Free Download - Anatomy of a Financial Fraud - Part I By John Franczyk
Any mention of "financial fraud" will likely conjure images of Bernard Madoff or any number of other big-ticket fraudulent schemes that have been exposed over the past several years. Financial fraud is more rampant and insidious on a much smaller scale, however, and frequently, closely-held businesses are the targets and victims of that fraud. Not too long ago, one of our clients came very close to losing several million dollars in a transaction which, initially, looked perfectly legitimate. The client's instincts, however, caused it to dig deeper into the bona fides of the transaction, which subsequently exposed a broad but ultimately superficial scheme that had been created to defraud the client of its funds. This article describes the nature of that fraud and the client's and our joint efforts which exposed it.
The client is a lending institution which originates loans that are collateralized by publicly-traded securities. During the term of these loans, the client holds the securities in its own name with an account that it has established with its own brokerage firm. Once the terms and conditions of the loan are agreed upon, the loan transaction typically closes on a "delivery versus payment" ("DVP") basis, in which the securities are transferred into our client's account at the same time as the loan funds are transferred into the borrower's account.
A prospective borrower came to the client seeking a multi-million dollar loan that was to be secured by a basket of blue-chip stocks, which were then held in an eTrade account. The borrower presented several months' worth of eTrade account statements showing the existence and value of that stock and gave our client personal references and the name of his eTrade account representative. His only unusual request was that the transaction be closed through an escrow account that would be managed by his attorney at a prominent, nationally-known law firm. The borrower gave our client the attorney's name and contact information, as well as a copy of correspondence from the attorney on the law firm's letterhead and a copy of the escrow agreement that the attorney had purportedly drafted.
The escrow arrangement conflicted with our client's internal underwriting requirements, which ratcheted the transaction into a more rigorous underwriting environment. The transaction would clear this rigorous environment only if the escrow agreement could be modified to meet certain standards. Our client asked us to assist with the negotiation of those modifications while the client completed the remainder of its underwriting. We first contacted the borrower's attorney through the contact information which the borrower had provided. We later researched the nationally-known firm of which this attorney was a member and attempted to contact him through the law firm's switchboard. The attorney that we then contacted, however, had no knowledge of this transaction nor of the borrower. The transaction and the underlying scheme began to unravel shortly after this latter contact was made.
Upon closer examination, we discovered that the law firm stationery we had seen included a correct building address, but a different suite number for the borrower's attorney. Further, the attorney's email address that we had been given included a slightly different domain name extension than the extension used by all of the other email addresses listed on the law firm's website. Simultaneously, our client compared the borrower's eTrade account statements with other eTrade statements in its possession and determined that the account number listed on the borrower's statements was one digit longer than other eTrade statement numbers. We ultimately conducted a "WHOIS" domain name search on the domain extensions for both the borrower and his attorney, and discovered that the domain names for all of the email accounts we had been given were registered and owned by the same party.
It quickly became apparent that this prospective borrower had prepared forged eTrade statements and law firm stationery, had enlisted one or two accomplices to play the role of attorneys and account representatives, and had concocted a thatch of websites, all of which had a gloss of legitimacy yet none of which withstood a closer inspection. The client then referred the matter to the US Attorney's Office, and the prospective borrower has since been indicted.
Our client in this transaction was fortunate to have enacted strict internal procedures which precluded it from being a victim. Statistics in this area are hard to come by, as many firms which have been victims of fraud either do not report the fraud or are not able to grab the attention of a prosecutor who is then willing to pursue the perpetrator. The individuals who enact these schemes will generally be long gone before the fraud is uncovered, and the victims will have little recourse as a result.
The best course of action for any company is therefore to impose internal procedures that are designed to catch the fraud before it affects the company. The second part of this article, which will be published shortly, includes a series of suggestions for internal controls that are designed to prevent fraud. Fraudulent schemes remain rampant throughout the world of closely-held businesses. Time- and cash-strapped business owners may well groan over the prospect of the additional work required to implement these procedures, but in light of the alternative, that additional work may well be the best investment of time and cash that the business owner has ever spent.
Marcus Arkan
Marcus Arkan currently serves as the President/Principle Broker of Syndicate Mortgages Inc. After working with a number of Canada's top financial institutions, the experience and knowledge he gained throughout his professional career combined with his drive and entrepreneurial spirit led him to develop his own company. The operation began in 2003 in the basement of his home and now has flourished into a successful corporation with a head office in one of Metropolitan Toronto's busiest sectors and 10 branch locations employing over 100 mortgage professionals. His organization is now one of Ontario's leading mortgage brokerages specializing in residential, commercial, and construction financing. He holds the designation of Accredited Mortgage Professional from the Canadian Association of Accredited Mortgage Professionals. This allows him to differentiate himself from other mortgage originators and demonstrates his commitment to the highest standards of industry performance. For more information on Mr. Arkan and his Syndicate Mortgages Inc., please visit www.syndicatemortgages.com. - Visit Marcus Arkan's Website
To learn more about the Evan Elite Author Program please contact us.
John Franczyk is an attorney and
counselor to entrepreneurial
businesses and technology
companies in Chicago and
throughout the United States. He
has established himself as a
creative and innovative legal
counselor for companies seeking
advice on corporate structure,
finance, intellectual property and
transactions. He frequently
fulfills the role of general
counsel for his clients and
provides necessary legal oversight
for their internal functions as
they grow from two- or three-man
startup organizations to thriving
concerns. During his more than
twenty years of practicing law in
Chicago, Mr. Franczyk has advised
numerous clients who were seeking
startup financing ranging from
$500,000 to $20 million. He has
negotiated business purchases and
divestitures and has drafted
contracts and agreements for
numerous corporate transactions.
He advises clients on various
aspects of marshalling and
protecting their intellectual
property assets, including their
patents, trademarks and
copyrights. He has also
represented his clients in
litigation both at the State and
Federal levels. Mr. Franczyk
received his Bachelor's degree,
with honors, in chemical
engineering from Rensselaer
Polytechnic Institute ("RPI") in
Troy, New York. He is a volunteer
alumni representative for RPI in
the Chicago area. After working as
an engineer for Procter &
Gamble and IBM, Mr. Franczyk
enrolle at Northwestern University
Law School. He received his law
degree, with honors, from
Northwestern in 1987. He is
currently a member of the Bar of
the State of Illinois and is a
registered United States Patent
Attorney. Mr. Franczyk also serves
as a volunteer leader for Boy Scout
Troop 55 in Glenview, Illinois. He
participates in endurance sports
and outdoor activities.
John Franczyk is a Silver author on EvanCarmichael.com
John Franczyk's
Complete
List Of
Legal Articles
If you enjoyed this article, get John Franczyk's Complete List of Legal Articles For FREE!
Have you written articles that would be of value to entrepreneurs? Become an expert on our site by publishing them! Expose yourself to a wide audience, drive more traffic to your website and get more sales! Click Here for details.
Modeling the Masters: Learn the true secrets behind Walt Disney's business success factors & grow your company!
Video produced by Phanta Media
Get advice & tips from famous business owners, new articles by entrepreneur experts, my latest website updates, & special sneak peaks at what's to come!
Email us your ideas on how to make our website more valuable! Thank you Sharon from Toronto Salsa Lessons / Classes for your suggestions to make the newsletter look like the website and profile younger entrepreneurs like Jennifer Lopez and Sean Combs!
Marcus Arkan
Subscribe to John's articles
Power of Concentration
