The Age of Fraud

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0:38We truly have to ask ourselves, like, why is it noteworthy? And even change you. I literally feel like I'm a different person. Yes. Do you feel that way? Ideas worth spreading. From TED and NPR. I'm Manoush Zomorodi. About three hours west of Chicago is a town called Dixon. It is the quintessential small town, a population of 16 ,000 people approximately. Dixon is known for its yearly Petunia Festival. It's also where Ronald Reagan grew up. It's this cute town that has this main street where there's a few shops and, you know, there's a jeweler, there's a banker. but it's this really small town, super cute.

1:26A place where you don't think people lock their doors at night. Everybody knows everybody. You know, your kids are outside playing in the front yard by themselves, and you have no concerns. That's Dixon, Illinois. This is Professor Kelly Richmond Pope. I like to describe myself as by day, I'm an accounting professor, and by night, I'm a fraud investigator. For the last 20 years, Kelly has been specializing in forensic accounting, studying how and why financial crimes happen. It's the intersection between accounting, auditing, fraud, psychology, social psychology, and just a dash of just being super nosy.

2:07One of Kelly's favorite cases is about a Dixon, Illinois resident named Rita Crundwell. Rita started working for the city right out of high school. And she rose up through the ranks and became the city comptroller, So the person that manages all the money for the town and everybody trusted Rita. In her documentary called All the Queen's Horses, Kelly chronicled how Rita managed to embezzle money from the city coffers for 20 years and dupe the entire town, including her colleagues at City Hall. She made it easy to work here. She would always say to me, if ever you make a mistake, don't worry. It can always be corrected.

2:47You know, you have a trusted employee, and it's human nature to trust them. What fascinates Kelly was how Rita openly flaunted what she did when she wasn't balancing the city's books. She was breeding champion horses. Congratulations, 2011. World champion. Good I will be. Owned to show by Rita Cronwell of Dixon, Illinois. Rita didn't have just one or two horses. She owned 400, which would clearly have been impossible on a civil servant's salary. She was leading a big lifestyle. I thought, and I think everybody in town thought, that it was all due to these horses. You know, there'd be stories in the paper that she's got another national champion and she'd have pictures.

3:33Rita was very polished all the time. She always had beautiful jewelry on. By day, she's wearing meek, you know, municipal clothes. And by night, she's dripping with jewels and furs. I saw her pull up one day with a brand new custom-made sundowner trailer just to haul the horses in. And, you know, the word was out it was$250 ,000. There were people that questioned. But when you question someone like that, then people start questioning you. And so I think she created this barrier around her where she was really untouchable. Because why would a city comptroller that works every day nine to five own 400 horses and be showing them in such a lavish way?

4:21Everybody was like, how did Rita come across all this money? And we were told that Rita had a boyfriend that passed away and left all her money to her. And it was believable. She told people that her parents were investors in Campbell Soup companies. I mean, certainly her parents could have owned many acres of farmland, which is very high revenue. When I'm teaching my fraud class, I use the term lifestyle fraud. It's because you live right out in the open. And sometimes when you are so brazen, people couldn't think that you're stealing. Like, it doesn't make sense that someone would actually do that.

4:59So you tell yourself, nah, they're not stealing because who would do that? For Professor Kelly Richmond Pope, Rita Crundwell's case is a gateway to understanding the psychology of white-collar criminals. Because while we hear about big financial scams in the news all the time... Grace Theranos, founder and CEO, found guilty... This morning another scandal is rocking Wells Fargo. The bank has an organization guilty of all charges. 15 counts of tax fraud. Smaller, quieter cons are happening all around us every day. We've been trying to reach you concerning your car's extended warranty. Costing companies and individuals an estimated$5 trillion a year.

5:42So today on the show, living in an age of fraud. The motivations and implications of why we cheat the system with accounting professor Kelly Richmond Pope. Ted Speaker and author of Fool Me Once, Scams, Stories and Secrets from the Trillion Dollar Fraud Industry. So back to Dixon, Illinois. Rita Cronwell had been embezzling money for two decades. But then in 2011, someone finally noticed something was wrong. So this is Kathy. Kelly Richmond Pope picks up the story from the TED stage. Kathy Swanson is a retired city clerk from the city of Dixon. And one day Kathy was doing her job just like she always did.

6:27And she stumbled upon a pretty interesting case. See, Kathy was at the end of the month, and she was doing her treasurer's report for the city. And typically, her boss, Rita Cronwell, gave her a list of accounts and said, Kathy, call the bank and get these specific accounts. And Kathy did her job. But this particular day, Rita was out of town, and Kathy was busy. She picks up the phone. She calls the bank and says, fax me all of the accounts. And when she gets the fax, she sees that there's an account that has some withdrawals and deposits in it that she did not know about. It was an account controlled only by Rita.

