The Divorce Asset Hunter

The Divorce Asset Hunter

When Debtors Make Themselves Look Poor by Raising Spending

By Anastasia Wincorn on Posted in Business

PROBLEM:

To make himself appear cash-poor, the debtor, a small business owner, increases his business’s discretionary expenditures knowing that he can recoup the money after the divorce is final.

SOLUTION:

This problem can take several forms such as overpaying employees, as we discussed here, buying expensive merchandise with the intent of returning it later, or overpaying vendors.  

If you have access to the company’s financial records, an important first step is to familiarize yourself with the business’s past practices. Combing through historical financial records will show you whether there have been any recent anomalies in the debtor’s spending patterns.

Pay special attention to any unusually large payments to vendors who are related to or friends with the debtor.  They are the most likely to be willing to help the debtor and to give him his money back once he’s made a purchase.  Again, look at historical records to determine who the vendors are and how much they are normally paid, then compare that information to records from after the debtor caught wind of the divorce.  If the company’s financial records show an upswing in inventory or supplies purchased from vendors but flatlining or decreasing income prior to those purchases, then there may be cause for suspicion.  There are few reasons to spend more on vendors when business is bad.

A visit to the debtor’s place of business can also uncover unusual purchases.  For example, receipts may show that the debtor spent $100,000 buying new office furniture, but a walk-through showed the same old particle board desks that have always been there.  It could be that the debtor purchased the furniture, but had the seller to store them to avoid the cost of moving items that he knows he will soon return.

Say the debtor owns an auto body repair shop, and he says he spent all his cash on new equipment.  Tour the facility with someone who is familiar with that type of business who can tell you 1) whether the new equipment is really worth what the debtor says it’s worth, and 2) whether the equipment is necessary or even helpful for running the business.

While financial records are crucial, sometimes a good old fashioned phone call can do the trick.  If you know the company’s office manager, have a friendly chat with her.  She may be more than happy to let you know that she has been crazy trying to get in tons of vendor orders.  She may also be able to tell you how often the company usually orders new furniture or equipment to gauge whether the purchases are out of the ordinary.

Finding Real Estate Bought Through a Secret Company

By Anastasia Wincorn on Posted in Real Estate

PROBLEM:

You think that your debtor owns property, but you cannot find any evidence that he owns any real estate in his own name.  You suspect that he purchased property through a corporation so that you would not be able to find it.

SOLUTIONS:

If you do not know the name of the debtor’s companies, or you think he may have more companies than he has told you about, begin with a search of the department of state website in the debtor’s home state.  Also try searching corporate filings in Delaware and Nevada, two common places to register businesses. 

Keep in mind that certain states’ corporate registry databases are far more helpful than others.  In New York, searching a partial name of a company will result in a list of all entities with names similar to the one you entered.  This is a fantastic way to find the debtor’s other corporate entities, since people often will often have a series of companies with similar names.  For example, a search of Company Inc. will also reveal Company II Inc., Company LLC., et cetera.

In one recent case, our client suspected her husband was concealing assets in companies he had kept secret from her.  We found dozens companies the husband had registered in New York, Delaware, and Nevada simply by searching for company names similar to the handful of names our client had given us.  We were then able to search public records to find out whether the debtor had purchased real estate through any of his myriad LLC’s and partnerships.

Once you know the names of the debtor’s companies, search county property records for each of them.  As we discussed in our prior blog post on locating hidden real property, the best place to start is a search of property records in each of the counties where the debtor’s companies are registered or wherever else the debtor may have ties.  You can also search online resources like ACRIS, the New York City Finance Department’s database of property records, which allows you to look up deeds by the owner’s name or by address.

UCC filings against the debtor or his companies can also reveal hidden assets.  Public records of UCC liens will show whether the debtor has put up any property as collateral on those liens.

Easy Come, Easy Go: Gambling Winnings

By Anastasia Wincorn on Posted in Finances, Uncommon

PROBLEM:

A debtor hit it big in a poker tournament and promptly squirreled away the prize money.  Now, when the creditor asks about the winnings, the debtor’s response is, “Poker? Sure, I play for fun, but I’ve never won any real money at it.”

