Legal 123s with ByrdAdatto Tile

Legal 123s with ByrdAdatto (Embezzlement From the Top )

Jay D. Reyero | 2.24.21

They say trust is the foundation of any relationship. When it comes to business relationships, how do you know who to trust? In this episode, Partner Jay Reyero joins us to share the story of a client who trusted his money with one of the highest ranking people in his organization. This individual ended up diverting a significant amount of this money for personal gain. Tune in as we discuss safeguards to protect yourself and your business from an embezzlement dumpster fire.

 

Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at info@byrdadatto.com.

 

 

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Transcript

Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences. Creating simplicity in three, two, one.

 

Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my cohost Michael Byrd.

 

Michael: Thanks Brad. We have another powerful story today, and by powerful, I mean massive dumpster fire. Quick question. Do you trust me?

 

Brad: That’s way too broad of a question.

 

Michael: Okay, let me focus it in. Do you trust me not to take money from our law firm bank account for my own personal use?

 

Brad: Much better question. Of course.

 

Michael: Well, you have something in common with our story today. Our client trusted one of the highest people in their organization with their money. The season’s theme is dumpster fires. So I’m betting you can guess how this worked out.

 

Brad: Probably not. Well, I’m excited to share today’s story, but Michael [00:01:00] first, let me ask you a random question. What are the different ways to navigate?

 

Michael: Well, that is random. And my wife would attest that I can tell you that I have a GPS in my brain and that I can just instinctively find wherever I need to go. But don’t ask her about how successful I am about that.

 

Brad: Okay. Well, that’s okay. That’s fine. It’s a perfectly good answer. So you use the map in your head to get from one place to another. But if you’re going somewhere that you’ve never been before, what do you do?

 

Michael: Okay, well, this isn’t on the record, right?

 

Brad: Right, no one’s listening. Just between you and me.

 

Michael: Safe space, safe space. All right. Well then I’ll use my iPhone or the GPS in my car to help guide me.

 

Brad: All right. So you’re using navigation tools.

 

Michael: And where are you going with this, Brad.

 

Brad: In the modern society we no longer have these skills that we need to learn how to really navigate a route. Originally you had to use the stars and maps and compasses to go from [00:02:00] point A to point B, but now it is ask your phone or a car or a computer to say, how do I go from here to there? So many of us have either forgotten, or actually never even learned, how to go from point A to B without the assistance of our phone or car.

 

Michael: So I started talking about trust, you starting talking about navigation. What does this have to do with today’s episode?

 

Brad: Well, we’ve all heard of people who follow their GPS verbatim. And so they may have just driven their car right into a lake. And if you ever read about these incidents, the app that the person was following will have all their normal disclaimers, but they’ll often say people should “use all environmental information available to make the best decision” as they drive. Basically use your common sense.

 

Michael: I have a funny story about that. My oldest son, Christopher, when he got his driver’s license several years ago, was going to visit a family member in the hospital. He typed in Baylor, which is a local healthcare system in Dallas, [00:03:00] and followed the directions to a Baylor facility— an hour away. The actual hospital was only 10 minutes from our house. Anyway, where are you going with all this again?

 

Brad: All right, just like your son, and in this case, the person who drives their car in a lake, these are preventable by just monitoring your surroundings and learning the basics of land navigation. The same thing happens when you start your business, you start understanding these basic ways in which you bring money in collected and you pay your vendors. But as your business grows, you add more employees and you want to make sure you still go on the right path. And as the owner of the business, you must confirm that those leaders, those employees that you’re adding, are taking you in the right direction. You can never lose sight of those same basics that you started your business with. You should trust your leaders, but verify that the route they set matches where your actual surroundings are.

 

Michael: Agreed. Well, let’s get going with today’s episode and introduce our special guest, Jay [00:04:00] Reyero. Many of you who have listened have heard that name before, he’s been a repeat offender on our show, so it kind of feels wrong to do the formal introduction again. So let’s do it a little different today. Jay, why don’t you tell us a funny story about you?

 

Jay: So I’ll keep it in line with the theme of navigation. So I did a little bit of litigation early in my career, and I had a hearing in Collin County, which is the first time I ever had to go there. So, like Christopher, I plugged in the address into the GPS and headed on my way. As I’m getting close to my destination, I’m sitting there stunned by how this court is literally located in the middle of nowhere. Then you know that sense of panic that sets in when Google says you have arrived at your destination and you are clearly not at your destination? So I’m on the road in between some large green open spaces on both sides, not a core building insight.