7:04And actually, I had the opportunity of interviewing Kathy for my documentary, All the Queen's Horses. I saw this one account that I had never heard of before. And what I noticed on it was three large deposits. And it was in care of her. It was RSCDA, City of Dixon, in care of Rita Crundwell. I didn't know who to go to. I sat on it for a couple of days. I hid it in my car. So Kathy looked at the information. She reported it to her direct supervisor, which was then Mayor Burke. And this led into a huge investigation, a six-month investigation. I said, I think there's a cancer in City Hall, but I need to talk with somebody.

7:49And I took the bank statement along. The FBI secretly investigated Rita with the help of Mayor Burke and Kathy Swanson. Kathy keeps her mouth closed. She's providing information to the FBI and still working her regular job under her supervisor, Rita Cronwell, until the final day when the FBI said to Mayor Burke, listen, we're ready. We have the information that we need to make an arrest. And that's sort of how everything blew up in Rita's face. In the end, how much had she stolen and how big was this case? Rita had embezzled$53.7 million. Whoa. And that, Manoush, is a conservative estimate because some records were lost or not able to be confirmed.

8:39So$53.7 million that was stolen. This is known as the largest municipal fraud in United States history. This case here that happened in small town USA, Dixon, Illinois, 16 ,000 people. Stolen from under the noses of her unsuspecting neighbors. And stolen in plain sight, plain daylight. The thing that bothers me is how many projects and or services have not come about in the city of Dixon because the tax dollars weren't there. If people ask, well, who suffered because of this? Everybody in this city suffered. So Rita Cronwell was found guilty. She was sentenced to 19 years in prison. She only served eight before being released early in the pandemic.

9:34But even though she committed the largest municipal fraud in American history, which when I heard this, I was like, whoa, this is such a crazy story. But what you have discovered in your career, Kelly, is that she's not actually that unique in what she did. Exactly. She's not unique in terms of do people steal from organizations. She's not unique there. But a lot of them are small, you know. It's the person that abused the corporate credit card for a pretty significant amount. It's some corporate executive, some person that has an MBA and is working on Wall Street that has manipulated the books.

10:17Or there's some person that may create an entry that overstates revenue or understates expenses. Fraud is built into our culture in a way that we just can't get away from it. I think what makes Rita's story unique is the amount of time and the amount of loss. I mean, it takes some maneuvering to take$53.7 million for 20 years. It's pretty significant. So that's what makes her unique. In your book, you outline very clearly some recurrent themes that you've seen in your case studies. For example, you describe what you call three distinct types of perpetrators. Can you talk about those three categories, what they are?

11:03Sure. One of the things I do in my class with my graduate students is we have a lot of visitors, guest presenters, and we have various perpetrators that would come to class. I realized that my students' responses to them were very different depending on their rationalization. And so it started me wondering, all perpetrators really are not the same. They're not the same. everybody does not steal for greed. So how can I try to break down this rationalization component so that people can understand the why a little bit differently and perhaps even empathize? And so what I wanted people to realize too is everyone is not an intentional perpetrator.

11:53If you are listening to any true crime podcast or if you're watching any crime shows, you're typically watching the lives and decisions of an intentional perpetrator. The Rita Crundwells of the world. The Rita Crundwells of the world. Somebody that knows a system inside and out and manipulates that system for personal gain. But everyone's not like that. In a minute, more psychological profiles of white-collar offenders with TED speaker and accounting professor Kelly Richmond Pope. Everyone is not a Bernard Madoff who is just doing things for personal gain. There are some people that are either following the boss's orders or there are other people that are using their organizations because they have the power and the privilege within an organization to help someone outside.

12:44And that was Kayla. That's who she was. The accidental perpetrator and the so-called righteous one, like Kayla Ravello. There were students that were crying as they were listening to what happened to her because they could empathize and they could hear that she was a perpetrator but did not receive any direct personal gain, was really, truly trying to help her husband. I'm Anoush Zomorodi and you're listening to the TED Radio Hour from NPR. Stay with us.

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15:33I'm Manoush Zomorodi. On the show today, living in an age of fraud. My guest is TED Speaker, forensic accountant, and professor Kelly Richmond-Pope. Her book is called Fool Me Once, Scams, Stories and Secrets from the Trillion Dollar Fraud Industry. Kelly, according to the FDC, here in the U.S., fraud losses totaled nearly$9 billion in 2022. And that was up from$3 billion the year before. That's a big increase. What do you attribute it to? I think that there's a couple of things that have pushed a lot of people that would never, ever think that they would engage in fraud now to engage in fraud.

