Simon Consulting Newsletter – April 2017

When is a Court Appointed Receiver the Right Choice?

By Susan Conrad

gavel

You probably have clients who told you they have talked until they were blue in the face, trying to convince their borrower how important it is to formulate a plan to repay their debts. However, the borrower is not listening, and prefers to stick their head in the sand, hoping the situation will go away. Suddenly, the borrower is no longer returning calls.

Perhaps your client is a partner in a partnership, and discovers funds are being moved out of the company, but their partner is not being open about it. The friction between the two of them is building, and they are no longer communicating. Your client is now deadlocked on how to move forward.

What are your options for either of these scenarios?

A court appointed receiver may be a solution to either of these situations, especially if there are significant assets involved. Appointed by a court of law as an equitable remedy, the receiver is a disinterested third party that is charged with taking control of and preserving the assets of an entity.

The receiver can have a wide array of rights and obligations. While the receiver takes control of the property in a receivership, they do not obtain title to the property. In addition to being dictated by law, the rights and obligations of the receiver can and should be specifically spelled out in the receivership order. Particular attention should be given to drafting the receivership order, due to the wide array of options and authority that can be given to the Receiver.

A receiver may be the right choice in many situations, as the receiver’s responsibilities and obligations to the parties is very high. The goal of a receivership is to represent all parties to the issue fairly. The receiver is required to faithfully pursue its duties and report to the Court on a consistent basis. Experience counts, as the receiver needs to be reliable, fair and exercise due care when carrying out his/her duties.

A receiver can often help the parties negotiate a settlement, or the threat of a receivership may cause the parties to settle.

A successful receiver should exercise good business judgment. Many decisions need to be made with the parties’ best interest in mind. Should the business continue to operate? What is the best way to operate the business to provide the best outcome to all parties? Perhaps the best course of action is to liquidate the assets? Sound business judgment comes from experience. In addition, a receiver can bring a fresh perspective to business and legal problems that can result in savings and/or a more efficient process.

Due to our successful track record, Simon Consulting has been appointed as receiver or as a court appointed neutral in over fifty matters, ranging from complex Ponzi schemes to simple liquidations. Below, you may read about some of the receivership cases we have handled and our cases that are currently open.

Fraudulent Manipulation of Bank Statements in Electronic Format

By Peter Davis, CPA, ABV, CFF, CIRA, CTP, CFE and Sara Beretta, CPA, CFE, CFI


Bank records are of particular interest and importance to forensic accountants and receivers, as they reflect an entity’s actual financial history. In fact, bank records can tell a powerful story. We identified bank statements in several of our investigations that were electronically manipulated to reflect deceptive and fraudulent statement entries. Both the descriptions and amounts were changed for electronic payments, such as wire transfers and debit card transactions reflected on statements.

In some cases, deposits were altered to reflect greater cash inflows, and the balances were manipulated such that they rolled forward, helping the manipulations go unnoticed.

Bank and credit card statements are often downloaded by accounting personnel from bank websites in PDF format, in lieu of receiving hard copies via mail. This practice is becoming increasingly common as companies are encouraged to go paperless. In some cases, we found that statements were manipulated using software that cracks open PDF files and provides editing tools that were used to change amounts, dates, and descriptions of various transactions. The files were then converted back to PDF format.

Today, bank records can be easily manipulated using Adobe Acrobat Pro software, which doesn’t require converting the file to a different format. For example, imagine a case of employee embezzlement, in which an employee uses a company credit card for personal purposes. If the employee has access to the electronic statements, it would be incredibly easy to change the payee name from a department store to a less questionable vendor, such as an office supply store.

Inevitably, all PDF files are editable. Even if the original PDF file is scanned as an image in bitmap format, a process known as Optical Character Recognition (OCR) allows users to convert the PDF into text format. Adobe Acrobat contains an OCR feature, and there is other software available on the internet. Even PDF files that are not in text format can still be edited through other means. Techniques such as using screen capture software to take an image of the document and then editing and resaving it can be used to change an electronic file.

Some financial institutions apply security features to PDF files, which can help to prevent manipulation. In our experience, this occurs most often with investment accounts. In Adobe Acrobat Pro, you can check whether security features have been applied to a PDF file to determine if the document is subject to manipulation. These security features can only be removed if you know the password used to enable them. However, in our experience, most banks don’t apply these simple security features to electronic statements.

