Fraudulent Transfers Read online

  Fraudulent Transfers

  Jim Flynn

  Copyright © 2015 Jim Flynn

  All rights reserved

  By the same author:

  Overdraft

  Where There’s No Will

  This is a work of fiction and all names, characters (other than Fletcher), businesses, organizations, places, events, and incidents are a product of the author’s imagination or they have been used fictitiously. Any resemblance to actual persons (or dogs, other than Fletcher), living or dead, or actual events is coincidental.

  This book is dedicated to Winston and Abby, successors in interest to Argus, Murphy and the real Fletcher. Although Winston and Abby have not read this story, and never will, I consulted with them frequently during our daily walks around our neighborhood.

  Jim Flynn

  Table of Contents

  Chapter 1

  Chapter 2

  Chapter 3

  Chapter 4

  Chapter 5

  Chapter 6

  Chapter 7

  Chapter 8

  Chapter 9

  Chapter 10

  Chapter 11

  Chapter 12

  Chapter 13

  Chapter 14

  Chapter 15

  Chapter 16

  Chapter 17

  Chapter 18

  Chapter 19

  Chapter 20

  Chapter 21

  Chapter 22

  Chapter 23

  Chapter 24

  Chapter 25

  Chapter 26

  Chapter 27

  Chapter 28

  Chapter 29

  Chapter 30

  Chapter 31

  Chapter 32

  Chapter 33

  Chapter 1

  “Jack,” my secretary said over the telephone intercom, “Mike Lawrence just called and he wants you to attend a meeting with a couple of his bank officers this afternoon at 4:00. He said it’s important. Can you do that?”

  “Well, shoot, Stephanie, I was planning to leave early today and take Fletcher for a walk in the Garden of the Gods. It’s a nice November day and we’re nearing the end of chipmunk season. Fletcher loves chasing those critters around even though he never catches them. But, duty calls. Tell Mike I’ll be there at 4:00. I’ll give Fletcher an extra helping of Greek yogurt with his dinner. That usually buys me some forgiveness.”

  Mike Lawrence is the president of Front Street Bank, National Association, one of the few national banks remaining in Colorado Springs that hasn’t been acquired by a bigger bank. Mike, although twenty years younger than me, is also a friend. And, Front Street Bank is our firm’s landlord. Since Mike greatly dislikes incurring legal expense—the word cheapskate comes to mind--if he wanted me at a meeting, something important must in fact be happening.

  Shortly after 4:00, I headed downstairs to Mike’s office, where his ever protective secretary, Brenda, told me I could go right in. There with Mike were Hillary Johnstone, the bank’s senior vice president in charge of deposit account operations, and Justin Phillips, recently hired by Front Street Bank after five years with the Federal Deposit Insurance Corporation as a bank examiner. Upon his hiring, Justin was given a vice-president title and the job in the bank no one wants—compliance officer. Hillary had been with the bank for thirty-two years and, unlike many others, had managed to keep up with the dramatic changes technology has brought to the banking industry.

  “Hi Mike. Hi Hillary. Hi Justin,” I said when I entered the room. “You guys are looking pretty somber. What’s up?”

  “Hello McConnell,” Mike said. “Thanks for coming. We were afraid you’d be off fishing somewhere this afternoon. Here’s what’s up. We received a hand delivered letter a few hours ago from one of your colleagues in the bar, a Ms. Josephine B. Houghton, Esquire, telling us that the bank will be promptly sued if it doesn’t put $4.8 million back into her client’s account by 2:00 p.m. tomorrow.”

  “Josephine is a good lawyer, although occasionally on the cranky side, and she’s not known to make idle threats. She’s a transactional lawyer and not a litigator, but her firm—Ralston Daniels—certainly has lawyers who know how to sue. That firm, as you probably know, has its main office in Denver with two hundred plus lawyers. It has an office in Colorado Springs mostly because the firm represents Millennium Enterprises, a public company with its headquarters here that owns mining operations in Cripple Creek and on the Western Slope. But again what’s up?”

