A new article entitled “And Now for Some Good News About Fraudulent Transfers” written by Financial Forensic Services President Joe Dickerson was recently featured in ABFJournal magazine. To read the article in PDF format, please click HERE
Due diligence an important step to take prior to investing
By Tony Monterastelli
Many techies love to invest their money in other tech companies. But whether you’re putting up seed money for a startup, or buying the stock of a public company, look out for more than just the market risk. Look for signs of fraud. Here are some tips for making proper due diligence a regular part of your investment decisions, according to Joe Dickerson, a private financial investigator based in Lakewood. Many of his customers are investors who hire him to check out companies and businesses before they invest.
… Closely examine the structure, even the location, of the company. For example, think twice before investing in a limited liability company and limited liability partnership, Dickerson said. An LLC or an LLP make it easy for the owners to hide financial and business shenanigans, he said. “There are still a lot of legitimate LLCs and LLPs,” Dickerson said. “But it raises a red flag.”
… Location matters, too. Caution lights illuminate when Dickerson sees that a company is incorporated in California or Florida, especially when its offices are in Orange County, Calif., or Boca Raton, Fla. With many wealthy retirees, those areas tend to attract more than their share of scam artists, he said.
… Read the company’s reports. Public companies must file regular quarterly and annual reports with the Securities and Exchange Commission if they have more than 500 shareholders and at least $10 million in assets. All companies that list their securities on the Nasdaq Stock Market or the New York Stock Exchange file reports with the SEC, and anybody can get those reports for free from the SEC’s EDGAR database (located at www.sec.gov). However, the reports never will give you the whole story, Dickerson said. For example, a company will report that it has been sued for patent infringement, but it won’t say whether the suit involves a crucial technology, he said. “It’s going to get couched in minimal terms,” Dickerson said. “But you’re going to have enough information that you’ll be able to make additional inquiries.”
… Beware of penny stock companies. These companies generally have shares priced under $5, have few assets and usually are just in the idea stage, with few, if any, customers and little revenue. In the tech realm, many such companies trade on the National Association of Securities Dealers Over The Counter Bulletin Board (OTC BB), a quotation service that never should be confused with the Nasdaq stock exchange. Penny stocks can tempt tech-savvy investors. Usually, the concept sounds exciting, and at such low prices, they offer the chance to amass a large ownership position, along with the feeling of getting into an investment at the ground level.
But sometimes the people who run these companies engage in “pump and dump” schemes, which are among the 10 most frequent forms of stock fraud listed by the North American Securities Administrators Association (NASAA), a group of state securities officials. Such schemes often involve the use of paid stock promoters who tout the company’s stock in the media and on Internet message boards. Beware of companies that issue press releases that hype the potential of their technology, often saying that it will “revolutionize” their industry, especially when the company has no customers and little, if any, revenue. Stock promoters should clearly disclose whether the company has paid them to tout the firm. The NASD can give a partial disciplinary history on the broker or firm that’s touting the stock through its toll-free disclosure hotline, 800-289-9999, or its Web site at www.nasdr.com.
… Beware of timely or trendy ideas. In the mid-1990s, some investors fell for bogus “wireless cable” investments, despite the oxymoron, because those words sounded like a hot new technology, Dickerson said. While most techies know enough not to fall for such a fabrication, it’s good to look twice at investments in hot technologies. According to the NASD, scams have arisen recently regarding companies – or supposed companies – that make defense, anti-terrorism or biological detection products. Often the company claims that is has technologies or services that will help the war against terrorism or protect the public from biological threats, such as anthrax.
… Finally, know who you invest with. Know your company executives well, Dickerson said. For example, Dickerson starts by checking a company president’s driving records. “I want to know how many times he’s been arrested for driving under the influence. It tells you something. If you’re going to invest your money with somebody, you don’t want all of it going up his nose,” he said. “If people would look at who they invest with, they would avoid a lot of bad investments.” Above all, Dickerson reminds investors to heed these familiar rules: “There’s no free lunch, and if it seems too good to be true, it probably is.”
‘Financial detective’ on the lookout for hidden assets
by Amy Bryer
Joe Dickerson is a detective of sorts. He’s not a gun-toting detective who gets into fistfights and always gets the villain and the girl. He’s a financial detective who can find where people hide money, assets and anything else of value.