The [00:05:00] hearing was starting in 30 minutes, I had no idea where I was, and immediately panic sets in. I’m thinking I’m going to lose this hearing. I’m going to have to go back and have to tell the client, and all the people I work with, why I lost the hearing. But long story short, luckily it all worked out fine. I found the court, I didn’t end up missing the hearing. So I didn’t have to drive back to the office in shame, but I still literally have no idea how I ended up where I did.

 

Michael: Well, that’s a great story. I would say the story today revolves around a client with a unique structure. It’s was more of an enterprise with several different divisions independently operating underneath one roof.

 

Brad: There are various different affiliated companies involved and there’s always been some kind of centralized decision-making group that kind of help run it. And initially it was just comprised of the founders, but eventually they grew to start adding certain key members.

 

Michael: But even with this group in [00:06:00] place, not surprisingly, they constantly face the struggle of keeping up with the day-to-day operations of the enterprise as a whole, because of the responsibilities associated with their own divisions. For the longest time, they really needed someone who was going to be dedicated to the whole enterprise without having any other responsibilities.

 

Brad: And we had a lot of conversations with this client about this particular point, and they always agreed that they needed somebody, but there just wasn’t enough time to ever conduct that search and they were just too busy. But finally they found someone who had the experience and the ability to help them set the role that they wanted. And they felt a huge weight lifted because this individual had a strong financial background, they had accounting background, and prior experience at an executive level. So they brought him on to be their chief financial officer.

 

Jay: I think for purposes of today’s story, we should call the CFO Pinocchio.

 

Brad: I like that, I see where you’re going here. Except this [00:07:00] Pinocchio’s wallet grew every time he lied and said it was his nose.

 

Michael: Well, that makes me think of last episode where we talked about Coke being bad for your teeth and our star was Doctor Nose. I think whenever he lied, his nose actually fell off.

 

Jay: I remember when Pinocchio was hired, there was a great amount of trust placed in him because I mean, they immediately appointed him the primary point of contact for us as well. Those were the responsibilities so we were no longer having to jump around to different people, depending on what divisions are involved. He became the voice of that centralized decision-making group.

 

Michael: And he played an important part in their growth over the next four to five years, as he was able to take responsibility of the overall enterprise operations and explore new opportunities that may have been examined previously. I know for us, dealing with him on a day to day basis, we had a better sense of everything that was happening. [00:08:00] But Brad, it was you who the client reached out to initially when something questionable was discovered?

 

Brad: Yeah, I remember the phone call clearly. It was about 6:00 PM. I got a phone call on my cell. And what happened earlier that day, one of the founders had been brought a stack of papers and checks to sign. This is not unusual in any case. This happens often, you’re busy people, your staff tries to find time in which you can start signing off checks to pay your vendors. This was no different, and this is typically the way in which people do things to be more effective.

 

Michael: So what was different this time?

 

Brad: Well, the founder, when they were going through the checks and he was about to sign it, something just kind of caught his eye. And it was a vendor that the founder wasn’t really familiar with. He couldn’t ever remember hearing about this vendor before so he just asked one of the staff members to look into it and find out exactly who this vendor was and just check more into it.

 

Michael: I remember the [00:09:00] check being for a couple thousand dollars, so nothing big or out of the ordinary for this size of a company.

 

Jay: And I think that that was the key, typically an amount like this for an organization this size would go unnoticed so it probably falls below a threshold where discussion or approval needs to occur and just so happened in this case it wasn’t really the amount that drew the attention, it was actually the vendor.

 

Brad: Yeah. So the founder team did some more digging. They located the invoice for this particular vendor, the amount to be paid matched the unsigned check so everything looked normal. The invoice matched and it was a standard looking invoice. Jay, do you remember what the invoice said that they were paying for?

 

Jay: Yeah, it was some very generic description for some type of data analysis. Nothing that on its face, you would see and think something was wrong. And like Brad said, it looked like any other standard invoice.

 

Brad: But things kind of started taking a turn and they just kept digging in to determine what this vendor [00:10:00] was, you know, what was the vendor doing for the company?

And then they found out the Pinocchio, their current CFO had actually formed this company a few years ago. Now the founder was obviously alarmed by this discovery, but was hopeful there was a good explanation, but he wanted to dig even deeper before really speaking with Pinocchio.

