MST Network Systems Fraud Case Its hard to say whether Leslie Smart knew when he first walked through the door that he was going to steal from Many Special Things (MST). Events suggest that he did. Management at MST believes that from the day he was hired as vice president of information technology, Leslie began defrauding them of $1,181,554 during his chaotic 13-month employment. I spent about an hour interviewing Leslie during the last day he was allowed on MSTs premises. That was the extent of my direct contact with him. But more than two years later, after a very complex investigation, I knew a lot more. What I found painted a picture of a classic serial fraudster who operated brazenly, with impunity and without regard for those he hurt. Divorced a few times, with a trophy wife and no children, Leslie had a penchant for embellishing the truth. Some said he was an accomplished liar, thief, and con man. One former co-worker said, Leslie didnt feel his day was complete if he couldnt lie to somebody about something. A consultant who was employed by Leslie characterized him as a psychopathic liar and wacko. You didnt have to dig very hard to find the red flags flying around Leslie. But MST didnt look until it was too late. Its complacency was exacerbated by its vulnerabilitya well-intentioned company that trusted certain employees far more than it should have. As a result, Leslie was able to commit a laundry list of unsophisticated fraud schemes. Supposedly, a technical recruiting firm recommended Leslie to MST. In actuality, Leslie knew Peter Johnson, MSTs soon-to-be-retiring vice president of information technology (IT), through mutual business contacts. Johnson hired Leslie to be his replacement. These mutual contacts turned out to be key conspirators in the frauds. 2 The recruiter alleged to have located Leslie through an Internet ad placed on behalf of MST. He also claimed to have done a background check on Leslie, but we found out that it consisted solely of calling two of his references. Their comments about him were glowing. Johnson said he made his hiring decision based on the strength of Leslies resume and those checks. Unfortunately, the only thorough background on Leslie was done during our investigation. Had even minimal pre-employment screening procedures been completed a year earlier, at least some of these inconsistencies would have come to light and Leslie would never have been hired: He claimed to have undergraduate degrees in business administration and electrical engineering. When interviewed, he grudgingly admitted he had never attended college. Public records indicated at least 10 state and federal tax liens. At the time MST hired him, his wages were being garnished by the state at the rate of $2,000 per month. Leslie filed for personal bankruptcy ($175,000 in debts) a few years before MST hired him. He claimed past employment with Amazon and Googlehe had never worked for either. In addition, he substantially exaggerated his titles with previous employers. A month before MST hired him, Leslie and his wife lived in a tiny, one-bedroom rented house in northern California. Within six months of joining MST, they were living in a 4,000-square-foot home on the water with a 50-foot deep-water boat dock. In addition, Leslie acquired a brand-new Ford pickup truck, a mint condition 2015 Ferrari 308i, a new BMW M3 Roadster (a birthday gift for his wife), a Beechcraft five-seat airplane, a 21-foot speedboat, and a pair of Jet Skis. How he paid for these items became the subject of our investigation. What our search ultimately revealed was shocking. 3 Based on the West Coast, Many Special Things is known worldwide for its popular, expensive, and trendy products favoured by celebrities, business leaders, hip-hop stars, and regular folks. Maybe it was the laid-back style of the company and its products, or maybe it was the distractions associated with a quickly growing business, but for some reason, MST never focused much on internal controls, good governance, or setting an appropriate tone at the top. A number of midlevel managers repeatedly expressed concerns. But for the most part, they had trouble getting senior managements attention about their apprehensions. Leslie Smart reported to MSTs chief financial officer, a rising star in the company with a great background and a brilliant mind. The CFO gave him free rein on expenditures, most of which Leslie justified as the price for both developing an online catalog of products and for implementing a network in the companys new Hong Kong office. Suzy Morris, a senior member of MSTs finance division, discreetly reported to the HR director that Leslie had a financial stake in one of the companies he used as a contractor in the IT Department. She never said how she came to know this fact. The CFO authorized an immediate review of Leslies activities, and our investigation quietly began. It took less than a day for MSTs loss prevention manager, Ken Brown, to review Leslies expense reports for any obvious anomalies. As it turned out, Leslie had submitted expenses for money never spent, for personal items unrelated to business expenditures, and for the same expenses on multiple reportsclassic double-dipping. In the days that followed, I worked with Jim Peters, MSTs director of loss prevention, on a comprehensive review of all IT vendors. While many were nationally known companies, a couple of local operations seemed to stand out. We dug further into these firms and found several troubling issues. 4 Invoices from one of the firms, Alpha Partners, were for computer equipment and consulting services. But some were obviously exact duplicates with different invoice numbers. Others had prices that were much higher than MST should have paid. In addition, Alphas fees seemed way out of line, with some consultants working 80 to 100 hours per week at excessive billing rates with no backup detail describing what they were working on. One common thread on these invoices was Leslies personal, handwritten approval on each. Around the same time, the CFO authorized a search of Leslies office. We found a number of documents suggesting he may have extorted money or taken bribes from a vendor in Hong Kong, where he had gone five or six times to oversee the network installation at MSTs new office. On Leslies desk was a photograph of a private airplane, the title of which we later learned had been transferred to him recently, under extremely unusual circumstances. The preliminary investigation indicated approximately $50,000 in expense fraud, with the potential for several hundred thousand dollars in overbillings by one or two small local vendors. One of the first interviews we conducted was with Ron Harris. During his first month at MST, Leslie had hired Ron as an independent contractor to serve as a technical project manager in the IT Department. However, when we interviewed Ron, he said his last job was running a pool cleaning business. He had no college education and no experience related