Against someone who committed fraud or another white-collar crime. Frequently the convicted person hid assets to avoid paying the victim, and it’s Dickerson’s job to find the money. Dickerson goes beyond just a subpoena of a bank records. Assets can be hidden in shell corporations, homes, boats, cars, planes, stocks, even construction equipment. Often, the assets are concealed under the names of family members or colleagues and sometimes those people aren’t even aware their names are being used.
In one case, Dickerson found a check written to an out-of-state power company that turned up thousands of acres of farm and ranch land owned by the convicted person, but not listed under his name. The search doesn’t stop with the subpoena of financial records. Even analyzing a phone bill can reveal calls to a bank in the Bahamas, he said. Dickerson will even interview ex-spouses and former secretaries to find leads to assets that are hard to locate on paper. According to a study by Dickerson Financial, less than 3 percent of restitution orders in criminal cases are fully recovered. Dickerson is trying to change those odds. “Getting the verdict is only half the battle,” he said.
The majority of criminal cases are turned into civil cases that allows the victim to use subpoena power to obtain the personal financial information on the convicted criminal. In white-collar crime, the victim is torn by competing interests, Denver Chief Deputy District Attorney Bill Lucero said. “The victim would like to see the person punished and put in jail, but what they need more than anything else is to get their money back,” Lucero said. “If youcan’t prove they have the ability to pay, you can’t squeeze blood out of a turnip.”
The DA’s office often cuts deals for probation just so the victim will recover his or her cash. Lucero describes Dickerson as a junk-yard dog who sniffs out people’s money.
A district attorney is not allowed to counsel victims in recovering cash, but Dickerson is not hamstrung by the same rules, Lucero said. “He can use techniques that are not allowed by us — they’re not illegal, just not allowed,” he said. “Government has to play by a different set of rules.”
Lucero worked with Dickerson during the savings and loan crisis of the 1980s and the early 1990s when several land developers swindled banks out of millions of dollars with phony letters of credit. At the time, Lucero was employed by the U.S. District Attorney’s Office. Dickerson located assets for the head of a now-defunct real estate company who declared bankruptcy during the savings-and-loan debacle of the ’80s. The financial detective uncovered the assets 10 years after the deals were done, Lucero said. “All I know is I’d hate to have [Dickerson] on my tail,” Lucero said.
Dickerson, who started his career in the 1960s as a detective for the Houston Police Department, helped a bank in Fort Collins recover $1.3 million in bad bank loans in the same case. After 14 months, Dickerson found 71 different corporate entities where the money was hidden, said Larry E. Scott, a retired banker. Dickerson also located money and assets in a house in Scottsdale, Ariz., a $250,000 mutual fund in Kansas City and other property held in a trust that no one recognized as his own. Although Scott said he never thought his bank would see the money again, Dickerson managed to find it all. The justice system believes justice is served when the verdict comes in and convicts the wrong-doers, but Dickerson disagrees with that philosophy.”Justice is served when the victim gets their money back into their bank account and they are made to feel whole again,” he said.
Most consumers have no idea what the Mortgage Electronic Registration System (MERS) is, but one out of every two loans in the United States is ‘owned’ by it. And it has become a tool used by debtors to hide their assets. If you have debtors that invest in mortgages, you need to know about MERS.
MERS is a private US corporation that solved one very expensive problem: how can large amounts of mortgages be bought and sold by investors without generating the fees charged by counties to record the change of ownership? A large group of loans could incur thousands, if not hundreds of thousands, of dollars in recording fees, every time an investment in a loan pool was made. MERS solved this neatly by simply operating an electronic registry. Transfer your loan into it, and MERS is now the nominee owner. You’re free to buy, sell, and transfer your loan to other investors within the registry, without having to record the change of ownership with the local County Recorder. The Federal Government has backed the system as a way to create a liquid market for investors.
However, some state County Recorders have started to fight back. They are claiming that MERS is nothing more than a work-around to avoid the proper paying of recording fees. Fees that are used to support the cost of a public recording process are lost.
We have also seen cases where debtors use MERS to hide their assets by making sure their ownership is not publically recorded, and they have then failed to disclose their ownership of these assets. The good news is that once we have identified debtors that are involved with MERS, we now have a decided advantage for uncovering current ownership and proving fraudulent transfers: the MERS system itself!
