California Attorney Busted for Business Fraud in San Diego

It may come as little surprise, but attorneys can, and often do, commit business fraud. Unfortunately, in the wake of the financial meltdown in 2008, numerous “mortgage attorneys” have found themselves at the center of controversy, and in some cases, behind bars.  A recent example is the case of Arizona Attorney Jeffrey Greenberg, who, together with Coronado businessman Courtland Gettel, was charged with extensive fraudulent activity involving home loans, fake San Diego lien releases, and fraudulent Arizona rehab loans.

Greenberg and Gettel pleaded guilty in a San Diego federal court on May 17th to charges of conspiracy and wire fraud conspiracy. In reaching their deal, both defendants agreed to forego profits from fraudulent land deals they made and to pay restitution.

Greenberg used his legal knowledge and real estate experience to help his co-conspirators gain access to loans (mortgages) against multi-million dollar properties in La Jolla and Delmar, California. How did he do this? He and his co-conspirators filed bogus lien releases with the San Diego County’s Recorder’s Office that made it look like the properties were free and clear of prior loans. He then helped his “clients” apply for new loans against the same property from new lenders. Then, they put the funds received from the lenders in their pockets and defaulted on the loans, leaving the lenders to fight amongst themselves to seize the collateral. Another co-conspirator was a notary public who notarized fraudulent documents, recorded them in her book, then reported the book stolen to the state of California.

The fraud in Arizona began with co-defendant Gettel, who had a real estate investment company in that State. Using that company, co-defendant Greenberg helped other co-defendants apply for real estate rehabilitation loans. They never used the money for that purpose, of course. The money went towards the co-defendants’ personal expenses.
This fraudulent activity went on for more than a year and involved 8 multi-million dollar loans. Altogether, the co-defendants’ business fraud resulted in losses of $33.6. To make matters worse, Attorney Greenberg used his client trust account for these fraudulent deals, which of course violates the State Bar Rules of Professional Responsibility.

There are some important takeaways from this story. First, please note that attorneys involved in business fraud (mortgage or otherwise) are a small number of bad apples in the barrel…they aren’t the whole barrel!

Second, it is really difficult for people like Greenberg and Gettel to get away with business fraud in the area of real property. Real property transactions are matters of permanent public record, because real estate sales transactions are recorded in the County Recorder’s office.  Critical pieces of evidence are available for all eyes to see, for all time. In other words, you can run but you cannot hide from recorded transactions, and they typically provide detectives and prosecutors with important initial evidence upon which to build a case.  When prosecutors are diligent, they’re usually going to bust the bad guys on these deals.  orange-county-lawyer-hammerThat certainly happened in this case.

Further details of portions of this story are available in the San Diego Reader article entitled “Real Estate Fraudsters Stole More Than 30 Million.

To talk more about real estate fraud, business fraud, or any related wrongdoing, please do not hesitate to contact Stephen Hammers at hammers-law.com.

Business Fraud and the Trusted Employee

orange-county-lawyer-hammerBusiness owners are often filled with pride at the notion of employing friends and family in the workplace. Employers treat employees “like family” and often accomplish great things based upon the mutual trust they establish with employees. Unfortunately, the same trust that may propel a company to great success can be its undoing. Business fraud can and often does occur within small businesses. If left unchecked, the most trusted of employees can level great and irreparable harm to an overly trusting business owner.

Workers who are most attentive and likely to follow the rules may be the ones to watch most carefully. This position was advanced in a recent Washington Post article by Ariana E. Cha, who cited a Harvard study for the premise that strict adherence to the rules by an employee may be an indicator of a secret, “Machiavellian” agenda.  See, Washington Post Article by Ariana E. Cha, Dec. 15, 2015.

In 2012, the ACFE or Association of Certified Fraud Examiner’s estimated the median loss for a small organization that experienced fraud was $140,000. In fact, the Association found that small organizations, those with less than 100 employees, are the most likely to be victimized by business fraud. Nearly 32% of all small business experience some kind of fraud. The most common types of inner office fraud include billing fraud, corruption, check tampering, skimming, and expense reimbursement fraud.

