MICHAEL O. FREEMAN

HENNEPIN COUNTY ATTORNEY

“Securities Litigation & Business Fraud” CLE

August 31, 2009

BUSINESS FRAUD – CRIMINAL COMPONENTS

1. INTRODUCTION

Theft by employees responsible for purchasing equipment from third-party vendors, particularly sophisticated IT equipment, is an increasing business fraud problem. The employee:

1. Purchases equipment from a vendor who conspires with the employee to sell the equipment at inflated prices and receives a kickback; or

2. purchases equipment represented as new, not refurbished, or unnecessary, and vendor kickbacks money to the employee; and

3. an employee buys from a vendor that, unbeknownst to the employer, is actually owned by the employee.

2. THE PROBLEM

1. Corrupt employee who violates internal policies regarding conflicts of interest or conspires with third-party vendor to obtain money kickbacks.

2. Occurs often in the IT area where corrupt employee has expertise in products and company’s needs. Often those who supervise the corrupt employee lack the technical background to easily notice the fraudulent scheme.

3. Schemes include: buying at inflated prices; buying unnecessary equipment; paying for new equipment that is actually refurbished; purchasing equipment that is never delivered; buying from an “inside” vendor.

4. Illustrative cases:

   1. A.G.A. Medical Inc.: employee conspired with outside vendor to purchase equipment that was not delivered, unnecessary, and/or at inflated prices; nearly $1 million in fraudulent proceeds to perpetrators.

   2. UCare: employee owned computer supply company and used his position at UCare to buy equipment at inflated prices; nearly $100,000 in theft proceeds.

3. THE CRIME

1. Theft by swindle, Minn. Stat § 609.52, subd. 2(4).

2. Liebesny and Peterson (AGA Medical) convicted and sentenced to 57 months incarceration and restitution.

3. Robinson (UCare) convicted and sentenced to one year in the workhouse and restitution.

4. PREVENTION

1. Do not allow single employee to be responsible for purchasing equipment: have second employee check invoices against received equipment.

2. Conduct regular audits of an employee’s work including: contacting vendors to determine whether conflict of interest exists, periodic checking of whether equipment received matches invoices.

3. Make sure at least one employee has the technical capacity or at least the commitment to understand purchases in IT or other technically sophisticated areas.