Getting it Back

couple-sailing-12“We are again honored to have a fourth guest post from our friend and Richmond Chapter member, Rumbi Bwerinofa, CPA/CFF.  Rumbi is a Director of the Queens/Brooklyn Chapter of the New York State Society of CPAs and a member of the NYSSCPA Litigation Services Committee. She is the editor of, where she discusses financial forensic issues.” – Charles Lawver-2014 RVACFES Chapter President…”

Financial Frauds come in many shapes and hues but at the end of the day, money is come by through some devious means employed by the ethically challenged. During trying financial times, all the many varieties of the classic Ponzi scheme have proven especially popular.  As exampled by the shenanigans of Bernie Madoff and/or the bitcoin investment schemes recently in the news, the mechanics of this devastating con always work in essentially the same general way. A charismatic person with a great sounding get-rich-quick pitch enters on the scene. Her presentation can be as various and sophisticated as the imagination of the fraudster or the gullibility of the mark can make it and, indeed, may vary in particulars of content, but one thing never varies; guaranteed financial returns way above market rates. Always the promised returns are so good as to induce incredulity even in the most vulnerable or desperate would be investor, but, if the Ponzi is to succeed, the allure of the pitch has to be strong enough to overcome any doubts. In the end, people sign up and pass over their hard earned money by the hand-full.

The charismatic salesman takes the money, uses part of it to pay the fantastic returns promised to some of the initial investors and a large percentage of the rest to fund the extravagant lifestyle expected of a super successful business person. By continuing to charm and attract new investors, cash flow is soon surging through the scheme at an ever increasing rate as more and more would-be investors are attracted by the news of such a fantastic level of return.  Because the claimed returns aren’t being made our fraudster is soon in constant need of new funds to pay existing investors and to carry that ever more extravagant lifestyle. This cycle can sometimes go on for a surprising length of time but the longer it goes on, the more money the fraudster needs to take from her new marks just to make her nut. Although 18 months is the median time a Ponzi scheme typically lasts before discovery, a sophisticated, charismatic operator like Madoff can operationally carry one (or several) for decades.   We now know that the Madoff scenario apparently started somewhere between 1970 and the early 1990’s, depending on whose version of the depressing story you’re inclined to believe.  However, at a certain point, sooner or later,  the Ponzi is discovered and the fraudster inevitably must face the arm of law enforcement and defend against whatever charges are brought.

Had you have been tracing the flow of the money through the Ponzi, you would have quickly noticed that our salesman is only continuing the monotonous process of  taking money from Peter in order to pay Paul, never failing to skim his commission off the top. Since the point of the whole exercise is the financing of a life style not about investing, no returns are being earned on the money taken in and the business plan has to be about recruiting more people in order just to keep the scam going. This means that, when she or he is inevitably caught and everyone finally sees and can discuss the fruits of the extravagant shopping sprees – fancy homes, expensive cars, the boat – the pricy adventures – trips by private jet, membership in exclusive clubs, the rubbing of shoulders with celebrities – his immoral ways – his hubris, his dishonesty and maybe even his pornography … I’m willing to bet that not once will you hear mention of his investment acumen  and the smart ways he made his ill-gotten gains grow!

Yet when our fraudster is convicted and sentenced to some kind of punishment, you will also always learn that he has been ordered by the court, and agreed, to make restitution; to pay back all that money wrongfully taken from so many people over all those years. At times, there is even a fine added to the restitution amount. It looks good on paper but it begs the question – from whence is all the money to pay these penalties supposed to come?

Let’s look at a real case that made the news recently. Sandy Jenkins plead guilty to embezzling over $16 million from Collin Street Bakery, where he worked as the corporate controller from 1998 until 2013 (when his fraud was discovered). While employed by the bakery, his annual salary was never more than about $50,000 per annum. With the money he stole, he and his wife lived lavishly, buying a vacation home, taking flights on private jets and indulging in all kinds of expensive luxuries. In addition to facing up to 60 years in prison, Jenkins was fined up to $2.75 million, over and above the money he stole from his employers. As part of his plea deal, Jenkins additionally agreed to pay full restitution. Prosecutors will certainly seek to get back as much as they can from the property they seized from Jenkins and his wife (she too faces charges) but I, for one, will be shocked if the value of all their property comes anywhere near the $16 million dollars he stole.  As with the majority of such cases, the bulk of the money stolen was spent in ways never subject to reclamation; on vacations, private jet flights and luxury cars that started to lose value as soon as they were driven off the lot.  In light of all this, it’s hardly surprising then that the Association of Certified Fraud Examiners (ACFE) reports that 58% of defrauded organizations recover none of their losses and only 14% make a full recovery (the median recovery amount is 20% of the value of the assets stolen).

The fact that money stolen will not likely be recovered, can only emphasize the importance of fraud prevention and, if fraud should occur, of early detection. It makes sense that the earlier a fraud is discovered, the smaller the losses will be and, of course, if fraud is prevented in the first place, there no losses will be suffered at all.  As fraudsters continually seek new ways to perpetrate their crimes, it’s vital that forensic accountants and fraud examiners constantly improve and develop methods of fraud prevention and detection. It’s equally important that organizations understand that employing effective fraud prevention and detection measures will save them many times the cost of such measures in the long run. Forensic accountants have the skills and training to perform the very difficult, and often expensive, task of tracing money and assets that have been acquired through dishonest means, but they can’t re-manufacture the funds already lost to fraud. After all, we’re not magicians.

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