Rushing an insurance claim
Would-be ‘gold king’ takes advantage of bank’s credit line and insurance company’s payment
Gold-seller Anthony Grau wanted to become “king of the world” with other people’s money. However, a CFE’s questions unraveled Anthony’s scheme to steal from his own company and cover it up with a bogus break-in.
This article is excerpted and adapted from the “Insurance Fraud Casebook: Paying a Premium for Crime,” edited by Laura Hymes, CFE, and Dr. Joseph T. Wells, CFE, CPA, published by John Wiley & Sons Inc. © 2013 used with permission. Some of the names in this case have been changed.
Most business owners spend a majority of their day thinking about how they can improve their business — how they can increase sales, increase productivity, be more efficient and pay the bills. However, for a small percentage of them, the thought process is very different. These individuals care more about how they can personally benefit from the least amount of effort, regardless of how many people are affected. Anthony Grau initially spent most of his time thinking of the right way to grow the business he inherited from his father.
Anthony wanted to exceed his father’s successes and expectations and was going to stop at nothing to preserve his family’s legacy in the wholesale business.
Unfortunately, Anthony’s ability to grow the business didn’t match the demands of his lifestyle.
Anthony’s parents, Victoria and Phillip Grau, were born and raised in Poland. Shortly after World War II began, they gathered a few of their personal possessions and left Europe for the U.S. Soon after arriving in New York City, Phillip, barely 18 years old and with very little education, found a job polishing diamonds in New York City’s jewelry district. This was a good job for Phillip because he only knew a few words of English. The weekly salary was low, but Phillip was happy that he was able to bring home some money and support himself and his wife.
As the years passed, Phillip learned English well enough to interact with customers directly and build relationships. In 1946, after the owner of the company retired, Phillip used the professional relationships he had created to start his own company, Gold Rush, Inc. The business was modest and at first focused on polishing diamonds, but as his network grew, so did his business. He decided to begin importing gold and selling it to local retailers and manufacturers.
As Gold Rush grew, Victoria and Phillip welcomed their son Anthony. He began working for his father at a very early age and often spoke of his childhood memories involving the store, such as when he would visit his father and play with gold bracelets and rings. He would place the jewelry on his arms, neck and fingers, pretending he was the king of the world. Anthony’s father thought it was so cute that he took a picture and placed it in a gold frame on his desk; it served as a conversation piece when customers came in. After Phillip passed away, the picture sat on Anthony’s desk and served as a reminder that he wanted to be “king of the world” and would do anything to ensure his success.
Anthony didn’t have a college degree or hadn’t taken any business courses, but he was a businessman who loved to wheel and deal. Unlike his father, who established deep relationships with vendors and was comfortable that any deal presented to him was a fair one, Anthony almost always negotiated. He hardly ever took the first deal and frequently demanded better terms from vendors. The majority of the time, vendors did give him a better price. Anthony knew that a fortune could be made buying and selling gold and that the more gold he had, the more he could sell for a bigger fortune. Unfortunately, Anthony’s credit limit prevented him from buying as much inventory as he wanted. But that would soon change.
For any business, it’s not uncommon to have a line of credit with a financial institution for general business purposes. In the case of a jewelry wholesaler, a line of credit is used mostly to purchase gold or precious stones and on occasion for labor purposes (e.g., setting precious stones into prefabricated gold jewelry). In the wholesale jewelry industry, a line of credit is especially important during the holiday season. Purchasing gold for the holidays can begin as early as September. A saying in the jewelry district during the holidays is, “He who has the most gold is king.”
Anthony realized that if he was to continue growing his business, he needed more gold. After speaking with advisors, he decided to take out a line of credit with a financial institution. This would allow him to purchase more gold and, better yet, secure the line of credit with the purchased gold. Anthony arranged an appointment at a financial institution on the corner of 5th Avenue and West 40th Street.
Fortune Bank was a major creditor in the jewelry district and had the process down to a science. Anthony provided the bank with financial records and a business plan and within a few days Gold Rush was approved for a $1 million line of credit. Anthony was excited and was eager to put it to good use. What he didn’t fully understand when he agreed to the line of credit was that Fortune Bank was going to hire an independent company to perform a monthly inventory count, and Gold Rush would need to pay for it.
Within the first few days of receiving credit, Anthony purchased more than $500,000 worth of gold. He was buying from any supplier he could place an order with and selling the gold to retailers at a profit in just a few days. Anthony was finally running the business the way he envisioned.
Shortly after Fortune Bank approved the loan, the loan officer assigned the monthly inventory review to NewBridge CPAs, a small, independent firm specializing in gold inventory counts. NewBridge, where I was employed, was located near Fortune Bank. The two companies had a long professional history together.
Working at NewBridge had many positive points. Granted, the prestige didn’t compare with a Big Four company, but the diversified experience was second to none. As I began scheduling client visits for the weeks ahead, I saw an email asking the auditors if anyone could perform Gold Rush’s monthly inventory counts. I recently had a new availability in my schedule, so I quickly volunteered. I obtained the contact information and account details and called Gold Rush.
