the school to not only admit its failures but build a culture of ethics and compliance so that the horrors wielded upon the victims of Nassar never again stain this great university.

Perhaps the best way to sum all this is up is as a tragedy.

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

In this special five-part podcast series, I interview John Gill, the 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 what compliance professionals need to have in place to detect and prevent corruption.  In this Episode 3, we discuss Andrea Baxendale and explore what is fraud risk. Some of the highlights include:

  1. How does the Fair Process Doctrine help in fraud detection and prevention?
  2. Why is segregation of duties is a key anti-fraud and anti-corruption control?
  3. Institutional fairness is a critical question for the fraud examiner to consider.
  4. Equal pay for equal work isn’t just a good idea, it’s the law.
  5. Trust by verify applies to even the most loyal employee.

For listeners of this podcast, the ACFE is offering a free Fraud Risk Assessment Tool. Check out this great offering by clicking here.

For more information on the ACFE, click here.

In this special five-part podcast series, I interview John Gill, the 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 what compliance professionals need to have in place to detect and prevent corruption.  In this Episode 2, we discuss Mark Whitacre and how senior management sets the tone on fraud for the entire organization. Some of the highlights include:

  1. How do employees take their cues from management about ethics and compliance?
  2. If an employee knows where the corporate skeletons are buried, what will happen?
  3. How fraud incidents are handled in an organization communicates tone and corporate culture.
  4. What led to Whitacre turning informant for the government?
  5. People who cooperate may not always be as pure as the driven snow.

For listeners of this podcast, the ACFE is offering a free Fraud Risk Assessment Tool. Check out this great offering by clicking here.

For more information on the ACFE, click here.

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