16:19Look at our most recent situation that we're dealing with, which is the pandemic. And one of the things that was really interesting is the PPP loan fraud. There was a fair amount of first-time offenders, doctors, lawyers, entrepreneurs, who realized that the rules were relaxed. The government had relaxed rules in order to get money in the hands of business owners. But when you relax those rules, it allowed people to say, hmm, I heard that the government really isn't verifying if I actually have four employees. I could probably say I have 40 employees and money is going to be doled out based on the size of my organization.

17:00If they're not really confirming or verifying that, and I heard my friend down the street did it and got money, I'm going to try it too. I mean, that seems pretty risky. From your interviews and research, why do you think people assume that no one will notice, that they won't get in trouble? So I think that there's this spread of fraud where everyone is willing to try it because they think, eh, I'm just going to get a slap on the wrist anyway if I get caught and things will be fine. So I do think that we're living in a time where people are willing to try more. I also think that social media has played a role in what I think people feel as though is due to them.

17:44So never in life, in my young adult life, did I have access to see how celebrities were living, where they were eating, where they were traveling, what they were doing, what they were wearing. And that does something to me, I think, if I were to do this, where I think I should have those things too. How can I have them now? Hmm. Maybe I'll try to use my corporate credit card to purchase an expensive handbag because I want it to. I think when we have leadership that may present as a little bit less ethical than it may have the best. Yeah, and I'm thinking of Donald Trump saying, you know, getting around my taxes doesn't make me fraudulent.

18:30It makes me smart. But think about how that impacts society. When you see the most powerful office in the land saying that, how does that impact what I should be doing? You know, so I think all of that has an impact on the way we are living and what we're willing to try. Let's go back to the three types of perpetrators that you've identified. Earlier, we talked about the intentional perpetrator, someone who commits fraud very much on purpose. Let's talk about the second category, the accidental perpetrator. What is their motivation? How do you describe them? Yeah. Some people are following the boss's orders, don't feel as though they can push back, and they find themselves ensued in a fraud.

19:23That is a category that I define as an accidental perpetrator. Because I'll use myself as an example. If my department chair came to me and said, Kelly, I need you to just sign off on this document. I'll explain it to you later. Don't worry. More than likely, I'm going to do it because I trust her. I trust the system. I trust the process. And I may feel as though I can't even push back because she's my department chair. She's my superior. So I'm going to honor my role, my duty, and the hierarchy that I work in. And if she asks me to do something, I'm going to do it. Now, that could lead me to being engaged in fraud.

20:00And I'm still a perpetrator, but my rationalization of why I did it was not for personal gain. I was just following the boss's orders. You give an example of a man named Andy Johnson, who was the vice president of finance at an energy company. And this brings us back to your specialty, accounting. He got into a tricky accounting situation that ended up blowing up in his face, even though he didn't think he'd done anything wrong. Can you share that story? Yes. So Andrew Johnson, he was in a situation where he was an accountant inside an organization and he was charged with really just making the numbers work.

20:44He worked for a company called NICOR Energy. NICOR Energy was a very sales driven organization. The more customers we find, the more money we make and we don't necessarily care how we find them. We just need to make the money. And all they told Andy is just make the numbers work. And so they would bill customers a certain amount for the energy that they would use. And then they would have to estimate how much they think that bill would be when it became due in the next cycle. And so it's this accounting process where it's not an exact science. So Andy found himself in a situation where they overestimated what they thought their customers needed to pay.

21:34And because of the fluctuation of natural gases, that estimate went down. And they needed to go back and say, actually, our revenues are lower than we thought that they were going to be. Now, his CEO, CFO, did not want to hear that. And Andy was charged with, OK, how are you going to fix this situation? Because we can't lower our revenue. So basically, Andy estimated his company would make a lot more money than it actually did, which meant that as a certified public accountant, he should have gone back and revised the numbers in his spreadsheet to reflect how much money they really took in. Yes.

22:16So Andy knew as a CPA, he knew that he had to follow generally accepted accounting principles. And generally accepted accounting principles says that you must adjust that in the period that you know that you're going to take a reduction. Andy tried his best to explain that, but nobody wanted to hear that. And so instead of taking all the loss in the moment and the period that he knew of it, he spread it out over a period of time. You're not allowed to do that according to generally accepted accounting principles. You just can't. So he made it look like there had been less of a big hit on the books and just sort of to cushion the blow, he spread out the loss over several months.

