News this morning of a Federal Trade Commission civil fraud case against four “cancer” charities in Tennessee is a good time to highlight a wonderful investigative tool out there that we have been using for years.charity non profit investigation1.jpg

Based on the fact that they get tax exemptions, charities have to make their tax returns public. Tax returns are something we rarely get to see early on in a case, but the exception is usually when a charity is involved.

We love it when we have to look at a person who may be wealthy and secretive as far as his for-profit businesses work, but who has to open things up a bit if he’s decided to give money away through a tax-exempt vehicle.

Looking at tax returns is easy. We have a free account at Guidestar which lets us see most of the tax returns of U.S. non-profit organizations. These are usually Form 990, but there are other useful forms that accompany the 990 filing.

While the cancer charities alleged this week to be fraudulent had made it on to lists of bad charities compiled by watchdog groups and were the subject of news articles, there would have been no need to wait for others to evaluate the charities if you had had access to the tax returns. The really good news is that unlike the Form 1040 most of us fill out, the 990 is short and straightforward. You don’t need to be an accountant or have TurboTax to understand it.

Take the 2012 return for Cancer Fund for America, one of the organizations the FTC has targetted. This was an endeavor that took in $13 million, but paid out $3 million to independent telemarketers to raise funds and a total of $4 million for “professional fundraising services.” That may be fine, but with four compensated “key employees” in the whole organization and all that money going to independent contractors, why would this organization need to spend $1 million a year in office expenses?

That would be a hefty rent for a small operation in Central London or Madison Avenue in New York, but in Knoxville, Tennessee?

Such is the joy of being able to investigate based on uncomplicated forms written in English, and not Accounting. A million bucks a year for an office for four executives and a huge telemarketer bill to outside contractors may be explainable, but any prospective donor should ask to see photos of the office (and an employee count) before writing that first check.

How independent should an independent investigator be? The cover story in this month’s American Bar Association Journal called “The Probers” takes a look at some of the highest profile independent investigations of recent years carried out not by private investigators, but by attorneysindependent investigator.jpg.

These are the mega-cases involving among others Penn State, the NCAA, the George Washington Bridge scandal, and soccer’s governing world body, FIFA. As famous as these names are, so are the law firms and lawyers involved: former FBI Director Louis Freeh, former Senator George Mitchell, DLA Piper, K&L Gates, and Ted Wells at Paul Weiss, Kirkland & Ellis, WilmerHale, and Jenner & Block.

Anyone who reads a daily newspaper has probably seen reference to at least one of these investigations, as well as the inevitable questions that arise once the reports are issued: how independent can a report be when the subject being investigated is paying the bills?

The answer may be “100%,” but two issues should always be up front for evaluation:

  1. Was the report as submitted to the client subject to editing by the client before being released?
  2. How much other work do the investigative lawyer and firm do for the client?

It’s easy to imagine an honest lawyer submitting a report to a client that the client doesn’t want to receive because it will result in public humiliation or open that client up to liability. If the report remains a privileged document that the client decides to bury, the lawyer’s job is done. We do these jobs not to get on television but to serve our clients as finders of fact.

But if the client decides to go public with a version of the report that may mischaracterize what the report concluded, would the lawyer be put in a position of having to correct a statement made by his client that he knows to be untrue? Rule 3.3 deals with candor before a tribunal. Happily, we have never been put in such a position.

As for the issue of conflicts, that too is something we have no worries about because investigations are all we do. In what may have been one of his last interviews, the ABA Journal article interviewed Hofstra University Law School ethics expert Monroe Freedman (1928-2015), who questioned “how independent these investigations can truly be.” A lawyer who has a history with a client before undertaking an independent investigation could well be in violation of Rule 1.7 of the ABA Model Rules.

“’If there’s a significant risk that the lawyer’s personal interest might be affected by what the lawyer is investigating, then you have a conflict at that point,’” said Freedman. Instead, “having neutral third parties perform independent investigations would be the ideal scenario.”

