Take the money and run
According to the “rule of thirds” outlined in the Journal of Accountancy’s December 2001 issue, a third of your employees are stealing from you right now, and the problem is not only worse than ever, but much more visible.A recent survey of executives by the Association of Certified Fraud Examiners found that 67 percent believe fraud is worse today than five years ago, while 70 percent believe fraud detection is getting better. Eagle County might be a good example.Earlier this summer, indicted CEOs of multi-national conglomerates made headlines when they were forced to sell off Vail-area trophy homes likely bought with plundered corporate funds. Now, local businesses are discovering that a similar brand of white-collar crime is impacting the county much more directly.According to District Attorney Mike Goodbee, there are no fewer than four embezzlement cases currently litigating in Eagle County, a number he says is unusually high.”When there were better financial times, it was more difficult to find embezzlers,” says Goodbee, “because there was so much money out there.” He says now that the economy has taken a sharp downturn after the most sustained period of affluence in American history, the embezzlers are easier to spot.”It’s like the tides,” he says. “When the water level goes down, you can see the barnacles emerging.”Two of the more recent cases to come to light involve local real estate companies. One is Summit Habitats, a development company whose owners Sandy and Kathy Treat claim that a former employee of theirs, Karen Sue Kaffka, stole $2 million from them beginning in 1997 and ending with her termination in February of this year.Though Sandy Treat refuses to comment on the case and The Vail Trail was unable to track down Kaffka, who is out on bail, the affidavit in support of an arrest warrant penned by Eagle County Sheriff’s Detective Doug Winters outlines the case against her.Kaffka was hired in 1997 to act as financial controller for Summit Habitats, along with her husband, Greg, who was appointed the company’s project manager. In 2000, she was appointed chief financial officer, but by then, she had already allegedly built two houses in Eagle County using a substantial portion of money funneled through Summit Habitats.Much of the $2 million around $800,000 was removed through checks Kaffka wrote to herself and to her husband, police say, and another $105,000 disappeared through an unauthorized petty cash account set up by Kaffka. Other financial improprieties were not mentioned specifically by Winters.In a phone conversation between Kaffka and Summit Habitats Kathy Treat, recorded by Winters, Treat asks Kaffka why she did it, and Kaffka responds that she doesn’t know, but if she had to pick a reason, it would be greed.Treat then replies, “Once you start having a lifestyle, you have to pay for it.””I know,” says Kaffka.Tangled websA much more complex example of the recent wave of embezzlements is the Crescent Club, a time-share venture that used to have an office in the Riverwalk complex in Edwards. In this case, it is Edwards resident Mark Mogul who is at the center of the allegations.In 1999, Mogul, along with business partners Joe Mitchell and Eric Lyon, formed a company called Crescent Club Holdings, LLC (CCH), with the goal of purchasing luxury homes in resort locations and selling them as fractional shares to would-be vacationers. Mitchell was the 99-percent owner and controlling partner, and it was the job of Mogul and Lyon to sell the timeshares, market the company and act as brokers. Mogul was a 1-percent minority owner.That summer, the group approached Kit Phillips of Phillips and Tober, Inc., a Denver-based brokerage firm that Mitchell had worked with on a deal in Arizona, to act as the funding source for the project. Phillips agreed, formed Crescent Club Investors, Ltd. (CCI), and raised $2 million in capital to get the project off the ground.Three years later, Mogul is now being sued by CCI for the alleged theft of $366,825; the Colorado Real Estate Commission is auditing him for misappropriation of funds; and the People of Colorado, represented by District Attorney Goodbee, are prosecuting a theft case against him that has its first plea hearing Oct. 8, which begs the question: how did it happen?By all accounts, the trouble began on July 18, 2001, when Sam Marchese and Brad Brown of Nebraska purchased a one-sixth interest in a Crescent Club-owned property in Los Cabos, Mexico, thereby joining the Crescent Club. A total of $351,352.94, along with a $20,000 reservation deposit, was wired to Mogul’s escrow account, for which he was the sole signee.On Aug. 20, Mexican officials notified CCI that the closing procedures on the property had been finalized and that it was OK to