It is important to know that each loan transferred into the MERS system is assigned a Mortgage Identification Number (MIN), and will have this number for the life of the loan, no matter who the current owner is. Once we build the master list of loans owned (past or present) by the debtor, we follow the ownership transfers by date to develop the status of the investment pool. Post-judgment transfers can also lead to other entities that are sheltering the ownership of the assets for the debtor that we may have not known existed.
So be aware that MERS is an effective tool that a debtor can use to hide assets, and that it is an even better tool to use for recovery.
If you need help tracing large sums of money through numerous real estate transactions feel free to give us a call at Financial Forensic Services, LLC. 303-974-5610.
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By Joe Dickerson, CFE, CFI
Garnishing your judgment debtor’s bank account should not be your principal reason for finding it. I personally consider it gravy when we find an account with money to garnish. While the funds are important, they aren’t the most important reason for finding it. A good forensic research firm will treat that bank account like the bloody fingerprint it is. Just like a CSI team, we’re looking for the DNA to solve the case, and a bank account is just that. Hidden within are the clues that can lead hard working, inquisitive experts to the otherwise elusive details. Some cases have a plethora of clues, others have fewer, but they are always there, whether we can see them or not—just waiting to show us the hidden path to solving the crime and collecting on your judgment.
Always remember, you have the power of the court behind you to effectuate the discovery needed to locate and recover the assets you need to satisfy your client’s judgment. If the judgment debtor does not have the assets to satisfy the judgment, substantially or entirely, the sooner you learn that, the sooner you can get your clients out of the chase and back to their lives. In most states, the judgment is good for 7 to 20 years and can be renewed prior to expiring. In this sense, time may actually benefit your client as the debtor accumulates assets.
Based on my 50 years of experience, you WILL NOT find your debtors assets via deposition or interrogatories. The first thing most attorneys want to do is a debtor’s exam as allowed by law. That is often followed by interrogatories of the debtor. I have attended hundreds of depositions and have never seen a debtor appear for the deposition with all the subpoenaed documents or tell the truth when questioned about their assets.
Not only is this nonproductive, but usually it’s counterproductive because you merely tell the debtors what you already know through questioning. This gives debtors ample time to really hide assets, costing the client even more money and time to continue the chase. Even subpoenas to the debtor for bank records, tax returns, financial statements, phone bills, and credit card records generally fail to deliver truthful or complete information. To get complete accurate bank records, you must get them directly from the vendor source, not your debtor!
Let’s look at the DNA of bank accounts to see how it can lead you to the documents that will reveal the various sources and assets to satisfy a judgment. To get started—you or someone on your judgment enforcement team has located one or more of your judgment debtor’s bank accounts. You will go through the following process with each account.
First of all, serve the bank with a garnishment for the funds from any and all the debtor’s accounts simultaneously. Serve each bank with a subpoena for copies of all safe deposit box documents; including signature card(s); box entry records; applications; all loan applications and support documents including tax returns; financial statements; copies of corporate resolutions and all other business records on file; all trust documents; all correspondence and notes in loan files relating to the judgment debtor or any business entity related in any way to the debtor; copy of all payment instruments relating to every payment made to the bank by or on behalf of the judgment debtor, directly or indirectly, or any entity related to him or her in any way.
The first subpoena to the bank should also require the production of every bank statement for each account upon which the debtor is a signatory along within, at least, the last 24 months of credits and debits [front and back] for each account. That subpoena should include all authorization documents including who is authorized to send wire transfers plus all actual authorizations for outgoing wires including both paper and voice recordings.
If the bank or a mortgage company is financing the judgment debtor’s home, subpoena the lender for the name and address of the insurance company, and the policy number, for which they are escrowing and paying the premium. Then subpoena the insurance company for a copy of the policy including a copy of all scheduled personal property which can include; artwork, jewelry, furs, antiques, collectibles, guns, silver, and all kinds of valuable personal property. You will not find these valuable assets in public record anywhere. With this evidence, sometimes even in the debtor’s own handwriting, I have never seen a court deny a Writ of Execution or a Turnover order—no one is going to pay a premium on a Rolex they do not own.
