The Legal Intelligencer Blog

It's the Little Things: Preventing Fraud, Waste and Abuse in Your Company

By B.J. Hoffman
Special to the Legal

Your law firm and corporate clients are likely losing 5 percent of annual revenues to fraud, waste and abuse, according to the most recent study conducted by the Association of Certified Fraud Examiners. The numbers are staggering: A firm with revenues of $5 million loses an average of $250,000 annually. In many years, these amounts would be the difference between surpluses and deficits. In today’s challenging economy, however, such losses can result in an organization’s death.

Executives typically tend to deny the existence of fraud. I often hear company leadership proclaim, “We have the best employees – they would never steal,” or “If there was fraud, I would know about it.” Sadly, these blinders obscure reality and tend to result in many years of diminished profits.

Fraud, waste and abuse are everywhere. Sometimes the schemes are large – involving purchasing (such as kickbacks paid to your employees or fake vendors), collections (including the theft of company accounts receivable or the “skimming” of cash), or employee incentive frauds (the booking of fictitious sales or false accounting entries that allow employees to hit sales targets). Sometimes the schemes are smaller, but add up over time – the submission of fictitious employee expense reimbursements, the personal use of company property or the theft of inventory.

Fortunately, there are many ways to minimize the exposure to losses without turning the workplace into a police state and without incurring major internal control related expenses.

• Segregate incompatible employee duties. Generally, it is wise to divide responsibilities among several staff members so that the authorization of business transactions, the physical custody over assets and the accounting responsibilities for those assets are assigned to separate individuals.
• Broadcast your resolve that fraud and abuse are unacceptable. Make sure they are addressed in your employee manual and that the manual is distributed regularly. The tone from the top of an organization goes a long way in defining the culture of a company. Draft an ethics policy and compel all employees to acknowledge the policy annually.
• Receive copies of all bank statements and payroll service reports independent of the accounting department, review the reports and make a regular practice of inquiring about transactions. Employees who know that someone else is truly watching are less likely to perpetrate frauds.
• Always conduct background searches on potential new hires.
• Secure fidelity bond insurance coverage.
• Look for red flags or indicators of fraudulent behavior. Employees who work strange hours, who never take vacations or who appear to live beyond their means might be involved in activities detrimental to the organization.

There are many more policies and procedures that can be effective deterrents to unethical behavior. The goal should be to create an environment where employees understand that fraud and abuse are intolerable, and where a “perception of detection” exists, namely that employees perceive that any untoward act would be quickly discovered.

The implementation of effective internal controls should go a long way toward reducing the losses experienced by most companies. A reduction of the rate of loss from 5 percent to 3 percent can result in significant savings for a business, which far outweigh the costs of implementation.

B.J. Hoffman is a certified public accountant and certified fraud examiner for Citrin Cooperman, an accounting, tax and business consulting firm. He is a partner in the Philadelphia office. He provides clients with a mix of audit, tax and litigation support services. He often works with closely held entities in a variety of industries including professional service firms and real estate enterprises, and can be reached at [email protected] or 215-545-4800.

Conahan's Sentencing Set for Sept. 23

By Zack Needles
Of the Legal Staff

Former Luzerne County Common Pleas Court Judge Michael T. Conahan's sentencing has been scheduled for Friday, Sept. 23, in Scranton.

The news comes less than two weeks after Conahan's alleged co-conspirator and fellow former Luzerne County Common Pleas Court Judge Mark A. Ciavarella was sentenced to 28 years in prison following his convictions on 12 of 39 counts of corruption filed against him, including racketeering, racketeering conspiracy, honest services mail fraud, money laundering conspiracy and a host of tax fraud charges.

Conahan (pictured above), who faced an equally damning indictment, opted to plead guilty last year to one racketeering charge in relation to the alleged crimes.

U.S. Attorney Peter Smith said following Ciavarella's Aug. 11 sentencing hearing that no one should underestimate the "major role" Conahan played in the scandal.
 
Zack Needles can be contacted at [email protected] or at 215-557-2493. Follow him on Twitter @ZNeedlesTLI.

Fresh Ink: Inside Today's Legal (and Delaware!)