 

 

We recently came across this news article about the business of selling citizenship and passports in the Caribbean, particularly in St. Kitts and Nevis.  Increasingly, in several island states, people are able to buy pasPassport Image.jpgsports simply by investing large amounts of money in those islands.  Most of these passports don’t reflect the holder’s place of birth and other names by which he or she has been known.  This is potentially dangerous because criminals and terrorists might be able to buy second passports from these countries and travel around undetected.  Some islands are responding to the concern by recalling passports to include further information about the holders.

This article underscored for us the need to know every name by which your investigation subject has gone, prior to embarking on any sort of deep background check or asset search.  Too often investigators rely on the output of commercial databases for background checks and other investigations.  We also use a number of proprietary commercial databases, but have found that databases 1) incorrectly connect people with the same name and 2) are terrible at connecting one person that has gone by different names.  In practice, this means that the assault record of a Nancy Smith from New Jersey might come up as a match for Nancy Smith from New York.  It might also mean that databases would miss a criminal record for a subject who was arrested or charged prior to taking her spouse’s name, if the investigator was unaware of the maiden name.

If you know every name by which a person has gone, you can run several different checks in the databases which would yield more accurate results.  That said, having all names is not just important for database searching, but for searching at the federal, state and county level as well.  For example, in order to do a New York State criminal check, you need the exact name and date of birth of the subject.  The state will not produce results for any alternate names or spellings, which is why, if we notice someone has gone by multiple names, we have to do the search several ways, despite the fact that the state charges for each search.  This also goes for civil litigation, property, lien, SEC filing and other searches to be conducted at the federal, state or local level.  If you don’t have all of the names, you simply will not get all of the results.

The big heavy breathing lead story in the Sunday New York Times this week was about the increasing number of government agencies using undercover operations to detect law breakers of all kinds. The Small Business Administration, the IRS, even the U.S. Supreme Court Police have agents hiding badges, blending into crowds and perhaps using assumed identitieundercover investigation ethics.jpgs.

Should lawyers follow this lead? Usually the answer is no, for two reasons.

  1. Undercover work can quickly veer into areas deemed unethical for lawyers and their agents.
  2. Going in through the “front door” can often get you information just as good as the secret agent product. Better still, it will be admissible and won’t risk a professional disciplinary hearing.

Ethical rules. Police officers, journalists, and many others are allowed to lie to get what they want. Attorneys are allowed to “dissemble,” but outright lying is frowned upon for attorneys and their agents. The ABA model rules in this area tend to be the same nationwide: Rule 4.1 covers truthfulness in statements to others, and Rule 8.4(c) says that it is professional misconduct for a lawyer to engage in conduct involving dishonesty, fraud, deceit or misrepresentation.

That’s the reason our firm will not engage in pretexting, the common term for pretending to be someone else. This is the way investigators gain access to phone records, banking and health records, none of which is legal: they pretext, or pretend to be the person who has the right to these records. The Gramm-Leach-Bliley Act covers pretexting to get bank records, the Telephone Records and Privacy Protection Act of 2006 covers the same area for phone records, the Drivers Privacy Protection Act does same for motor vehicle records, and of course there is HIPAA for health records.

The exceptions? Pretexting is generally accepted as ethical in the context of race discrimination in housing and certain intellectual property cases. Process servers get away with it too, in general.

The Front Door. We have found, time and again, that calling people on the phone at a time convenient to them and being truthful about who we are can yield enormously healthy results. Even when our clients tell us we may not identify them, people are still happy to talk to us a lot of the time about former colleagues, places of work, and other topics. This, despite having no clear idea why we want the information.

The main secret in getting people to talk? Be nice to them, be patient, and let them talk without cutting them off. Without a badge or a subpoena, courtesy is the best tool out there.

Being nice to people and telling them the truth about who you are means you run very low risks of getting into ethical trouble. Suppose they want to give you trade secrets? What if they are already represented in the matter and you violate the no-contact rule (rule 4.2)?

