COVERING THE BASES: RISK ASSESSMENT & LEGAL ISSUES FRAUD EXPERT: LITIGATION AND TRIAL

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1 COVERING THE BASES: RISK ASSESSMENT & LEGAL ISSUES Learn how to establish yourself as the fraud expert in future litigation and trials. This session will showcase the critical elements of litigation and trial that are pertinent to a fraud examination. Delve into the key concepts of a fraud investigation, such as evidence gathering, witness interviews, and how to properly prepare and present a summary report to your client and in-house counsel. CARL KNUDSON, CFE, PI Owner/Operator Knudson and Associates Thousand Oaks, CA Mr. Knudson has over 37 years of fraud investigative experience at the highest level of government and the private sector. Mr. Knudson has been a PI and CFE since Mr. Knudson worked in the Office of Naval Intelligence and Central Intelligence Agency prior to his 23-year career as an IRS special agent in the Criminal Investigation Division. As an IRS special agent, Mr. Knudson investigated complex white-collar crime cases, including tax evasion, money laundering, drug traffickers, and organized crime syndicates. Mr. Knudson testified as a summary witness and subject matter expert in federal and state court proceedings. Some of Mr. Knudson s drug trafficking cases were chronicled in the books Washed in Gold and Dark Alliance. Upon retiring from the IRS, Mr. Knudson was hired as a Director in the Dispute Analysis and Investigative practice at Price Waterhouse, a Big 5 accounting firm. As a Director at PW, Mr. Knudson led several international fraud investigations involving overbilling schemes perpetrated against a large computer manufacturing company. Mr. Knudson subsequently was hired as a Director at the Big 4 accounting firm of KPMG. As a Director, Mr. Knudson led several large fraud investigations involving internal embezzlement schemes. Mr. Knudson started his own business in November of 2000 and has specialized in forensic accounting and fraud investigations for his private and government clients. Mr. Knudson has taken on many projects for indigent defendants who are represented by the Federal Public Defenders Office and Criminal Justice Act panel attorneys. During this time, Mr. Knudson has testified as a Certified Fraud Examiner expert in more than 50 federal and state court proceedings and trials. Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. 2011

2 Introduction As a testifying Certified Fraud Examiner, your work environment is full of challenges, expectations, and complex issues. As a testifying CFE, you will experience the best of times, but you will also experience the worst of times. I have experienced both, but I used each event as a learning experience. As Shakespeare suggests in Hamlet, To thy own self be true. We must first take care of ourselves if we want to be in a position to help others. What Are the Opportunities as a CFE Expert? There are countless opportunities to enhance your resume. Whether you are presenting the results of your own investigation or disputing the results of someone else s investigation, the forum and the form could be in: Depositions Declarations Affidavits Reports Preliminary hearings Grand juries Trials Sentencing proceedings Federal guidelines calculations Fraud-loss calculations Forfeiture proceedings Unavoidable Facts Most of your clients, government or private, won t have a clue as to what you are doing. Therefore, they will rely upon you completely. Your work has to be perfect. Witnesses and clients will lie to you about the evidence or their role in the offense

3 Some of your clients will be quick to criticize your work because your results didn t fit their agenda, whatever it was. All of your work flows to or through an attorney; live with it. You must communicate with your attorney from the outset to set expectations and boundaries. You are not the advocate. The competition in your field of expertise is fierce; nobody will make you become relevant. Despite your best efforts, you will get fired. Once you become a successful expert in your field, others will try to knock you off your perch. Never compromise your ethics. There will be many projects or cases were you work feverishly to prepare for trial, only to learn at the last second that your client decided to settle the dispute or take a plea. Don t despair; your hard work will be necessary in settlement agreements and sentencing reports. Of Vital Importance Is the Retainer Agreement In this litigious society you do not want to become the target! The retainer agreement sets forth the parameters of your work, such as fees and deliverables. Very useful statements to include are: We will work with you and your attorneys to determine the scope of the work to be performed and the requirement for any appearance in court or other proceeding. Any reports, data, worksheets, or other documents that we prepare in connection with this case will be construed as attorney-work product. We cannot and do not warrant or predict results of final developments

