There's Gold in Them Thar Malls!

CARL KNUDSON

Thomas Bourne's credentials were impeccable. He and his conglomerate, Emerge Markets, owned and operated ten large malls throughout the United States, plus several others in foreign countries. Thomas had a degree in finance and an M.B.A. and had spent his professional career developing an impressive network of connections. He was in his mid-40s, married with two beautiful daughters whom he showered with love and affection, and his trophy wife, Greta, was a major stockholder in his business. The Bournes lived in a $3 million townhome in upscale Beverly Hills, California, and traveled extensively throughout Europe.

However, Thomas had a dark side: He was arrogant, dismissive and short-tempered with his office staff and often launched into obscenity-laced tirades. The turmoil in the property management arm of his company was constant. It was the classic hostile work environment.

When It Rains, It Pours

World Wide Insurance Inc. (World Wide) received a claim from Thomas Bourne two months after a storm had purportedly caused severe damage to the Border Towne Mall, located in a small community 60 miles east of Los Angeles, California. Border Towne was one of the many malls owned and operated by Emerge Markets. The timing of Bourne's claim was strange in that the policy on the mall, written by one of World Wide's Los Angeles consultants, had only been in effect for a few months before the storm caused substantial damage to the 400,000-square-foot structure, including the roof, plus interior water damage and mold accumulation.

The insurance claim came with a very detailed report and numerous photographs from Lawrence Tolson Insurance Adjusters, Inc., an established firm based in Mobile, Alabama. The report detailed substantial roof repairs by contractors, ongoing mold remediation by specialists, external damage to mall fascia and signage surrounding the property, plus an outrageous claim for loss of business. The claim also included copies of invoices and checks paid by Border Towne Mall to insurance adjusters and construction companies that were brought in to do emergency repairs on the mall a few days after the storm hit. So what was the problem? At the time, nothing seemed amiss.

Jillian Krauss, World Wide's in-house adjuster, processed the claim on the Border Towne Mall and authorized preliminary payments to reimburse the up-front costs paid by Bourne to mall contractors based on the documents provided. Jillian had a law enforcement background and had a couple of years under her belt at World Wide, but she was soon to discover one of the largest insurance frauds in the company's history. However, she couldn't know it at the time, or that the insurance fraud targeting World Wide had already been perpetrated against many of the company's global competitors.

Divide and Conquer

One of the time-tested markers of a sophisticated fraudster is the concept of divide and conquer — keep the guardians of accounting records and business records divided so no single individual understands the complete flow of the finances. It was clear that Thomas Bourne understood this tactic well and intentionally created an atmosphere of fear in the office. Each and every day, he presented the accounting staff with incoherent to-do lists, which kept them from focusing on their daily duties. This constant chaos led to last-second scrambling to reconcile the mall's monthly banking activity and prepare the required quarterly reports for the lenders.

It seemed like just when the staff became an efficient team despite Bourne's best efforts to create dissension, he would fire the office manager, or the manager would quit, and the whole process started anew. In retrospect, it was a red flag that Bourne had fired the office manager and accounting staffjust after he filed the first claim with World Wide.

Just the Tip of the Iceberg

A year after Bourne submitted his claim for damages to the Border Towne Mall, Jillian Krauss received a sizable loss claim from the Prairie Harvest Mall in Omaha, Nebraska. As with the Border Towne claim, Krauss noticed that the signatures on Prairie Harvest's policy were barely dry before the mall suffered damages from “a heavy wind and rain storm.” The specific damage even mirrored the damage claimed by Border Towne. Then Krauss saw that the claim certification document was signed by Thomas Bourne and that he had used the same adjusters and construction companies in Nebraska that he used in California. These contractors had already received hundreds of thousands of dollars in up-front fees for emergency repairs to Prairie Harvest. The total losses claimed were $15 million, including $7 million for lost business.

Krauss queried Bourne's name online and discovered, to her chagrin. that one of World Wide's major competitors had recently filed a lawsuit against one of Bourne's malls in Illinois for insurance fraud. The lawsuit allegations related to purported false claims from storm and wind damage. The codefendants named in the lawsuit were the same subcontractors that Bourne used in the two claims with World Wide.

Krauss immediately notified World Wide's general counsel and detailed what she believed to be a pattern of fraudulent claim submissions by Thomas Bourne related to the “severe storms” that had damaged the malls. Krauss also searched local and national weather databases to determine whether any such storms had actually occurred on the dates in question and learned, with a sickening feeling in her stomach, that they had not.

Whistleblower, Beware

Allen Linn was a 20-year veteran bookkeeper with government and corporate experience who responded to a job posting on an accounting temps website. Linn was interviewed and screened by Ronald Jepson, the new office manager at Border Towne Mall; Jepson had only been on the job for about a month and was building a new office staff, including the bookkeeping position. Linn received a tour of the office and was able to review the accounting programs that recorded and tracked the mall's financial affairs. The accounting system was a customized product that included a function to scan all of the deposits, deposit items, payables and invoices, culminating in the monthly bank reconciliation. Linn was also given a tour of the file room where the accounting backup programs and some paper boxes of documents were stored.