If you are pretending to be someone else, you can’t very well ask them whether or not they are represented, and you can’t warn them that you are not looking for them to violate confidentiality agreements. But as yourself, a lawyer or a lawyer’s agent, you can and should do those things before you get down to talking about substantive matters.

In so doing, you will greatly increase the odds that the evidence you get is admissible, and you will avoid a trip to the disciplinary department of your local bar association.

While clients who ought to know better frequently ask us to get banking and cell phone records, a request for a medical record is far more rare.facebook medical records.jpg

All three are illegal for us to obtain without a court order by federal statute in nearly any circumstance, as we’ve written about many times on the privacy section of this blog.

If your investigator says otherwise, have a look at HIPAA (42 USC 1320d), the Gramm Leach Bliley Act (15 USC 6821) and the Telephone Records and Privacy Protection Act (18 USC 1039) for starters. 

Maybe because we sign so many privacy forms every time we visit a doctor, it seems that everyone knows that medical records ought to stay private except when we explicitly release them to specialist doctors or insurance companies. HIPAA violations can get you serious jail time.

Now there is word that Facebook wants to get into the business of health information. The Reuters report is here.

We won’t go into what Facebook could do with your information, which is dealt with by Bradley Shear on his social media blog here. In summary, he thinks putting medical records on Facebook is a terrible idea, and we certainly wouldn’t do it. But others disagree.

Our point is that once something is on Facebook, it’s often more easily accessible by other people with access to Facebook. While we can’t ethically “friend” a person under false pretenses, people sometimes put things on the public portion of their Facebook account that’s available to any Facebook user.

Plus, interviews with anyone who is a friend of someone we’re looking at are fair game as long as they don’t violate the no-contact rule.  Hearsay evidence of someone’s medical condition probably won’t be admissible evidence, but sometimes admissibility isn’t the only objective in gathering information.

Just one more reason why any search on a person – for assets, for general information, for just about anything – must always include a social media profile.

We are as zealous as anyone in arguing for the legal protection of a person’s privacy. But if that person decides to climb up on an electronic soapbox and broadcast to us facts that could otherwise stay private, we will work within the law and the rules of professional responsibility to find those facts and report back to our client.

Something to think about before pressing “Share”.

According to several news reports, Walter Reinhardt of North Carolina, pled guilty to 40 charges of securities fraud, common law forgery and common law uttering in North Carolina yesterday.  From 2005 to 2009, Reinhardt solicited fraudulent investments for businesses he claimed were owned by someone in Richmond, Virginia.  He targeted teachers and sweet talked his way into faculty meetings at schools to make hWalter Reinhardt Investment Fraudis pitch.  Authorities believe he may have bilked investors out of a total of $3 million of their planned retirement income.

When we’re talking about investing large sums of retirement money, we always advocate hiring an investigator to look into the background of the person investing the money.  This case is an excellent example as to why.  We previously blogged about Gary Mares, the New Mexico landscaper who took 50% payment for landscaping work up front and then disappeared, never to actually do the work.  In that case, we told you that a Google search of “Gary Mares” produced a trail of bad press, and would have dissuaded people from hiring Mares in the first place. 

In this case, a Google search would not have been enough.  But a good investigator would have known to check the FINRA records on Reinhardt.  One look at FINRA’s records would have shown that, in 2001, Reinhardt was barred from selling securities by the National Association of Securities Dealers for engaging in private securities transactions and for forging the signatures of a public customer both without authorization.  A phone call to the North Carolina Securities Division would have also revealed that Reinhardt was not licensed to sell securities in the state.

We would certainly be hesitant to invest our retirement funds with someone that was barred from selling securities and we’d guess that Reinhardt’s clients would have been too.  This is yet another cautionary tale about doing your research before handing your money over to a potential fraudster.

Grandchildren of the late Judge Leander Perez, a segregationist political boss who ruled Plaquemines Parish, Louisiana from the twenties until his death in 1968, recently filed a so-called “legacy lawsuit” against several large oil companies for allegedly polluting land on which the family held mineral rights.  The glaring problem with the plaintiffs’ case is that Perez stole the mineral rights in question from the Parish he controlled for over 40 years. 

