The Hazards of Doing Business with Friends
BILL MALONEY
Jack Fellows was a man who could fool anyone, even those closest to him. He was married with two children, but he had never been very savvy with his career moves and he had a checkered employment past. However, he hit the jackpot when his longtime friend, Phil Careselli, took it upon himself to help out his buddy.
Phil was also happily married and had three children, two of them in college. He was a successful business owner, and he wanted to use his position to help those he cared about. When he was just out college, Phil was hired as a claims processor for a large, well-respected insurance company in the Midwest. He put in five years with the company, earning promotions and gaining valuable insight into the insurance business. Shortly after he got married, he took another big plunge and opened his own company, Careselli Insurance Agency. He started in a small office with one assistant. Over time, Phil's hard work and dedication grew the company to five branches in several cities. His flagship office employed 12 people, and each regional office had four to five staff members. The company offered a range of insurance products, but its main trade was in policies for other business enterprises.
While Phil enjoyed professional success, he watched his close friend Jack struggle to hold down a series of sales jobs and listened to his stories about unfair bosses and how nobody respected his ideas and abilities. Phil knew some of Jack's rants had to be bluster — after all, his string of “bad bosses” was pretty long — but Phil had known Jack for almost two decades; he was a good guy. Phil thought if he could just give Jack the break he so desperately seemed to need, Jack could turn things around for himself and his family.
Phil offered to hire Jack and train him to be the manager at Careselli's main office. Jack jumped at the chance to work with his friend and to oversee the small staff. He boasted to his wife that he was going to be “the boss of people” and wouldn't have to stress about pleasing his own tyrant of a boss anymore. Phil spent months explaining to Jack the day-to-day operations of his company, the insurance industry as a whole, the accounting and finance processes and the roles of other employees. At the end of his intensive training, Jack was given the title and responsibilities of office manager. He happily began to oversee the staff and manage the daily operations. After a few months, Phil was pleased with Jack's performance and gave him free rein to run the office as he needed. Jack had an engaging personality and earned the trust of the staff easily. He managed Careselli Insurance Agency without any apparent problems
Before hiring Jack, Phil had divided the daily tasks among his staff based on their individual strengths and how they benefited the system of opening new accounts and managing claims. This meant that several people could be working on a single policy at various points, each addressing different concerns. This placed the general oversight of accounts on Phil and Jack, and enabled Jack to take advantage of his position. Phil was a true entrepreneur who kept himself busy expanding his business endeavors and branching out into related fields, such as real estate and mortgage financing, and getting more clients. Phil totally trusted his friend — his mentee — to maintain the insurance office side of the operation.
In addition to management responsibilities, Phil gave Jack authority to broker third-party financing to fund corporate insurance policies — and Jack alone controlled this function. He was able to create financing accounts but divert the funds without the knowledge of Phil or other office staff members. It was common for companies to need pricey insurance that they could not afford to pay for up front. In these situations, Jack would arrange financing for them through his preferred vendor, Grandview Financiers. The clients received the insurance they needed, Grandview had a steady stream of new accounts and Jack earned a small commission on each contract. It was a win-win situation.
It Started with a Single Call
A fluke of memory served to bring Phil back into the thick of his business operations. One day an agent at Grandview Financiers couldn't remember Jack's direct phone number, his contact at Careselli, so he simply looked up the office number and called Phil, assuming the owner of the company would be able to assist him. He had a question about one of Careselli's accounts that had gone into default and needed answers. However, after explaining the situation to Phil, he received confused silence. After a moment Phil said, “What were those account details again?” The agent got the impression Phil had no idea what was going on with the account and decided to remind Phil about the many other default accounts that Careselli had with Grandview. Phil said he would look into the matter and call the agent back.
Certain that there was some misunderstanding, Phil began pulling files related to the various financing contracts that had gone into default and discovered that they were all for straw insurance policies — someone had requested financing from Grandview for policies that Careselli didn't sell. Phil was able to trace some of the funds from Grandview to the personal bank accounts of Jack and his wife. Still in a state of disbelief, Phil confronted Jack about what he had discovered.
