This is a story about a successful, privately owned, logistics technology and execution vendor with a long list of blue-chip customers and more than $1 Billion USD in annual revenue located in a lovely little southern city. Customers transferred enormous amounts of money to this company to pay third party costs, in advance. The monies were, by contract, to be placed in segregated accounts for the benet of each customer. Everything hummed along with no hiccoughs for more than fteen years.
Then one day the customers received an email informing them that all of their money had mysteriously disappeared. The amount of money missing was several hundred million dollars. The vendor requested additional funds from the customers in order to complete pending critical logistic activities, for the customers, while the vendor carried out its own investigation. The customers refused and instead hired lawyers and forensic accountants to nd out what happened.
The attorney for one of the customers hired me to conduct an investigation at the company. The company facilities were like the logistics version of Willy Wonka’s Chocolate Factory. There was no piece of equipment too advanced or expensive to have made its way there. There were more personnel hanging around that building than there were Oompa Loompas at Willy Wonka’s place. It didn’t take long for me to discover that the money was gone. I listened as the owners spun fanciful tales to try to explain the disappearance of all of that money. But, whatever the reason, a quick review of the company bank records revealed that the money was, in fact, gone and would not be coming back.
I reported my ndings to my client. My client and the other customers moved, the next morning, to put the company into involuntary bankruptcy. The Bankruptcy Court, in response to an unsecured creditor ling, appointed a trustee.
This seemed like the way to make the best of a bad situation until you confronted the fact that the vendor had very little in the way of assets that were not already pledged as collateral to secured creditors. There simply wasn’t anything available to satisfy unsecured creditor claims. The customers, now unsecured creditors, began to angrily and incorrectly describe what had happened as a Ponzi scheme. They were right about one thing; like a Ponzi scheme all of the assets were gone.
My investigative work revealed that the company had been in the widget business for a long time. All those expensive machines and excess personnel meant that they were losing about $3 for every $1 of revenue they earned. In addition, the owners were treating those “segregated accounts” like personal piggy banks. They used a lot of that money to purchase exotic cars, failed restaurants, failed business ventures, failed real estate deals and so on. The segregated account representation was a terrible fiction.
So what could the customers do to get their money back? If left to look to the assets of the estate, the customers were looking at recovering 2 cents on the dollar at best. This is unfortunately all too common in Ponzi schemes and similar cases like this one; the scheme itself destroys the entity’s assets.
Well, if there’s nothing left inside the box, it’s time to look outside the box. Outside the box, in a case like this, are third parties who either aided and abetted the scheme or conspired to cover it up. These can include accountants, bankers, real estate agents, car dealers and others who have civil liability, insurance policies and deep pockets.
In this case, a large CPA rm conducted annual service bureau audits and had opined in each of ten years that the customer monies were, in fact, held in segregated accounts. This was, of course, not true. I never did learn whether they just didn’t do the work or if they had discovered the fraud, but, didn’t do anything about it. Of course those audit reports were sent to the customers who relied on them to their detriment.
I provided a complete evidence package, proving this conclusion, to the attorney who retained me. Following one meeting with the CPA rm and its malpractice carrier, my client recovered 80% of the money it had lost, amounting to more than $40 Million USD. It pays to think outside the box.