4 Another vital part of your retainer agreement is the discussion about fees. Make sure that hourly rates (actual or blended) are stated, including your expenses, such as travel time and mileage rate for driving. You may have a separate rate for trial testimony. Do not start your work before you have a signed agreement and retainer. Make sure that the attorney signs the retainer, but include in the fee section of the retainer that the client is solely responsible for paying your invoices. The Work Plan Next in importance, after the retainer, is the work plan. This is where the parameters of your work are documented, (e.g., deliverables, milestones, anticipated number of hours to accomplish the work, and the format in which the results of your work will be presented. Some clients will want cost projections for each category of your work, such as review of discovery, analysis of financial data, investigative work, preparation of exhibits, reports, declarations, and testimony at depositions and trials. This is the first opportunity to stress the importance of your attendance at the trial and to listen to the opposing expert, plus other relevant witnesses. If the client adds work, amend the original agreement regarding the additional work. You are the scorekeeper and it is imperative that you document all conversations regarding the additional work desired by the client. Make sure that both the client and the attorney are on board with your work plan. Never compromise your ethics; clients will want (and expect) you to stretch your findings. Remember the Enron fiasco and Arthur Andersen? There are countless other lawsuits where the shareholders sued the accounting firms for cooking the books

5 Basic Skill Sets Whether you have started your career in the private sector or the government sector, there are necessary skill sets to be an expert in white-collar crime cases. In your career you will be hired to evaluate someone else s findings, so the more you know about the process, the more valuable you will become. Clearly, your work is performed in anticipation of litigation. Understanding basic accounting and auditing standards and concepts are important to know, including: The process in compiling cash receipts journals, cash disbursements journals, general ledgers, profit and loss statements, balance sheets, adjusting journal entries, the trial balance, which all close into a tax return. There are real people involved in the success or failure of the accounting process. Know the bank reconciliation process and what records are maintained as a result of that process. In fraud cases, this data is vital in assigning responsibility. What are the current fraud-auditing standards since SOX? Knowing investigative and legal processes and procedures is critical for a CFE to be effective. Whether the investigation begins with state or federal violations, you have to know the rules of evidence collection and the storage safeguards for your evidence, including chain of custody documentation. Are you allowed to dumpster dive? Can you access your target s website? How is photographic or satellite imaged evidence viewed by your state? In the art of conducting interviews, what are the key components? Law enforcement versus non-law enforcement:

6 You have a captive audience. Interview without leading the witness. Have a list of the important questions: Establish rapport. Fraud cases are document driven. Date and initial documents. Non-law enforcement What are your levers? Planning an interview is critical: They are document driven. You have subpoena power. Approach, ambush, or arrange the interview. Computer skills are a must in today s electronic age. Knowledge about the recovery process of computerbased evidence and its legal use is a must for CFEs. It is amazing how many imaged computers have never been examined a fatal flaw in any fraud case! Knowledge of accounting software, such as QuickBooks, Peach Tree, and Access, is important. Plus, you must be able to process large amounts of electronic discovery quickly and competently. That means your computer must be current. Report writing is how you convey your findings to your client. Moreover, your report/declaration is a direct reflection of your competence. What are the critical parts of a declaration or report? Hint: Find a report/declaration template that courts have accepted. Report of Fraud Investigation Commercial and government agencies have different formats for their reports and some agencies don t issue a report at all. For this exercise, assume your employer requires a report of your investigation prior to seeking an