 

Jay: Yeah but what they found eventually made it hard to still be hopeful. There were numerous monthly invoices from the same company for almost a two year period, all of which had been paid. And not only that, but the issue wasn’t limited to just one division. In fact, this company had issued invoices to multiple divisions each month over the same timeframe. All refer the same services, just the amounts on a monthly basis were different

 

Michael: In total, it was hundreds of thousands of dollars that our client had paid to this company owned by Pinocchio. The only question really remaining was were these legitimate services that have been paid for? [00:11:00]

 

Brad: And that’s what they asked Pinocchio. Once they conducted this initial investigation they immediately confronted him with what they had uncovered. And the only question remaining was why. And at first Pinocchio tried to convince them that Pinocchio was actually acquiring this data on behalf of the company. And the company was just reimbursing them for the work that he was getting done. The problem was he couldn’t either specify or as to whoever requested this data or actually produce any of the data or reports that he actually been paying for. And then shackling, when he finally does realize he was caught, his demeanor just instantly changed and became very matter of fact about the situation and basically showed no remorse for what he had been caught doing.

 

Jay: I remember on the client side, there were a lot of emotions. At first it was hurt because Pinocchio was someone they trusted and had actually done a good job working there. He was a savior in the beginning, took a lot of off their plates from an [00:12:00] administrative perspective. But then I remember that anger as they discuss what they should do and how they should handle the situation.

 

Brad: You know, given that Pinocchio was in charge of the books and funds, there are plenty of opportunities for him to divert funds from this organization, from our client. And so there’s this huge fear and dread that it was unknown how much more money that they had taken from. So we immediately coordinated with an auditing, a forensic accounting firm for the come in and figure out what had happened. And fortunately for our client, even though they lost hundreds of thousand dollars, the extent of the harm didn’t go beyond what they had initially discovered.

 

Michael: Yeah, all of us have experienced a breach of trust in our lives at some point, and an extreme breach of trust like this when they’re dealing with, you know, really the livelihood of your business is massive. I mean, this is an unfortunate dumpster fire. And really, if not for the almost accidental [00:13:00] red flag on identifying the vendor, this could have been much, much worse. So let’s take a quick break. And when we come back, we’ll discuss the strategies businesses can take to prevent this from happening to them.

 

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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd. And we’re still here with our special guest and repeat offender, Jay Reyero. And in season three we’ve been discussing [00:14:00] dumpster fires, and we’ve got one burning right now. We just told a story of how the CFO of a client took advantage of his position of trust and was able to divert a significant amount of money for personal gain. And we don’t use this term embezzlement, but that’s exactly what it is.

 

Jay: And you know this story reminds me of a former CFO of a biotech company was actually sentenced to prison last year, and he embezzled about a million dollars from his company. He used personal the corporate credit card for personal expenses. Because he was in charge of payroll, he also over a period of time wrote checks to himself that he disguises quote, unquote bonuses. He also gave himself unauthorized additional salary payments. And when the company found out what he was doing, they found that his annual salary was actually more than twice what he was entitled to get.

 

Michael: Yeah. I think it’s important for our listeners to understand that the term embezzlement can have a pretty broad meaning. Simply it can [00:15:00] mean that the fraudulently taking a property or money that’s been trusted to you for your own use or benefit, but there’s a variety of ways this can occur. It’s not just stealing cash, but it can be overstating work hours. Like Jay mentioned using corporate credit cards for personal expenses or paying yourself unauthorized payments, or in the case of our client using fake companies to defer.

 

Brad: And that’s exactly what happened in this particular case, but any business of any size needs to be thinking about this. That’s also why it’s difficult to give clients, you know, Hey, what should we do? There’s no one size fits all approach, but that doesn’t mean a business shouldn’t try to implement as many safeguards as possible. I think the first place you can look to during the hiring phase, by conducting background checks and references, particularly for those who will be handling funds or in a place of a superior trust position.

 

Michael: I agree with Brad and his really important to [00:16:00] understand that there are employment laws in each state that dictate how and when these background checks can occur. So you have to be sure you’re following the correct process to properly conduct those background checks.

 

Jay: And I also think it’s important that a business not be lulled into that false sense of security if they don’t find anything alarming on these background checks, because the strategy really isn’t a guarantee. I mean, whether there are confidential settlement agreements in place or I mean most of the time the person just hasn’t been caught yet. There are still reasons why you may not uncover anything or find out some past bad actions.

 

Brad: Yeah, that’s a great point. And unfortunately we know many incidences where it turns out the person was a bad actor before. So what other safeguards could a business put in place, Jay?

 

Jay: Well, one would be making sure you have good solid accounting consoles.

I mean, this would include periodic audits, particularly of cash and credit card statements. You can also to the extent [00:17:00] possible separate your bookkeeping, accounting and financial duties. I mean, it makes it easier to set up a scheme if you’re the only one involved and have control over the areas where it could be discovered. And as shown in our story, if you’re the owner of the business, keep the authority to person sign checks, but be diligent in reviewing them that they’re both check signing requests.