Jack assured Phil that it was an error and that he would take care of it. He explained that the checks written to him were for a company loan that he intended to pay back. However, Jack could come up with only a portion of the money, and Grandview was becoming more assertive. The story didn't make sense to Phil, and when managers at Grandview threatened to start legal proceedings and go to the state insurance commission, Phil decided he had to fire Jack, contact the police and file a complaint of employee theft, which was referred to me.
Understanding the Industry
I was an investigator at the local police department where Phil filed his complaint, and I received the intake officer's initial report. After reading through the details, I contacted Phil for a meeting. I asked him to come to my office, and he readily agreed. I conducted a fact-finding interview with Phil and learned the structure of his various offices and particularly the headquarters where Jack worked. I asked about the staff and job functions. Phil explained how the office was set up, what the various duties of his employees were and what Jack's responsibilities were within the business. After finding out how the accounting and bookkeeping was done and how Grandview had been used, we discussed Jack's alleged theft and the evidence needed and gathered so far to support the allegation.
After my meeting with Phil, I contacted the state insurance commissioner's office, informed them of the complaint and requested an investigator from their office be assigned to assist. I also contacted the National Insurance Crime Bureau (NICB) to have an investigator from its office help with the case. This proved to be a mistake made so early in the investigation, and one that I won't make again. The investigation stalled several times while I waited for the other agencies to take action. I had requested several documents from them, but — although they had regulative authority to obtain the items I requested — because of the civil nature of their organizations, they had different procedures than law enforcement when faced with noncooperative parties. Long story short, I never received the files I requested.
Phil did provide me with the paperwork for the policies funded through Grandview. In addition to the theft of funds from Grandview, we also found that Jack had misappropriated checks from Careselli. Jack did not have check-signing authority, so he simply forged Phil's signature on checks that he made out to himself. Being the office manager, with little oversight, it was easy for him to take, sign and hide the forged check. When Phil went through the books after the theft was discovered, it was no problem for him to find the checks that Jack had forged. I obtained copies of the fraudulent checks and forgery affidavits for each one. A review of the company checkbook revealed that Jack had written checks to or for his personal benefit worth more than $150,000.
A few days later, Phil called and told me that Jack was contacting some of his customers and asking them to switch from Careselli Insurance Agency to a new agency that Jack was starting on his own. One of the customers who informed Phil of this development said that Jack was also sending an online advertisement to potential clients that appeared to be affiliated with Care-selli Insurance, but the contact number was to Jack's personal cell phone. Phil knew immediately what the customer was referring to; when Jack was still employed at Careselli Insurance, Phil had asked him to set up an online ad to attract new clients for the company. Phil didn't think anything of it when Jack suggested that, since he was the office manager and would field most of the calls anyway, he should put his cell phone number on the website. That way Jack could take calls from potential clients even when he was out of the office. It looked like Jack left the ad up after he was fired and was now using it to try to start his own business venture. Phil asked me if I could do anything about it, so I decided to use this as my reason to contact Jack and have him explain his side of the story.
In my years of experience as a police investigator, I've learned that it is essential to gather as much information as possible before contacting a suspect and setting up a meeting. It is very important to learn about the subject of the interview and to thoroughly understand the fraud at issue. Having this knowledge prior to the interview gives the interviewer a distinct advantage over the subject for developing rapport, detecting deception and formulating interview strategies from the answers provided compared to the information already known. Before I called Jack, Phil and I recapped the various ways Jack committed the fraud, and Phil gave me a full account of Jack's background.
What Jack Did Not Know
I called Jack the following day and asked him about the online ad he posted. He told me that he had forgotten all about it, and when he left Careselli's he didn't think to take it down. He promised to take care of it right away. I asked Jack to come to police headquarters for an interview about what was going on between him and Phil, and he agreed. He came to my office that afternoon and gave his side of the story. He explained that it was a misunderstanding and insisted that he had not done anything illegal. He initially thought that he was there to explain the advertisement and the disagreement he had with Phil. He said that was surprised the police had been contacted and were involved in the matter.
