Risk Scenario

Double Crossed

Employee theft rocks an alternative energy company.
By: | October 4, 2012 • 8 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One

Heddy Phelps and his best friend, Peter Longo, hit the top of Heartbreak Hill as they always did, practically in tandem. Their thighs were burning from the exertion of pedaling their sleek Italian racing bicycles up the four-mile incline that rose 900 feet in elevation into the California foothills.

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Then came the sweeping S-curves of the long downhill along the banks of Lake Petri. This is where both men geared back up, and really leaned into their handlebars, racing each other as they always did.

Soon they arrived at, “Dotty’s Place” the old timey lakeside café where they traditionally took a break. On this day, Heddy, the CEO of the Sunburst Solar Cell Company, felt like he didn’t have a care in the world. The endorphins from the ride were coursing through him, his business was doing well and the sun on his face felt great.

Peter, the company’s head of business development, was lying down on a bench on the next picnic table over, closing his eyes and taking in the sun.

Heddy’s cell phone chirped and he reluctantly fished it out of the little bag that was strapped to the back of his cycling seat. The call had to be important. It was Roger Hambleton, the company’s CFO.

“Heddy, it’s Roger.”

“Hey, what’s up?”

“You guys out on your bikes?”

“Yep, resting now but we’re out here.”

“You and Peter?”

“Yeah, me and Peter,” Heddy said, almost impatient with the question. It was always him and Peter. They always rode together. Why was Roger suddenly getting stupid on him?

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“Heddy, I really don’t know how to tell you this, but I got a call today from one of the audit committee members on the board of directors. They’d been called by somebody anonymously, probably someone in accounting. I spent all morning looking into this and it looks like we might have a bit of a problem, a fraud problem.”

Heddy paused, was on the verge of telling Peter, but checked himself.

“How much of a problem?”

“It could be a million and I think Peter and Sarah Goodwood’s handprints are all over it,” Roger said. “They’ve been….seeing each other, apparently,” Roger said, putting it as delicately as he could.

The pit of Heddy’s stomach turned cold, like he’d just drunk a couple pints of ice water. His hand trembled.

“No way you can talk about this now but as soon as you get out of ear shot of Peter, you better call me,” Roger said.

“How sure are you?” Heddy said, trying to hide the anger rising up inside him. His hand wouldn’t stop shaking.

Peter, in addition to being Heddy’s friend, had been his employee for 12 years. Now a big piece of Heddy’s world was crumbling.

“I’m pretty sure Heddy, I’m pretty sure,” Roger said.

Heddy hung up. He was a competitor who lived on the edge and stayed in great shape. He didn’t have much of an off button.

He felt a compulsion to stand up and cave in Peter’s head with the reinforced instep of his riding shoe. But he stifled the impulse.

Peter got up and got ready to get on his bike.

“You coming?” Peter said.

To buy time, Heddy looked down at his cell phone, even though no one had called or text-messaged him.

“Crap, I’ve got to take this. Go ahead and ride easy, I’ll catch up,” Heddy said.

“Okay,” Peter said and pedaled off.

As soon as Peter was out of earshot, Heddy called back his CFO and got the details on Peter’s elaborate scam to siphon increasing amounts of money into a private bank account over time.

Then he called his firm’s outside counsel and told him about his desire to fire Peter on the spot.

“I wouldn’t fire him yet if I were you,” the attorney said. “Might complicate things.”

“Really?” Heddy said.

“Really,” the attorney said. “I’d call the attorney general before I’d fire him.”

“Hmmm,” Heddy said. “Thanks. I’ll get back to you.”

To say that Heddy couldn’t think straight would be an understatement. He took off on his bike after Peter.

Heddy respected his attorney, but the further along he biked, the madder he got. When he saw Peter starting to load his bike on to his car, Heddy lost control.

“You’re fired!” Heddy said, pushing Peter to the ground.

Before Peter could react, Heddy had picked up Peter’s expensive racing bike and begun smashing it pedal first into the back window of Peter’s sport-utility vehicle. Heddy kept smashing and smashing the bike into the car as he yelled.

“Roger…(smash) just called me and told me you and Sarah (smash) ripped off the company (smash) for about a million you (smash) traitor!”

Peter was too scared to stop Heddy. After the bike and window were destroyed, Heddy just walked away from Peter. Peter eventually gathered himself up and drove his damaged car away.

