Case Study: Comics Books and Corruption: How To Botch a Case
Posted on July 25, 2015
In this segment of Clarium News we review a case study about a lawyer who used his position as corporate counsel for a Texas company to dishonestly deprive his employer of $9 million using fictitous and false invoicing schemes. We'll draw a few lessons that can be applied to help deter fraud from occurring within your own company.
In their article which appeared in TheVerge.com authors Russell Brandon and Colin Lecher treat us to a very well-researched and well-written article about fraud, corruption, and money laundering. "Comic Conman: A True Crime Tale of Comic Books, Corruption, and a $9 Million Vanishing Act" recounts the case of suspended New York lawyer Anthony Chiofalo. Chiofalo was hired on as a corporate lawyer for Texas-based company Todano and, over the course of a few short years managed to use his position to defraud his employer of $9 million dollars. Brandon and Lecher explain how Chiaflo was able to pull off the scheme, how he laundered some of the funds through the purchase of high-value comic books, the corrupt investigator who stole evidence, and the losses suffered by a number of businesses. Please read their article. It's entertaining and informative.
So, what can we learn from this case? Let's have a look:
Red Flags of Fraud
- Todano did not conduct sufficient background checks on Chiofano. If they did they would have discovered that Chiofano was under investigation and disciplinary action by the New York State Court's disciplinary committee. Todano hired Chiofano in 2010 (article is not clear). The disciplinary committee handed Chiofano a 2-year suspension in October of that year.
- Todano had poor internal controls and Chiofano was able to submit false and fictitious invoices to non-existent people, companies, and law firms. Proper tender, approval, and invoicing practices could have detected this scheme much earlier. Separation of duties, especially when it involves a gatekeeper position such as corporate lawyer, is critical in maintaining a transparent, accountable, and robust invoicing regime.
- Management at Todano confronted Chiofano prematurely. Deciding when to confront a dishonest employee must be a strategic decision reached in collaboration with legal counsel. Todano was 2-months into their investigation when an executive with the company confronted Chiofano. Chiofano fled the next day. Know that once you confront the employee, the evidence will likely disappear forever. In this case it might have been better for the civil lawyers to obtain civil search warrants for Chiofano's home and restrain Chiofano's assets including bank accounts before tipping their hand. Todano may have recovered more losses in this way.
Red Flags of Money Laundering
- The comic book investors who tracked the purchase of the rare books that were purchased by Chiofano noted that the books were being purchased at prices well above their market value, in a pattern that made no apparent financial sense, and by an investor who clearly appeared to be an amateur. These are classic indicators of money laundering and are often seen in money laundering schemes involving real estate and fine art.
- The investors/traders who purchased the comic books stolen from the evidence pool by the corrupt investigator hired by the Texas District Attorney recognized many irregularities about the back stories on the comic books. They knew that the stories did not add up and were suspicious yet they went ahead with the deals anyway. In the end they suffered a serious financial loss when the authorities seized that stolen evidence.
The Truly Impressive
- The firm Certified Guaranty Company has an elaborate authentication system in place to identify, track, and valuate comic books. Who would have thought? All the systems that this company had in place are well known within the industry. Brandon and Lecher explain these measures in detail and provide some photographs to demonstrate. The investors who purchased the stolen evidence were well aware of the industry's security and authentication measures and if they had conducted some due diligence they would have known all they needed to be satisfied that the books were stolen.
This article by Brandon and Lecher offers some great lessons about preventing, detecting, and investigation occupational fraud and money laundering. It serves to demonstrate the vulnerabilities of corporations to fraud and steps that can be taken to detect and deter schemes long before a multi-million dollar loss threatens the very existence of the firm.
Clarium Fraud and Compliance Solutions can assist your business with a number of solutions to lessen the risk of fraud in your company. Call us to see how your company can benefit from fraud risk assessments, tip lines, and robust investigations.