  “Let me first tell you about our customer, Ms. Houghton’s client. It’s a financial planning and stock brokerage firm called Turnbull and Williston Wealth Management, LLC. This is a two partner outfit that provides so-so investment advice at $500 an hour and then steers its mostly elderly, but wealthy, clients into actively managed mutual funds with high expense ratios. These mutual funds, oh-by-the-way, also pay nice commissions to brokers who bring them business. Turnbull and Williston has had its hand slapped a couple of times by the Colorado Securities Commissioner for questionable advertising practices, and it’s been the subject of maybe a half dozen arbitration proceedings with unhappy clients in the past five years, all of which have been settled before they went to hearing. Turnbull and Williston moved its accounts over here eighteen months ago, from one of the too-big-to-fail banks. Neal Turnbull got cross-wise with that bank because no one at its office in Colorado Springs has any authority to make a decision, no matter how trivial.”

  “I thought Front Street Bank was picky about who it let in the door as customers and that investment adviser/stock broker types were told to take their business elsewhere.”

  “That was the case two years ago but then my directors, who are also the bank’s major shareholders and my boss, started telling me I needed to grow the bank, and that meant bringing in deposits. And Turnbull and Williston brought us nice deposits. We have the firm’s business operating account, which has an average daily balance of maybe $3.5 million. And, we have its trading account, where client money gets parked going into and out of trades. There, we see daily balances anywhere from $300,000 to $30 million. The account we’re talking about here is the trading account. This is a fiduciary account, meaning the money in the account doesn’t belong to Turnbull and Williston. It belongs to its clients. And, if there is a problem in that account, Messrs. Neal Turnbull and Randolph Williston are personally on the hook to their clients. They can’t hide behind the shield of their otherwise limited liability company.”

  “OK, but you still haven’t told me what the problem is.”

  “Be patient McConnell. We’re getting to that. The story is complicated. Hillary, you can probably explain this better than me.”

  “Sure. Although we’re still piecing together some of the puzzle, here’s generally what happened. Turnbull and Williston had a customer who said his name was Jarad Salamante. Salamante opened a trading account with Turnbull and Williston a month or so ago, and brought in the door roughly $580,000, which he invested through the firm in a couple of exchange traded funds and some individual stocks. No problem. The firm checked him out with the usual stuff—drivers license, from California; Social Security number; credit report from Equifax. No red flags. Salamante claimed he was a software engineer, that he’d made a lot of money in Silicon Valley when a start up company that employed him did an initial public offering, and that he was currently between jobs, but had a job offer in Colorado Springs he would probably be accepting.”

  “So far so good.”

  “Yeah, well things start to go down hill pretty quickly from here. Thirteen days ago, Salamante delivered to Turnbull and Williston, by FedEx, a cashiers check from Merchants Bank in San Francisco, payable to himself, for $4.8 million. He tells Randy Williston that this check constitutes the buy-ou
t of his stock option rights in the company he just left and he’s now going to be investing this money with trades to be made at Turnbull and Williston. He’s endorsed the check to Turnbull and Williston, and Randy Williston brings the check over to me and tells me to deposit it into the Turnbull and Williston trading account—the fiduciary account—which I do. We normally put a one-day hold on cashiers checks, as called for in the Expedited Funds Availability Act. In this case, however, because of the size of the check and the out of state bank issuer, we put a four day hold on the deposit. The act lets us do that in unusual circumstances. Justin, maybe you can pick up the story from there, since you’re the one who most recently talked to Randy Williston.”