“Gold Rush, what?!?” A man barked out.
“Hello, can I speak to Anthony?” I responded.
“Who is this? What do you need?”
I introduced myself and explained that I was calling on behalf of Fortune Bank and was scheduling an inventory count.
“Well, I’m Anthony and I didn’t agree to any inventory count!”
I explained that it was part of his agreement with Fortune Bank and that he should contact them directly to confirm.
“I will.” Anthony snapped as he hung up.
I quickly thought that I might regret volunteering to take on this client.
After a few days, I called my contact at Fortune Bank, Lori Rizzo. Lori was a no-nonsense loan officer who played by the rules. If a debt covenant failed on one of her loans, she acted immediately. I explained the situation to her and she began to laugh.
“Yes, I know all about it. I explained the inventory clause to Anthony, and he was not happy. Regardless I told him that if it does not get done, I will be forced to call the loan.” Lori replied.
“What did he say?” I asked.
“Let’s just say he had a change of heart. You should not have a problem scheduling a count, but if you do, call me immediately.”
After I hung up with Lori, I called Anthony.
“Gold Rush, what do you need?”
Nervously I responded, “Hello, Anthony. It’s. Peter from NewBridge, how are — ”
“Yeah, I know, you need to come in.” Anthony interrupted. “Come in on Thursday before three o’clock,” he said as he hung up.
As I sat at my desk with the phone to my head listening to a dial tone, I wondered if this was a joke.
Thursday arrived and I prepared the documentation for the inventory count. The straightforward paperwork consisted of an Excel spreadsheet that automatically calculated gold value based on total weight and current market value. As I began my 10-block walk to Gold Rush, I practiced my introduction and explanation as to why the gold count was required in case Anthony began complaining that the procedure was taking too long. When I arrived at Gold Rush, I rang the bell and waited for a response.
Suddenly a voice yelled out, “Yes!”
“It’s Peter from NewBridge,” I replied.
A loud buzzer sounded and the door opened. I entered the office and was immediately greeted by Anthony. Anthony wasn’t what I expected; he stood about 6’6” and was very thin. The clothing he wore looked five sizes too big. He reminded me of a kid playing in his father’s wardrobe. And he looked as if he just woke up, with his mussed-up hair and unkempt beard.
“Hello, happy to meet you,” Anthony said as he reached out to shake my hand.
“Hello, Anthony, happy to meet you in person too,” I replied.
As I followed Anthony to the inventory bins, he stopped me and asked, “So, how much gold do you need to count?”
Not sure what he meant, I just looked at him with a confused look.
“What I meant is, you don’t need to count everything do you?”
Knowing that my response wasn’t going to be what he wanted to hear, I decided to answer his question differently.
“Why do you ask; is there something you want to tell me before I begin?”
“No, not at all,” Anthony quickly replied.
He then introduced me to the inventory clerk.
“This is Ralph Joseph, RJ for short. He will be assisting you with the inventory count.”
Anthony returned to his office, and RJ and I began the inventory count. Bin by bin each item was documented by style number and weighed. Within the first hour Anthony checked in to see how it was going.
I told him it was fine so far and added, “The first time usually takes the longest since this is the initial documentation. It should be more efficient going forward.”
I explained the process to Anthony, detailing that the two major drivers to the review were the cash balance at the bank as of the day of the inventory count and the amount of gold on hand.
After three hours, we completed the count and the initial calculation revealed that the inventory level was insufficient. I asked RJ if there was any additional inventory, but he just shrugged his shoulders.
“Let me ask Anthony,” RJ replied.
After a few minutes RJ returned with Anthony.
“How much are you short?” Anthony asked.
Knowing that he was looking for a specific amount, I responded, “The calculation does not work that way; it is based on outstanding balance on the day of the inventory count and total inventory level on hand.”
“Well, I still have old gold that is being smelted. That is a few pounds and should be enough. I have to pick it up tomorrow. Come by first thing and I can show you.”
Reluctantly, I agreed. I noted the finding in the work papers and left the office. Early the next morning I returned to Gold Rush. As I entered the office Anthony greeted me with, “Good morning, the stuff is behind you.”
I turned and noticed a dolly with three large plastic containers on it.
I immediately asked, “I thought it was going to be smelted?”
“I have to return it to the smelter after you look at it,” Anthony snapped.
I was expecting to count one-ounce gold bars, which would have made my visit easy, not three large containers. I took out my computer and opened the containers and began counting.
Almost immediately Anthony became enraged, “What are you doing!?”
“What do you mean?” I asked. “I have to document the inventory.”
Rubbing his head, Anthony grumbled, “This is going to take forever.”
After an hour I was able to document the items in the containers and noticed that it didn’t match what I counted the previous day. This gave me peace of mind that Anthony had not tried to pull a fast one. Also, the calculation revealed that the inventory on hand was adequate in relation to the loan balance outstanding for the month.
I turned to Anthony, “Okay, all good, see you next month.”
“Can’t wait,” Anthony responded sarcastically.
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