Divorce and Family Law: Uncovering Hidden Income In a Closely Held Business

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Written by Tracy L. Coenen, CPA, CFF

ABA Section of Family Law eNewsletter

When a divorce or a child support issue is looming, it’s amazing how a quickly a closely held business starts “losing money.” I use quotes because such a situation is so predictable. One party wants to protect her or his assets, and when there is a business involved, the motivation to hide money can be stronger than usual.

The types of businesses that can be prone to manipulation of the books include restaurants, retail stores, doctor or dentist offices, construction companies, auto dealerships, and law practices. This list isn’t exhaustive by any means, but it provides good examples of businesses at risk of financial maneuvering.

Any business that is closely held and has finances that are easily manipulated by the owner is at risk. A lawyer filing for divorce from his wife may suddenly stop taking a paycheck and then claim he has no earnings from the practice. A restaurant owner could stop reporting cash receipts from customers, thereby claiming much lower revenue for the business while secretly pocketing the cash. A carpenter may offer customers a discount if they pay with cash and don’t request a receipt, never reporting that money as income. Continue reading

Roca Labs Weight Loss with “Gastric Bypass No Surgery”

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roca-labs-lawsuitLast year, I reported on Roca Labs and their “Gastric Bypass No Surgery” regimen. I criticized the advertising and public relations tactics employed by the company. I was skeptical of the safety and effectiveness of the Roca Labs product, and thought that the company might be scamming consumers.

Roca Labs has changed some of its tactics and seems to be treating customers better. I have had a chance to review some of the testimonials and opinions on the Roca Labs product. I encourage consumers to do their research on the Roca Labs regimen, including seeking out product reviews on sites like PissedConsumer and testimonials on YouTube.

Many have spoken about their opinions on the “Gastric Bypass No Surgery” regimen, both positive and negative. While some are unhappy, others claim the regimen changed their lives or saved them from gastric bypass surgery. Satisfied users of the Roca Labs product and plan say it helped them achieve a healthy weight, losing as much as 100 pounds. Darlene is a senior who lost 81 pounds and believes that she added years to her life. Roger lost 120 pounds and says Roca Labs is worth a try.

Herbalife CEO Michael Johnson on Recruiting

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Michael Johnson, CEO of Herbalife, talks about how the company is based on recruiting. ” Today, we’re recruiting. We’re still a recruiting company, and we’ve got to never not be this [again pointing to the word “Recruiting” on the slide behind him]…”

This is the problem with multi-level marketing. The “business” is not about the product. It is about recruiting. The product is merely an inconvenience that is necessary to make it appear that these companies are not pyramid schemes. Read more at Quoth the Raven.

Update: Video is now available here.

Truth About Poverty in America

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Last week the internets informed me that the United States is terrible because we “allow children to go hungry.” This is not true by any stretch of the imagination. If parents are willing to take even a minimal amount of responsibility for their children, the children will be fed. Food stamps, free breakfast and lunch at school, food pantries, and cash benefits from government programs are more than enough to feed a family’s children.

I wanted to bring the picture of “poverty” in America into focus with some cold hard facts. What you will see is that “poverty” in America is nothing close to the poverty we see around the world. To illustrate this, I am using a fictitious Milwaukee family of 4 as an example. (In this example, we are assuming there is a mother, a father, and two school age children. If you instead assume a single parent household, the numbers work out slightly better for the family.)

Under guidelines issued by the U.S. Department of Health & Human Services, Office of The Assistant Secretary for Planning and Evaluation, this family is “below the poverty line” if the income of the household is less than $24,250. Continue reading

Thompson Burton: Support Company of the Year from Academy of Multilevel Marketing

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lolThompson Burton, a law firm providing services to multi-level marketing companies, provides our comic relief today, along with “The Academy of Multilevel Marketing” (TAMM).

The Academy of Multi-Level Marketing is an organization created by MLM industry supporters to make up some awards to give legitimacy to those involved in the grand scam that is called multilevel marketing, direct sales, network marketing, or other clever names (generally used to disguise the fact that these companies are nothing but endless chain recruiting schemes).