Part Two

When he got back to the office, Heddy did act on the advice of his attorney in one respect, he called the State Attorney’s office. He also asked for a meeting with the board’s audit committee to get a better idea of the scope of the fraud.

Soon after he got another call, this time from Luke Negley, his risk manager.

“Heddy, it’s Luke.”

“What’s up?”

“I just talked to Roger. Is it true we’ve got a possible embezzlement case on our hands?”

“That’s what it sure looks like,” Heddy said. For some reason he wasn’t in the mood to be questioned by Luke, who had a careful, painstaking way of approaching things that Heddy sometimes found grating.

“Well, where are you with things?”

“What do you mean ‘Where am I with things?’ I just got off the phone with the state attorney general’s office, that’s where I am with things!” Heddy said.

Luke sighed into the phone and Heddy’s radar went off. Obviously Luke was about to take a different view.

“What is it?” Heddy said impatiently.

“Uh, there’s just some things I’d like to go over with you when you get a chance,” Luke said. “We need to consider this might be an insurable loss and I think we better tell somebody that.”

“Well, not today,” Heddy said.

They set up a meeting time for later in the week and hung up.

“Looks like the horse is already out of the barn,” Luke said to no one in particular.

***

News that Peter Longo had been fired and Sarah Goodwood suspended under the cloud of a criminal investigation threw the culture at Sunburst Solar into a tailspin. Employees there always prided themselves on their association with the illustrious, brilliant Heddy Phelps and his longtime friend Peter Longo; both of whom were considered visionaries in the alternative energy field.

Employees were questioning the company’s ethics and its mission. Were they working for a progressive alternative energy company, or just a bunch of thieves posing as progressives?

If he had the time to monitor it, Heddy would have been aghast at the time that was being wasted by employees texting one another and surfing the web for postings about the scandalous affair and alleged theft that was now part of a criminal investigation and steady news coverage.

To Luke Negley, Heddy’s behavior was so impulsive and counterproductive that he almost wondered whether he was in on the alleged scam.

On the one hand, now that he understood that Sunburst had coverage for employee dishonesty, Heddy was pressuring Luke to finish the work necessary to complete and submit the “proof of loss”. On the other hand, Heddy was taking actions that seemed to thwart Luke at every turn.

Heddy had the head of IT and the CFO working overtime running all sorts of reports for him, so much so that the IT department and the finance department weren’t able to respond in a timely manner — when they responded at all — to Luke when he asked for backup to support the claim.

Unbeknownst to Heddy, Peter and Sarah had also been in touch with the head of IT, with whom they were much closer to than Heddy. Even though Peter was fired and Sarah was suspended, the head of IT scrubbed their old hard drives clean, at their direction, right under the nose of Sunburst’s security head.

Things got even more hectic when the State Attorney’s office concluded, at the end of a six-month investigation, that it had enough evidence to charge Peter and Sarah with theft by unlawful taking and criminal conspiracy to commit theft. Sarah also faced a separate charge of obstruction of justice for destroying crucial business records.

The State Attorney had also involved the U.S. Attorney’s office. The two also faced federal charges of wire fraud because the alleged scam involved the wire transfers of money to banks in different states. They faced fines of up to $1 million and 30 years in prison if convicted.

Despite Heddy badgering him all the way, Luke pulled together supporting documents and completed a two-page proof of loss form and got it into the carrier before the policy deadline. He estimated the loss at $1.2 million.

The lead investigators from the State Police Bureau of Criminal Investigations, joined by special agents from the U.S. Internal Revenue Service arrested Peter and Sarah. It was all over the news. They did the dreaded “perp walk.”

Part Three

Heddy Phelps hoped the investigation would not seriously disrupt the company’s culture and workflow. The state police investigators had no such concerns.

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They were at times abrupt and bullying, driving one administrative assistant to tears when she had trouble grasping the scope of one of their information requests. At least that was as it seemed. In essence, they were doing their jobs in putting together the intricate puzzle from years of deception.

“Look, what part of obstruction of justice don’t you understand?” an imposing state trooper yelled at a flustered employee.

“We want the following hard drives and we want them right now,” he demanded. Sunburst Solar professionals who were well thought of in their industry and had their own egos were infuriated at the way they were being treated. Management had left them ill prepared to deal with such an experience.