This is just the tip of the iceberg, so be sure to join us next month, when we take a trip down south for some Texas style judgment justice by following the leads from the credit and debit DNA!
When you’re synthesizing your debtor’s financial DNA, the proof is in the paper. Be sure the subpoena to the bank or mortgage company also requires a copy of all payment instruments including checks, wire transfers, cashier’s checks, etc. for at least the last 12 payments. The source of these payments may lead you to trusts, business entities, or offshore accounts you did not previously know about. Your debtor may be paying his mortgage with funds from one of his corporations and this evidence can help you pierce the corporate veil as this usage could extend deeper into his personal life. You may also find payments drawn on banks in small towns in another state. Such accounts have led me to a ranch in Texas with a herd of valuable registered cattle along with oil and gas production on the property.
The debtor had claimed the 100% Texas homestead exemption on the ranch but we were able to prove his Colorado homestead ($65,000.00) exemption was valid. He had claimed the homestead in Colorado, he was paying Colorado state income taxes, was registered to vote in Colorado, had a Colorado driver’s license (but no DL in Texas) and his son was attending the University of Colorado with residence tuition. We took the 1,200 acre Texas ranch, the oil and gas production, and the cattle as well. Since we had subpoenaed the bank in possession of the Colorado mortgage for his loan application and support documents, including three years of tax returns and financial statements, inconsistencies began to appear.
One year, the debtor had paid excessive taxes. We subpoenaed the work papers from his CPA, and our Director of Forensic Accounting audited the questionable tax returns along with interviewing the CPA. It turned out that our judgment debtor was anticipating our client’s judgment against him so he overpaid his federal income taxes by about $200,000 with the intent of settling the judgment for a few cents on the dollar after convincing our client that he couldn’t pay. He planned to fill an amended return and get a refund for overpayment. With a court order, our client became the beneficiary of the refund instead.
The three years of financial statements informed us that our judgment debtor had acquired a $275,000 condo for cash in 2006 as well as an oceanfront home on five acres in the Turks & Caicos Islands in 2008 for $1.2 million. Rather than fight for the properties in a well-known tax haven, we requested cash payment of $500,000. This was a win/ win for everyone involved, and there was practically no related cost for the work.
From the original bank account, we subpoenaed the signature cards and all credit and debit instruments for two years. This wealth of information included everything from authorization documents to voice recordings for all inbound and outgoing wire transfers. The subpoena also covered all direction and authorization relative to any and all sweep direction, credits, and debits including transactions and the full name, address, and account number of every account receiving debits from the account.
Million dollar debit transactions in Texas required we move our action further south. Investigation of an account held in our debtor’s name revealed still more subpoenaed documents which led us to recover $85,000 from the debtor’s checking account and a $1.1 million 1,200-acre ranch. Copies of a $325,000 wire transfer from the original account payable to Ft. Lauderdale Rolls Royce and an account in Ft. Lauderdale, FL. After registering the judgment with the US District Court in Miami, we learned that the dealership had sold a Rolls Royce to Florida Enterprises, operated by J. Debtor, Jr. We were able to show the court that the vehicle was purchased by J. Debtor Sr. who signed all the purchase documents personally and then titled and registered the vehicle fraudulently to his son. We were able to return the car, and the $300,000 refund went to our client.
From the debtor’s personal credit report, we found a very active American Express card. We subpoenaed the records for the card for the past two years, and again we found more spending in another state. Charges to Caesars Palace Hotel & Casino in Las Vegas led us to register our client’s judgment in Reno, NV. More investigation uncovered a $250,000 credit on deposit with the casino which we garnished. Subpoenaing all charges to the debtor’s room revealed numerous toll calls to a phone back in Florida. The mystery phone belonged to Jane Doe (later determined to be Mr. Debtor’s girlfriend), and further research reflected that she resided in a $385,000 condo with no encumbrances owned by our debtor. We obtained a Turnover Order, took ownership of the condo and sold it for a net recovery of $360,000 for our client.
Even more activity was later revealed, and it was all due to the information found within that very first bank account! Our very strategic debtor had done his best to hide as much as he could, but spending leaves a bloody trail that forensic analysts can piece together based on that financial DNA. Never underestimate a paper trail, even if the bank looks empty.