Later that day, he was interviewed by Thomas Bourne, who struck Linn as a little condescending but overall on the up-and-up. The salary was not the best, but the office was close to home and he had already retired from one job. A few days later, Linn was notified by Jepson that Bourne had authorized his hire and they wanted him to start as soon as possible.

The first couple of weeks went well, and Linn was catching up on inputting the latest receipts and payables for the mall. The office staff seemed competent and responded well to his suggestions regarding the bookkeeping processes and procedures. He reconciled the bank account and prepared a preliminary profit and loss statement for the first quarter. He made a mental note that the mall had only one bank account at a nationally known institution. Linn then prepared a balance sheet and noted some interesting receivables from other businesses owned by Bourne, including malls in Colorado, Nebraska, South Dakota, Illinois and California.

“That's odd,” Linn thought to himself when he opened the daily mail and found a sizable check from a company called World Wide Insurance. The memo section of the check indicated that the funds were being paid on a claim filed previous to his employment at Border Towne Mall. Linn scanned and processed the check through the accounting system but wasn't sure how to categorize the payment, and there wasn't an insurance-pending file in the office.

Later that day, he called Jepson to ask what to do with the check but was told to talk to Bourne directly. Linn again thought something weird was happening; why couldn't Jepson explain an insurance claim? When Linn called Bourne, he received a rude and antagonistic response that it wasn't his business and he shouldn't have opened the mail. Linn wasn't the kind of guy to pick a fight, especially since he was fairly new, but he explained to Bourne that the deposit had to be accounted for in some fashion. Bourne told Linn that he would take care of it himself.

A few weeks later, a letter arrived from a World Wide Insurance claims adjuster requesting additional information on the checks paid by Border Towne Mall to the contractors for the emergency repairs. Linn opened the letter because it looked like normal mail, but he saw copies of checks from a Border Towne Mall bank account — not the account he was familiar with. It was a regional bank in Los Angeles and had no offices in the immediate area. Linn could tell that the some of the copied checks had not been processed through a bank because they did not have MICR coding at the bottom of the checks.

Linn signed onto Border Towne's accounting system and brought up the checking account to verify that the checks had cleared. However, he could not find the account listed on the books. Linn felt a dull pain in the pit of his stomach; this was beginning to look like a real problem. He queried last year's balance sheet data to see if the bank account had been listed, but it wasn't there either.

Maybe there was an explanation, but the office staff was as new as he was, so he asked Jepson if he could speak with him privately. The meeting did not go well; Jepson told him that he knew nothing about the accounting or insurance claims before his tenure and that Linn should ask Bourne for the information.

Linn's subsequent meeting was an utter disaster. Bourne accused Linn of spying into his private affairs and threatened to fire him on the spot, but he didn't. Bourne informed Linn that the final accounting for the mall was done by an accounting firm that prepared the financials and tax returns, but he refused to explain why the missing bank account was not in the accounting system. Bourne advised Linn that he was handling the insurance claim and that the check from World Wide should not have been deposited into the mall's bank account. Bourne berated Linn for opening the mail and told him that he was never to open the mail again.

Over the next few weeks, Linn's relationship with Bourne became increasingly strained, to the point that Linn decided to work at home for a few days and contemplate his future at the Border Towne Mall. Linn was a proud man and honest to a fault, so the situation with the insurance claim and the mystery bank account wore on his conscience. After much soul-searching, Linn decided to do the right thing and turn in Bourne to law enforcement officials. Of course, being familiar with qui tam claims Linn saw an opportunity to make a few bucks for his effort. He downloaded Border Towne's entire general ledger onto a thumb drive that he kept in his briefcase to substantiate what he believed to be insurance fraud and possibly tax evasion.

Complications Begin to Mount

Linn arranged for a meeting with the Federal Bureau of Investigation (FBI) at the local agency and provided the data stored on the thumb drive to the agents. The agents seemed impressed and assured him that they would check out the allegations and get back to him, so Linn continued to work at the Border Towne Mall.

It wasn't long after this that Linn was contacted by Gerald Riley, an attorney working for World Wide Insurance. Riley told Linn he was investigating allegations of fraudulent insurance claims related to the Border Towne Mall and another mall located in Nebraska. Linn agreed to meet with Riley at a nearby diner and brought along his thumb drive just in case the attorney was interested in the data.

The meeting went well and Riley was interested in Linn's documentation, but he was even more interested in having Linn's cooperation because he was still employed at Border Towne. Linn agreed to cooperate but asked for an advance on the anticipated recovery from the lawsuit. Riley agreed to Linn's request.