7 arrest warrant or a grand jury indictment or filing of a civil lawsuit. There is no way to know all of the evidence that exists relative to your investigation; a useful phrase to clarify your findings is the information in this report does not purport to include all my knowledge of the evidence. The report will be used for your appearance in grand juries, depositions, and other court proceedings, including testifying as an expert at trial. What are the main components that you should include in your report? The purpose of the report Does your attorney agree? The criminal statute allegedly violated Your background and expertise in this particular violation Introduction and summary of findings Get to the point in two paragraphs Evidence reviewed and collected (list enough for the purpose) Evidence is your foundation Source of your evidence Explanation of exhibits and spreadsheets Complete, error-free and understandable See Exhibit A for suggested format of summary exhibits Note the reference to a Bates stamped document Reconciled on a monthly basis Each document refers to a witness List of witnesses and exhibits You will need this information when going to trial Disclosure

8 Organization for your trial binders The Government Fraud Expert If you know your opponents background, including where they started their fraud investigative career, you gain a valuable perspective on their strengths and weaknesses. Fraud investigations begin in many different ways, but regardless of the origin, they rely upon banking, accounting, and bookkeeping data obtained through search warrants, subpoenas, or voluntary compliance. Trust but verify is a useful axiom for government investigators when financial evidence has been provided by cooperating witnesses or referring agencies. Adopting without verifying financial evidence will compromise the very foundation of your case. Questions to ask include: Was the evidence obtained legally? Has the evidence been authenticated? Do you have a competent witness? Is evidence complete or are there parts missing? Does your witness have skin in the game? Does the evidence fall within the business records exception? Has a court previously ruled on your evidence? The source of electronic data that was seized must be verified. Make sure your computer forensic person examines all of the imaged data and provides a report. From the government perspective, in a white-collar crime prosecution, you are required to prove the charges beyond a reasonable doubt. We are not attorneys (most of us), but we must have an understanding of what this means. Moreover, you also must be aware of precedent-setting cases that affect your financial evidence and your

9 testimony. Criminal tax and money laundering prosecutions rely upon the special agent s manual and precedent-setting court cases. One of the problems with government agencies interviewers is that they don t review the witness statement (that they wrote) with the witness, which causes problems with impeachment of testimony at trial. An admonishment to government investigators: Complete your investigation before seeking an arrest warrant or grand jury indictment; you have a sworn duty to do so and you won t be compromised on the stand later. Preparing for Trial There are local court rules that you must be aware of because they control expert testimony from experts, the makeup of expert reports, and the notice of experts testifying for the government. Some areas of concern are: Does your attorney plan on using you as the expert? Do you have a current resume? Does it provide the basis for your expertise? What is the rule for notification of experts, time-wise? Compile the notice of expert for your attorney s signature. Are experts excluded from attending parts of the trial? Does the court require your declaration or report to be divulged before trial? If so, when and in what format? If your report is not in the correct format or complete it s possible that it will not be accepted or not given the importance it deserves. If your report is not provided on time to the defense it (and you) may be excluded

10 Has the underlying evidence of your summary exhibits been provided to the defense? Are you in conflict with other fact witnesses for your side? What happens if the court does not allow you to testify as an expert? Have a backup plan. Most of what you will testify about on direct is factual so be prepared to testify as a fact witness. You could be proposed as a rebuttal witness. Direct Examination Coordinate your testimony with your attorney and create a template for your testimony. Propose the question and the answer: Are you relevant? Education, training and experience Are you competent? What evidence you reviewed Are you material? How your testimony relates to the charges How your results are presented Summary exhibits Know the foundation. In the box: Make sure your attorney understands that the foundation to your testimony is based upon bank documents and/or accounting documents. What are your conclusions (not findings)? Make sure your attorney understands your work product (e.g., schedules, summaries, exhibits) Organize your exhibits according to your testimony. Take your time; be methodical and confident. Do not spill the water

