DAVID MUNRO and DREW MACONACHY : How Not to Be a Fraud Victim : 2 White-Collar Crime Investigators Provide a Few Tips

Federal and local law enforcement authorities say a day rarely goes by in Orange County when an individual or corporation doesn’t become a victim of white-collar crime.

Southern California is considered the center of financial fraud, home to more con men than any other region of the United States.

The perpetrators range from corporate executives pilfering company funds to small-time thieves who steal investors’ money simply by promising them sky-high returns. No one has a precise estimate of how much all of this costs Orange County businesses and residents, but regulators conservatively put the damage at more than $1 billion a year.

Drew P. Maconachy and David J. Munro are private investigators with the Santa Ana firm of Murphy & Maconachy, which specializes in white-collar crime cases.

Maconachy, 39, joined the FBI in 1976 fresh out of graduate school. He was the agent in charge of the W. Patrick Moriarty case, one of the biggest local investigations this decade,conducted by the FBI, the Orange County district attorney’s office and the Internal Revenue Service. Moriarty, former president of the Anaheim-based fireworks manufacturer Pyrotechnics, pleaded guilty in 1985 to mail fraud violations in connection with the bribery of local elected officials. Maconachy left the FBI in 1984.

Munro, 43, has worked in law enforcement for 23 years, beginning with a three-year stint in the U.S. Marine Corps’ criminal investigation division. He spent the next decade working for the San Clemente Police Department as an investigator. In June he retired from the Orange County district attorney’s office, where he had worked for 10 years. He most recently was the supervisor in charge of the district attorney’s major fraud unit, which primarily investigates white-collar crime.

Maconachy and Munro recently spoke with Times staff writer Gregory Crouch about how businesses and individuals can avoid becoming victims of white-collar crime.

Q. How extensive is white-collar crime in Orange County?

A. Maconachy: I think it’s fairly well known among the law enforcement community that Los Angeles and Orange County are considered the white-collar crime capitals of the world. And every major white-collar scheme can be found in Orange County, from an advanced fee scheme to a Ponzi scheme to fraudulent tax shelters to boiler room operations that are frequently involved in precious metal schemes or other types of investment opportunities that we refer to as get-rich-quick opportunities.

Munro: The only thing I could add would be large-scale real estate investment fraud and bank fraud.

Q. How big are the losses to corporations and investors?

A. Munro: At the time of my retirement in June, I was responsible for the investigation of about $670 million in white-collar fraud cases. Those were Orange County jurisdiction cases only. In one respect or another, victims of those losses either lived in or had businesses in Orange County. It’s epidemic. My estimate based upon what I had seen in the three years I was in charge of that division was that figure represents about 40% of the white-collar fraud that exists in Orange County.

Maconachy: You have to remember that Dave’s office was not handling all of the white-collar crime cases in Orange County. They had certain jurisdictions over certain violations, but there are also other local agencies and federal agencies that are very much involved in white-collar crime investigations.

Q. How do these con artists find their victims?

A. Maconachy: Take a boiler room operation, for example. Regardless of where one lives, you are going to have a ZIP code assigned to your principal residence, and those ZIP codes will be gathered and stored and analyzed so the purchasers of those lists will be able to determine the relative household incomes or net worth of the people living in those communities. I can randomly call people in Newport Beach and know they are generally going to have a higher average per-capita income than, say, someone residing in Twentynine Palms or in Riverside or in Garden Grove. So from a standpoint of individual investors and precautions that can be taken by them, if the individual is called out of the blue and approached by a broker of some type or an investment counselor or financial adviser whom they don’t know and who is offering a very attractive investment, bells, whistles, sirens, alarms should be going off in that person’s head. Because that is the typical way these boiler rooms operate. And if you are offered an investment opportunity that sounds too good to be true, it probably is too good to be true.

Q. Are investors and companies that are victimized just naive, stupid or greedy?

A. Munro: By and large, most investors generally are sophisticated. And they are motivated by greed. On a number of occasions at the D.A.’s office, we found the same victims would appear in different cases.

Maconachy: One of the more remarkable things about people calling in these complaints is that, even though they are very sophisticated--many of them owners of their business or chairmen of very respected businesses--they all fell for unrealistic opportunities.

Q. How do companies become victims of fraud?

A. Maconachy: You have many different types of situations where a company can lose money. The first type of situation will involve an in-house, trusted employee who will be given substantial latitude in terms of what he can authorize the company to purchase. He has an ability to sign checks on behalf of the company, and it certainly has been our experience if such an employee wants to steal from you, there is very little you can do to prevent it. The second type of fraud is an investment scheme that a company falls into. The company is enticed by false promises of very high returns to invest funds from its own accounts, such as a 401-K program, and ends up losing all its money. The third type of situation would be where you are dealing with vendor fraud, where you have a situation like an in-house employee acting in collusion with an outside party to obligate your company to a bogus contract or authorize payment of a nonexistent purchase and cause the company to lose a great deal of money.

Q. Can you give me an example?

A. Munro: It is an ongoing case, so I can’t give you the name. It is a very large case in the area of $200 million to $300 million and encompasses several states right now. And it has to do with employee withholdings in retirement funds. And it’s relatively simple. A number of businesses acquired the services of a company--which operates under about seven different names--that sells various retirement funds. Basically, what happened is that the retirement funds did not exist except in name and the money invested over a period of years by the employer and employees has been stolen and used for the personal benefits of the thieves. The guys made $200 million to $300 million, and the employees do not have retirement accounts now.