Small businesses are especially vulnerable because they often lack the manpower needed to segregate duties and design adequate internal controls. Business owners enlist a small number of trusted employees to handle financial affairs and often do little follow up to ensure financial statements are correct. Employers assume criminal fraud can only be committed from the outside, and that they’ll see it coming long before they suffer any loss. They do not consider that the smiling bookkeeper or associate who greet them every morning can be diverting funds or skimming with expense reimbursements.

Those who commit business fraud do not fit the criminal stereotype. The typical employee thief has worked at a company 4 or 5 years, is in good standing, and is usually a first time offender.  According to the ACFE’s report, 87% of those who commit business fraud have never been charged with a fraud-related offense and 84% have never been punished by an employer for fraud-related behavior. When faced with personal financial stress, even the most trusted employee may submit to the overwhelming temptation to take company money. Some employees rationalize their behavior, believing that the money is a temporary loan that they intend to repay at a later date. Others may resentful, believing that they have spent years attending to their employer’s financial wealth and are entitled to greater financial compensation.

The fraud often begins small with extra charges on a company credit card or money missing from petty cash. Even though business owners may notice some suspicious activity, they often dismiss it, believing that employees would never violate trust. This often results in greater losses for the company as the fraud continues to grow over time.
Many small businesses never report fraudulent behavior. A Business owner may be embarrassed because a particular crime has been committed by a family member or trusted employee. It’s estimated that less than 3% percent of businesses file criminal charges while over 30% of small businesses fall victim to fraud. It can take years for a small business to overcome the loss of income that results from employee fraud.

If you suspect you have been the victim of business fraud, contact us today. Attorney Stephen Hammers has over 24 years experience in general business and real estate law. He understands that fraud has a high burden of proof in our court system and works diligently to document and represent employers who fall victim to fraud. He will work with you to ensure a fair and equitable outcome.

Tips for Orange County Business Owners to Avoid Fraud

Orange County business owners can avoid fraud and the damages and penalties that arise therefrom. It is a harsh reality that a business can not only suffer at the hands of a wrongdoer, but also incur penalties and damages after being the victim! The issue is rampant in California.  In Orange County, fraud attorneys are employed regularly to address it.  We provide some examples here and tips as to how owners can avoid and cope with fraud.

  • Avoid Misleading Letters Fraud: The State of California Tax Franchise Board warned businesses about a scam called the “misleading letter.” California corporations and LLCs are not required to file board minutes with any government authority. LLCs can file the necessary information return with the California Secretary of State for $20. The misleading letter scam contacts businesses and tells them they need to file board minutes or information returns for a higher fee. The letters have official looking forms and ofsgh-photo-4Cficial sounding names. The letters threaten fines and penalties and suspension of the business’ powers, rights, and privileges for failure to comply. Do not comply with those demands; rather, ensure that you are filing the proper and necessary forms, such as information returns, with the Secretary of State.  Filing the wrong forms with a fraudulent group does not relieve you of responsibility to file the proper forms with the State.  If you receive these fraudulent demands, submit written complaints and a copy of the misleading letter to: CALIFORNIA OFFICE OF THE ATTORNEY GENERAL, CALIFORNIA DEPARTMENT OF JUSTICE, PUBLIC INQUIRY UNIT, PO BOX 944255, SACRAMENTO, CA 94244-2550.
  • Avoid Payroll Fraud: Payroll fraud can happen to anyone.  Essentially, the fraud occurs at the hands of employees who turn in false time records, or overstate their working hours.  Grifters are smart. They will keep their fraudulent activities to what usually amounts to the neighborhood of a rounding error on your books. So without reconciliation of payroll to time-keeping records, you will never pick up on their schemes.  In fact, Forbes says that 27% of businesses encounter payroll fraud. It occurs in businesses with fewer than 100 employees more often than large companies. Orange County business owners can avoid fraud in this area by regularly reconciling payroll accounts to the business’s time-keeping system. The reconciliation should occur monthly or at least quarterly. Any longer than that and the money will be long-gone before you realize what’s happening.
  • Avoid Second Check Fraud: This type of fraud generally involves a trusted bookkeeper or an accountant. The scam calls for the grifter to write a second check to herself when paying one of your suppliers to whom you regularly write checks. The grifter writes the second checks for small amounts and codes them with the code for your regular supplier. The scam may take place over several years. It is not unusual for such fraud to aggregate to substantial amounts (a half million dollars or more) over several years. Even if you  check financial records, you may not notice an overage that appears in a reasonable range and spread over several expense accounts. You can avoid this by having more than one person with check signing authority and more than one person reconciling the bank accounts.
  • Avoid Over-Zealous Ordering: This type of fraud usually involves an administrative assistant or office manager who regularly orders supplies. The grifter over-orders supplies, then returns them for a refund in the form of a gift card. He/she takes the gift card, buys something small, and then pockets what’s left of the card. It may not seem like high dollar fraud but even a $50 gift several times a month can add up over the years.
  • With Friends Like these…: Hiring employees simply because they are family or friends or someone you have sympathy for is never a good business decision. Such emotional hires often work into positions of trust with check-writing ability or some other control over financial matters and often with little supervision. All potential employees should face the same strict standards. Make personal accountability and checks/balances a part of your business’ culture. Establish at initial job interviews that your company has zero tolerance for fraud and has established office procedures that ensure a second set of eyes reviews all activities related to financial matters. Trust, but verify.
  • Stolen Credit Cards: Accepting a stolen credit card leaves your business without recourse to recover the money stolen. Always, always check several forms of identity, check if the system declines the card, and check to see if the card’s number appears on the stolen credit card list. Of course, if your business does a lot of internet business or other non-face-to-face transactions, you are most ripe for this type of fraud. Orange County business owners can avoid fraud by checking all identifying information, especially for larger orders. Get phone numbers, address, the three-digit code on the back of the card, the precise name, etc. Mismatched addresses are a clue to fraudulent orders. If you are suspicious of an order, do not process it. Trust your intuition.