The most secure PDF files can restrict users from changing a document, combining multiple files, extracting pages, copying text, and even printing the files. Although this security feature is almost never used, one might question why a financial institution would want to prevent users from printing out statements. Someone with access to printed statements could simply scan them back into PDF format and convert them into text, which essentially washes away all security features applied to the original electronic file. The creator of the PDF can implement password protection, but ultimately, this protection can be broken.

Changes made to bank statements are virtually impossible to identify without having a copy of the original bank statement to compare them to. Forensic accountants and receivers should exercise caution when relying on bank and credit card statements in PDF format, unless they come directly from the financial institution. Specifically, there are a few things to look out for with regard to statements received from other sources:

  1. Look for slight differences in font types and sizes. Some banks use more obscure fonts that are difficult for basic OCR software to match.
  2. Look for statements that appear to have been scanned but have been converted to text format, as such documents reflect the potential for manipulation.
  3. Match ending balances from prior statements to beginning balances of subsequent statements. It can be difficult to carry on the manipulation without error for an extended period of time.
  4. Look for excessive bank fees, as such fees might be indicative of overdraws despite an apparent positive cash balance.

The ease of electronic manipulation teaches a valuable lesson. We must remember to exercise caution, and remain on heightened alert of fraudulent schemes in the analysis of bank records.

Meet Mark C. Musa

Managing Director at Simon Consulting

Education

B.S., Economics, Arizona State University

Mark Musa

Managing Director Mark C. Musa has 20 years of experience in litigation support, forensic economics, accounting, finance, litigation consulting and financial investigations. Mr. Musa’s areas of expertise include the following: lost earnings and fringe benefits, lost business profits, business interruptions, breach of contract, valuation of life care plans / cost of care assessments, misappropriation of trade secrets, damage calculations, misappropriation of assets, loss of household services, and forensic accounting / fraud investigations. Mr. Musa has provided expert testimony on numerous occasions related to financial damages at jury trials, arbitration, and depositions.

Mr. Musa has extensive experience in evaluating and calculating economic damages stemming from litigation involving personal injury (including medical malpractice), commercial business disputes, wrongful death, and employment disputes (wrongful termination and discriminatory actions). Mr. Musa has worked extensively with law firms, insurance companies, Fortune 500 companies, privately held businesses, governmental agencies, and individuals as part of his work as a financial consultant.

Mr. Musa holds a B.S. degree in Economics from Arizona State University. He is a member of numerous professional organizations, including the National Association of Forensic Economics and the American Academy of Economic and Financial Experts. Prior to joining Simon Consulting, Mr. Musa worked for a global consulting company in that firm’s Disputes and Investigations practice.

Interesting Facts

Mark is a native Arizonan. He is married, his daughter is active in gym and she’s on a cheer competition team. Mark is a collector of rare and vintage sports cards and he is an avid football and baseball fan.

 

Simon is Providing Continuing Legal Education (CLE) Classes

Our own Scott Evans, Managing Director here at Simon Consulting, will be teaching two classes on behalf of the National Business Institute’s Continuing Legal Education for Professionals on May 31, 2017, in Phoenix. The two classes are 'Forensic Accounting 101 for Attorneys,' and 'Business Valuation: Dissecting Closely Held Entities'. To learn more about the class or to register, click here.

Scott will also be speaking in front of the attorneys of the law firm of Davis Miles McGuire Gardner of Phoenix on April 27, 2017. Scott’s presentation is titled ‘How to Talk to Your Clients about the Value of Their Business’ and it is part of the firm’s CLE program.

If you are interested in having one of Simon Consulting’s forensic accounting experts speak to your firm or group, please email us at info@simonconsulting.net to request information.

Who We Are

As the premier provider of complex financial and litigation consulting services in the Southwest, Simon Consulting, LLC (“Simon”) is the authority for forensic accounting, fraud investigation, damage calculations, receivership and restructuring, business valuations, family and criminal law matters, forensic economics, and expert witness services.  Simon personnel has provided expert testimony regarding fraudulent transfers, damages, solvency, forensic accounting, alter ego, lost earnings, business valuations, and other matters hundreds of times in both State and Federal courts.  Simon’s team provides the required depth of knowledge, education, experience, and skills necessary to meet and exceed client expectations.