“I got an advanced degree from Stanford to be treated like this?” one worker posted on her Facebook page, where she also posted photos of uniformed troopers practically ransacking the desks in the office.

***

Anyone who had any experience watching a trial could see that the defense attorneys Peter and Sarah hired were diligently and successfully cutting down the size of the alleged loss in the eyes of the jury.

One day in court Luke saw the insurance adjuster sitting in the row behind him. As the defense attorneys worked to shred the jury’s perception of Sunburst’s competence at creating checks and balances against fraud, Luke kept an eye on the insurance adjuster; by all appearances he wasn’t amused.

In the end, the jury found Peter guilty of the theft of $180,000 and criminal conspiracy to commit theft. It found Sarah guilty of criminal conspiracy to commit theft and obstruction of justice.

The carrier was taking its sweet time reviewing the proof of loss.

“There is no way the carrier is going to go for $1.2 million,” Luke’s broker told him one day during a break in the court proceedings.

With the testimony given at trial in hand, the insurance carrier argued that Sunburst failed to implement proper safeguards against fraud in its accounting procedures. After six months of review, the carrier sent Luke a letter saying that it will reimburse Sunburst Solar just $100,000.

The trial and the chaos it caused left Heddy Phelps in a withered state. He called a meeting with Luke, Roger and the company’s general counsel to discuss the possibility of suing the insurer. After a long, drawn out deliberation, the company’s general counsel persuaded Heddy not to sue.

Convinced as he is that the claim is worth more than $1 million, the news that the company is getting $100,000 sent Heddy over the edge.

Refusing to acknowledge that it was in many respects his actions that impeded Luke from filing a successful proof of loss, Heddy took his anger out on Luke.

“I pay a fortune for insurance every year and this is what I get?” he thundered at Luke in one particularly ugly exchange.

Heddy restrained himself from firing Luke but Luke’s relationship with his CEO will never be the same, and he knows it.

Luke starts sending out resumes.

Summary

CEO Heddy Phelps thinks he’s doing the right thing, or what feels like the right thing anyway, when he immediately fires a long-time friend and employee who comes under suspicion of having committed a massive fraud. But the CEO’s impulsive decision backfires on him, ending up reducing the payout he could have gotten under his employee dishonesty coverage.

1. Involve risk management: Emotions can run high when a trusted employee is accused of theft. But that’s no excuse not to involve risk management from the very beginning in key decisions. Things might have gone smoother in the insurance recovery process if Heddy Phelps had put Luke Negley in the loop sooner.

2. Choose the appropriate prosecutor: The decision by Sunburst Solar management to contact the State Attorney’s office locked the firm into the investigation by the state police. As the investigation developed, it became clear that this matter transcended local laws and needed the attention of federal resources.

3. Focus on the recovery: Yet another place where logic should rule emotion is in the documentation of loss and how that impacts the recovery process. Sunburst Solar needed a steady, focused effort that was directed at documenting not only the amount of the suspected fraud but how it was committed. Better forensics and less drama could have led to a better outcome here.

4. Don’t alienate key players: As it turned out, Heddy’s decision to fire Peter on the spot was the wrong thing to do. Heddy and his company would have been much better off if Heddy had kept Peter on site as he investigated whether the suspected fraud was for real. Sending Peter packing eliminated any possibility that Heddy could take advantage of their long-time relationship to access records that were either deleted from hard drives or destroyed altogether.

5. Manage interaction with law enforcement: In this scenario, law enforcement descended on the work place at Sunburst which not only disrupted employees from their daily routines but raised concerns that their company was in a crisis. Further, the employees began to feel defensive, paranoid, and accused. It would have been much better for the culture and overall productivity if an in-house team or an outside firm was used to conduct preliminary inquiries, gather relevant information and statements, and to act as a conduit for requests from law enforcement. This action by the insured serves to expedite the criminal investigation and prepare the staff for the inevitable interactions with law enforcement and the prosecutors.

6. Iron-clad checks and balances: Establishing true checks against fraud is something that most companies think they’re doing but don’t really get to the bottom of. A documented, communicated system of checks and balances in accounting is the only thing that’s going to give the company any credibility in a court of law.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

Risk Matrix: Presented by Liberty Mutual Insurance

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