To read more about payroll fraud, read the Forbes.com article “Payroll Fraud – A Big Threat and How to Avoid it.” To talk more about business fraud, or anything else, please contact us.

ARE YOUR LINKEDIN CONTACTS A TRADE SECRET?

If salespeople connect with their business contacts on LinkedIn or another social media site, can they take that information with them when they leave the company?  Maybe not, according to a federal court in California.

Employees who wish to start their own businesses are often faced with difficult questions.  Can I take my customer list with me?  Can I contact customers of my former employer?  We have received many inquiries on these questions through our websites, pcghlawyers.com and hammers-law.com, both from employers and employees.

David Oakes worked for six years as a salesman for a cell phone accessories company. He had signed an agreement saying that he wouldn’t disclose any proprietary information, including the company’s customer base. When the company terminated him, he started a competing business. His old company then sued, claiming, among other things, that he had maintained his LinkedIn contact list after he was terminated.

Oakes asked the court to throw the suit out, arguing that contacts on LinkedIn are not a “trade secret.”

But the court said a jury should decide the question. Among other things, the jury will have to consider (1) whether the contact list was built up as a result of the company’s business efforts, as opposed to simply being generated by LinkedIn’s “People You May Know” algorithm, and (2) whether Oakes “disclosed” the information by making his contact list accessible to others.

If you have questions about your right to limit employees from taking customer lists, or if you are an employee wishing to start a business, contact a lawyer.

Stephen Hammers, Price, Crooke, Gary & Hammers, Incorporated, 10 Corporate Park, Suite 300, Irvine, California 92606,(949) 573-4910; (800) 511-6058; www.hammers-law.com 

 

COPYING COMPETITOR’S WEBSITE? THINK AGAIN.

If you’ve put a lot of time and money into designing a distinctive website or online store, and a competitor comes along and copies your site’s look, what are your rights?  Can you file a lawsuit?  Yes, according to a federal court in a recent California case. The “look and feel” of a website is protected by the trademark laws.

Surprisingly, this is one of the first court rulings ever on this question.

