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.


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?


Scenario Partner

“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.


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.


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]

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]