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Scherzer Blog

Alert Regarding Sexual Offender Data

A new California case came out March 23, 2010 that gives a background firm protection when it reports sexual offender data from the Megan’s Law Web site, and also clarifies that the prohibition of using sex offender registration information for employment does not apply when there is a person at risk.
For a quick review of the case, see:
http://www.esrcheck.com/wordpress/1440/california-case-protects-constitutional-right-of-background-screening-firm-to-report-sex-offender-registration.
The actual case can be found at:
http://www.courtinfo.ca.gov/opinions/documents/B214653.PDF

|Educational Series, Legislation|

A career in fraud

A prospective client investigation was ordered on a company and its president, but the preliminary information on the president was enough to reject the subject or any company under his direction from the possible business engagement. Initial court searches uncovered a 2001 criminal misdemeanor conviction for possession of a false identification to be used to defraud. The index did not provide much information and the file was destroyed by the court, so SI’s analyst turned to media sources to dig deeper. Sure enough, one article referenced guilty pleas entered in 2002 by the subject and his business partner for hiring imposters to take the Series 7 securities brokers’ examination for them. Each was sentenced to a year of probation and fined $5,000. Other articles from 2002 reported three civil cases for fraud in locations where the subject appeared to have no residential history, and further disclosed that the subject and his partner had been statutorily disqualified from working for a broker licensed by the National Association of Securities Dealers, ordered to disgorge profits and interest totaling $4,649,125 and each were fined $15,000 in civil penalties in 2006. Articles also linked the subject to a con artist who had admitted to defrauding Jewish organizations and individuals of $80 million during the 1990s. Most recently, the FDIC had executed a written agreement with the subject and (the same) business partner after they allegedly failed to seek FDIC approval before making an investment in an unregistered bank holding company. On the whole, this company president had been engaged in fraudulent behavior for nearly a decade and no amount of legal or regulatory action appeared to change his mode of operation.

|Fraud|

Updating investigations as part of your risk management strategy

As part of its standard risk management program, our client requested background investigations of two individuals in connection with an engagement continuation. SI had conducted investigations of these subjects three years prior when our client initially began its consulting engagement with them. No negative information was located in the previous investigations; however, our client quickly learned the value of conducting periodic updates.

    The new investigation revealed recently filed federal indictments charging both subjects with aiding and abetting in the evasion of taxes owed on their salaries between 2006 and 2008, amounting to more than $450,000 each. The government also charged that subject #1 directed his wife to evade income taxes on her salary between 2004 and 2007 by claiming as many as 99 exemptions on her W-4. Additionally, searches of the State Real Estate Board disclosed a pending disciplinary action against subject #2 for “misstating a material fact” that “included fraud.” Both subjects had filed personal Chapter 7 bankruptcies in December 2008 and had been named as debtors in multiple judgments and tax liens for amounts ranging from $35,000 to $2,300,000. The subjects had begun their start-up company three years earlier with clean records, but in short-order they had become a liability to our client.

    |Educational Series, Fraud, Taxes|

    Background investigation reveals untruth in advertising

    SI was engaged to investigate a national company along with two of its principals as part of our client’s risk management program. The company’s ads have appeared almost daily in major newspapers and on the Internet, and the merits of its consumer services (for confidentiality, we can’t say what they are) have been touted in the professionally scripted testimonials of “real” customers. But SI’s investigation found media reports and court documents showing that the claims were not so credible. There is a pending federal class-action lawsuit against the company and its principals alleging several fraudulent business practices, including the misleading advertising of a service guarantee that “is riddled with restrictions, waivers and limitations” and service enrollments without authorization. Six additional lawsuits for similar causes of action are pending in various county-level courts.

      Further, SI’s investigation uncovered the checkered backgrounds of the two principals behind the company. Searches of bankruptcy records revealed that both subjects had filed for protection from creditors – and in the co-founder’s case, had filed multiple times. Also missing from the company’s pitch was that the co-founder’s previous career in a similar business culminated in a federal judge’s order barring him from “promoting, offering for sale, performing or distributing any product or service related to

      [consumer] services.”  Had our client’s decision-makers relied on the company’s presentation of itself and its principals, they would not have been able to realistically assess the risk of engaging in business with the subjects. While a search of media stories might reveal complaints against a potential client, it’s a full in-depth investigation that brings all the pieces together.

      |Bankruptcy, Criminal Activity, Fraud|

      The Fallacy of a National Criminal Database

      Scherzer International is occasionally asked about the availability of a non-law enforcement “national criminal database” as some of our competition offers this service. The fact is that no such database exists.

        The FBI maintains the only comprehensive national criminal database and access to it is restricted to law enforcement agency use. The information offered by private vendors as a “national criminal database” is incomplete, unverified and unreliable for any purpose other than as a supplemental tool.  The reason that these databases are of such little value lies in the fact that there is no central criminal record database for the United States other than the FBI. Even the FBI records are not totally accurate as they are based on fingerprint data which is not always submitted in a consistent or usable manner.

