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The horses take a nasty fall, Part 2 of 2

Equestrian comptroller's alleged $53 million fraud exposed



November/December 2012

 

 NovDec-falling-saddle    
 

As the comptroller for the small town of Dixon, Ill., since 1983, Rita Crundwell managed all financial aspects of the city funds, including transferring money between accounts, writing checks and authorizing payments. Her salary was $80,000 per year, but she enjoyed a lavish lifestyle and was a nationally known horse breeder. After a city clerk found a problem in the city's accounts, the mayor contacted the FBI. Six months later, agents arrested Crundwell. She has pleaded not guilty to misappropriating $53 million in city funds.

On April 23, 2012, the members of the Dixon (Ill.) City Council voted unanimously to fire Rita Crundwell, 59, the city's comptroller. Crundwell had tried to resign over the weekend but the mayor rebuffed her. He and the council wanted to ensure that she wouldn't receive any pension benefits for her time. 

The FBI arrested Crundwell on April 17 on one count of wire fraud, in the amount of $175,000, with the stipulation that more charges could be coming as the investigation unfolds. She was released on a $4,500 recognizance bond. Wire fraud carries a maximum penalty of 20 years in prison and a $250,000 fine. 

Crundwell, 59, who served as comptroller since 1983 and handled all of the city's finances, was released on her own recognizance on April 18. She was arraigned May 7 in U.S. District Court in Rockford, Ill. She plead not guilty to the charge of wire fraud. 
[Update: Crundwell has now pled guilty to fraud, according to the Nov. 14, 2012, New York Times article, "Former Official Pleads Guilty to Defrauding Illinois Town of $53 Million." - ed.]   


Since the initial arraignment, the investigation has been expanded to cover the 2006 - 2012 period. Crundwell allegedly embezzled an estimated $34 million during that time. 
The investigation was expanded again — to 1990 – 2012 — when actual dates were obtained for Crundwell's 1990 opening of the non-City of Dixon bank account with Fifth Third Bank in Ohio. The estimated total now is more than $53 million. The period of the alleged fraud spanned more than two decades.

The Department of Justice says as part of the fraud scheme, Rita allegedly created fictitious invoices purported to be from the State of Illinois to show the city's auditors that the funds she was fraudulently depositing into the RSCDA account were being used for a legitimate purpose. 

The indictment seeks criminal forfeiture of two residences and the horse farm in Dixon, a home in Englewood, Fla., a $2.1 million luxury motor home, more than a dozen trucks, trailers and other motorized farm vehicles, a 2007 H2 Hummer, a 2005 Ford Thunderbird convertible, a 1967 Chevrolet Corvette roadster, a pontoon boat, approximately $224,898 in cash from two bank accounts and other assets allegedly purchased with fraud proceeds. Many of these assets were seized when Rita was arrested, and the government requested on May 2 a restraining order on the real estate that is allegedly subject to criminal forfeiture. 

The government also filed a civil lawsuit alleging that the quarter horses owned by Rita are subject to civil forfeiture because she purchased and/or maintained them with criminal fraud proceeds. On June 15, a federal judge in Rockford, Ill., ruled that the U.S. Marshals Service could move forward with selling as many as 400 quarter horses belonging to Crundwell.

"The government is pursuing both criminal and civil forfeiture proceedings to ensure that every available tool is being used to recover proceeds of the alleged fraud in order to recoup as much money as possible for the City of Dixon, its residents and taxpayers," said Patrick J. Fitzgerald, U.S. Attorney for the Northern Disrict of Illinois. The investigation is continuing, he added.

On the same day as her arrest, FBI agents obtained seizure warrants for her home property, Rita's Ranch, Meri-J Ranch and her city hall office. They seized personal financial documents, computer hard drives, general ledgers and statements relating to her business and ranches, bills and receipts relating to her horse business as well as her position as comptroller, trophies and buckles, AQHA recognition plaques, documents relating to her horses (registration papers, veterinary documents, records of sales and purchases, transfer documents and horse embryo spreadsheets) and insurance policy documents. The FBI also froze the contents of two bank accounts that she controlled. 

The seized evidence indicates that Crundwell made personal loans to at least two city employees and one other individual. The records show she made a $2,000 loan to Donald Wolber. His relationship to Crundwell hasn't been determined. She also made loans to Tim Shipman, the Dixon fire chief and Shawn Ortgiesen. The documents don't show the amounts or terms of the loans, but Shipman said he had a short-term loan with a 1 percent interest rate. Ortgiesen said he was making payments on a 10-year loan with a 4 percent interest rate. 

Shipman and Ortgiesen said they felt comfortable going to Crundwell when they were struggling because she'd been known to help people out, and they both considered her a friend. After council meetings, the group often would often go out or over to Crundwell's house. 

