Dwight Freeney, a professional football player for the San Diego Chargers, was recently defrauded of a reported $3 million at the hands of his finance manager. The finance manager, Eva Weinberg, who had previously worked for Merrill Lynch and then left to form her own business, reportedly introduced Mr. Freeney (her only client) to a man named Michael Stern, whom she portrayed to Freeney as a wealthy businessman, who could enhance Mr. Freeney’s financial position.
Mr. Stern, who was introduced by Ms. Weinberg under the alias of Michael Millar, informed Mr. Freeney that he was interested in potentially investing in a restaurant owned by Freeney, in an apparent effort to gain his trust. Although he never made any investment in the restaurant, Mr. Stern gained access to several Freeney bank accounts and performed hundreds of financial transactions with Freeney funds, including paying for personal vacations, jewelry, legal bills and even his children’s tuition.
Mr. Stern was subsequently arrested and charged with fraud. He has been sentenced to five years in prison and fined $2.6 million in restitution. Ms. Weinberg is awaiting sentencing.
Professional athletes, who earn millions of dollars in salary and lucrative endorsements, are unfortunately the targets, and very often easy targets, for unscrupulous people to prey upon and violate their trust.
The circumstances as to why Ms. Weinberg left Merrill Lynch are not clear, but according to court documents, her professional relationship with Mr. Freeney began in 2009, and given the fact that he was now her only client should have raised some suspicion. For whatever the reason or motivation, Ms. Weinberg must have gained Mr. Freeney’s trust over a relatively short period of time, and his faith in her professional decision making was enough to not create any suspicion of her reasons for introducing a potential third party investor, Michael Stern.
Did Ms. Weinberg leave Merrill Lynch because she saw that Mr. Freeney was an easy target to be defrauded or perhaps there were controls in place at Merrill Lynch which would make it more difficult or more improbable for her to steal money from him there? The fact that she introduced Mr. Stern under an alias reveals her apparent intent. According to court documents filed by the FBI, Ms. Weinberg and Mr. Stern had a romantic relationship, and, in all likelihood, targeted Mr. Freeney once they felt confident that they could defraud him.
If there is any lesson to be learned in this instance, it’s that having one person in exclusive control of investments is not the best idea. This applies to financial managers that oversee personal as well as corporate finances. Internal controls established at most businesses ensure that one person does not have the power or authority to make all of the financial decisions without an internal mechanism to identify potential fraud. As in the case of Dwight Freeney, Ms. Weinberg’s activities went virtually unchecked and unsupervised as she was the sole decision maker with regard to disbursement of Mr. Freeney’s finances.
Not only should someone in Dwight Freeney’s position request that due diligence be performed on anyone with access to his or her finances, but also on anyone in an instance when one person is placed in a position of trust and significant responsibility. The cost of conducting a background inquiry far outweighs the potential losses that someone like Dwight Freeney suffered.
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The recent news of the city of Detroit, Michigan filing for Chapter 9 bankruptcy highlights just one troubling example of the state of affairs for many municipalities across the nation, and with rising debt and pension obligations, many are struggling to stay afloat. Detroit is not the first city to file for bankruptcy, although it is the largest, according to numerous media articles. Jefferson County, Alabama; the cities of Stockton and San Bernardino, California; and the city of Central Falls, Rhode Island have all filed for Chapter 9 bankruptcy since 2010.
The city of Harrisburg, Pennsylvania attempted to file for Chapter 9 bankruptcy in 2011 due in part to a $300 million debt from a failed incinerator project that would have turned trash into energy. The bankruptcy filing was eventually blocked by state lawmakers.
As the economies of these municipalities continue to deteriorate, allegations of corruption and fraud have started to appear. In recent years, the Securities and Exchange Commission (SEC) has been intensifying its investigations and charging several cities, counties, and states with fraud:
- On July 19, 2013, the SEC charged the city of Miami, Florida and a former budget director, Michael Boudreaux, with securities fraud and with violating an existing cease-and-desist order. According to the SEC, in 2009 the city and Boudreaux made materially false and misleading statements and omissions about the financial health of the city’s General Fund, the city’s operating budget, in order to receive favorable terms on three municipal bond offerings that totaled $153 million. The agency accused the city of playing “shell games,” by transferring $37.5 million from its Capital Improvement Fund to the General Fund in order to conceal mounting deficits. This is the second occurrence of similar misconduct, after the SEC issued a cease-and-desist against the city in 2003. Additionally, Miami is the first municipality to be charged with violating an existing SEC cease-and-desist order.