  “Right. So, Jack, six days after this check is deposited in the Turnbull and Williston account and the hold on the account has expired, Salamante telephones Randy Williston and tells him he’s got a new and really great job opportunity in Miami. He tells Williston he needs to leave California immediately and head for Florida and he instructs Williston to sell all of his exchange traded funds and stocks, which Williston promptly does. That money—now $600,000 with investment gains--goes into the trading account. Good funds. No problem. Salamante also tells Williston to wire transfer the proceeds from the EFT and stock sales, and the $4.8 million he had just brought in, to an account he says he has opened at South Florida Bank and Trust in Miami. The next day--by now it’s seven days after the cashiers check was deposited into the Turnbull and Williston trading account--Williston calls us and instructs us to wire transfer a total of $5.4 million out of the trading account to South Florida Bank and Trust, for the benefit of Salamante. At that time, there was $5.8 million in the trading account—Salamante’s $5.4 million and another $400,000 from other Turnbull and Williston customers—all of which, as far as we knew, constituted good collected funds. So, we executed the wire transfer, leaving $400,000 in the Turnbull and Williston account.”

  “And?”

  “Yesterday, which was five days after we sent the wire out and twelve days after the deposit had been made, we get a notice from the Federal Reserve Bank in Denver telling us that the cashiers check Salamante gave Turnbull and Williston, and that was deposited in the trading account, is a counterfeit. It is nothing more than a piece of paper created on a desktop computer to look like a cashiers check. The Denver Federal Reserve Bank tells us it has taken $4.8 million back out of our check clearing account with it and has recredited $4.8 million to the clearing account of Merchants Bank. We in turn do what our deposit account contract says we can do and we debit the Turnbull and Williston trading account in the amount of $4.8 million. After that, because there had been $400,000 of good funds in the account when we did this chargeback, the account was overdrawn by $4.4 million. We immediately called Neal Turnbull and told him he needed to cover the overdraft. Otherwise, we would be returning checks presented for payment on this account. Since these would be checks going to Turnbull and Williston’s clients for money they are owed resulting from trading activity, and for which Neal Turnbull and Randy Williston have personal liability, these guys had a big problem.”

  Mike continued with the story. “As you might expect, Turnbull and Williston were in my office in a matter of minutes, displaying limited diplomatic skills and demanding that we reverse the chargeback to their account. When I refused to do that, they scraped up $4.8 million from somewhere and put it into the account, bringing the balance back up to $400,000 and allowing us to pay checks presented on the account. They then obviously went to see Ms. Houghton, who is now threatening to sue us unless we put $4.8 million of the bank’s own money back in the Turnbull and Williston account.”

  “Mike, I know you’ve tried for years to explain to me how the check clearing process is supposed to work these days using digital imaging and all, and I get some of it, but take me through what happened here.”

  “Hillary, can you dumb this down to Jack’s level?”

  “Sure. The check clearing process still works on a no-news-is-good-news basis. When we take in a check as a deposit to an account, we turn it into a digitized image and send it off to the bank on which the check is written. We do this through the Federal Reserve check clearing system. We have an account with the Fed, as does the bank on which the check is written. As soon as the Fed gets notice from us of the deposit, it credits our account for the amount of the check and debits the account of the bank on which the check is written in the same amount. Unless the bank on which the check is written objects to this and refuses to pay the check—usually because there are insufficient funds in its customer’s account—all of the debits and credits firm up. So, no news is good news. The bank on which the check is written only has a short period of time to reject the check and refuse to pay it. Essentially, that bank has until midnight of the first business day after the check shows up on its doorstep to decide whether or not to pay the check. If that deadline passes and there is no rejection, the transaction is considered complete and the bank on which the check is written is stuck with paying the check. If there are no funds in its customer’s account, too bad for it. It just made a loan to its customer. With a check this size, the law and the Fed’s regulations also require the bank on which the check is written, if it’s not going to pay the check, to call the bank where the check was deposited and tell that bank the check is coming back. It has to make this call before the deadline passes for paying or not paying the check.”

  “OK, so what went wrong here? I assume you didn’t receive a call from Merchants Bank telling you it wasn’t going to pay this check. Otherwise we wouldn’t be having this conversation. Doesn’t that mean Merchants Bank is on the hook for this fraud, and shouldn’t it have to pony up $4.8 million for recredit to your Fed account?”