Shipman did some work on her house six to eight years ago, and he had known her family for a long time. In fact, he would sometimes drive her trailers back home from horse shows. Shipman and Ortgiesen said they didn't realize the money Crundwell lent them was part of misappropriated city funds; they said they thought the money was from Crundwell's horse business. Neither Shipman or Ortgiesen is suspected of being an accomplice to the fraud scheme, and the mayor said that neither violated city policies by obtaining the loans. 

Dixon, a city of about 16,000 people where President Ronald Reagan grew up, was shocked by the scandal. The mayor says he audits the financials every year and never saw anything out of the ordinary. He blamed the city's financial shortcomings on the weak economy and late state payments. Some have called for his resignation. 

Of course, many citizens are wondering how this fraud went on for so long; the city only has an annual budget of about $20 million. The city has hired an accounting firm and organized a team of city officials to recommend better internal controls. 

As of press time, Crundwell awaits trial. On Sept. 11 and 12, the U.S. Marshals Service sold 80 horses on 18 of the farms throughout the country for $1,641,200 — the most succcessful online equine auction ever, according to Jason Wojdylo, CFE, the chief inspector of the U.S. Marshals Service Asset Forfeiture Division. 

On Sept. 20, Lee County State's Attorney Henry Dixon announced Crundwell was indicted on 60 counts of felony theft, according to "State Charges Dixon's former comptroller over missing millions," by Melissa Jenco, in the Chicago Tribune.

If she's convicted, much of the proceeds will revert back to the City of Dixon coffers, according to officials. Meanwhile the city has hired Crundwell's replacement. (See coverage by WQAD TelevisionThe Chicago Tribune and mystateline.com.)

 

  

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LESSONS LEARNED

The mayor, city council and City of Dixon employees have a lot to learn from this preposterous fraud. Of course, a major red flag was the discrepancies between Rita's lifestyle and income. While still earning an annual $80,000 salary, her lifestyle changed from modest to lavish. Most assumed she was able to increase her expenditures because her horse business was flourishing. However, if they had looked closely they would have realized that she couldn't be making enough from shows and breeding activities to cover expenses. 

The standard rule of segregation of duties and internal controls (often touted, seldom followed) are absolutely necessary to ensure that one person doesn't have significant authority over every aspect of the finances. In this case, apparently there was little to no segregation of duties; Crundwell was able to authorize and open accounts, make payments, write checks, move money between accounts and provide narratives to the mayor and members of the city council explaining why the account balances were negative or didn't balance. 

Dixon's budget grew from $9 million to $20 million in two decades while Crundwell was the comptroller. A city with such a low budget should have realized that her excuses didn't compensate for the missing money. She claimed that the State of Illinois continually owed the city money, and the council members accepted her explanation as valid. No one made a call to the state's auditor general to verify Crundwell's claims. 

For some strange reason, Crundwell eventually was responsible for picking up and distributing mail within city hall, which gave her the perfect opportunity to intercept bank statements from the secret account she had opened with Fifth Third Bank in Ohio. The city hadn't appointed anybody else to perform this simple but sensitive duty. Big mistake.

The mayor and council members learned the hard way that trusting someone too much can cloud their judgments about evaluating that person's actions and effectiveness. Evaluations of performances should be based on effectiveness — not friendship. Because Crundwell was everybody's friend, socialized with her and trusted her, they accepted her excuses for the discrepancies in statements and didn't check her work or processes. So, Crundwell got away with this massive fraud for nearly two decades. It seems so obvious, but you should never neglect internal controls simply because you trust someone. So many entities make this basic mistake and pay for it dearly.

Janis Card Associates, an external CPA firm based in Sterling, Ill., annually audited the financial statements of the City of Dixon as required by law. (On June 11, the city filed a lawsuit against the firm. The suit accused Janis Card Associates of professional negligence and negligent misrepresentation for overlooking the huge thefts.) 

The external auditor, in the Sept. 21, 2011, Independent Auditor's Report to the Mayor and Commissioners of the City of Dixon, stated, "The City of Dixon … has not presented the management's discussion and analysis as required by accounting principles generally accepted in the United States of America." As we wrote in part 1 of this article, Government Accounting Standards Board (GASB) 34 requires that the Management's Discussion and Analysis section be included in an audit report; that requirement had been in effect for at least six years by the time the fraud was discovered, yet the City of Dixon had omitted it each year. Officials should have asked Crundwell why the section was consistently omitted. 

The city learned that it needs to separate duties. Case in point: Crundwell was able to open the 9530 bank account in the city's name with her name as a joint holder and independently authorize all transactions run through the account. If another employee had been responsible for reconciling Dixon's bank accounts, and someone other than Crundwell had collected and delivered the mail (it was a small city, but why was the comptroller responsible for the mail?), her personal account with Firth Third Bank would have been discovered sooner. 

 

 

 


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