to computers or information technology, but he was learning on the job and by reading manuals. Ron didnt have a good explanation for cleverly split billing records that, when analysed closely, showed several instances of him working 40 hours at MST in a one-day period at double his contract rate with MST. 5 The interview came to an abrupt end when we asked Ron about corporate records showing he was the president of STAR Engineering Associates (STAR), a newly formed corporation. About two months after Leslie was hired, he engaged STAR to provide consulting for MST. In a very short time period, STAR billed MST almost $300,000, though no one in the IT Department had ever heard of the company and couldnt imagine what services they might have been providing. In addition, we discovered that one of MSTs checks to STAR had been hand-endorsed by none other than Ron himself. MSTs director of loss prevention said, Ron, why dont you think about where all this is going. We will get to the bottom of things, and you can help yourself out immensely if you tell us what is going on. But the offer ends when we part today. Ron closed his eyes, put his head down and remained dead still for about a minute. Then he looked up and said, I dont have anything more to say to you. Ill just take my chances. With that, he got up and left the building. This marked the beginning of our field investigation, an odyssey that would take us around the country, to Hong Kong twice, and to countless meetings with attorneys, local police, county prosecutors, the Federal Bureau of Investigation, and MSTs insurance company. At the start, we felt strongly about two things: Fraud losses from Leslies doubledealing had the potential to be sizable, and this was not going to be easy. We were right on both counts. On a Friday afternoon, very early in the investigation, MSTs CFO told us that management wanted Leslie questioned the first thing on Monday morning. Though we asked for more time to develop evidence, the message was clear: Interview him now! During a detailed over-the-weekend inspection of Leslies office, we recovered what later proved to be some incriminating data from his computer. We also visited his neighbourhood and discovered his newly ostentatious lifestyle. But we had yet to find the smoking gun. 6 On Monday we interviewed him. We didnt want to show all our hand, so we picked our discussion points carefully. Leslie acknowledged a dozen separate instances totalling over $40,000 in which MST reimbursed him twice for identical travel and other expenses, but he claimed the payments were an inadvertent oversight and blamed his administrative assistant for the mistakes. Leslie also characterized $36,000 of duplicate invoices from Alpha Partners as a problem and agreed that it was hard to imagine they were submitted in error. He said his approval was another oversight but rationalized that he signed numerous invoices and could not be held accountable for the accuracy of each one. After unsuccessfully trying to position himself as the victim, Leslies attitude took a noticeable turn. With steely eyes and a defiant demeanour, he began answering questions with questions and claimed ignorance of even basic facts regarding the vendors he used in his department. Leslie tried to turn the interview into a fishing expeditionhe clearly wanted to know what else we knew. But it was apparent that he was not going to provide us with any more information. We ended the interview and escorted him to the CFOs office, where he was suspended pending the outcome of the investigation. Three months later he would be terminated for cause. MST blocked payment on STARs and Alpha Partners invoices. Not a peep was heard from STAR, but within just a few days Phillip Jones, the chief executive officer (CEO) of Alpha, threatened to sue MST over $85,000 in unpaid bills. Jones reluctantly agreed to meet with us and answer all of our questions. But he arrived with an attorney, and the meeting was brief. Jones fumed about the financial chaos his company would suffer if he was not paid quickly. His attorney threatened that, unless MST immediately disbursed all Alpha invoices, he would make sure the world knew MST was unfairly preying on one of the fastest-growing consulting firms in California. 7 During the discussion, Jones acknowledged the questionable invoices that clearly appeared to be double billings but blamed Alphas accounting system for the mistake. Oddly, he also turned over several additional invoices that MST had paid, which we were unaware of, representing another $16,000 in duplicate billings that Leslie had approved. We later came to believe this disclosure by Jones and the demands by his attorney for immediate payments were intended to distract attention from other Alpha billing improprieties we had not yet discovered. MST didnt take the bait and we continued our investigation, identifying what appeared to be fictitious invoices from fabricated companies, more apparent overbillings from real entities (mostly Alpha Partners), and questionable deals from subcontractors to Alpha on MST projects. Within a month we also knew who owned the Ferrari (Phillip Jones) and the ski boat (Ron Harris) just before Leslie did. We also traced the tail number of the airplane in the photo on Leslies desk and discovered it was registered to STAR at Rons home address, which just happened to be Leslies former address. Leslie threatened to sue when he was terminated but ultimately said hed settle for a generous separation package and a good reference. MST said no. Any prospects for his cooperation ended there. Harris disappeared. Joness demands for immediate payment waned when we discovered he had sold the Ferrari to Leslie for $35,000 but couldnt produce evidence that Leslie ever paid for it. Jones ultimately agreed to arbitration. But his attorney resigned after determining that his client had lied about the validity of the invoices. In the end, Jones didnt receive a dime. 8 We discovered documents that linked Peter Johnson, who had hired Leslie, to two suspicious payments from STAR totalling $47,000, just before he retired from MST. I contacted Johnson about it, but he had clearly gotten wind of how things were going with Leslie and Jones. The once-cordial, grandfatherly-type figure abruptly referred me to a criminal defence attorne

1 Apply the fraud triangle to this case. Speculate on the motivation, pressures, opportunity, and rationalization of Leslie and possibly Jones in this situation. (10 marks)

2 What were the red flags that signaled fraud was occurring at MST? What should coworkers pay attention to that could be indicative of fraud? (10 marks)

3 Describe the investigative techniques used by the team from the loss prevention department to uncover the fraud? Identify any deficiencies in the process that could have led to the absence of a conviction. (10 marks)

4 Explain the lessons learned by the organization in this case. Outline the recommendations to prevent a future occurrence. (10 marks