11 Thoughtfully listen to the question, pause, and then give your answer to the jury. Despite preparation, your attorney could still ask a confusing or compound question; don t be afraid to ask for clarification. Do not stare at any one of the jurors; treat them all the same, but don t overact. The court (judge) might interject a question. Look at the judge (if you can) and give a thoughtful answer. If you don t understand, ask for clarification It is possible that the court has confused the issue, so wait for your attorney to intercede. You may have to respectfully disagree. Your Cross Examination What Greek philosopher said a fool can ask more questions in a day than a wise man can answer in a lifetime? Aristotle. If your work is error-free you have nothing to worry about. Think about what is the most important part of your testimony, probably your summary chart of the fraud-loss calculation. This chart is the crowning jewel that you need to defend. The opposing attorney will attack your summary chart and your knowledge on how it was compiled. Be prepared for the following. Compound questions designed to confuse you: If you don t understand the question, ask for a clarification. Don t use the could you please ask the question again trick; it becomes obvious if you are trying to play games

12 Do not respond with anger or impatience. Use the same demeanor you used on direct. Attempts to invade your space: Attorneys might approach and get in your face. Pause before answering because your attorney will object to compound questions, misstating the evidence, being argumentative, or asking questions that aren t relevant. Don t be afraid to concede points that are obvious: You didn t review all of the evidence in this case did you? All of the evidence that I reviewed was listed in my report/declaration. I believe I have covered the major points. How much did you get paid for your testimony today? I was paid a total of $$ This area should have been covered during your direct testimony in order to defuse the issue of being a hired gun who would say anything for money. Concede small errors; otherwise let me look into this during recess. It is possible that your attorney or client did not supply you with an important piece of evidence that would affect your conclusion! You have to concede that it could affect your analysis and then wait for your attorney to rehab you. If you made a big error, fake a heart attack; you re done. i The Cross Examination of Your Opponents Expert Your attorney might not know how to cross the opposing expert or just might not have the time to dig into the minutiae of financial evidence. This is where your expert services can be of great assistance. Plus, this gives you a

13 chance to really set the foundation for some of your findings. Remember, the prosecution has to go first, so you can help your attorney develop some points for you before you take the stand. Pre-trial challenges First, challenge his/her training and expertise: Give notice to opposing counsel that your side is challenging the expert s credentials. Provide the voir dire questions for your attorney. Many announced experts aren t competent experts at all due to the lack of training or experience. An expert in one area is not an expert in all areas. Challenge the completeness of the opponent s spreadsheet analysis. Challenge the underlying supporting data, such as missing or incomplete bank account data. If you don t challenge the summary spreadsheet exhibits, you re stuck with them. Summary As a testifying Certified Fraud Examiner, your role in fraud investigations and resulting court proceedings is vitally important! Don t be afraid to say no to an opportunity that doesn t fit your skill sets. Know your evidence, do the hard work, and examine the minutiae. Do not wing it. Prepare your attorney. What is his/her style? Plan for face-time and rehearse your testimony. The retainer agreement and work plan are your protection

14 Have a disaster back up plan. Prepare for the optimum but consider the worst. Look and act like an expert. Never sacrifice your ethics. i Following this advice might result in adverse legal action or be detrimental to your professional career