By Jaime Bochet
Of the Legal Staff

Welcome to your daily round-up of stories in today's edition of The Legal Intelligencer. Click the links below to access stories directly, or head to The Legal homepage. (Some stories may require registration or a paid subscription.)

Just as Tuesdays always include our Pennsylvania Law Weekly section, Wednesday is the unofficial "Day of Delaware," when we roll out the fresh ink from our First State to the south. That includes the Delaware Law Weekly, available online at www.delawarelawweekly.com, as well as our newest product, the Delaware Business Court Insider, an online newsletter that definitely warrants a look.

But more about Delaware in a bit … let's get to today's Legal.

Topping the front page, U.S. Courthouse Correspondent Shannon P. Duffy has news that former state Sen. Vincent J. Fumo must be resentenced, the 3rd U.S. Circuit Court of Appeals has ruled, because the trial judge made a series of errors in the sentencing process and failed to explain precisely how he decided to reduce the recommended prison term under the guidelines to 55 months. Voting 2-1, the court found that Senior U.S. District Judge Ronald L. Buckwalter miscalculated the losses caused by Fumo’s massive fraud schemes in several ways and also failed to impose two key "enhancements" that would have increased the recommended sentence. 

Below the fold, Shannon also reports that an expert witness who testifies equally for plaintiffs and defendants cannot be compelled to disclose how much he earned from all his work as an expert in the past year, a federal judge in Harrisburg has ruled, because the information could not be used to prove bias.

Today's Page 3 story is by editorial intern Jen Zimmerman: When Max Baer, now a Pennsylvania Supreme Court justice, began serving on the Allegheny County Court of Common Pleas family division court bench in 1993, he had no background or education in child development or family dynamics, and he was "faced with decisions that were purely in [his] own discretion" regarding children's welfare, he said.

As always, our People in the News section is on Page 2. The top stories from our sister publications across the country make up the Page 4 National News section.

Today's contributed columns are our "GC Mid-Atlantic" page, with a story from our affiliate, Corporate Counsel magazine, and the first of two "Legal Marketing" articles by Gina F. Rubel on sorting out social media for lawyers.

As we move south in our weekly coverage to Delaware, we'll stop first at the Delaware Law Weekly, where reporter Jeff Mordock has the top stories. Please note: all of our Delaware coverage is for paid subscribers, but you can register for a free 30-day trial by clicking here.

In the top slot, Jeff writes that a Delaware Bankruptcy Court judge has agreed to approve a $35.3 million settlement between two North American affiliates of a European technology firm and their former employees, who alleged that they were laid off without notice in violation of the Worker Adjustment and Retraining Notification Act, also known as the WARN Act.  

Jeff also reports that the Delaware Chancery Court refused to grant an injunction that would prevent the city of Wilmington from arresting registered sex offenders living in the Harriet Tubman Safe Houses. 

Finally, we'd like you to meet (if you haven't already) the Delaware Business Court Insider.  As the name suggests, this is a national product covering the latest news, analysis and cases from the Delaware Chancery Court, Bankruptcy Court and Supreme Court. The accompanying website is www.delbizcourt.com, where you can go to subscribe to this newsletter weekly. You can also follow us on Twitter at @delbizcourt.

Top stories there include:
- Reversing a Chancery Court decision, the Delaware Supreme Court encouraged applying the "conceivability" test to determine if a complaint states enough facts for a claim to survive dismissal instead of using the "plausibility" test established by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly.

- The Delaware Supreme Court outlined multiple factors the Chancery Court must consider in applying laches instead of the three-year statute of limitations which typically governs contract disputes after ruling the lower court correctly applied the equitable defense in IAC/Interactivecorp v. O'Brien.

- The Chancery Court issued a declarative judgment for K&K so its business would not be held up by its dispute with Emerick Capital.

Have questions or comments about any of today's stories, or our coverage as a whole? E-mail me or any of the reporters directly. We hope you'll enjoy today's Legal and our Delaware coverage!

Jaime Bochet is the Magazines & Supplements Editor for The Legal. Follow her on Twitter at @JaimeBochetTLI  or e-mail [email protected].

Judge Denies Stay of Production of PHA Legal Bills to HUD

By Gina Passarella
Of the Legal Staff

A federal judge in Philadelphia has denied a motion to stay the production of legal invoices from the Philadelphia Housing Authority to HUD while the PHA's former executive director appeals the order allowing the bills to be turned over.