- On May 6, 2013, the SEC charged the city of Harrisburg, Pennsylvania with securities fraud for failing to provide accurate information about its deteriorating financial condition to the city’s municipal bond investors. According to the SEC, between 2009 and 2011, the city failed to comply with requirements to provide certain ongoing financial information and audited financial statements. In what the agency called an “information vacuum,” municipal bond investors had to obtain current information on the city’s finances from other sources; however, that information was seldom publicly available elsewhere. The SEC stated that this was the first instance that the agency had charged a municipality for misleading statements outside of its securities disclosure documents.
- On March 11, 2013, the SEC charged the state of Illinois with securities fraud and was accused of misleading its municipal bond investors of the condition of the state’s pension obligations. The SEC claimed that between 2005 and early 2009, a period in which Illinois issued more than $2.2 billion in municipal bonds, the state failed to make proper disclosures that its statutory plans underfunded its pension system and increasingly raised the risk over time that pension obligations would not be met. This was only the second instance that the SEC has ever charged a U.S. state for violating federal securities laws in their public pension disclosures; the state of New Jersey was the first U.S. state to be charged in 2010.
Since April 2013, the SEC has also charged the city of South Miami, Florida and the city of Victorville, California with fraud charges.
In 2012, the 17 SEC enforcements in the municipal securities market was more than twice the amount filed in 2011. Whether the SEC is simply increasing their focus on municipal securities fraud or if municipal officials are more willing to conceal troubling economic conditions, it is a growing concern for investors. In a recent statement, SEC Commissioner, Luis A. Aguilar, declared “that a greater focus on this market is needed in order to protect investors.”
Ricky Tong is a Coordinating Investigative Analyst at MSA Investigations. For more information on this topic and MSA Investigations' fraud investigation services, contact us today.
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In the wake of disasters such as Hurricane Sandy, which hit the Northeast a little over a week ago, people often come together to help those in need; volunteering in clean-up and meal distribution efforts, hosting displaced victims, and donating to charitable organizations such as the Red Cross. As a resident of New York City, I have been fortunate enough to witness, firsthand, the outpouring of compassion from people not only within the five boroughs, but from all around the country. Food, water, supplies and money have been pouring into the hardest-hit areas, giving residents a sense of hope and knowledge they are not suffering through this tragedy alone.
It is an unfortunate truth that with every disaster, along with the incredible support, come those who seek to profit off the victims. Donating money to disaster relief is a wonderful thing to do in times like these, but it is important to be selective about where you donate. The Boston Globe recently published an article on disaster relief scams that are cropping up as a result of Hurricane Sandy. Luckily there are ways that you can verify the authenticity of a charitable organization before making a donation.
Conducting a due diligence investigation on an organization before making a donation could save you from contributing to scam. Guidestar is a free service that provides tax returns for non-profits throughout the country. This information is valuable in that it gives you details on who is running the charity, where they are based, how much they take in each year, and most importantly, where the money is going.
While confirming the legitimacy of an organization is a must before making a contribution, equally important is understanding who is in charge. Conducting a background check on the officers and directors of a charity can provide invaluable information such as whether or not they have a criminal record or have been involved in disaster relief fraud in the past.
The National Center for Disaster Fraud (NCDF) was formed in 2005 following Hurricane Katrina, when disaster relief fraud ran rampant. NCDF recommends donors consider the following before making charitable contributions:
The NCDF also provides donors with a 24/7 hotline to report suspected disaster relief fraud.
When in doubt, asking for assistance from due diligence firms, like MSA Investigations, who have significant experience in detecting fraud, can also help protect you.
To learn more about what MSA Investigations can do to help you avoid contributing to a disaster relief scam, please contact us.
Victoria Kapastin is Manager of Due Diligence Investigations at MSA Investigations.
Learn more about Victoria Kapastin.