Perez legacy suit divorce.jpgAlthough it was no secret that Perez was crooked, exactly how Perez and his family amassed their $80 million fortune remained a mystery until 1987.   Suspecting Perez’s misdeeds, Plaquemines Parish later brought a lawsuit against him and his family.  

The Parish could prove nothing until one of their lawyers decided to try sifting through the records from Perez’s son’s divorce.  In the file, the Parish lawyer found a scrap of paper that referred to a company called Delta Development Inc.  Delta Development Inc. turned out to be the company the Perez family had used to receive their oil royalties for decades. 

Our big break in a case often comes from the unlikeliest of places.  We always tell our clients to try to think outside the box when developing an asset search strategy because you don’t know what you don’t know.  It just might be worth getting that old case out of archives or interviewing that former secretary.  

In fact, much like in the Perez case, we rcently uncovered offshore companies holding assets at issue in a commercial litigation by reading through the public divorce filings of one of the defendant company’s executives.  Our clients, who previously had no reason to suspect that their adversaries were conducting business through offshore companies, can now craft discovery demands that could reveal what we suspect may be a much larger network of hidden offshore companies and assets.

Not one, but two stories of criminals foiled by their own selfies have made the headlines this past week.  Tanya Peele, a 26-year-old Atlanta woman, is accused of setting up a fake business account at JP Morgan, then using that account to steal over $100,000.  When Peele went to withdraw the allegedly stolen cash, JP Morgan’s security cameras caught her on video.  Atlanta police matched the video to selfies she had posted on her Facebook page. 

Criminals Caught by Selfies.jpgMichigan bank robber Jules Bahler pled guilty this week to robbing a Bank of America branch.  Like Peele, Bahler was caught on one of the bank’s security cameras.  Police later identified him through Facebook posts of selfies he took while holding the same submachine gun he used to carry out the robbery. 

One would think that any criminal would want to keep a low profile both online and off.  But criminals are caught because of their online presence all the time (don’t believe me?  Just google “criminal” and “selfie”).  The most famous such case we’ve written about is that of Ross Ulbricht, the mastermind behind the illicit e-commerce site Silk Road.  Ulbricht posted his personal email address on a message board about Silk Road, which eventually led to his arrest.

Most of our clients are lawyers, so we have to be careful when dealing with social media.  Ethics rules prohibit us from reaching out to represented parties on social media or “friending” people under false pretenses to gain information that could be helpful to a client’s case.  In our experience, you often don’t need to be sneaky to find fantastic information. 

We were once able to track down a witness in a case because she posted a picture of herself at a bar on a publicly-viewable social media site.  In the background, we saw the name of the bar reflected in a mirror, tracked it down, and found out that she was a bartender there. 

In fact, we were also able to find the defendant in that case because he obsessively tweeted messages to attractive female talk show hosts.  His geocoded tweets showed that they were coming from California.  Until we found his Twitter account, we weren’t sure whether he was living in California or at his parents’ house in Oklahoma.  Mystery solved thanks to social media!

As part of our comprehensive pre-investigation briefing process, we always ask our clients to identify the target’s e-mail and social media handles.  We have found that HappyGuy73@email.com will also be HappyGuy73 on social media sites and message boards.  In one case, our subject, who was a high-level executive at a very large bank, was involved in running a mud wrestling ring in Nevada.  We found out because he had posted comments on a mud wrestling message board using a social media handle that our clients had given us.    

We have said time and time again that a Google search is never enough for a thorough investigation.  However, it can come in handy when using an individual’s online presence to track down information that they have chosen, however ill-advisedly, to reveal about themselves online.    