In Ingrid & Isabel, Inc. v. Baby Be Mine, LLC, the U.S. District Court for the Northern District of California has made an important ruling.  The case involves two websites selling maternity products. Ingrid & Isabel claimed that a competitor by the name of Baby Be Mine had illegally copied its website design. Specifically, Ingrid & Isabel claimed that Baby Be Mine had copied (1) the idea of putting its logo in pink-orange pastel feminine lettering, (2) the use of models with long wavy hair, shown from head to mid-thigh, wearing white tank tops and jeans, and (3) the general colors, patterns, fonts and wallpaper of Ingrid & Isabel’s site.  Baby Be Mine filed a summary judgment motion arguing that the case should be thrown out.  It argued that there is little, if any, precedent suggesting that a cause of action can succeed on a claim that a website has been ‘copied.’

The District Court disagreed with Baby Be Mine.  It found that the case can and should be tried.  In the past, courts have ruled that the design of a physical store can amount to “trade dress” – such as the color scheme of 7-11 markets, or the distinctive décor of a Mexican restaurant chain. But this is one of the very first occasions in which a court has protected the design of online stores as well.

“Trade dress” refers to the distinctive way that a product is packaged or presented. Examples include the shape of a Coca-Cola bottle or the color of Tiffany’s blue boxes. You obviously can’t trademark the general idea of putting soda in a bottle or jewelry in a box, but if the color and shape are distinctive enough and are separate from the functionality of the product, then they’re protected, and a competitor can’t simply copy them.

Of course, websites are different from trademarks, which provide businesses with a number of additional rules to consider.  I’ve blogged about the importance of protecting trademarks in an earlier article (http://hammers-law.com/business-fraud/dont-skimp-protecting-trademarks/).  But differences aside, this ruling is important because it affirms that a website can be protected by the law.  In particular, a website can be a significant aspect of a company’s “trade dress,” and online shops now have legal recourse if their websites appear to have been copied by a competitor.

‘CROWDFUNDING’ BUSINESSES HAVE OBLIGATIONS TO INVESTORS

Start-up businesses are increasingly seeking funding on websites such as Kickstarter or Indiegogo, and promising small rewards to individual investors in return for micro-contributions.  Examples of these businesses include the Veronica Mars movie, which raised millions of crowdfunding dollars by promising small contributors posters, DVDs and movie scripts, and a space telescope project that offered “space selfies.”

Note to start-ups: pay attention to your legal obligations.  Recently, the State of Washington accused a Kickstarter company of reneging on its promise to send small contributors decks of horror-themed playing cards. The state is seeking restitution plus additional damages of $2,000 per contributor and the costs of bringing the suit.

Keep in mind that the promises made through crowdfunding sites establish legal obligations.  If a start-up ends up getting hundreds or even thousands of contributors by offering small rewards, the promises have to be honored.

 

SUPREME COURT SAYS “NO PATENT” IN ALICE CORP. LTD.

A business cannot obtain a patent for taking some ordinary process in the real world and coming up with a computer program to make it easier, according to the U.S. Supreme Court.

In ALICE CORPORATION PTY. LTD. v. CLS BANK INTERNATIONAL ET AL, decided in June of this year, a company called the Alice Corporation tried to patent an online system to reduce risk in financial transactions. Alice’s program was little different from a third-party clearinghouse or escrow service, except that it offered all such services automatically online. The fact that the activity could be accomplished on-line did not make it worthy of a patent, according to the Supreme Court. Alice didn’t really come up with a new idea, technique or process. It simply took an age-old process and created an app for it.

The decision is important because many companies have been seeking to drub out competition through patents that isolate their on-line apps. The high Court obviously feels that reduction in competition in this manner is not one of the policies served by the patent process.

Immediately after the Supreme Court decision, other courts began throwing out patent claims along the same lines. For instance, a judge in New York rejected a patent for a computer program that helped people plan meals. The program let people choose meals from picture menus, learn how the meals would fit into their diet or nutrition goals, and let them substitute items and see how those changes affected the results. But that’s no different from what nutritionists have been doing for years, the judge said, and even if a computer program makes it easier and faster, it’s not such a new idea that it can be protected with a patent.

DON’T SKIMP ON PROTECTING TRADEMARKS

Ever heard that you don’t actually have to register a trademark?  Perhaps you believe you only have to “use” your trademark in business to have “a right to it.” That’s true to some extent – but beware!

