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Fraud Is a Constant Concern in Turnarounds

Guest Editor

The Journal of Corporate Renewal serves the turnaround industry as a key resource, with content that provides relevant commentary on key trends in industry and finance. One of the constants in turnarounds is dealing with fraud and litigation. 

Fraud is often a critical part of a turnaround case. Recently, I received a call from the Chapter 7 trustee on a case who wanted to discuss the debtor’s controller. This controller had previously committed fraud at the company of one of my clients, though we fortunately saved the client’s business after the fraud case was settled in mediation. And now, per the trustee, another business had been rendered insolvent, quite possibly due to this controller’s actions. Had it invested in risk management, background checks, and other due diligence, the debtor may have avoided such a devastating situation.

According to Kroll, businesses saw a significant increase in fraud and risk incidents during 2016. Kroll’s “Global Fraud & Risk Report, Building Resilience in a Volatile World, 2016/17” states that although companies have taken significant strides toward building resiliency, they still need to do more.

This month’s JCR features several articles, examples, and refreshers on the subject. Michael Goldman, head of KCP Advisory Group’s Forensic Accounting and Litigation Support, offers “Fraudulent Conveyance Actions Provide a Tool for Asset Recoveries,” based on his recent case experiences. The article focuses on the transfer of property for less than equivalent value.

Last year the Panama Papers scandal unfolded. Jon Barooshian of the Bowditch & Dewey law firm says the case is a reminder for companies to guard against money laundering. An unprecedented leak of 11.5 million files from the world’s fourth biggest offshore law firm, the Panama Papers were shared anonymously with the International Consortium of Investigative Journalists. The documents show how offshore shell companies can be used to make dirty money look clean. Twelve national leaders were among 143 politicians, their families, and close associates from around the world shown to be using such offshore companies. 

Nicholas Kajon and Eric Robinson of Stevens & Lee provide valuable commentary on the use of litigation finance as a tool to boost creditor recoveries in cases of fraud and other misconduct. They discuss a case in which they helped a bankruptcy trustee monetize a $213 million judgment the trustee had won but that was being appealed. Kajon and Robinson believe it is the first such transaction in a pending bankruptcy case.

Lisa Vandesteeg and Jonathan Friedland of law firm Sugar Felsenthal Grais & Hammer share the results of a recent case in their article on the risks encountered when businesses fail to respect corporate formalities. Along with a general overview of the benefits of the corporate structure in terms of preventing personal liability, they provide insight on the exceptions to the rule. They discuss a case in which the court successfully pierced the corporate veil, along with what that meant to the bankruptcy case.

Harold Bordwin and Heather Milazzo of Keen-Summit Capital Partners LLC provide commentary on the advantages of stalking horse bids, with “higher and better” bids unleashing added value with respect to real estate transactions. Given our industry’s current focus on retail restructuring opportunities, Andrew Moser of the recently formed Scargo Hill Capital provides perspective on retail lending and recovery. While not fraud-related, these topics are highly relevant to current restructuring cases.

Staying informed and vigilant on fraud can mitigate risk and ensure corporate resiliency. 

Jacen Dinoff

Jacen Dinoff, CTP

KCP Advisory Group

Jacen Dinoff, CTP, is co-founder and CEO of KCP Advisory Group, a business advisory firm providing creative solutions to rehabilitate businesses. Dinoff has hands-on accounting, finance, management, and operations experience that complements his technical expertise in bankruptcy case administration and financial advisory. His career has included financial and operational restructurings, asset divestitures, and senior debtor/creditor advisor roles for public and private companies.

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