SOLUTIONS:

Like lottery winnings, which we wrote about here, all gambling income must be declared to the IRS.  If you have access to the debtor’s tax returns, gambling winnings should be reported as part of his gross income.  Professional gamblers should report their winnings as business income.  Your debtor is only a professional if his “gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby.”  Commissioner v. Groetzinger, 480 U.S. 23 (1987).

When a gambler wins at a casino, the casino sends him (and the IRS) a W2-G reflecting the amount of the win.  If the gambler does not report the winnings, he may be prosecuted in tax court.  Tax court records, which we always review as part of any asset search, may reveal the amount of his winnings.  The picture is murkier in the case of offshore online gambling sites, which exists in a sort of regulatory limbo.  The IRS will not receive a W2-G from the online gambling site, so, although the gambler is still required to report the income, he is essentially on the honor system.

If you have access to financial records, look for evidence of travel to gambling destinations like Las Vegas or Atlantic City.  Also, pay attention to purchases that the debtor made while on his trip.  A luxury impulse buy or a lavish dinner may be clues that the debtor celebrated a big win, even if he has hidden the winnings.

Litigation searches can also reveal a debtor’s gambling activities.  In the course of one of our investigations, we found court records showing that the COO of a major corporation had tried to avoid his gambling debts at an Atlantic City casino by arguing that he did not have to pay because he was not a New Jersey resident.  Unsurprisingly, he lost the case, but the court records gave us a window into his gambling habits.

Finally, never underestimate the human need to brag.  Chances are, if a casual gambler beat the odds in Vegas, he’ll tell his story to anyone who will listen.  Talk to friends, family, co-workers or, better yet, gambling buddies.  Also check social media outlets to see if the debtor has been boasting to his friends.

No Surrender: Finding Secret Life Insurance Policies

By Anastasia Wincorn on Posted in Banking and Investments, Common

PROBLEM:

You suspect that your spouse has secretly hidden money by purchasing a life insurance policy that he plans to cash in once the divorce is final.

SOLUTION:

The first step is to look for any evidence of payments to insurance companies.  If you have access to financial records, check for automatic bill payments on credit cards or cancelled checks in your bank statements reflecting either the payment of premiums or the purchase of a policy.  Also, be sure to keep an eye out for any bills or mailers from insurance companies.

If your spouse is a creature of habit, he might have purchased a policy through the agent that sold you your car or homeowner’s insurance.  Try giving her a call. If you are not the beneficiary of your spouse’s policy, the agent has no obligation to give you any details.  But, if you’ve worked with her for a while, she may be willing to give you information about whether your spouse has taken out any new life insurance policies.

If your spouse did not purchase a policy through his usual agent, think about whether he has any contacts or friends who work for insurance companies.  For example, if he belongs to a country club, see if any of his fellow members sell insurance.  Once you’ve identified these people, you can call them and ask them about your spouse’s policy.  Why not ask for “a policy just like the one you sold him?”

If you can get the agent to reveal that he sold your spouse insurance, then all the details can be ferreted out once divorce proceedings have begun.  Information regarding the spouse’s policy is discoverable, so you can subpoena the agent’s records or depose him.  Federal courts and most states (excepting Illinois, Indiana and Missouri) do not recognize an insurer-insured privilege.   This means that, while insurance agents might enter into confidentiality agreements with clients, they are otherwise under no legal obligation to keep client records confidential.

You can also try talking to your spouse’s employer.  Even if you can’t get specific information on your spouse’s policy, you may be able to find out what insurance company the employer uses and whether your spouse has purchased insurance through them.  Once divorce proceedings have begun, you can demand discovery of the employer’s records to see whether any unusually large payments were made to their insurance broker.  You can also subpoena the insurance company’s records of any policies that cover your spouse.

Tax records could also provide some helpful clues.  Generally, life insurance policies are not taxed, but that is not always the case.  Some policies combine insurance coverage and an investment fund that can pay dividends that are taxed on a deferred basis.  If you do not take dividends in cash or use them to purchase more insurance, those dividends remain with the insurance company and earn interest.  This interest is taxable and would appear on your spouse’s tax returns.