15 USA V. JOHN DOE EXHIBIT A Knudson & Associates, LLC Wells Fargo Business Checking Date Credit Debit Check No. Transaction Type Balance Description Bates # 12/31/2008 Beginning Balance $ 114, /2/2009 $ Wire Transfer $ 114, From account 002 1/2/ , Sweep Debit $ 5, /5/2009 $ 109, Sweep Credit $ 114, /9/2009 $ 20, Deposit $ 135, /9/ , Sweep Debit $ 25, /12/2009 $ 109, Sweep Credit $ 135, /16/ , Sweep Debit $ 5, /20/2009 $ 130, Sweep Credit $ 135, /21/ Wire Transfer $ 134, To account 003 1/22/ Service Charge $ 134, Wire Transfer Fee 1/22/ , Wire Transfer $ 104, From account 002 1/23/ , Sweep Debit $ 5, /26/2009 $ 99, Sweep Credit $ 104, /30/ , Sweep Debit $ 5, /30/ Service Charge $ 4, Monthly Fee 2/2/2009 $ 99, Sweep Credit $ 104, /2/2009 $ Wire Transfer $ 104, From account 002 2/6/ , Sweep Debit $ 5, /9/2009 $ 99, Sweep Credit $ 104, /13/ , Sweep Debit $ 5, /17/2009 $ 99, Sweep Credit $ 104, /17/2009 $ 13, Deposit $ 118, /20/ , Sweep Debit $ 5, /23/2009 $ 113, Sweep Credit $ 118, /27/ Service Charge $ 118, Wire Transfer Fee 2/27/ Service Charge $ 118, Wire Transfer Fee 2/27/ Service Charge $ 118, /27/ , Wire Transfer $ 98, From account 002 2/27/2009 9, Wire Transfer $ 88, From account 002 2/27/2009 9, Wire Transfer $ 79, From account 002 2/27/ , Sweep Debit $ 5, /27/ Service Charge $ 4, Monthly Fee 3/2/2009 $ 74, Sweep Credit $ 79, /2/2009 $ Wire Transfer $ 79, From account 002 3/3/ Harland Clark Check $ 79, From account 002 3/6/ , Sweep Debit $ 5, /9/2009 $ 74, Sweep Credit $ 79, /10/2009 $ 21, Deposit $ 100, /13/ , Sweep Debit $ 5, /16/2009 $ 95, Sweep Credit $ 100, /19/2009 1, Wire Transfer $ 99, From account 002 3/20/ , Sweep Debit $ 5, /23/2009 $ 94, Sweep Credit $ 99, /25/ , Withdrawal $ 67, /27/ , Sweep Debit $ 5, /30/2009 $ 62, Sweep Credit $ 67, /31/ Service Charge $ 67, Monthly Fee 4/1/2009 $ Wire Transfer $ 67, From account 002 4/3/ , Sweep Debit $ 5, /6/2009 $ 62, Sweep Credit $ 67, /6/2009 $ 30, Wire Transfer $ 97, From account 002 4/8/2009 $ 16, Deposit $ 114, /10/ , Sweep Debit $ 5, /13/2009 $ 109, Sweep Credit $ 114, /17/ , Sweep Debit $ 5, /20/2009 $ 109, Sweep Credit $ 114, /24/ , Sweep Debit $ 5, /27/2009 $ 109, Sweep Credit $ 114, /30/ Service Charge $ 114, Monthly Fee 5/1/2009 $ Wire Transfer $ 114, From account /1/ , Sweep Debit $ 5, /4/2009 $ 109, Sweep Credit $ 114, /4/ , Wire Transfer $ 94, To account /8/ , Sweep Debit $ 5, /11/2009 $ 89, Sweep Credit $ 94, /12/ , Wire Transfer $ 84, To account /12/ , Wire Transfer $ 74, To account /13/2009 $ 10, Wire Transfer $ 84, To account Prepared by: Carl R. Knudson, CFE 1 3/15/2011

16 USA V. JOHN DOE EXHIBIT A Knudson & Associates, LLC Wells Fargo Business Checking Date Credit Debit Check No. Transaction Type Balance Description Bates # 5/14/2009 $ 17, Deposit $ 101, /15/2009 $ Wire Transfer $ 101, From account /15/ , Wire Transfer $ 51, To Sav. Acct. # /15/ Wire Transfer $ 51, To DDA Acct.# /17/2009 $ 17, Deposit $ 68, /17/ , Wire Transfer $ 53, To account /19/ Service Charge $ 53, Wire Transfer Fee /19/ Service Charge $ 53, Wire Transfer Fee /19/ Service Charge $ 53, Wire Transfer Fee /19/ , Wire Transfer $ 23, To account /19/2009 9, Wire Transfer $ 14, To account /19/2009 9, Wire Transfer $ 5, To account /30/ Harland Clark Check $ 5, To account /3/2009 5, Wire Transfer $ (0.00) To account Totals: $ 2,000, $ 2,114, Prepared by: Carl R. Knudson, CFE 2 3/15/2011