Business Fraud and the Trusted Employee

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orange-county-lawyer-hammerBusiness owners are often filled with pride at the notion of employing friends and family in the workplace. Employers treat employees “like family” and often accomplish great things based upon the mutual trust they establish with employees. Unfortunately, the same trust that may propel a company to great success can be its undoing. Business fraud can and often does occur within small businesses. If left unchecked, the most trusted of employees can level great and irreparable harm to an overly trusting business owner.

Workers who are most attentive and likely to follow the rules may be the ones to watch most carefully. This position was advanced in a recent Washington Post article by Ariana E. Cha, who cited a Harvard study for the premise that strict adherence to the rules by an employee may be an indicator of a secret, “Machiavellian” agenda.  See, Washington Post Article by Ariana E. Cha, Dec. 15, 2015.

In 2012, the ACFE or Association of Certified Fraud Examiner’s estimated the median loss for a small organization that experienced fraud was $140,000. In fact, the Association found that small organizations, those with less than 100 employees, are the most likely to be victimized by business fraud. Nearly 32% of all small business experience some kind of fraud. The most common types of inner office fraud include billing fraud, corruption, check tampering, skimming, and expense reimbursement fraud.

Small businesses are especially vulnerable because they often lack the manpower needed to segregate duties and design adequate internal controls. Business owners enlist a small number of trusted employees to handle financial affairs and often do little follow up to ensure financial statements are correct. Employers assume criminal fraud can only be committed from the outside, and that they’ll see it coming long before they suffer any loss. They do not consider that the smiling bookkeeper or associate who greet them every morning can be diverting funds or skimming with expense reimbursements.

Those who commit business fraud do not fit the criminal stereotype. The typical employee thief has worked at a company 4 or 5 years, is in good standing, and is usually a first time offender.  According to the ACFE’s report, 87% of those who commit business fraud have never been charged with a fraud-related offense and 84% have never been punished by an employer for fraud-related behavior. When faced with personal financial stress, even the most trusted employee may submit to the overwhelming temptation to take company money. Some employees rationalize their behavior, believing that the money is a temporary loan that they intend to repay at a later date. Others may resentful, believing that they have spent years attending to their employer’s financial wealth and are entitled to greater financial compensation.

The fraud often begins small with extra charges on a company credit card or money missing from petty cash. Even though business owners may notice some suspicious activity, they often dismiss it, believing that employees would never violate trust. This often results in greater losses for the company as the fraud continues to grow over time.
Many small businesses never report fraudulent behavior. A Business owner may be embarrassed because a particular crime has been committed by a family member or trusted employee. It’s estimated that less than 3% percent of businesses file criminal charges while over 30% of small businesses fall victim to fraud. It can take years for a small business to overcome the loss of income that results from employee fraud.

If you suspect you have been the victim of business fraud, contact us today. Attorney Stephen Hammers has over 24 years experience in general business and real estate law. He understands that fraud has a high burden of proof in our court system and works diligently to document and represent employers who fall victim to fraud. He will work with you to ensure a fair and equitable outcome.

DUAL AGENCY IN REAL ESTATE SALES REACHES THE CALIFORNIA SUPREME COURT

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sgh-photo-4COne of the areas of real estate law that is most often litigated in California is dual agency.  Our State permits a single agent or agency to represent both the buyer and seller in the negotiation and sale of real estate.  A case regarding dual agency has just reached the California Supreme Court, and the decision by the Court could have serious implications on the real estate industry in California.  The case pits a Malibu homeowner, Hong Kong multimillionaire Hiroshi Horiike, against a Caldwell Banker affiliate.  The same Coldwell Banker brokerage was hired on both sides of the transaction, for Horikke as buying agent, and for the seller as listing agent.

There are good arguments on both sides of the coin when it comes to dual agency.  Dual agents often require lower commissions. They can streamline escrows and reduce the “game playing” of multiple agent deals.  The flip side is that the client often does not reap the benefits arising from single party representation. Brokers are in many instances called upon to act like lawyers, looking out for their client’s best interest when the other side appears to be taking advantage. When the same agent handles both parties, the adversarial aspect of the representation arguably disappears.

In the case involving Horikke, the t0pic of disclosures created a serious problem for the dual agent.  Horrike bought a stunning Tuscan style house overlooking the Pacific Ocean for $12.25 million cash in 2007.  The listing agent provided Horikke with a brochure that stated the house was 15,000 square feet, but county records showed that the house was only 9,500 square feet. The discrepancy in square footage resulted from various factors.  Notably the City of Malibu’s measurement metric is different than other cities and municipalities.  It includes garages and other spaces beyond the primary residence.

When Horikke was in the process of applying for permits to remodel his residence in 2010, he discovered that the house was not as large as he thought it was.  After making this discovery, he decided to sue.  Horikke’s agent, the “selling agent” or “buyer’s agent,” was associated with the same firm as the listing agent, Coldwell Banker, ergo, the “dual agency.”  Hirokke thus sued the listing agent, Chris Cortazzo, arguing that Cortazzo owed him fiduciary duties because he was associated with the same firm representing Hirokke.  In paricular, Hirokke argued that Cortazzo had given another prospective buyer a handwritten note, encouraging the buyer to hire a specialist to verify the square footage of the residence.  Horikke argued that Cortazzo and Coldwell Banker owed him a fiduciary responsibility to provide the same such note.  The case went to trial and the trial court disagreed with Horrike. It found that the listing agent had no fiduciary responsibility to the buyer and that the brokerage itself was not responsible for breach of fiduciary responsibilities based on the actions of individual agents.