Last month, Judge Anita Brody denied a preliminary injunction motion made by former PHA executive director Carl Greene, who argued the PHA's decision to give unredacted legal bills to the U.S. Department of Housing and Urban Development could release privileged attorney-client information belonging to Greene.

The bills in question were from Schnader Harrison Segal & Lewis, Fox Rothschild, Duane Morris, Flaster Greenberg, Ballard Spahr and Wolf Block. Redacted bills from Schnader Harrison and Fox Rothschild have already been turned over under a previous order by Brody. The remaining bills were ordered to be reviewed to see if they contained any privileged information regarding Greene.

When the PHA's counsel, Barry Gross of Drinker Biddle & Reath, wrote a letter to the court, and later an affidavit, swearing his firm's review of the bills found no privilege belonging to Greene, Brody denied Greene's preliminary injunction motion and ordered the bills turned over to HUD.

Greene's attorneys, Clifford Haines and Lauren Cates of Haines & Associates, are now arguing on appeal that an affidavit signed by the attorney representing their opponents was not the type of review they envisioned. They argued they should also be allowed to see the bills or that a third-party review should be done. Greene requested a stay of their production until his appeal to the 3rd U.S. Circuit Court of Appeals was complete.

In a one-paragraph order issued Tuesday, Brody denied that request. Haines said he was disappointed with the ruling and didn't think there was any particular urgency for the release of the documents.

He said he would guess the PHA would turn over the bills now without waiting for any appeal to conclude. Haines said if the 3rd Circuit looks at the issue and decides the bills shouldn’t have been handed over, HUD's Inspector General will have to forget what he has seen.

Gross has said that the bills that have been turned over to HUD and the ones that remain will all be redacted to some degree to protect the PHA's own privilege concerns.

Gross said Tuesday the PHA is ready to turn over the bills but will wait for an undetermined amount of time in case Greene files a stay request with the 3rd Circuit. Gross said he was pleased with Brody's decision.

HUD is investigating the PHA's spending of $38 million on outside legal fees between 2007 and 2010.

Gina Passarella is the senior reporter for The Legal. She can be contacted by e-mailing [email protected] or calling 215-557-2494. Follow her on Twitter at @GPassarellaTLI.

 

Attorney: PHA Review of Legal Bills Shows No Privilege Regarding Greene

By Gina Passarella
Of the Legal Staff

The Philadelphia Housing Authority has completed a review of legal bills from six law firms, concluding there was no privileged information contained in them regarding former executive director Carl Greene.

Drinker Biddle & Reath conducted the review on behalf of the PHA after Judge Anita Brody of the U.S. District Court for the Eastern District of Pennsylvania (pictured, left) ruled in a case brought by Greene that the bills could be handed over to the U.S. Department of Housing and Urban Development if they contained no privileged information specific to Greene.

In a status report filed Wednesday in the case, Greene v. Philadelphia Housing Authority, Drinker Biddle attorney Barry Gross asked that the judge allow the PHA to hand over to HUD all of the unredacted legal bills from Fox Rothschild, Duane Morris, Ballard Spahr, Wolf Block, Flaster Greenberg and Schnader Harrison Segal & Lewis. Those bills were requested in a subpoena issued by HUD as part of the department and its Office of Inspector General's investigation into whether $38 million in legal expenses paid by the PHA to outside counsel between 2007 and 2010 were appropriate.

Carl Greene sued the authority, its interim director Michael Kelly and sole board member Estelle Richman after Richman took over the board at HUD's direction  and did an about-face, directing the agency to turn over unredacted bills. Previously, the PHA had said it would only hand over redacted bills.

Greene argued some of those bills covered legal expenses for him individually and that disclosing the details of those legal matters could waive privilege in any ongoing cases.

But the PHA and HUD argued Greene was only represented in his official capacity and the privilege does not extend to him individually. In the alternative, they argued Greene waived his privilege rights when he allowed the PHA to pay for those legal bills.

Greene agreed to a review of the bills and their disclosure if nothing pertained to his individual representation.

In his letter to Brody, Gross acknowledged not meeting her May 27 deadline for the review. He said some of the bills were in storage and others were at the law firms. He said he reviewed approximately 24,100 pages of legal invoices.

