In an unusual move for a divorce case, a Queens judge added Benny Tal’s business partners as defendants in Benny’s divorce action because the three men had colluded to hide Benny’s assets from his wife Michal.  As Michal told the New York Post, “It’s like a dirty soap opera. There’s so much fraud going on, we now have a divorce proceeding involving a husband, wife and his two business partners.”

Hidden Assets DivorceBenny, along with his two business partners, owned a lucrative parking garage in Manhattan through a company called Kura River Management, Ltd.  As part of the Tals’ divorce proceeding, the judge ordered a valuation of Kura River.  Benny’s business partners obstructed the valuation after the appraiser discovered that Kura River had hidden at least $100,000 in cash from Michal and from the tax authorities.

In the meantime, Benny and his partners met with an attorney whose license had been suspended to discuss ways to hide Benny’s money.  They decided that the partners would buy Benny’s $1.6 million stake in the company for $250,000, in violation of the court’s restraining order.  Benny then promptly took the cash and ran.  When the judge had him arrested and dragged back into court, Benny claimed that he had squandered all of the money on bad investments.

We have seen countless cases in which the non-moneyed spouse (in our experience, this is often the wife) thinks that her husband runs a fairly straightforward, lucrative business.  Come divorce time, the husband says he’s destitute and the business is hemorrhaging money.  With some digging, you can often find out whether the husband may have taken steps to make his company look less profitable on paper.

In this case, we would have started by investigating whether Benny had any other companies he could have used to hide income from his parking garage business.  We would also have interviewed former employees, litigation opponents, or others who had done business with Benny and Kura River to ascertain how much cash business the company did, how diligently they managed the company’s books, and whether they had side companies or accounts that they used to hide cash.  Then, we would have taken a close look at the finances and lifestyles of his business partners.  We would also look for any real property, vehicles, aircraft, or other purchases Benny might have made so that he could plausibly claim that he spent all of his money on bad investments.   A good divorce lawyer can then use that information to send targeted subpoenas and recover Benny’s and Kura River’s hidden assets.

© Sbukley | Ne-Yo Photo Dreamstime.com
© Sbukley | Ne-Yo Photo Dreamstime.com

Grammy award winner Ne-Yo and several professional athletes are among those set to testify in federal court against the principals of Ohio-based sports drink company Imperial Integrative Health Research & Development. Preston Harrison and Thomas Jackson are charged with defrauding investors out of $9.5 million. Harrison’s wife, Lovena Harrison, was hit with related tax fraud charges.

Imperial Integrative Health Research & Development made OXYwater, a drink they claimed was highly-oxygenated and would improve energy and mental clarity. Jackson and Harrison allegedly misled investors about the expertise of the company’s staff, as well as the company’s sales and profits. Federal prosecutors claim that, all the while, Jackson and Harrison were diverting company funds into their own accounts, and Lovena Harrison was hiding their ill-gotten income from the IRS.

Due diligence is always an essential first step before investing in a company. Just because the company is private does not mean that you need accept the information they give you at face value. While independently verifying information about sales and profits is difficult, it is not impossible. Former employees, investors, or people who had disputes with the company are often willing to share information. A few well-crafted interview questions posed to a disgruntled ex-employee or former litigation opponent might supply you with all the information you need.

You can also find out crucial information about the company’s principals and employees by searching the public record. In this case, had investors done even a cursory public record search, they would have seen that both of the Harrisons and Jackson all had multiple lawsuits (many involving nonpayment of debts), judgments, and tax liens against them in the past. This information may or may not have influenced the investors’ decision to put money into the company, but I, for one, would think twice about handing over my savings to someone whose financial choices had repeatedly landed them in hot water.

A London judge has ordered oil trader Michael Prest to pay his wife over $600,000 in support and alimony payments or face jail time.  Prest’s case gained attention last year for a landmark U.K. Supreme Court ruling permitting Yasmin Prest to pierce the corporate veil to reach assets that Michael had placed in trusts held by his various offshore companies.  The ruling represented the first time the British courts pierced the corporate veil in a divorce case, and ultimately led to Yasmin obtaining a 17.5 million pound divorce award.

