Ripple Effects Of Fraud

We often focus on a fraud’s perpetrator, the conditions that allowed the fraud, plus the victim business and its owners. In this case, the authors cover the bases but also discuss the forgotten aspect: how the fraud affects so many more who live in the concentric circles around the fraudster.

 James Brighton was running a successful trucking business in Monroe, Louisiana, when he was approached by Bob and Larry Hymel, two brothers who owned Zoom Transport, a much larger but similar operation in Lafayette. (All names and places have been changed.) The brothers offered James a job as company president. Promised perks included a low six-figure salary and a company car.

And if Brighton met two years of revenue and growth goals, the company would reward him with 5 percent of stock each year with a cap of 25 percent. When Zoom hired Brighton it owned 90 trucks, and had $12.5 million in revenue and 100 shares of outstanding stock. Mona, Brighton’s wife, was thrilled about his new job. The couple built a $450,000 house and settled into Lafayette society.

She decorated the new home with, among other things, high-end antiques (including a $30,000 armoire), five $6,000 couches, two $4,000 dining tables, eight $800 chairs, dozens of $800 lamps, 24 place settings of China and silver, and a $17,000 rug. Ripple effects of fraud Fraud also affects fraudsters’ families and friends in concentric circles The yard needed an in-ground $60,000 swimming pool and $40,000 plum trees.

She drove around town in her top-of-the-line Mercedes. And Brighton bought a boat for fishing in the Gulf of Mexico to put some occasional distance from his wife and his son, Sean.

Brighton seemed to be a good fit for the Zoom Transport job. In his first year, he hit all the Hymels’ targets. Despite some raised eyebrows, he requested and received a red Corvette as his company car plus a generous raise. After his second year of meeting and exceeding the Hymels’ goals, he received five shares of company stock per his contract.

Five percent of 100 outstanding shares, of course, was five shares.

However, immediately after the Hymels gave Brighton his shares, they issued 9,900 more shares to themselves, which made Brighton’s share of the business essentially worthless. Brighton wasn’t pleased and asked the brothers to rectify the situation by changing his contract terms from “shares” to “percentage ownership interest.”

The brothers seemed to be too busy to correct what they termed a “small error” in the contract. But they hadn’t realized they’d created a perfect storm for fraud. The brothers — absentee owners who rarely visited the company offices — often told Brighton to sign their names to Zoom Transport business documents. Brighton had full access with no oversight to all accounting systems and records. Internal controls really didn’t exist.

The only other employee with access to accounts was the controller, Tom Limon, who’d worked for Zoom Transport for many years. When Brighton came on as president, he realized that Limon was substantially underpaid, so he gradually increased his salary to reflect his growing responsibilities at the expanding company. This gesture of goodwill bought Limon’s loyalty to Brighton rather than to the owners.

But you promised … As time passed, Brighton worked hard but felt the brothers weren’t paying him what they’d originally promised him. He felt he was working hard to grow the company, and he was hitting the target numbers, so the company owed him much more. Brighton had full access with no oversight to all accounting systems and records. Internal controls really didn’t exist.

Thus, rationalization and opportunity plus the pressure of his wife’s spending habits collided, and Brighton succumbed to the circumstances. He began writing checks to cash and to himself. He transferred the money to an account not connected with his household so his wife wouldn’t find out. He paid personal expenses from the new account.

 Limon made balancing entries in the books as “Loans to James,” didn’t question Brighton about the movement of the funds and didn’t raise any red flags to the Hymel brothers.

As the thefts grew, Brighton realized he needed to find a way to conceal the misappropriations. So, he tried to get the Hymel brothers to consider selling the company and began talks with several companies about possibly buying Zoom Transport. Brighton had increased Zoom’s truck count to 225, trailer count to 400 and revenue to $24 million — a two-year growth averaging 25 percent per year.

But the economy was beginning to slow, and the company was facing cash flow problems. Brighton used one company suitor’s good-faith advance payment to hide some of his cash shortfall. Two of the potential purchasing companies performed limited due diligence but didn’t discover any missing funds. Both companies felt that the Hymels were asking too much for Zoom. In the end, the Hymels decided they liked the changes they were seeing at Zoom and said they really didn’t want to sell.

The brothers might not have detected the theft if they hadn’t investigated a $350,000 insurance settlement Zoom had received in error. The insurance company deposited the check, but when it ordered a stop pay, some of Zoom’s checks for truck payments bounced. The Hymels asked Limon why the payments hadn’t cleared. “Ask James,”he said.

They then asked him why he never said anything about what was going on. “You guys never did anything for me,”Limon said.

Detection and confrontation The brothers confronted Brighton who confessed he’d been taking money from the company. They immediately fired him and took away the Corvette. He had to ask an employee for a ride home. Even though the total theft wasn’t substantial (the original charges claimed $770,000, but the actual theft amount was approximately $450,000), Zoom Transport closed its doors because the fraud simply exacerbated a business cash-flow problem.

The company was paying six-figure salaries to Brighton, both Hymel brothers and the brothers’ father — although he never actually worked at the company. In addition to the salary payment, the brothers paid rent on the trucking facility to their father who owned the property.

However, the $30,000 monthly rental was substantially inflated from what would’ve been paid in an arm’s-length transaction. Bob Hymel’s wife was also drawing a salary, but she was a ghost employee. Financing costs from increasing the fleet size were hefty. When the insurance company revoked the erroneous payment, Zoom Transport didn’t have enough funds to cover ongoing expenses even though Brighton was no longer receiving a salary nor stealing money for personal use.