I asked him about how Careselli's office was run and what he did there, and this led to a discussion of how Grandview was involved in the business. He explained how Grandview financed various accounts several times and in different ways so that I could understand how this was just a misunderstanding. My feigned confusion led him to provide more and more details on how everything was done. From there I was able to have him talk about how financing procedures were normally handled, and then he was left to explain why deviations from normal practices had been made in some instances. He hesitated for a moment and seemed confused about how we ended up on the topic.
Jack was unaware of what paperwork I had or how much I had discussed with Phil Careselli. I had called him in to talk to me so soon after he and Phil had parted ways that he assumed I had not discovered what really happened. After we discussed the business details, I started presenting various documents concerning the loans he established with Grandview for his straw companies and asked for explanations. It became apparent to Jack that I had a lot more evidence and knew much more about what happened than he assumed. I had a clear paper trail showing that Jack set up fake accounts with Grandview to finance fraudulent fake policies and then diverted the funds to his private bank account.
In addition, I had discovered that some of that funding had been used to finance a “preferred customer's” commercial insurance policy at no cost to the client. Essentially, Jack was giving someone insurance for free but taking financing from Grandview. I asked him about this client, but he said he didn't know what I was referring to and clammed up.
Jack left my office but agreed to come back after I gathered more paperwork and investigated further. I considered this initial interview a success and was eager to learn what I could about Jack's special customer. Why would he put himself at risk by funding a third-party policy? What was he getting out of the deal? He was open about everything else I asked, and his silence on this issue was intriguing. I dug into my files and conducted lengthy online research. I discovered the client, Express Midwest Freight, was a trucking company owned and operated by a man named Jacob Gilkey. From archived news stories and police records, it looked like Gilkey was a man no one would want to cross. He had several convictions for assault and was reported to control a gang of “employees” who used their sway to further the interests of Gilkey and Express Midwest Freight. I started to understand why Jack shut up so quickly when I brought up the topic.
It Does Not End with a Confession
I interviewed Jack again a week later, and he brought his attorney. Jack provided a written confession through his attorney and explained which accounts he had fraudulently created and how he did it. When I raised the question of Express Midwest Freight's policy, Jack became quiet again, and his lawyer said they did not want to discuss the matter. Jack said he was scared to talk about it. I assured him that I knew about Gilkey's history and could understand Jack's hesitation, but I told him that the paper trail was going to show what happened and who was involved, whether Jack gave me his account or not.
When Jack realized that I knew the full scheme, he confessed to financing the policy for Express Midwest Freight. He explained that Gilkey had approached him because the trucking company had outstanding debts to its insurer worth more than $75,000, due to problems with a workers' compensation claim. Gilkey told Jack that he needed a new insurer and wanted to go with Careselli Insurance Agency, but he demanded that Jack first pay off his outstanding debt. Feeling threatened, Jack arranged for a straw account with Grandview for the money Gilkey needed. Jack insisted that other than the commission for writing this fraudulent policy, he did not receive money from the transaction.
He said that he also wrote a new policy for Gilkey — financed by Grandview — and received another commission. Jack said that almost immediately Gilkey failed to make payments on the loan, so Jack fabricated additional insurance policies and financed them to make payments on behalf of the trucking company. He was afraid to approach Gilkey about the money and was trying to take care of the situation himself. Jack said at that point he figured if he was generating funds for Gilkey, why not do it for himself? But when Grandview started catching errors in the supporting paperwork for these straw accounts and looking into them, Jack tried to get money together to pay back his theft. He said he paid back more than $100,000 before it all came to a head.
Plea Deal
As a result of this case, I was able to secure a promissory note from Jacob Gilkey to repay Grandview Financiers for the amount of his loan; however, Gilkey has already defaulted on the note.