Prest claims that he does not have sufficient funds to pay the award because his company, Petrodel Resources Ltd., is no longer operational.  Yasmin asserts that, despite his claims of poverty, Michael still lives a lavish lifestyle, spending hundreds of thousands of pounds per year on luxury travel.

As we wrote here, when conducting matrimonial asset investigations, especially those involving self-employed spouses like Michael Prest, our first step is to look for companies owned by the spouse, his family, and his close associates.  If the spouse makes no mention of income from these companies in his net worth statement or if he has not disclosed his interest in them during the discovery process, then their mere existence can be a sign that the spouse is using his companies to hide money.

Once we find the spouse’s companies, we can then search for assets owned by those companies, not just by the spouse.  We may find real property, stock holdings, aircraft, boats, or any of a wide range of assets that can be uncovered in a public record search.

We were once able to find a side company owned by a lawyer husband in which he had stashed an entire thoroughbred horse farm.  We also found the value of the horses, the trucks, the barns, and even the tractors on the property, all through searching the public record.  In addition to what we uncovered, our client was also able to request broad discovery of all of the husband’s hidden companies and their assets, including trusts and bank accounts.

Last week, Curtis Harold DeBerry, owner of the Texas-based Progreso Produce Company, was arrested and accused of cheating investors, business partners and banks out of millions of dollars over the past few years.  He now faces up to 30 years in prison.

According to the criminal complaint, DeBerry hid assets by transferring money to his children, and diverted assets meant for creditors to pay for his own luxury items (including a yacht).  One of the more egregious allegations in the complaint is that he bilked a fruit wholesaler out of over $8 million.

We regularly come across people that are hiding assets in their family members’ names or in secret companies.  We recently found that a debtor had placed all of his North Carolina companies in his nephew’s name, and then used those companies to buy up loads of property.  We always think outside of the box when we’re doing an asset search.  We’re well equipped to look for assets in the names of people close to the debtor using our proprietary commercial databases and by scouring the public record.

On the flip side, in many cases, our clients would not have needed an asset search if they’d done some more diligence prior to entering into the bad business deal.  This looks to be the situation here with the fruit wholesaler.  Sure, it costs money to do diligence, but a few thousand dollars to save $8 million seems more than worth it.

In this case, Fruit wholesaler, Eclipse Berry Farms, LLC, and Progreso entered an agreement to grow and sell strawberries together.  According to a civil complaint, to induce Eclipse to sign the agreement, Progreso showed Eclipse 42 leases with strawberry growers in Zamora, Mexico where the strawberries for the joint venture were to be harvested.  Eclipse then sent over $8 million to Progreso for growing, producing and packaging the strawberries.

According to the complaint, after the contract had been signed and money advanced, Eclipse sent a quality control person to Mexico to actually take a look at the strawberry harvesting land and operations.  It was then that Eclipse learned that Progreso did not have any leases with strawberry growers in Mexico and had instead been haggling with local strawberry growers to buy strawberries at a very low price.  Ultimately, Progreso used about $2 million of Eclipse’s funds to purchase strawberries in Mexico, but kept the balance of the $8 million for itself.

Though it was prudent for Eclipse to eventually send a quality control person to Mexico to check on the strawberries, it would have been wiser to send someone down prior to investing $8 million in the first place.  A few phone calls to the counterparties on the strawberry leases might have even been enough to put Eclipse on notice of Progreso’s alleged fraud.  Had they discovered that Progreso did not have any leased strawberry land, they would have never advanced the money, and wouldn’t now be stuck duking it out with other creditors to get pennies on their dollars back from Progreso.

According to the New York Law Journal, yesterday, a Brooklyn jury convicted former Brooklyn prosecutor, John Headley, of fraud and misconduct over his misuse of New York City Transit Authority funds.  Headley’s company, Advance I.M.E. Co., was hired by the transit authority to obtain medical records and expert witnesses for the authority.  However, Headley did not reveal that he was the principal in Advance I.M.E. Co.  Rather, he used the name James Douglas to get around inevitable conflicts of interest he had in taking on the work–he was dfraud, nyc transit, John Headley, money trainating the transit authority employee responsible for selecting and paying vendors and he also worked as outside counsel to the transit authority on other matters.