The multi-level marketing industry is no stranger to ruses that make it look legitimate. The Direct Selling Association (DSA) that has held itself out as an MLM industry watchdog. In fact, it is essentially a lobbying organization whose job is to convince lawmakers to keep their scams legal. And so it follows that “TAMM” would give out silly awards to those who perpetuate multi-level marketing scams. Continue reading

Marc Randazza Free Speech Win for Dr. Steven Novella

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Marc Randazza, The Legal Satyricon

Marc Randazza of Randazza Legal Group, First Amendment Attorneys

First Amendment attorney Marc Randazza of Las Vegas has scored a particularly important win in a case involving Steven Novella, MD and Edward Tobinick, MD. Dr. Tobinick sued Dr. Novella and Yale University in Florida, not for defamation, but for claims of false advertising and trademark infringement.

First, Randazza won an anti-SLAPP motion. Despite being a California plantiff, Tobinick filed suit in Florida. He may have hoped that California’s anti-SLAPP law wouldn’t follow him there. He would have been wrong. From the order (emphasis mine): Continue reading

Expert Witness Selection: Substance Over Form

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Wisconsin Law JournalIn commercial litigation, many cases require some kind of expert. Whether it is a financial expert, an engineering expert, a fraud expert, a valuation expert, or some other type of expert witness, the process of selecting one cannot be taking lightly. The effectiveness of your expert witness could win or lose a case for you, so it is important to carefully consider what makes a good expert witness.

Qualifications and Credentials
One of the first steps in evaluating your expert is looking at the education and credentials of the person. The potential expert needs substance in this area to have a reasonable chance of standing up to any challenges by opposing counsel.

In addition to college degrees, you should look at the licenses and professional certificates held by the expert witness. What are the most important certificates in this person’s field? Does this person have them? Are the certificates held by the expert actually worthwhile? Continue reading

Analyzing Expenditures to Determine Income in Family Law Cases

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It is sometimes difficult to determine the income of individuals who will be paying child support or spousal support. This can often be the case when dealing with self-employed individuals. If the reports of income made by the spouse or parent don’t seem to make sense, it may be necessary to look at his or her lifestyle to determine income. In this situation, we look at the expenditures made by the person and calculate the level of income necessary to fund those expenditures. Tracy Coenen explains the process in this video.

How to Commit Fraud and Get Away With It

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Written by Tracy L. Coenen, CPA, CFF

Wisconsin Law Journal

If a fraud is worth committing, it’s worth committing right. A little extra effort in the commission of a fraud can go a long way toward profiting from it as long as possible. Follow these recommended steps to increase your chances of successfully pulling off a fraud at work.

Don’t Act Suspicious
Don’t be a complainer. Don’t blatantly fight the rules. Appear to go along with policies and procedures, and don’t cause trouble for your co-workers or supervisors. You don’t want to appear to be disgruntled or seem like a problem employee. Those types of employees cause suspicion. Continue reading

Finding Hidden Income and Assets

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Cases of financial fraud often focus on the core issue of where the money went. Successfully carrying out a fraud scheme involves not only taking the money, but covering up the fraud and hiding the money trail. Recent headlines have consumers wondering how someone like John Corzine of MF Global could have no idea where hundreds of millions of dollars went. But skilled financial investigators know there is always a trail, and while the money may or may not be recovered, it can be located.

Cases involving allegations of security fraud, money laundering, misappropriation of assets, income tax fraud, and Foreign Corrupt Practices Act (FCPA) violations require investigators to follow a money trail. However, sometimes it is difficult to know where to start, or where to continue when you’ve come to an apparent dead end.

Third Party Records

Regardless of the type of case for which there is a need to trace the flow of funds, the most reliable source of information is third party records. The records of an alleged fraudster are always suspect. How are we to know if the accounting records have been manipulated?

In contrast, records from a disinterested third party are much more likely to be authentic and to tell the truth about the money. The most common and reliable sources of third party records are banks, brokerage houses, and credit card companies. Except in rare cases in which a secret relationship facilitates the manipulation of these records, they will tell us exactly where money came from and where it went.