According to KRQE news in Albuquerque, New Mexico, landscaper Gary Mares was busted for fraud once again.  This time, he solicited landscaping work on Craigslist, collected large sums of money for the jobs upfront, and then never performed the work.  Previously, he was working as a landscaping subcontractor for a legitimate company, Milligan Scapes.  According to the criminal complaint, when Mares wasDead Patch of Grass.jpg assigned a job by Milligan Scapes, he would ask customers to write out a check in his own name to pay for half of the job up front, and then never returned to actually do the work.

This case is interesting to us because Mares had a trail of bad press about him on the internet, yet he still managed to find people to swindle.  We searched Mares’ name on the internet, and, apart from the articles about his arrest from the past few days, we saw that he was on a 2005 list of New Mexico’s Top 10 Unlicensed Contractors, and that, at that time, he owed up to $125,000 in damage claims.  We also found a 2010 blogpost written by Mares regarding his prison time in which he talks about having gambled with other people’s money to help climb out of his own debts.

Evidence of a criminal record should not necessarily dissuade a person from engaging someone as their landscaper, but we certainly advocate at least searching someone’s name on the internet before hiring them, especially off of Craigslist.  If you’re dealing with either moderate to high dollar values or any sort of prolonged relationship, we would also recommend hiring an investigation firm to take a deeper look at the person because, as we blogged about here, so many records do not come up in a Google search.  Spending a few thousand dollars on a background check to save you from losing much more down the road is worth it.

In this case, a quick internet search would have probably done the trick.  The victims may have still hired Mares.  But the knowledge of the unlicensed contractors list and a prison sentence for swindling people out of money might have prevented them from paying such a hefty sum for the job up front, before Mares even did any work. 

Last week, Curtis Harold DeBerry, owner of the Texas-based Progreso Produce Company, was arrested and accused of cheating investors, business partners and banks out of millions of Decayed Strawberry.jpgdollars over the past few years.  He now faces up to 30 years in prison.

According to the criminal complaint, DeBerry hid assets by transferring money to his children, and diverted assets meant for creditors to pay for his own luxury items (including a yacht).  One of the more egregious allegations in the complaint is that he bilked a fruit wholesaler out of over $8 million.

We regularly come across people that are hiding assets in their family members’ names or in secret companies.  We recently found that a debtor had placed all of his North Carolina companies in his nephew’s name, and then used those companies to buy up loads of property.  We always think outside of the box when we’re doing an asset search.  We’re well equipped to look for assets in the names of people close to the debtor using our proprietary commercial databases and by scouring the public record.

On the flip side, in many cases, our clients would not have needed an asset search if they’d done some more diligence prior to entering into the bad business deal.  This looks to be the situation here with the fruit wholesaler.  Sure, it costs money to do diligence, but a few thousand dollars to save $8 million seems more than worth it.

In this case, Fruit wholesaler, Eclipse Berry Farms, LLC, and Progreso entered an agreement to grow and sell strawberries together.  According to a civil complaint, to induce Eclipse to sign the agreement, Progreso showed Eclipse 42 leases with strawberry growers in Zamora, Mexico where the strawberries for the joint venture were to be harvested.  Eclipse then sent over $8 million to Progreso for growing, producing and packaging the strawberries.

According to the complaint, after the contract had been signed and money advanced, Eclipse sent a quality control person to Mexico to actually take a look at the strawberry harvesting land and operations.  It was then that Eclipse learned that Progreso did not have any leases with strawberry growers in Mexico and had instead been haggling with local strawberry growers to buy strawberries at a very low price.  Ultimately, Progreso used about $2 million of Eclipse’s funds to purchase strawberries in Mexico, but kept the balance of the $8 million for itself.

Though it was prudent for Eclipse to eventually send a quality control person to Mexico to check on the strawberries, it would have been wiser to send someone down prior to investing $8 million in the first place.  A few phone calls to the counterparties on the strawberry leases might have even been enough to put Eclipse on notice of Progreso’s alleged fraud.  Had they discovered that Progreso did not have any leased strawberry land, they would have never advanced the money, and wouldn’t now be stuck duking it out with other creditors to get pennies on their dollars back from Progreso.