        There are also wide variations in the reporting standards and requirements of individual states as well as local jurisdictions within the states. Thus, although a “hit” may appear in this type of database, it should only be used as an indicator that there may be a criminal record. Further research must be conducted to verify this information. Similarly, if there is no “hit” in a national criminal database, this does not mean that the subject has a clean criminal record as the FBI estimates that less than half of all state criminal records make it into any national database. Based on the variation in record accuracy and reporting it is clear that a “nohit” result in a “national criminal database” is of virtually no value. As a reminder, the Fair Credit Reporting Act (FCRA) requires that Pre-employment investigators always follow all “reasonable procedures to assure maximum possible accuracy” of information we present to the client. (FCRA 607b) FCRA Section 613 (a) (2) also requires “that the information is complete and up to date.” Pre-employment investigators should keep these requirements in mind whenever a Consumer Report is prepared. The requirements of the FCRA do not apply to the Business Background or

        Prospective Client Investigations. The Fallacy of a National Criminal Database

        |Educational Series, Employment Decisions|

        The not-so-good deeds of a charitable organization director…

        As part of a business transaction for an accounting firm, SI was engaged to investigate one of the most respected charitable organizations in the US. The organization itself showed many years of humanitarian service, but among its countless good deeds, SI uncovered the not-so-charitable actions of a former chapter director. In 2008, this individual was sentenced to six years in a federal prison following his conviction on 15 counts of fraud, money laundering and interstate transportation of stolen property. The fraud charges involved swindling an Ohio man out of more than $9 million in a bogus investment scheme.

        Additionally, in 2006, the Utah Division of Securities had fined the subject $60,000 and obtained a default cease-and-desist order barring him from future acts of securities fraud in an unrelated matter. Court records also revealed that the subject had convictions for grand theft and forgery dating back to the 1980s. By employing a risk management strategy like our client’s, the charity would have avoided its association with a felon, and thus prevented significant expenses and continuing embarrassment.

        |Criminal Activity, Fraud|

        Consider the source…of the funds

        A holding company’s claim that it “had the funds and network to take the action necessary to complete business deals” was put to the test in an SI background investigation. Searches of civil records located a lawsuit filed in 2008 in which the holding company sued the United States of America, the Drug Enforcement Agency, and Internal Revenue Service for return of approximately $24.5 million seized from bank accounts in Florida. The government’s response to the holding company’s claim disclosed that there was an ongoing criminal investigation in Arizona involving drug trafficking and related international money laundering enterprises. The seizure of the funds resulted from evidence gathered during the investigation.

          In addition to the foregoing, the government stated that it was still investigating whether there were any victims of fraud because the investigation made it apparent that many of the entities associated with the seized accounts had no legitimate business activity, are shell companies, and have failed to comply with reporting requirements in Florida regarding their purported operational activities. The government specifically noted that the holding company’s Web site appears to promote an investment scheme with unrealistically large interest returns which typically is consistent with a fraudulent investment operation and, in fact, agents have received statements from individuals reporting that they have invested in a program that promised incredibly high rates of return. The government’s investigation led it to conclude that the holding company failed to establish it is an entity of substance and not composed of a series of shell companies simply moving money around in a money laundering exercise to conceal the ownership, source, and control over the funds.

          |Fraud|

          One of the largest employment tax-fraud cases in IRS history

          Our investigation, which included manual civil and criminal record searches and searches of media sources, revealed that the subject company and four of its subsidiaries are under federal indictment for conspiracy and wire fraud as part of a multimillion dollar tax fraud scheme orchestrated by the companies’ founder. This individual recently was sentenced to over 20 years in prison and ordered to pay restitution of $180 million to the Internal Revenue Service after pleading guilty to five felonies including failure to collect and pay payroll taxes and obstructing a federal investigation. It is reportedly one of the largest employment tax-fraud cases in IRS history. Before the sentencing, the individual attempted to justify his actions by claiming insanity.

          The subject company and its subsidiaries also were defendants in dozens of lawsuits for fraud and breach of contract with damage claims totaling over $220 million, in addition to filing for Chapter 11 bankruptcy. Several motions had been filed to dismiss the bankruptcy proceedings, one of which was made by the company’s former accountants who were sued for professional negligence. In court papers, the accountants asked that the case be dismissed or converted to a Chapter 7 because “the only reason the debtor filed the petition was in an effort to help (the founder’s) criminal case.” The motion to dismiss also argued that the company has no chance to successfully reorganize because it is a “sham company used only for illegal activities,” has no remaining employees and no income.

          |Bankruptcy, Fraud, Taxes|

          Your Risk Management Partner … Because Integrity Matters

          The past few months have witnessed appalling stories of con artists who bilked billions of dollars out of people, business, and charitable foundations. These white collar thieves were not just in banking and on Wall Street; they were in health care, retail, oil and refining, military supplies and other fields. In short, the effects of these cons have been felt on every street in America and beyond.

            Do these stories indicate that business crime has increased in recent years, or are we simply more effective in catching the perpetrators? Perhaps it is a combination of both, but these cases point to the importance of internal controls through due diligence and risk management.

            Scherzer International (SI) has a proven reputation for accuracy, expertise, quality and speed in risk management. As part of a Risk Management Program we provide background reports with search strategies designed for each client’s risk level. Our highly trained research analysts review and summarize public records for both individuals and companies and deliver a comprehensive, easy-to-read report targeted on the client’s purpose of investigation.

            SI’s trusted reputation was proven once again recently in two highly publicized cases involving fraud, money laundering and drug related crimes. Years before news broke on the cases; SI identified these individuals as a potential risk for two of our clients. Based on our reports, our clients (one a financial services firm and one an accounting firm) made the informed decision not to engage in business with these individuals. In one case, the subject of our investigation was arrested and convicted of drug related crimes, money laundering and involvement in organized crime. In the other case, the federal government charged the subject with illegal financial dealings, investments that could not be traced and altering financial records.

            It is difficult to quantify just how much SI’s background report saved these companies in what could have been very costly and damaging decisions. What we can say is that our clients feel confident that we are an integral part of their Risk Management Program.

            Your Risk Management Partner … Because Integrity Matters

            |Partnership|
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