Investigating A $140 Million Fraud
Investigating A $140 Million Fraud
By Tod McDonald
I had the honor of working directly for the case trustee (Mark Calvert, who is an investor in VALID8) for the Meridian Funds Ponzi Scheme case back in the mid-2000’s. Here’s a quick overview of the detailed work accomplished to answer the simple question, “Where did the money go?”
Day 1 with perpetrator: “All the financial statements and most assets are falsified.” One of the first statements given by the perpetrator during our first discussion. That meant we couldn’t trust any accounting records or financial statements. The only thing left was the money came in and went out of several dozens of bank accounts from a handful of financial institutions over a decade or so. We worked with attorneys to draft subpoenas for every single bank statement and use those documents to recreate what had happened.
An “innovative” solution, not really. To be as efficient as possible, we spooled up a transcription service in India that engaged via spreadsheet templates and Dropbox to create a transaction database, which was essentially a 20MB Microsoft Excel spreadsheet. Back in the day, this was considered by the other professionals working the case cutting edge innovation. As you can imagine, the output was rife with typos, it was nearly impossible to determine if you had a comprehensive data set, and as we uncovered the facts, it required that we continue to add to an ever expanding universe of data. This went on for years, millions of dollars were spent on what was essentially a massive bank account reconciliation.
The need for speed and control. The most critical aspect to this analysis was speed to intelligence. I worked on behalf of the case trustee, in addition to our team, there was a trustee for the perpetrator’s personal assets, the FBI, State of Washington, and creditor attorneys who were all conducting discovery to determine what the next move was. The party that could prepare the data and extract intelligence first by default established control over the next steps in the process. With millions on the line, the value of speed to intelligence overwhelmed all other aspects of the work.
Redundant efforts. Cases like this one require a small army of professionals loosely working together to establish a common set of facts as the basis for litigation. That meant data often was shared. Some had more data than others, configuration control or the ability to know how up to date the data set you’re working with and how comprehensive it was became a huge issue. Not to mention the PC blue screens, frustration, and inefficiencies that comes with emailing multiple versions of 20BM spreadsheets integrating them while trying to keep everything accurate and up to date. Between my work, the FBI, and other work done on behalf of creditors, there were at least 3 different versions of the same data. The FBI wouldn’t use our DB because it had to be reconciled to the penny, we did not have the time/resources to do that. We couldn’t wait for the FBI to finish their work. The creditors had access to other data sources before we did – all resulted in a lot of redundant work efforts.
Accurate data for clawback and damage calculations. Once you figure out “where did the money go”, the real work is just starting. There’s some really interesting (and scary) laws that kick in once a case is proven a Ponzi scheme. One example is the ability to claw back money that was used inappropriately. Say for instance, the perpetrator of the Ponzi scheme pulled out $4 million to purchase a new home from an unsuspecting seller. Then 2 years later, after a Ponzi scheme has been proven, creditors that lost money on the scheme have the legal right to go back to the seller of the house and clawback the $4 million that the perpetrator gave the seller for the home. As you can imagine, the level of scrutiny required on any sort of financial damage or clawback calculation is extraordinarily high. Cases will go on for years while these details are figured out. Litigation associated with the Meridian case lasted for the better part of 10 years.
Lawsuits all around. This particular case resulted in dozens of cases requiring litigation that involved over 700 individual investors, multiple financial institutions and wealth advisors, and the CPA firm responsible for audits. Over $140 million was lost, the CPA firm ended up with an 8 figure settlement, and most importantly, hundreds of individuals lost their life savings.
The original idea behind VALID8 was to automate the data prep work associated with a case like this. As my cofounders and I realized that what a hard core financial investigation is, is essentially just an audit with an extreme level of scrutiny. If this level of scrutiny can be automated, why not place this up front, avoid the pain associated with these cases and prevent them from happening in the first place.