  “I wish it was that simple, but it’s not. First of all, Merchants Bank is taking the position that the rules I just described to you about midnight deadlines and warning phone calls and the like only apply to real checks. This wasn’t a real check, Merchants Bank says. It was just a piece of paper made to look like a check. This means we use a different playbook, except it’s one that hasn’t been written yet. And, there’s another problem. The fraudsters here are very sophisticated and they have a deep understanding of how the Fed’s check clearing system works. This bogus cashiers check had MICR encoding—MICR stands for magnetic ink character recognition—that pushed the check into a suspense account. This in turn, Merchants Bank says, delayed information about the check getting to it for nine days, so the usual time in which to make a pay/no pay decision passed before it knew the check even existed. We’re not sure this is correct. Our initial position is that Merchants Bank screwed up by not monitoring this suspense account. But Merchants Bank says, au contraire, the Fed screwed up by not telling it about the check. Just in case Merchants Bank is right about this, we have also had to take the position that the Fed screwed up. Merchants Bank and the Fed and Turnbull and Williston then all claim the problem is ours—we screwed up. We should have recognized that this check was a counterfeit when we accepted it for deposit. But we then claim that all of this is Turnbull and Williston’s fault—it screwed up--because it was the one dealing with Mr. Salamante, and it should have figured out he was a crook.”

  “I get the picture. We now have four parties pointing the finger at each of the other parties, saying the loss shouldn’t be theirs. But couldn’t you just go back to the bank in Miami and put the horse back in the barn?”

  Justin took on this one. “We immediately contacted South Florida Bank and Trust but by then the money had been wired out of Salamante’s account there to three other accounts, as instructed by Salamante. One of those accounts is in Nigeria, one is in Antigua, and one is in the Cook Islands. These places are all notorious for letting their banks keep private any information they have about their customers. And wire transfers don’t work like checks. As soon as a wire transfer is sent, it’s irreversible. The money immediately becomes collected funds in the account to which it was sen
t. So we had no right to reverse the wire transfer we sent to South Florida Bank and Trust and that bank had no right to reverse the wire transfers it sent to the banks in Nigeria, Antigua and the Cook Islands. Bottom line, this horse, now cut up into three parts and shipped off to three different countries, isn’t coming back to the barn.”

  “Mike,” I asked, “doesn’t First Street Bank carry insurance for this sort of thing?”

  “The answer to that question seems to be no. The insurance industry must have seen this one coming since our errors and omissions insurance has a nice little exclusion from coverage for customer claims alleging an improper withdrawal of funds by wire transfer.”

  “Swell. Anything else I should know at this point?”

  “Yes, actually. We have already managed to work out a deal with the Fed to the effect that we won’t start suing each other until we have a chance to further investigate what happened here. So, although we have each reserved the right to try to stick the loss on someone else, for the moment, at least, we will cooperate with each other in sharing information and trying to track down Mr. Salamante and whoever he works for. And Jack, you’ll also be pleased to know that the Fed wants your friend—now very close friend—Veronica Stailey to participate in the investigation. Since you work for us and she works for the Fed, this could get a little tricky, but I’m confident you can handle it. Still, if she says she won’t sleep with you unless you tell her Front Street Bank’s attorney/client secrets, you’ll just have to suffer.”

  “Thanks Mike. You certainly know how to make a complicated situation complicated. Let me add a few things to the game plan at this point. First of all, you need to include me in any written communications about this situation, so the attorney client privilege remains in effect. This includes emails. In the legal arena, carelessly worded emails have sunk more ships than anything else I can think of. And when you meet with your directors to tell them what has happened here, I need to be there as well—for the same reason. In the morning, I’ll call Josephine Houghton and see if I can get her to join in the standstill agreement, on the theory that filing a lawsuit isn’t going to help things any. I’ll do the same with Merchants Bank, once I figure out who its lawyer will be in this matter. Mission number one—for all of us—is to go after the crooks rather than pointing fingers at each other. Anything else?”