The Court of Appeal disagreed with the trial court. The justices found that Cortazzo was in the wrong even if his actions were unintentional.  The justices wrote, “A trier of fact could conclude that although Cortazzo did not intentionally conceal the information, Cortazzo breached his fiduciary duty by failing to communicate all of the material information he knew about the square footage.”  Cortazzo and Coldwell Banker thus petitioned the California Supreme Court to review that ruling.

Cases like this give the real estate industry reason to keep a close eye on their dual agency practices. When the Supreme Court provides its decision on this most recent case, agents should take note.

Contact Orange County real estate attorney Stephen Hammers for more news and relevant information regarding dual agency in California real estate transactions.

Tips for Orange County Business Owners to Avoid Fraud

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Orange County business owners can avoid fraud and the damages and penalties that arise therefrom. It is a harsh reality that a business can not only suffer at the hands of a wrongdoer, but also incur penalties and damages after being the victim! The issue is rampant in California.  In Orange County, fraud attorneys are employed regularly to address it.  We provide some examples here and tips as to how owners can avoid and cope with fraud.

  • Avoid Misleading Letters Fraud: The State of California Tax Franchise Board warned businesses about a scam called the “misleading letter.” California corporations and LLCs are not required to file board minutes with any government authority. LLCs can file the necessary information return with the California Secretary of State for $20. The misleading letter scam contacts businesses and tells them they need to file board minutes or information returns for a higher fee. The letters have official looking forms and ofsgh-photo-4Cficial sounding names. The letters threaten fines and penalties and suspension of the business’ powers, rights, and privileges for failure to comply. Do not comply with those demands; rather, ensure that you are filing the proper and necessary forms, such as information returns, with the Secretary of State.  Filing the wrong forms with a fraudulent group does not relieve you of responsibility to file the proper forms with the State.  If you receive these fraudulent demands, submit written complaints and a copy of the misleading letter to: CALIFORNIA OFFICE OF THE ATTORNEY GENERAL, CALIFORNIA DEPARTMENT OF JUSTICE, PUBLIC INQUIRY UNIT, PO BOX 944255, SACRAMENTO, CA 94244-2550.
  • Avoid Payroll Fraud: Payroll fraud can happen to anyone.  Essentially, the fraud occurs at the hands of employees who turn in false time records, or overstate their working hours.  Grifters are smart. They will keep their fraudulent activities to what usually amounts to the neighborhood of a rounding error on your books. So without reconciliation of payroll to time-keeping records, you will never pick up on their schemes.  In fact, Forbes says that 27% of businesses encounter payroll fraud. It occurs in businesses with fewer than 100 employees more often than large companies. Orange County business owners can avoid fraud in this area by regularly reconciling payroll accounts to the business’s time-keeping system. The reconciliation should occur monthly or at least quarterly. Any longer than that and the money will be long-gone before you realize what’s happening.
  • Avoid Second Check Fraud: This type of fraud generally involves a trusted bookkeeper or an accountant. The scam calls for the grifter to write a second check to herself when paying one of your suppliers to whom you regularly write checks. The grifter writes the second checks for small amounts and codes them with the code for your regular supplier. The scam may take place over several years. It is not unusual for such fraud to aggregate to substantial amounts (a half million dollars or more) over several years. Even if you  check financial records, you may not notice an overage that appears in a reasonable range and spread over several expense accounts. You can avoid this by having more than one person with check signing authority and more than one person reconciling the bank accounts.
  • Avoid Over-Zealous Ordering: This type of fraud usually involves an administrative assistant or office manager who regularly orders supplies. The grifter over-orders supplies, then returns them for a refund in the form of a gift card. He/she takes the gift card, buys something small, and then pockets what’s left of the card. It may not seem like high dollar fraud but even a $50 gift several times a month can add up over the years.
  • With Friends Like these…: Hiring employees simply because they are family or friends or someone you have sympathy for is never a good business decision. Such emotional hires often work into positions of trust with check-writing ability or some other control over financial matters and often with little supervision. All potential employees should face the same strict standards. Make personal accountability and checks/balances a part of your business’ culture. Establish at initial job interviews that your company has zero tolerance for fraud and has established office procedures that ensure a second set of eyes reviews all activities related to financial matters. Trust, but verify.
  • Stolen Credit Cards: Accepting a stolen credit card leaves your business without recourse to recover the money stolen. Always, always check several forms of identity, check if the system declines the card, and check to see if the card’s number appears on the stolen credit card list. Of course, if your business does a lot of internet business or other non-face-to-face transactions, you are most ripe for this type of fraud. Orange County business owners can avoid fraud by checking all identifying information, especially for larger orders. Get phone numbers, address, the three-digit code on the back of the card, the precise name, etc. Mismatched addresses are a clue to fraudulent orders. If you are suspicious of an order, do not process it. Trust your intuition.

To read more about payroll fraud, read the Forbes.com article “Payroll Fraud – A Big Threat and How to Avoid it.” To talk more about business fraud, or anything else, please contact us.