What We Do

Simon provides coordinated professional services in three primary areas:

  • Forensic Accounting: Fraud and forensic investigations, commercial damages, and business valuations, bankruptcy, family law, regulatory, criminal, or other matters.
  • Receivership and Restructuring: Management, restructuring, turnaround, or sale of businesses or real estate in transition or distress, and related expert services.
  • Forensic Economics: Economic analyses and determination of lost profits and lost earnings, including those related to tort and contract matters. 

 

Sample List of Receiverships

Certain of our open receivership cases and some past (closed) cases are listed below:

Open Receiverships

  • Cale A. Clayton v CV Flooring Mgmt. LLC, et al.; Maricopa County Superior Court; Receiver, 2015

    Simon was appointed Receiver for CV Flooring Mgmt, LLC due to litigation resulting from a dispute between the company’s partners. CV Flooring is a commercial flooring contractor. The Receiver was appointed to take possession and control of the company’s assets and to wind down the company. The Receiver took a supervisory role in this matter to reduce receivership costs by working with the partners and their staff to complete all outstanding projects, collect remaining accounts receivable, and pay remaining debts.

  • Hallmark Hospice LLC v Garrett, et al; Maricopa County Superior Court; Receiver, 2014

    Simon was appointed Receiver of El Sol Hospice, LLC due to litigation resulting from a dispute between the company’s owners. El Sol was a hospice provider. The Receiver was appointed to monitor the assets and income of the company. The company is no longer operating. Receiver performed an analysis of certain misrepresentations by one of the parties and has been relieved of all duties except any recovery related to a litigation claim.

  • Sonnenschein, et al. v Palo Verde Capital LLC; Maricopa County Superior Court; Receiver, 2013

    Simon was appointed Receiver over Palo Verde Capital, LLC due to litigation resulting from allegations of fraud. Palo Verde Capital was an investment fund. The Receiver was appointed to perform a forensic accounting and to recover assets for the Receivership estate.

Closed Receiverships

  • SVP Restaurant Financing LLC v KCI Restaurant Management LLC, et al.; Maricopa County Superior Court; Receiver, 2014

    Sky Financial Investments, LLC and SVP Financial Services Partners, LLLP acquired interests in various subsidiaries that operated various Taco Bell and Pizza Hut restaurants in the Midwest and East Coast. Simon was appointed Receiver for Sky and SVP due to litigation between various members and managers resulting from a dispute over management fees. Simon’s investigation in this matter determined that both Sky and SVP were insolvent prior to the payment of certain management fees. Due to the financial condition of the entities and because of additional remedies available to a trustee in bankruptcy that would not be available to the Receiver, the Receiver obtained the Court’s to file bankruptcy petitions on behalf of SVP and Sky in the United States Bankruptcy Court for the District of Arizona.

  • Hellman v Edgar, Ancillary Care Solutions LLC; Maricopa County Superior Court; Receiver, 2013

    Simon was appointed Receiver for Ancillary Care Solutions, LLC due to litigation resulting from a dispute between the company’s partners. ACS established and managed physical, occupational, and speech therapy programs by providing regulatory compliance guidance, billing systems, and other solutions. The Receiver was appointed to take control of the company’s assets and manage ongoing operations pending the resolution of the parties’ claims. Simon assisted with the dissolution, liquidation, and closing of the books of ACS pursuant to a settlement agreement between the parties.

  • Pham v All Greens Inc., et al.; Maricopa County Superior Court; Receiver, 2013

    Simon was appointed Receiver for All Greens, Inc., a medical marijuana dispensary based in Surprise, Arizona due to a dispute between the company’s members. The Receiver was tasked with several challenging responsibilities in this case, including (1) meeting strict Arizona Department of Health Services (“AZDHS”) deadlines in order to open the dispensary before the company’s dispensary registration certificate expired; (2) identifying and selecting a management candidate with sufficient background, expertise, and resources to finance, open, and operate the dispensary; (3) the difficulty of obtaining inventory given the infancy of the Arizona dispensary industry in 2013; and (4) operating the business in compliance with strict federal banking laws. Simon worked with the parties to negotiate a settlement agreement that successfully settled many of the receivership estate’s largest claims and debt obligations and helped to ensure that All Greens remained economically viable after the receivership.