 

Michael: Another safeguard is to ensure that there’s checks and balances.

 

Brad: Yeah checks and balances. Michael why don’t you help the audience out, please explain what that means.

 

Michael: It’s kind of a natural extension of what Jay was just talking about with accounting controls. It means setting up a structure that makes it less likely that someone can take advantage of their position or a structure that makes it more likely to discover something quickly. For example, you can require a multi-step process to include more people, cross train your employees so that they’ll work in different areas at different times, or use outside resources to [00:18:00] double-check for potential discrepancies. Imagine someone that holds onto their duties and doesn’t delegate or involve anyone, even when they’re not available. Basically they’re very protective of what they touch. This could signal something more going on behind the scenes and you need to check for this. So these checks and balances are meant to disrupt that or prevent the opportunity from starting in the first place.

 

Brad: Yeah and I think going back to those checks and balances, another area that really scrutinized. Who are your vendors? You know, just like our client, you should ask questions about any vendors that you’re not familiar with. Most businesses likely have some common set of vendors that they see, you know, month to month. And so you get familiar with those names. However, going to Jay’s point on auditing information. If you see something you don’t recognize, say something, ask the questions, not just who they are, but what did they provide and did you actually receive it?

 

Michael: These are all great ideas. Jay, what would you [00:19:00] suggest a business do with all these strategies?

 

Jay: So any company that’s looking to set the tone for how they want their business to run, they rely on their policies and procedures. And here it’s really no different as the company needs to have policies and procedures that are going to cover all of these safeguards. The first step obviously is to document them, but more importantly it should be customized and tailored to reflect the operational workflow of your business. I mean, it only works if it works for your business. And as Brad mentioned, there’s no one size fits all plan. So using a template or a form document can be dangerous and leave gaps. So you really want to pay attention to the customization of these policies and procedures.

 

Brad: And we talk to our clients all the time about policies, procedures, and this could be as simple as putting together your patient privacy policies or your employee policies. But one of the most important follow-ups to the documentation as Jay just mentioned is actually implementing them. It’s one thing to write them all up, but if you [00:20:00] don’t actually go in and implement it, it doesn’t help you at all. So these policies should be more than just, you know, the binders sitting on a shelf that no one gets to see. It should be documents that are constantly being used and accessible to you and your team. And we always joke that if your policy binder is covered in dust, then you’re not doing it right. So you can hold on your employees accountable if these policies are properly in place. And more importantly, you keep up with them and keep training them.

 

Michael: Yeah I mean, great point you just ended with there. So we have a common scenario where people print something off the internet and stick it on the shelf to gather dust or someone who takes it to the next level and they actually roll them out. The next thing that is an even more common mistake is not doing anything after it’s been rolled out. These policies should be living, breathing documents. We always say compliance is not stagnant, and I think that’s [00:21:00] applicable here. And that means constantly looking at the policies, but also constantly reinforcing them to your employees. And of course your new employees that come along the way. So they should be reviewed and audited frequently and really checking to see how they’re working. You’re wanting to look for updates that may be from the business itself, from the law or some other circumstances. Jay, just for our audience, whatever happened to Pinocchio?

 

Jay: Well, he was arrested and our client sued him for the hundreds of thousands of dollars that he stole. Unfortunately it’s often the case there was no money left for our client to see so they lost not only their trusted CFO, but also all the money and the emotions that came with it.

 

Brad: Jay, how about some final thoughts for our audience?

 

Jay: So I think going back to one of our season one episodes, Don’t be a Lone Wolf. [00:22:00] Don’t try and be a lone wolf when it comes to preventing what happened to our client. Businesses should surround themselves with trusted advisors, both legal, accounting, maybe financial who can not only help on the front end and getting in place the safeguards we’ve talked about, but also it could be one of those checks and balances that Michael talked about a resource in a position to penance potential issues.

 

Brad: Yeah I agree with those safeguards in place, that way you can trust, but verify the information that you’re receiving, that it actually adds up. And Michael, some final words?

 

Michael: Well, going back to the beginning, monitor your surroundings within the business. You don’t want to find yourself driving into a Lake or in an open field, looking for the courthouse.

 

Outro: Perfect. Well, please join us next Wednesday when we have a special guest, podcaster and former undercover police officer, Rob Griffin will be joining us. Thanks again for joining us today and remember, if you liked this episode, please subscribe making sure to give us a five star [00:23:00] rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our at www.byrdadatto.com.

ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney, client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.

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