Maconachy: The typical case isn’t that big. For instance, an employee is placed in a position of responsibility where he has access to money. The company has a sufficient amount of income from monthly billings so the owners or manager don’t know on a monthly basis what the gross income is, but the employee does know. So the employee will create phony accounts, phony invoices, and disburse money to those phony vendors and make off with the money.

Q. What about being defrauded by outside forces?

A. Maconachy: There is no question that happens a lot. For instance, if a firm is a generator of hazardous waste or materials, it is required to properly dispose of those materials, and there are companies that will offer to dispose of those materials for whatever the price may be. Rather than dispose of them properly, they will take them out to the desert or a deserted road or a vacant lot and dump the drums or liquids or whatever the case may be, and under the Superfund program, that company is still responsible for the damage their hazardous materials do to the property even though they intended to dispose of them properly.

Q. What can a company do to protect itself from being defrauded?

A. Maconachy: There are a number of pro-active and reactive programs that corporations should have. From a proactive standpoint, your first line of defense is the employees you hire. And from that standpoint, if you are hiring an employee in a high-risk position--they control company funds or purchases--by all means, you should attempt to develop as much background information on the employee as possible. Forty percent of all resumes do not accurately reflect either the educational backgrounds or prior employment.

Q. How do you go about checking someone’s background?

A. Maconachy: You can certainly verify his educational background, you can contact former employers and research courthouse records to determine if he has been convicted of a crime.

Q. But courthouse records only represent select areas. What if someone worked outside the Orange County area?

A. Munro: The answer is simple. If on the employee’s background they indicate employers in various parts of the country, you can get court records in the areas where he has been. That is the best way to determine what criminal and civil background he has.

Maconachy: More and more people are doing background checks because it is becoming more and more difficult to obtain insurance against the dishonest acts of employees. Businessmen should carefully review their insurance policies to ensure they are covered against the dishonest acts of employees, such as forgeries or embezzlements.

Q. How do the privacy laws affect the scope of a background check?

A. Maconachy: One of the reasons it is so difficult sometimes to catch the dishonest employee is because of the privacy acts that we now have in the United States. If you call a former employer and you inquire about a current applicant, even if that former employer discharged him because of a criminal act, stealing from the company or whatever, more likely than not, that former employer will not tell you that applicant was involved in some dishonest act. The reason is the former employer is concerned you would use that information as a basis for not hiring the ex-employee and all of a sudden that former employer will find himself involved in a lawsuit.

Munro: So it’s more important that you, as an employer, exercise as much due diligence as you can. That would include running a credit report. What is the current financial condition of the applicant? Does he have any liens against him? Has he ever filed for bankruptcy? Is he a party to a lawsuit that might motivate that employee to consider stealing from the company?

Is his credit bad?

Q. Besides background checks, what else can companies do to prevent fraud?

A. Maconachy: They have to set up other good internal controls. You shouldn’t have an employee who is able to sign a company check up to an enormous limit. There should be limits on one-party signatures.

Munro: You can establish joint signatures on checks over a certain limit. And you should make sure the person who is handling your accounts payable is not reconciling your cash at the end of the month. Don’t let that dishonest employee cover up the crime because you are giving him responsibilities for two segments of your business that overlap.

Q. What would be a reasonable limit?

A. Munro: Depends on the size of the business. For a small business, it might be a $1,000 transaction. For a big business, maybe it’s every $100,000 or $500,000.

Q. Should you investigate business partners, too?

A. Maconachy: Just as you screen a potential employee who may only be involved in $1,000 transactions, you should exercise due diligence in screening companies or developing background information on companies where thousands of dollars are at stake. You can do that the same way. You can develop a civil background on those companies to find out if they have been the subject of any lawsuits and what the subjects of those suits were. Have they been sued for fraud or breach of contract? Develop information about the owners of the business. What are their backgrounds? How long have they been in business? Has the business filed any petitions for bankruptcy or reorganization?

Munro: What many companies do is, they rely on a Dun & Bradstreet or any other type of similar credit report, but a Dun & Bradstreet is only as good as the information given to Dun & Bradstreet, which is given by the owner of the business.

Q. Who should a business contact once it discovers it has been the victim of a fraud?

A. Maconachy: Businesses should know their local police departments, and they should by all means feel comfortable contacting the local or federal authorities in an effort to get help. What they have to realize is that the law enforcement community is inundated with a tremendous volume of similar types of complaints, so that businessmen can help the law enforcement community by gathering as much evidence and as many facts as possible to shorten the period of time that law enforcement agencies may have to investigate that crime.

Munro: But there is not only a good chance but a likelihood that they won’t investigate it. When that happens, they have to turn to outside agencies, such as law firms or accounting firms or firms such as ours, to help them either with insurance recovery or locating the perpetrator of the crime to hopefully recover the money. The bottom line is to treat every investment or major expenditure as an adversary. Do your homework before you invest.

Q. How much caution is too much?

A. Maconachy: The vast majority of employees are conscientious and good solid people. We want to get that across. But it’s those few who can create havoc for the businessman.

Munro: I don’t think one should be paranoid, and I don’t think someone should spend 100 hours screening an employee. But if you spend little time evaluating that prospective employee, you could be sorry.