Highbrow, Low Profile: Hidden Art Collections

By Anastasia Wincorn on Posted in Fine Living, Property

PROBLEM: 

A debtor may say he has no assets when he actually owns an art collection worth millions.  Or, in anticipation of a divorce, a debtor may convert ready cash or easily-discoverable assets into art, which can be safely stashed away until after a settlement is reached.

SOLUTION:

Art, like some of the other luxury goods we have discussed such as antiques and wine, is hard to locate because even if it is worth millions, it does not require any kind of licensing or title registration.  There may be little direct evidence tying a debtor to a particular art purchase, but you may still be able to find clues that a debtor recently purchased art or stashed a valuable collection.

Unlike jewelry or expensive china, you usually cannot hide an art collection in the back of a closet.  Most art is also delicate and requires storage in a climate-controlled environment.

Art storage facilities are fairly rare and may provide a good starting point for a search.  A nationwide list of art storage spaces can be found at: http://www.axa-art-usa.com/artprotect/grasp.html.  If you have access to financial records or credit card statements, check for payments to art storage companies.

Some high-end art dealers such as Christie’s also offer storage and shipping services.  While the debtor may take precautions to conceal large payments for the art itself, look for smaller payments made to galleries or auction houses for these ancillary services.

  • We can also search customs records to see if the debtor or any of the debtor’s companies have received shipments from overseas.
  • Look for any purchases of new windows or window treatments, such as low-e glass or a spectrally selective window film, which protect art from sun damage.  This could be a sign that the debtor is storing art at home.
  • Any serious art owner would insure his collection.  Increases in insurance premiums and bills from appraisers are clues that art may have recently been insured.
  • If the debtor has enough lead time to arrange it, a free method to temporarily and safely store museum-quality art is to loan it out.  Look for shipping receipts, loan agreements, or even thank you notes from institutions that display art such as museums, libraries or universities.  Pay particular attention to institutions where the debtor has given large donations in the past or with which he has an established relationship.

Pending Class Action Awards

By Philip Segal on Posted in Finances, Uncommon

PROBLEM:

The debtor doesn’t have it yet, but is expecting a major payment when a class action suit settles and he comes into more than $100,000. However, he is not the lead plaintiff and his name doesn’t appear anywhere you can see as it would on other kinds of litigation.

SOLUTION:

Among the hardest kinds of assets to track down, class action awards that have yet to be paid out appear nowhere on the public record.

One such case got wide attention last month when an Illinois couple was convicted of bankruptcy fraud for concealing a pending payout of $113,000 in a class action suit involving Vioxx. They got the money, just after debts of $25,000 were discharged in a Chapter 7 filing by a judge who had no way of knowing about this pending payment.

The tip-off came from the debtor’s class action attorney, who knew that his client had withheld the information about the pending payment from the bankruptcy court.

But absent a conscientious lawyer, how would you find evidence of a class action payment that’s on its way?

  • Make sure to ask for it specifically, even if the statutory asset disclosure form in your state does not make class action awards a separate category. The reason you have to ask is that unless your debtor is the lead plaintiff, the list of class action plaintiffs is carefully protected by class action administrators, and isn’t even provided to the court as a matter of course. Claimant lists that do make it to court are not public documents.
  • Interview people close to the debtor. We’re written extensively about the power of interviews on our other blog, The Ethical Investigator, here and here. If you were in line to receive $113,000, you could possibly keep that information from the bankruptcy court, but you would perhaps tell colleagues or friends about the settlement. The only way to reach those colleagues or friends is to call them and strike up a friendly conversation with them.
  • Don’t pin your hopes on the Bankruptcy Trustee auditing process. While a powerful tool, audits have been performed on only a fraction of the consumer bankruptcies. As of March, probably because of the federal budget sequester, all audits have been suspended. If you want to uncover bankruptcy fraud, you’re probably going to have to do it yourself or hire someone to help you.