Trademarks are obviously an important aspect of branding and marketing an business.  They are particularly important for start-ups.  One of the key things investors look for is whether a new company has properly secured its trademark rights.

Before investing in a business name, symbol, type of packaging, or any other distinctive representation of your business, it’s worth paying to conduct a trademark search.  The consequences of discovering too late that someone else is already using your idea are serious. Unauthorized use of a trademark can result in a lawsuit, meaning high legal fees, and the results can include destruction of all marketing materials and merchandise, and/or the requirement that a new market plan be initiated.

Recently, a Massachusetts company called Chocolate Therapy discovered this too late, and was forced to rebrand its entire business. The company ended up holding a contest to rename the store (with the winner getting a box of chocolates).

Consider investing in a federal trademark registration. Again, this isn’t absolutely necessary, but it provides significant advantages. It allows the trademark user to claim the trademark nationwide (as opposed to just in the places where business is conducted), and certainly provides a leg up in the event of a court dispute!

SALE OF BUSINESS INTEREST CAN TRIGGER TAX RESULT

What triggers a “technical termination” of a business for tax purposes according to the IRS?

If more than 50% of the interests in a partnership or a multi-member LLC is transferred within a 12-month period, the entity technically ceases to exist under federal tax law. That’s true even if the business continues to operate as normal for all other intents and purposes.

A technical termination can occur even where partial sales occur in different calendar years. So if 25% of a business’s interests is transferred in September 2014 and another 25% are transferred in July 2015, this would still count as a sale of 50% of the business in a year.

A termination can also occur if a multi-member LLC becomes a single-member LLC – even if less than 50% is transferred. So if an LLC has two members, one with an 80% interest and one with a 20% interest, and the majority owner buys out the other owner, that’s still a termination according to the IRS.

This “technical termination rule” is not the end of the world for a business, but it’s something to be consider and address with proper paperwork. For example, a special tax return is due within a few months after the “termination” occurs. Recently, according to public IRS cases, one family business was hit with more than $12,000 in IRS penalties and interest because the family did not realize they needed to file their “special return.”

The partnership or LLC undergoing a transfer or sale must also make new federal tax elections and start over with new depreciation periods – which can significantly reduce tax write-offs. And if the business operates on a fiscal year, the owners might end up having to report more than 12 months’ worth of taxable income in the year the termination occurs.

So, the obvious lesson here is be sure to consult with your CPA before closing on a sale or transfer of a portion of your business.

Church Owner’s Charitable Business Threatened by Slanderous Statements

“My husband is a pastor one of the members left the church to start his own church”

“He left upset and has been visiting and calling other members saying false things about my husband and telling them to join his church what can I do ? by the way I recorded our meeting I have proof that he is lying (we have a sign) but no one knows of recording. 
How can I help my husband we already lost a lot of people who believed his lies? My husband reputation is being attacked”

The issue of unfair competition is unfortunately something we see quite often in business litigation.  If the allegations are true, the claims here would not be founded upon “business fraud,” but slander and unfair competition.  The claimants posted the above issue on AVVO.COM recently, and this is how I responded:

The issue regarding the Church member communicating false information about your husband may amount to actionable slander, which would be addressed in the civil courts. You should consult with an attorney for an assessment as to whether the statements satisfy the elements of slander. If the communications include statements that your husband has committed a crime or other such behavior, the allegations would be addressed with a claim of “slander per se,” a claim which places an even higher burden upon the defendant. If there is good reason to believe the communications will continue, consider discussing injunctive relief with your attorney. There are other important torts to consider in this situation as well, to the extent that these statements may be adversely affecting the Church’s income. I have a blog coming out shortly about interference with business income.

That being said, Mr. Hirsch’s admonition about recording conversations is well taken. While a number of States are considered “one party” states, permitting recording of conversations without notice to the other party, California is not one of them. Furthermore, California’s law on the matter is not the only law that regulates recording conversations. The Federal Law also regulates the area, through the Federal Communications Commission (“FCC”) under Title 47 of the Code of Federal Regulations. Any person considering recording a conversation in ANY State should become well acquainted with these rules before surreptitiously recording conversations.