Forgery, money laundering, embezzlement Brighton was also charged with check forgery because he’d routinely signed the Hymels’ names to company checks. Brighton was charged with money laundering and embezzlement based on his use of a company check to buy an antique French armoire. Zoom didn’t have multiple checking accounts, and some of the funds in the company account on which he wrote the check were for employee withholding taxes. Thus, Brighton was stealing tax dollars.

The Hymel brothers accused Brighton of signing equipment financing contracts and other documents without their authorization. They presented a memo to the court that had directed Brighton to no longer sign on their behalf. However, it was strange that the memo appeared out of nowhere after years of the brothers not contesting any of Brighton’s signatures. When the court reviewed the memo it determined that the paper’s watermark date was after the memo’s date.

The court decided that the brothers had concocted the memo to assign additional blame to Brighton. Brighton pleaded guilty and was sentenced to 37 months in prison; he served his full sentence with three of those months in a halfway house. He was also ordered to pay $435,000 of restitution, a major portion of which — $200,000 — came from an increase in value from the sale of the Lafayette house. His and his wife’s purchases (home, boat, furnishings, clothing, etc.) totaled more than the amount he’d stolen because he’d steal enough to cover down payments and monthly payments but not enough to buy all of the things he wanted outright.

Fraud’s impact is pervasive While the fraud amount of this case isn’t huge, and the case’s components aren’t necessarily unusual, some elements make the Zoom Transport story notable. First, unless a fraudster is a sociopath, committing fraud is a stressful endeavor, which generates external behavioral clues for family members and friends that something’s out of the ordinary. Brighton’s son, Sean, described how his extrovert father became sullen and withdrawn, got angry over insignificant things and began binge drinking. Sean said he couldn’t understand how his father was paying for the lifestyle the family was leading.

We imagine his mother — an accountant — must have known her husband was committing fraud. She ignored Sean’s suggestion to at least visit the office to observe the business scenario. Second, when a fraudster is caught, his innocent family suffers. Several days after Zoom fired Brighton, he borrowed Sean’s car, drove to a grocery store parking lot, called 911, and told the police he had a gun and was considering suicide. Brighton didn’t kill himself, but grief counselors showed up at the Brighton home to explain what was happening and offer support to Mona and Sean. But then the counselors left, and the family had to pick up the pieces of their lives. Brighton was taken to a mental health facility and put on suicide watch.

Sean visited and found his dad eating cereal out of a plastic bag with a spoon because the facility believed he might use a sharper utensil to harm himself. Denial became the mental health net for this family. Brighton was “away”or “sick.”It’s just too hard to admit that a family member is a criminal in prison. After the first few visits to the prison, Mona filed for divorce, packed her bags and flew home to her mom in Florida, leaving Sean and his new wife, Liza, with the mess. James and Mona divorced after 25 years of marriage.

They don’t speak or have any contact with each other. (Mona is still in denial. Even 10 years into a new marriage, she has never told her husband that Brighton had been in jail . She still takes antidepressants.) Brighton was charged with money laundering and embezzlement based on his use of a company check to buy an antique French armoire. Third, the me ss inc luded profe ssiona l ramifications. Prospective employers didn’t consider Sean for several well-paying positions in the financial industry because his father still owed substantial restitution on the fraud charges — a potential pressure point for Sean.

Liza believes that she needs to be upfront about her father-in-law’s fraud when she applies for jobs in state government accounting offices. Sean’s finances also suffered because James had forged Sean’s name on credit card applications, and Sean had to pay back some of the charges because he couldn’t prove he hadn’t made the purchases. Fourth, money transactions among family members became a conundrum. As much as someone might want to help a family member who’s facing fraud charges, loaning them money probably isn’t the best idea. James’s mother-in[1]law paid approximately $70,000 in legal fees for his defense.

His mother, a part[1]time waitress and school bus driver, loaned him $5,000. Neither has seen, nor likely will ever see, their money again. And Sean and Liza (as well as some other family members) sent money to Brighton for phone cards, snacks and other small items. However, when relatives sent too much cash, the courts confiscated it and applied it to Brighton’s restitution. Heavy stone in the water We’re all aware of the potentially explosive re a c tion when pre ssure, opportunit y and rationalization collide as they did in the Zoom Transport case.

However, behind this classic fraud story we see how a fraudster’s behavior affects a family. Brighton, freed from prison, works as a salesperson at a company owned by his son who says his father has an amazing “you can just trust him” kind of vibe that appeals to customers but also still makes him susceptible to fraud. Of course, Sean knows the limits he has to place on his father’s activities. At work, Brighton is never allowed access to money and has no authority to sign any business documents.

Much of Brighton’s paycheck is garnished for restitution payments. The father-son relationship has changed — and not always for the better — because much of the damage can never be undone. Sean feels that he can’t trust his father and must critically examine everything that he says for potential lies. Sean has become the authority figure in the relationship.

He tries to keep Brighton’s life on the straight and narrow even to the point of monitoring his father’s financial transactions. Because of his father’s fraud and the conditions that allowed it, Sean manages his own business with much more awareness of fraud risks and ramifications than Zoom Transport ever diThree well-worn but important takeaways:

1) Be acutely aware of the need for implementing internal controls (especially segregation of duties),

2) Monitor and address red flags of concern as soon as they appear

and 3) Adapt to changing circumstances regardless of how negative or positive they are.

Here’s a fourth critical and often forgotten takeaway: The commission of fraud is like the toss of a stone into the water. The big splash might occur at the spot where the stone sank, but the ripple effects spread out far and wide to the perpetrator’s family and friends and to the employees of the defunct victim organization. And those effects might be long-lasting. In the Zoom Transport case, almost 20 years later, the players still are addressing restitution and relationship issues.

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