Maybe Next Year: Delaying Income to Make Business Seem Worse

By Philip Segal on Posted in Business, Small Business

PROBLEM:

The debtor shows you some accounts from his business, and business is bad. However, that is because he is putting off booking income this year to make himself look worse-off financially than he is. Once the divorce is final, all that income that should have been booked this year will come rolling in.

SOLUTION:

Searching for assets isn’t just looking down a laundry list of possible hits (bank accounts, boats, Swiss watches) and checking off whatever we find.

Even though many spouses come to us with no real knowledge of how their other half has accumulated a certain level of wealth, an asset search is often the time to find out not just what there is, but how it was financed.

A good appreciation of how the other side’s business operates can be critical, because having a nose for accounts that seem out of whack can turn up income that ought to appear and be divisible – but isn’t.

This kind of asset concealment can take several forms: a business can set up reserves to help understate profits in one period (during settlement talks) so that there may be a larger profit later on (once the separation agreement has been signed).

The objective is to give the impression that the owner has less cash on hand than is the fact, and that the value of the business is currently lower than it actually is.

This is where being able to sniff out improper reporting is critical. Is it plausible that the business took a sudden turn down? We once looked at a real estate investor who claimed to have been all but wiped out in calendar year 2010. While plenty of people were wiped out in 2008 and 2009, someone in the best of business health in January 2010 and essentially broke in December of that year raised flags because the industry had somewhat stabilized by then. It turned out that he had withheld dozens of companies from his original net worth statement.

We sometimes recommend that a forensic accountant reviews expense statements. Can you calculate an imputed income from monthly spending or yearly spending that suggests that the business actually earned a different amount  – in this case more — than was declared?

Before you depose employees, a cheaper and often effective route is to talk to former employees who can tell you about the state of the business. People who no longer work there are often surprising happy to talk about the company. While they may be reluctant to trash their old employer, they may feel freer to talk about how good business was in the past year when they were still employed there.

Bonds: The Gift of Steady Income and Traceable Records

By Philip Segal on Posted in Banking and Investments, Common, Finances

PROBLEM:

The debtor has no cash to his name and his real property is mortgaged. All of his wealth is tied up in bonds. Where to find them?

SOLUTION:

The nice thing about bonds is that they generate income. Unlike a piece of real estate or a certificate in a company, bonds are meant to throw off cash on a regular (not discretionary) basis. That cash has to move and there needs to be a record of it, and records mean it’s easier to track down an asset.

Better yet, the record is being kept by someone who is not a co-conspirator with the debtor. While debtors can tell friends or relatives to hold money for them and not to tell anybody, a corporation or government is going to keep a register of who owns its bonds and where to send the interest payments.

In fact, companies employ transfer agents to keep track of who owns their bonds.

A little vocabulary could go a long way when it comes to U.S. government debt. If you ask your debtor whether he owns “bonds,” he could say no when he owns U.S. Treasury debt that matures in less than a year, because such bonds are known as “bills” or “T-bills.” Ask about those too, as well as bonds with maturities at issue of between two and 10 years (known as Treasury notes).

Tax returns done properly will provide evidence of bond ownership because interest payments are declarable income. U.S. Treasury bonds pay interest every six months. However, municipal bonds are not taxed at the federal, state or (where applicable) municipal level. Another kind of bond that may not appear on a tax return until it’s sold is a so-called zero-coupon bond, which pays no interest and acts more like a regular non-installment loan. U.S. Treasury bills (short term bonds) work this way, as do some corporate bonds do too. Others are taxed as if they pay interest even though they don’t.

Before we get to tax returns, we often get nice leads from records just lying around or sometimes in our client’s possession because of joint bank accounts. These sometimes provide extremely useful information. Every bond carries its own individual CUSIP number (this stands for Committee on Uniform Securities Identification Procedures).

Say you see a piece of paper or a bank statement with a nine-figure sequence composed of mostly numbers but some letters too, like this: 4465XHPP9. That’s a CUSIP number. Anyone with a brokerage account can search a security by CUSIP number to find out whether it’s a valid security. If it is, your debtor’s bond may just have revealed itself.