"Of the hundreds of thousands of unredacted legal billing entries reviewed, none reflected notes of meetings with counsel, legal analysis, or legal advice relating to Carl Greene, individually," Gross said. "DBR attorneys did not uncover a single instance in which a legal billing entry raised a question as to whether an attorney-client privilege existed as to Carl Greene."

Given those findings, Gross asked the court to order the production of the bills to HUD OIG.

Gina Passarella is the senior reporter for The Legal. She can be contacted by e-mailing [email protected] or calling 215-557-2494. Follow her on Twitter at @GPassarellaTLI.

Ciavarella's Post-Trial Motions Denied

By Zack Needles
Of the Legal Staff

U.S. District Judge for the Middle District of Pennsylvania Edwin M. Kosik has denied former Luzerne County Judge Mark A. Ciavarella Jr.'s post-trial motions.

As previously reported here, Ciavarella had petitioned either to be granted a new trial or to have his racketeering and honest services fraud convictions overturned, which would have left him guilty of only tax fraud charges.

But in a five-page order issued Thursday, Kosick said the former judge's arguments were groundless.

In February, a federal jury in Scranton found Ciavarella guilty of 12 of 39 counts of corruption filed against him, including racketeering, racketeering conspiracy, honest services mail fraud, money laundering conspiracy and a host of tax fraud charges. Ciavarella was cleared of extortion, bribery and honest services wire fraud charges, however.

In a series of motions filed in March, Ciavarella argued that the prosecution's evidence failed to prove that the allegations of racketeering and money laundering conspiracy occurred within the five-year statute of limitations or that money he received from the builder of two juvenile detention facilities was illegal in any way.

Kosik, in his order, sided with he prosecutors in the case, who had argued that this issue was waived because the defense failed to bring it up before trial. 

Ciavarella had also argued in his motions that Kosik had erred by not allowing him to introduce into evidence comments made by Assistant U.S. Attorney Gordon Zubrod during plea hearings for developer Robert K. Mericle and a former co-owner of the juvenile detention facilities, Robert J. Powell.

Ciavarella had hoped to use those statements, which included Zubrod saying Mericle's payments to Ciavarella amounted to nothing more than a finder's fee, in his defense.

Kosik, however, said in his order that Zubrod's statements "were not the equivalent of testimonial statements of fact" and that, even if the court had erred by not allowing those statements as evidence, "the exclusion of a statement by an attorney in another trial, while held to be a party admission, was ruled a harmless error."

Ciavarella had also hoped to keep out of the case any reference to civil cases he heard as a judge involving Mericle or Powell. Kosik let prosecutors mention those cases and, in Thursday's order, sided with their argument that the evidence was "intrinsic" and part of the proof of the charges.

Kosik also denied Ciavarella's motion for recusal, whichhad been part of the defense's pre-trial motion as well, saying the defense provided no new reasons for recusal.

Zack Needles is a reporter for The Legal. He can be contacted at [email protected] or 215-557-2493. Follow him on Twitter at ZNeedlesTLI.

Preventing Embezzlement in Your Law Firm

By Joseph S. Barbagallo
Special to the Legal

According to a 2010 Report to the Nations on Occupational Fraud and Abuse, prepared by the Association of Certified Fraud Examiners, fraud and abuse worldwide can cost upwards of $2.9 trillion per year. A typical organization loses 5 percent of its annual revenue to fraud, while the median loss caused by the occupational fraud cases was $160,000.

The report also concluded that small organizations are disproportionately victimized by occupational fraud because these organizations are typically lacking in anti-fraud controls compared to their larger counterparts.

Law firms and their clients are not exempt from financial fraud. In fact, just read the headlines. In 2009, the National Law Journal reported, "Law Firms Make Easy Pickings for Embezzlers." Just last year, a paralegal who had worked for more than 11 years at a Lackawanna County law firm was convicted for embezzling more than $75,000 from her firm. She forged a partner's signature on 130 checks while fabricating expense allocations in the general ledger.