So what was Headley’s defense?  He claimed that he masked his ownership in the company to hide assets from his wife in their then-imminent divorce proceedings rather than to bilk the transit authority out of money.  We haven’t seen this type of defense before—usually people don’t want to admit to hiding assets from their spouse.  Given his conviction on six counts, the jury may not have bought it.

If, indeed, Headley was hiding assets from his wife at the time of their divorce, hopefully she was hip enough to his tricks to hire an investigator.  We frequently help our married clients uncover hidden assets and it is not uncommon for one spouse to hide money in a secret company as Headley claims he did.  Using proprietary databases and other resources, we regularly find secret companies, unknown to one spouse, and position our clients to get all the information they need in discovery.

We also help clients find company affiliation information by using databases and individual secretary of state records, among other means.  In this case, it does not appear that “Advance I.M.E. Co.” is registered to do business in New York, however, the indictment indicates that “Advance I.M.E. Co.” may be a fictitious name for Headley’s company.  It states that Headley opened a business checking account at Bank of America in the name of “DBA Advance I.M.E., Co.”  We often find evidence of fictitious names in our databases and run searches at the county level to determine a company’s true legal name.  Had there been some form of vendor verification or approval process, outside of the purview of Headley’s transit authority girlfriend, a few quick searches might have revealed that Headley was the principal of the company.

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.

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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.

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PROBLEM:

Debtors who own their own business can hide funds by cutting checks to a nonexistent employee or overpaying a current employee. Once creditors are no longer hunting for funds, the debtor simply voids the checks and pockets the money.

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SOLUTION:

If you have access to the debtor’s business records, then you can unravel this trick by scrutinizing payroll and personnel files.  The debtor should be asked to provide a list of all employees at the business as well as corresponding personnel records. The goal is to make sure every employee can be linked to a record, or personal identification information like a Social Security number or a tax ID number. It might be worthwhile to go the extra step and try and track down whether any of the Social Security numbers are fraudulent.  A primer on how this works can be found in an entry at our Ethical Investigator blog, “Using Social Security Numbers to Root Out Employee Fraud.”

If there is any suspicion that the business owner is lying about the number of people on the payroll, it may be necessary to request to see whether all the recent payroll checks have been cashed. Generally it’s possible to spot patterns suggesting some checks regularly remain undeposited.

Other business paperwork may also help answer the question of just how many people are on staff. Business owners have to inform the government of how many people they employee in order to calculate their unemployment insurance tax rate. Paperwork for health insurance providers and uniform vendors may also detail how many employees are on the payroll.

Some business owners will allege that their paperwork does not match the number of employees they claim to pay because some people get paid “under the table.” This is far from a legitimate explanation. Paying off the books may make an employer liable for unemployment insurance tax fraud and make him the subject of an investigation by his state’s Department of Labor. The odds are he’d rather come clean about his assets than have to face increased government scrutiny.

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PROBLEM:

Debtors who run their own business know there is always a risk their books will be scrutinized. In order to maintain the façade that they have few to no assets, many find ways to hold back revenue. In some instances, debtors arrange to defer payments from clients and/or vendors until a later period. Or, if the payments have already been received, the debtor will simply fail to record the sum received and will avoid depositing the funds.

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SOLUTION:

Whenever there is an asset search involving a small business or a small business owner, it’s crucial to have a grasp of the industry’s and the company’s practices. In some industries, full payment is expected up front. In others, payment is deferred until a project is complete. Or payments are expected in installments during the course of a contract, either after a certain length of time or when milestones are met.

It’s also important to review the company’s historical practices, ideally through a review of its financial books, as well as invoices and contracts. Questions to ask include, What is a typical payment plan?  How often, if ever, does the company stray from that plan? What is the usual length of time between the start of a project and final payment?

Once a pattern is established, the next step is a review of payments for all completed and pending projects to determine which payments are outstanding and how long until those payments are due. If any accounts are past due, have good faith efforts been made to collect? We always advise looking over payments for at least the past one to two years to make sure that prompt efforts have consistently been made to collect on outstanding accounts.  A closer look at the companies in arrears is also in order. We’ve seen cases where companies run by the debtor’s family, friends, former colleagues and/or loyal clients are not collected on because there’s an agreement between them and the debtor to defer payment.

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