Anchors Away: Tracking Down a Hidden Boat

By Philip Segal on Posted in Chattel, Fine Living, Property, Vehicles

PROBLEM:

The debtor has chosen to hide his beloved boat to avoid having to relinquish it or sell it to pay off debts. Or he decides to liquidate some cash by purchasing a boat and storing it out of sight from his creditors.

SOLUTION:

There is no nationwide vessel identification system for boats (there are plans to complete one in the future, but launch is some way). This means that there is no central database permitting a search of all state title and boat registration information. A state-by-state search is therefore the only option.

Boat registrations usually come up during property ownership database searches. But confirming accuracy is labor intensive and highly dependent on where the debtor lives, what information about the vessel is available and possibly even on the size of the vessel.  Like cars, boats usually have to be registered with the state, though the department that handles the registration varies. In some states, the department of motor vehicles oversees boat registrations, but in others it may be the parks division, the wildlife or the fish-and-game department.

Some states allow searches of their registration databases using the owner’s name or personal identification information. Other state search engines require information specific to the boat in question, like the boat’s vehicle identification number (VIN) or hull identification number (HIN). These databases may help confirm whether a known boat is still in the debtor’s possession, but make it nearly impossible to determine whether a boat is owned at all. And other states don’t provide access to any boat ownership databases at all.

When the state databases are less than helpful, there are a few other options, though they are only useful if the boat in question weighs five net tons or greater. The U.S. Coast Guard’s vessel documentation division provides an abstract of title for a vessel documenting all bills of sale, mortgages and notices of claim of lien filed and recorded by the Coast Guard. This information is crucial to an asset search, but the database is limited to vessels that pass the five net tons test and whose owners are U.S. citizens. Complicating the search are the Coast Guard’s search parameters: Vessels can only be searched using their HIN or official Coast Guard-assigned six or seven digit number.

Luckily, if a vessel is heavy enough and documented by the Coast Guard, it can also be tracked via the National Oceanic and Atmospheric Administration Office (NOAA) of Science and Technology, though this requires knowing the vessel’s name. Many of the search records provide detailed owner information.

If tracking down the boat itself is a challenge, then other searches may provide circumstantial evidence to bolster allegations that the debtor owns a boat. For instance, many municipalities have wait lists to grant people mooring permission, and many of the lists can be searched by last name. Or a review of the debtor’s financial records may prove helpful. A home run would be a record of payments to a marina. Also helpful might be charges to a stoarge facility that houses boats, or larger than average fuel charges.

If the debtor has any ties abroad, he may have chosen to have the boat stored out of the country. If he sailed it abroad himself, look for any evidence of one-way travel back to the U.S. Otherwise, he might have hired someone to transport the boat for him. Look for any payments to people or companies that may have experience handling these sort of transactions, or unexplained large cash withdrawls that may have been used to cover the fees and costs for the delivery.

Hidden Treasure: Tracing Gold Assets

By Maria Matasar-Padilla on Posted in Banking and Investments, Finances, Uncommon

PROBLEM:

The debtor decides that instead of investing in stocks and bonds, he’s going to put his money into gold, and then takes pains to hide this investment from creditors.

SOLUTION:

Gold investments come in various forms, including gold certificates issued in the U.S. by gold pool programs, gold futures, gold miner exchange traded funds (ETF), and gold bars and coins.

Some of these investments will appear in the debtor’s tax records. For instance, gold futures are usually managed by commodity trading firms, and are declared for tax purposes.  Given the volatility of gold prices, the debtor may choose to sell his investment. If a sale is made, any profits on the sale must be reported to the IRS. ETFs are tradable on the stock exchange, therefore any trading will generate a paper trail and may also result in declarations to the IRS.

Interestingly, some ETFs allow investors to monitor the company’s gold vaults via cameras accessed online. The investment may therefore be revealed after an inspection of the debtor’s online activities.

If the debtor opted to invest in gold bars or gold coins, then circumstantial evidence may help lead to the gold. A review of the debtor’s financial records may indicate whether the debtor has invested in additional security to protect his investment, be it a safe, security cameras or staff, or the rental of a safety deposit box. Furthermore, his financial records should be checked for payments to services hired to help deliver the gold, including armored car rental companies.