release the funds out of escrow and into CCI’s account. J.D. Finley, also of Phillips and Tober, called the offices of Mogul-Lyon Equities (MLE), the limited liability company representing Mogul and Lyon, and instructed them to wire the money to CCI.Two days later, Mogul allegedly called Finley and Phillips and instructed them that he would not release the funds until a meeting of the investors was called. Finley and Phillips refused this offer and demanded the funds be released. During a subsequent conversation between Mogul and CCI’s attorney, Karen McMurry, Mogul agreed to release the funds after receiving a disbursement letter from the majority owner, Mitchell, but though that letter was faxed to him the same day, CCI says it has never received the funds.By analyzing Mogul’s bank records retrospectively, Detective Winters says he was able to deduce that the $20,000 deposit was placed not into MLE’s escrow account, but into a separate account called Rocky Mountain Club dba Crescent Club Expense Account, controlled by Mogul and his wife Patricia. According to Phillips and Tober, this account has absolutely no affiliation with CCI or CCH.Other records indicate Mogul had already re-appropriated nearly all of the money into various accounts he controlled by the time CCI requested it.According to statements made in the court documents, the Rocky Mountain Club was an entity formed by Lyon and Mogul but disbanded before the formation of the Crescent Club. Despite his part ownership in MLE, Lyon claims he never wrote a single check for them, nor saw a single penny of the money. Mogul, he claims, was the solitary controller of the accounts and operated without his censure.According to Finley and Lyon, Mogul’s reasoning for withholding the Mexico funds is that he was owed this money for the reservation system, which he claims he invented for the Crescent Club. (Despite repeated off-the-record conversations, Mogul would not commit to an official interview with The Vail Trail by press time.)Finley says Mogul’s claim is absurd and only surfaced after the demand for the money was made. Pressed by the courts to produce documents backing his claim, Mogul presented two e-mail correspondences between he and Joe Mitchell, wherein reference to a payment was made.However, after police searched Mitchell’s computer for the e-mails, they discovered that Mogul had doctored them. The originals make no mention whatsoever of a payment for the reservation system, according to police.”Besides,” says Finley, “there’s nothing unique or proprietary about (the reservation system).” He claims that the system used by the Crescent Club is widely used throughout the industry, and that through conversations with Tom Fulton, formerly of the Franz Klammer Lodge in Telluride, Finley discovered that Mogul had acquired the idea from Fulton before the formation of the Crescent Club.’Already a rich man’Finley believes the entire episode does originate from e-mails between Mitchell and Mogul, however. In one of the early ones, says Finley, Mitchell projected what Mogul could potentially earn if the Crescent Club idea was successful, and it’s this number, Finley believes, that caused Mogul to fancy himself as an already wealthy individual.”It’s my hypothesis that Mark started getting it into his mind that he was rich based on these projections,” Finley says.Further stacking the case against Mogul is a series of conversations recorded by Lyon on the advice of his attorney (Lyon, as a 50-percent owner of MLE, is listed as a defendant in the civil suit filed by CCI), during which Mogul makes reference to a sum of money around $250,000 to $300,000 that he had hidden away for the two of them.At one point Mogul says, “I’ve done a really good job making sure the money is gone until this (the civil suit) is settled no one else can get it except for me. When it’s all said and done, then we will be OK They owe us this money.”A 20-year-old study by Hollinger and Clark concluded that the most common reason employees embezzle is due to a dissatisfaction with their situation, what the researchers termed “wages in kind.””All of us have a sense of our own worth; if we believe we are not being fairly treated or adequately compensated, statistically we are at much higher risk of trying to balance the scales,” the study says.The other motivation besides perceived need, according to the Journal of Accountancy, is greed.”Frequently,” says the May 2001 issue, “an embezzler will be living beyond his or her means if a clerk who is earning $25,000 per year drives a Porsche and wears Armani, that should be a tip off.”Whether these generalizations apply to Mogul or Kaffka, however, is, in the words of Sandy Treat, “in the hands of the DA.”
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