Do you know where to start getting these records? It may be simple in the case of a bona fide business with one or two sets of books. Even if the accounting records are manipulated or altered in some way, the records will likely point to financial institutions that hold at least some of the company’s money. The first place to start is the accounts disclosed by the target of the investigation or the accounts documented in the target’s records.

If we’re tracking down a fraudster with no disclosed or confirmed accounts, we will have to be creative. It’s not practical to subpoena every bank in existence, so some precision is required in our investigation. We must look to parties other than the target for information on accounts and activities of the scammer.

For example, an investor in a Ponzi scheme may have canceled checks relating to his investment, and the information on the back of the checks can go a long way in telling us what banks the target was using. Gather together the documentation of multiple victims of the Ponzi scheme, and suddenly several financial institutions used by the fraudster may be revealed. We can then get those records and dig through them to find evidence of other accounts used.

Detailed Analysis

A skilled fraudster is going to tangle a very intricate web of accounts, transactions, people, and entities. Money is intentionally bounced from bank to bank, account to account, and entity to entity in varying amounts with seemingly random timing. These things make it difficult to trace the flow of money and to tie funds to any particular act or scheme.

A capable investigator is going to be able to unravel the mess and make sense of the money movements. This isn’t easy, especially when the number of involved bank or brokerage accounts climbs. Cataloging individual transactions is simple. The more institutions, accounts, and entities involved, the greater the complexity of the analysis.

The difficulty is in ensuring that all accounts and all time periods have been analyzed, and all transactions between these accounts are properly documented. It is easy to get so caught up in the details of individual transactions, that the investigator could lose sight of the big picture. This could result in a failure to analyze all transactions, a missed link between accounts, an overlooked payment to an outside party that be a smoking gun, or a failure to have a complete and accurate tracing of money through the web of accounts.

Don’t think of this as simply a data entry exercise. It is much more than that, and it is a critical part of prosecuting or defending a fraud case. It’s easy for just about anyone to look at one bank statement or check copy and tell me where the money went. It is another thing entirely to look at 100 bank accounts over a period of three or five years and get a complete picture of the flow of funds over time.

Dead End?

What happens when you seem to have come to a dead end in the money trail? There is usually no such thing as a dead end unless you’ve come to a piece of real estate, a boat, an airplane, or a sizable bank account that can be seized (or at least tied up in the legal system for the foreseeable future). Whether a case is civil or criminal, part of the endgame will be recovering the proceeds of the fraud. In many cases, it is the most critical thing, especially for the victims.

If frequent small transactions are all you are seeing, and there is no apparent pot of gold, you just haven’t found the right information yet. Somewhere within all this evidence is a clue to a piece of real estate that was purchased with illicit funds. A payment to a municipality, a utility company, a real estate attorney, or a construction company may hint to the existence of real estate. A payment for a registration fee, to a fuel company, or to an insurance company might lead us to the existence of a luxury yacht.

Again, the key will be to dig deep into the details of the financial transactions without losing sight of the big picture. As questions are raised regarding certain transactions, the investigation still must continue through the remaining transactions. Although one lead may look promising, it should not be the reason to stop going down other roads that may lead to the discovery of other valuable information.

Pulling It All Together

Equally as important as wading through a financial labyrinth skillfully is presenting the findings in a way in which non-accountants can understand it. Attorneys, judges, and juries may need to understand the flow of money in the scheme, so telling a story about the money is critical.

The best way to communicate results to people with varying levels of accounting and financial sophistication is with three approaches: words, numbers, and pictures. The financial investigator should start with an explanation of the work completed and the findings and conclusions. Then set forth summary tables of the most important numbers that are discussed, followed by charts and graphs that further demonstrate the findings. This gives the user an opportunity to see a picture of what has been explained about the disposition of funds or relationships between entities.

When these three approaches are combined, it is much easier for a reader to understand the conclusions that have been drawn after an exhaustive financial analysis. After all, a complex analysis and conclusion that is helpful to your case is not worth anything if the important people can’t understand the opinions and how they were reached.

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, securities fraud, investment fraud, tax fraud, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at [email protected] or 312.498.3661.

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