Riley downloaded the several gigabytes of data from Linn's thumb drive and began issuing subpoenas to banks and lending institutions based in part on Linn's information. World Wide Insurance hired a local forensic accounting firm to help Riley analyze the records. As the last step in the information-gathering process, Riley subpoenaed the business records of Border Towne Mall and contractors who had allegedly provided repairs to the damaged mall.

Delay, Delay and Delay!

Soon after Border Towne's records were subpoenaed, Bourne learned that Linn was cooperating with World Wide Insurance and had supplied Riley with extensive documentation relating to Border Towne's finances. Within days of learning that Linn had taken copied and shared business files, Bourne and his attorney filed motions of attorney–client privilege to prevent the use of any and all of the Border Towne records.

Bourne's counsel reviewed the documents and provided an assessment log for the court to determine whether any of them should have been made available to World Wide Insurance's management and attorneys. The court ruled preliminarily that almost all of the accounting and tax records provided by Linn were in fact privileged. Next, Border Towne's and the contractors' attorneys filed motions to prevent the production the subpoenaed bank records.

World Wide Insurance's legal fees were escalating at a dizzying pace, not to mention the fees of the forensic accounting firm brought in to analyze the financial records. After two years of dispute, the case was stalled due to legal gymnastics. World Wide's management team made a tactical decision to hire a bigger and more experienced law firm to continue the battle.

Our Team Enters the Fray

World Wide's leaders hired the law firm of Albert, Jennings & Luck, which specialized in fraud cases. Elaine Luck, senior litigation counsel, was leading the new charge. Elaine had hired me as an external examiner on cases before (I run a local, private anti-fraud investigations practice), so I was pleased to get her phone call one afternoon, asking me to help review financial information in this new case. Elaine gave me access to a database with more than 200,000 records, but there was no index to help me wade through everything. My initial analysis of the enormous amount of financial discovery showed that it was, on balance, virtually useless. Bourne's attorneys clearly did a data dump of irrelevant information in all the files they were forced to provide, and they turned over many documents that were not requested in the subpoenas. No one at the original forensic accounting firm had seemed to notice.

In large-scale civil fraud cases, a common litigation strategy — known euphemistically as baffle 'em with BS — is employed to frustrate and divert the attention of opposing counsel and their consultants. This strategy makes it so important to be on top of the discovery stage of an investigation. It was clear that Border Towne's counsel was well trained in the baffle tactic and equally clear that World Wide's initial lawyers and consultants were ill equipped to handle it.

I was also given spreadsheets from the previous forensic accountants with thousands of entries, including bank account data from more than 50 sources. The spreadsheet was overly detailed and confusing, with hundreds of duplicates of the same transactions from 15 related financial institutions. I resorted the data in the spreadsheets and eliminated duplicates to come up with a general picture of the financial data. My analysis showed that during the relevant time period, Bourne took out more than $5 million from the various related bank accounts.

Next I reviewed World Wide's records related to the claims for damages to the two malls. In particular, I was interested in the banking documents provided to substantiate the amounts paid to contractors for the “emergency” repairs. I was amazed to find that Gerald Riley's review of these important bank accounts was incomplete; there were still missing bank statements and canceled checks for the relevant period of time. I immediately advised Elaine Luck that we needed to issue a follow-up subpoena to the relevant banks.

I turned my attention to the Border Towne Mall's general ledger, but it was not a treasure trove of actionable information. Instead, I realized that what was not in the ledger was more telling that what was recorded. In cash accounts, I found only one bank account, but it was not the account from which funds had been paid to the contractors for emergency work. I tried to find a record of another bank account in the jumble of information Border Towne provided us but to no avail.

I next reviewed a series of financial institution documents related to the purchase and refinancing of the Border Towne Mall, hoping to find tax returns or an appraisal for the $35 million property. Again, I was frustrated by the lack of useful information; there were no financial statements — audited or otherwise — that could verify the stated value of the mall. Moreover, there was no indication that Gerald Riley realized he was missing these critical documents.

An Outcome, Not a Resolution

World Wide's corporate leaders were anxious about the substantial costs that this case had already racked up and the potential fees they would amass if they continued pursuing it. After I had been on the case for a few months, Elaine called to tell me World Wide decided to put the case on hold; in my experience, that means management has given up and decided to cut its losses. A month later, Elaine called to tell me she and Bourne's attorneys came to a settlement in which World Wide would not pursue restitution for the Border Towne reimbursements but denied the claim for Prairie Harvest.

About the Author

Carl Knudson, CFE, has more than 37 years of fraud investigative experience at the highest level of government and in the private sector. He has been a private investigator and Certified Fraud Examiner since 1995. As a special agent for the Internal Revenue Service (IRS), Mr. Knudson investigated complex white-collar crimes. Upon retiring from the IRS, he was hired as a director in the Dispute Analysis and Investigative practice at Price Waterhouse. Mr. Knudson started his own business in 2000 and specializes in forensic accounting and fraud investigations for his private and government clients.