There are, however, preventative measures that law firms can put in place in order to avoid internal fraud. They include the following:

- Employing solid anti-fraud measures, including separations of various accounting duties, and physical safeguards;
- Requiring dual signatures on all large checks;
- Conducting reconciliations of escrow accounts to subsidiary ledgers;
- Educating management and employees by implementing an anti-fraud training program;
- Implementing an anonymous and confidential fraud reporting mechanism;
- Conducting random fraud audits in addition to regularly scheduled fraud audits;
- Implementing a process for oversight of fraud risks via a governance or audit committee; and
- Implementing HR background checks (when permitted by law) that include past employment verification, criminal and civil background checks, credit checks, drug screening, education verification and reference checks.

If you or a client suspects financial fraud, a forensic accountant should review the books and financial records to identify suspicious or unusual transactions.

In my next post, I will address the process by which financial fraud is investigated and dealt with. Suffice it to say that having an expert on your side greatly increases your chances of finding criminal activity and getting embezzled funds back. Unfortunately, time is often on the embezzler's side, so remember -- haste makes waste. Most frauds last a median of 18 months before being detected.

Joseph S. Barbagallo is a partner with Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. With more than 35 years of experience, Barbagallo focuses his practice on business valuation and financial forensic services, expert testimony and litigation consulting services in fraud cases. He can be reached at [email protected] or 215-545-4800.

Ciavarella Begins Appeals Process With Series of Motions

By Leo Strupczewski
Of the Legal Staff

Convicted last month of racketeering and honest services fraud, Former Luzerne County Common Pleas Court Judge Mark A. Ciavarella has filed a series of motions to have the most serious charges against him tossed.

Three separate documents filed by Ciavarella's attorneys Friday challenged the sufficiency of evidence presented by federal prosecutors and rulings made by the judge who oversaw the seven days of trial and two days of jury deliberations. In them, Ciavarella asks for an arrest of judgment, acquittal or new trial on seven of his 12 convictions.

Absent from the challenges are any mentions of Ciavarella's five tax fraud and fax fraud conspiracy convictions, to which he admitted near universal guilt while on the witness stand during trial.

Instead, the former judge has targeted the two counts of racketeering, four counts of honest services wire fraud and one count of money laundering conspiracy.

In his motion for acquittal, Ciavarella argued that the prosecution's evidence failed to prove that the allegations of racketeering and money laundering conspiracy occurred within the five year statute of limitations or that money he received from the builder of two juvenile detention facilities was illegal in any way.

Further, Ciavarella argued, the U.S. Supreme Court's decision last year in U.S. v. Skilling, which limited the honest services fraud to bribery and kickbacks, barred him from being tried on those charges.

Ciavarella argued the premise of his conviction on the honest services charges was "non-disclosure of conflicts of interest."

Ciavarella also argued in his motion for a new trial that U.S. District Court Judge for the Middle District of Pennsylvania Edwin M. Kosik had erred by not allowing him to introduce into evidence comments made by Assistant U.S. Attorney Gordon Zubrod during plea hearings for developer Robert K. Mericle and a former co-owner of the juvenile detention facilities, Robert J. Powell.

Ciavarella had hoped to use those statements -- which included Zubrod saying Mericle's payments to Ciavarella amounted to nothing more than a finder's fee -- in his defense.

He had also hoped to keep out of the case any reference to civil cases he heard as a judge involving Mericle or Powell. Kosik let prosecutors mention those cases.

Ciavarella was accused by federal prosecutors in January 2009 of concocting a "kids-for-cash" scheme with fellow former Luzerne County Common Pleas Court Judge Michael T. Conahan and taking more than $2.8 million from Mericle and Powell.

A jury, however, only found Ciavarella took $997,000 from Mericle in his capacity as a judge, conspired to launder that money and lied about it on his tax returns.

Conahan pleaded guilty to a racketeering charge in an open-ended agreement with federal prosecutors.

Mericle and Powell also admitted wrongdoing for their roles in the case.

A spokeswoman for the U.S. Attorney's Office, Heidi Havens, was not available for comment.

One of Ciavarella's attorneys, Al Flora, said briefs to support the motions must be filed within 14 days under court rules. Prosecutors are then able to file briefs in opposition and Kosik will make rulings on the issues.

Meanwhile, federal probation officials have already begun the process of putting together Ciavarella's pre-sentence report, Flora said.

Leo Strupczewski can be e-mailed at [email protected].