23:01Okay. Exactly. Now, Andy did not think it was right because he was a CPA. He didn't think it was illegal. Andy felt really uncomfortable in the environment that he was working in. He decided he was going to leave NICOR. And he found another job. He left that world, thought it was okay. And then three months, about three, four months into the new job, he gets a knock on his door from the FBI at home. And even when the FBI came, he thought, let me provide them with some information on what I saw and how the operations worked within NICOR. Never did he think he was a target, but he was. He was definitely a target.

23:48Wait, so he ended up going to jail? Oh, yeah, he sure did. So there's no way that he could say, listen, this is what my bosses wanted me to do. Even if they didn't say it explicitly, I was just following directions. Listen, I can promise you that Andy said that. At some point in all of the interviews with the SEC, the interviews with FBI, I'm sure he said that. I was just following their orders. But then someone can say, you're a CPA. You understand the rules. You have a fiduciary responsibility to do what's right, to protect investors, potential investors. And you know this. Actually, you know it better than they do.

24:31So that can't be your defense. The worst part is, though, that he actually was like, oh, this place stinks. I'm going to go find another job. And he, like, left. Exactly. And so it's interesting because it matches this whole idea of an accidental perpetrator. I never said to you that Andy wanted to buy a new car or live this lavish lifestyle. None of those things applied to him. How many of us have been in a situation when someone that we report to asks us to do something that we just don't really feel comfortable with, but we don't push back? This accidental perpetrator category are people pleasers, people that are team players.

25:17And that's a lot of us. There are people who you talk about in the book who commit fraud on purpose, but not so that they can buy fancy cars or big houses. They do it because they think they're doing the right thing for other people. Right. Can you tell us about that category? Yeah. So that category is called the righteous perpetrator category. And so there is a category for people who think they're doing good, even if they're doing wrong. As I was organizing my thoughts and doing research, there was a person that reached out to me, and her name is Kayla Ravello. Kayla was a successful attorney.

25:59She graduated from Columbia University Law School, worked on Wall Street, and was a corporate lawyer for some very significant firms. And so Kayla was very successful, but her husband wasn't. And so she one day said to her husband, you know, we are in the process of hiring vendors. And if you were a vendor on record, you could probably do some of the litigation support work for the firm. Now, the firm didn't have any anti-nepotism policy. And Kayla's not going to let anything go wrong. It's a referral. We refer people to other people, other business all the time. So it doesn't sound illegal. Would you agree with me?

26:47Yes, I absolutely agree. Okay. So Kayla's husband started an LLC and his family worked in the LLC. And so they were providing litigation support services. And there was a request for a proposal. And Kayla's husband's firm was selected. Nothing wrong there. Now, Kayla did not tell her partners that who they actually selected was not only her husband, but her husband's family. She did not disclose that information. Okay. She knew it may be not the best thing to do, but illegal she never thought. So things were working fine. He was doing the work. He was submitting invoices. Kayla had ultimate oversight of the invoices for approving them.

27:36everything was working fine. Well, there was a change in Kayla's department where they decided that they needed to submit invoices for work that had not been done such that they could use up some of the budget and not have to go back to their accounting department to say, we didn't use all the money we requested this year. So Kayla says, I'm going to submit some of these invoices for this litigation support and we are going to pay them in advance with anticipation that the work will be done. The invoices were submitted by her husband's company, but the work stopped. He did not complete the work.

28:20So now people are asking Kayla, what's going on with this vendor? Why haven't we gotten the work? And Kayla feels as though she can handle it. It's her husband. So I'm going to ask you, if you were Kayla, what would you do? You would think I can talk to my husband. Yes? Yeah, I'd be like, what's going on? Get it done. Get it done. So Kayla tried and tried and tried to talk to her husband. And this went on for about six months. So Kayla's on a business trip, gets off the plane, and she's missed all these calls. Her husband had been arrested. He sold some type of drug to an undercover cop. When law enforcement started looking into her husband, what was revealed is he had another family.

29:10Oh, dear. He had another wife, another kid, and maybe that's why I wasn't getting the work done. Yeah. So now Kayla is in a tough space. She's devastated. Her husband has been arrested. this work that has not happened. These invoices have been paid. Her partners don't know. Can you feel the stress? And so now, as they are digging into her husband's life, they're digging into her life. So to make a really long story short, they're both arrested. She lost her law license, of course. Lost everything. And Kayla reached out to me during the pandemic and said, you know, I've been following you on Twitter.