Phil Careselli filed a dishonest employee insurance claim with his insurance provider. Careselli's policy paid out for the loss to the business on the amount insured per incident, but his policy was insured for a maximum of $50,000 per incident. I contacted Careselli's insurance provider to obtain its investigative report and learned that it had determined that, although Jack Fellows was responsible for $250,000 to $300,000 of loss to Careselli Insurance Agency, it was obligated only for $50,000. Phil was out $200,000 to $250,000.
The case is still open with the agencies I contacted at the start of my investigation, but my criminal case was resolved. Jack accepted full responsibility and agreed to a plea deal that included probation and full restitution to Careselli Insurance Agency.
Lessons Learned
Coordinating with several outside regulatory agencies to act at once is difficult. Due to the different regulatory and administrative procedures and the varying enforcement actions that each agency takes, it was impossible to get an across-the-board prosecution on everything simultaneously in this case.
I found that the regulatory agencies had administrative procedures that were very time consuming and that the companies dealing with them did not always cooperate in providing requested documentation. When that happened, the agencies handled the delays administratively rather than pursuing it as a regulatory violation. I found it hard to have to wait for something to be completed in the regulatory agencies' investigations only to find that the company they were requesting information from would not cooperate and I was not going to get the requested information.
I would suggest, if possible, that you notify external agencies of an investigation that you are working on but then handle your own jurisdiction investigation and file charges without worrying where the other parties are in their case. Of course, I would then forward my referrals to the other agencies for them to conduct their investigations and take whatever action as they see fit. However, coordination is sometimes more hassle that it is worth.
Recommendations to Prevent Future Occurrences
My insight into Phil's experience taught me about how not to run a company. It is never a good idea to allow one person to have control of the checkbook and oversight of accounts. Other than the owner, Jack was the only other person who had access to Careselli Insurance Agency's bank accounts and could issue checks. Phil, after training and guiding his friend in the insurance business, left the day-to-day operation of his agency to Jack while he pursued other business opportunities. Unless a problem was brought to his attention, he trusted that that his company was operating smoothly. Phil should have monitored the bank accounts more closely and not blindly trusted his manager, regardless of their friendship. If he was too busy to actively monitor the accounting processes, oversight should have been separated and assigned to other staff members who reported to him.
It is important to have checks and balances in place, including requiring that a separate employee verify all checks before they are sent out, and assign another individual to balance the accounts. If there had been a co-signer or someone else handling the books at Careselli Insurance, Jack would not have gotten away with cutting himself checks worth $150,000.
Do not allow one person to arrange the financing of new accounts and open and manage accounts without proper oversight in place. Jack set everything up with Grandview and was the self-appointed point of contact. This enabled him to set up the straw accounts, receive the financing and deposit and divert the funds. If the various duties associated with Grandview were segregated, it would have much more difficult for Jack to accomplish his scheme.
Another issue stemming from Phil's blind trust in Jack was that when the finance company came to him with the problem, Phil initially believed in and trusted Jack when he said he would take care of it rather than acknowledging that there was a problem. This gave Jack time to try to cover his tracks. Phil told me that in almost any other facet of his business, this wouldn't have happened — he would have trusted his instincts if they told him something was wrong. He said that in this particular case, because Jack was his close friend and mentee, he subconsciously put Jack beyond reproach. This enabled Jack to prolong the scheme, and it could have been a lot worse if Grandview had not been persistent in resolving the matter quickly. This forced Phil to check further and uncover the fraud.
About the Author
Detective Bill Maloney, CFE, works in the Norwalk Police Detective Division of Fraud Investigations. He has 32 years of police experience, 24 of them as a detective. He is a Certified Fraud Examiner and is certified in all the National White Collar Crime Center's (NW3C) fraud courses. He is a CT P.O.S.T. Police Academy Certified Training Instructor and has specialized training in fraud investigation, interview and interrogation schools, FBI hostage negotiation training, photography and videographer for crime scene processing, National Fire Academy's arson investigation course and composite artist schools. Bill's proudest achievement is being father to and raising a son, Michael, and two daughters, Meghan and Kelly, during a 30-year-marriage to his wife, Vicki.