For three years, a bookkeeper at a building-materials yard in South Los Angeles ran one of the simplest schemes you can imagine. Customer checks came in, made out to her employer. She erased the matching invoices from the company’s computer system, walked the checks to an ATM, and deposited them into her own account. They weren’t endorsed. They weren’t even made out to her. The bank credited them anyway. By the time anyone noticed, she had deposited 225 checks worth $1.6 million.
No detective caught her. An auditor did because the volume of goods leaving the yard didn’t match the sales on the books.
On this episode of Oh My Fraud, host Caleb Newquist and co-producer Zach Frank talked with Chris Derry, a former detective with the Los Angeles County Sheriff’s Department. Chris spent over 36 years in law enforcement, working fraud and cybercrime for the last 17 of those years.
One idea that came out of the conversation is that fraud is the crime our justice system is least equipped to punish, even though it’s the one you’re most likely to run into. These cases come to light when someone close to the numbers notices the story doesn’t add up and speaks up.
How the schemes surface
“Fraud, like any other type of theft, is driven by two main things,” Chris says, “greed or desperation.”
The bookkeeper was greedy. She bought a house, an expensive car, and a pricey motorcycle for her husband. She decorated her home with autographed sports memorabilia. She wanted to live above what she could afford. When the owner confronted her, she threw herself on the sword and admitted to stealing about $300,000. Once investigators pulled the bank records, the real number was $1.6 million.
It unraveled when the owner brought in an auditor, who found that the goods sold didn’t match the reported sales. The owner called a customer, learned they’d paid for a pallet of concrete, then found no order and no check in his system. He asked the customer for a copy of the check. It had been deposited at a bank that wasn’t his.
Chris’s other early case was greed with a punchline. On an $8 million commercial building sale, the sellers’ attorney slipped a $250,000 charge onto the escrow settlement statement, payable to a company the owners didn’t recognize. When they asked about it, he said they’d needed an environmental impact report. Great, the owners said, and asked for a copy. Three months later, they were still waiting on that copy.
Bank search warrants traced the money to an account in Illinois, then right back out again to a Ferrari dealership in Newport Beach. The deal file showed the car was sold to the attorney. He was prosecuted and disbarred. “That’s just greed,” Chris says. “Straight greed.”
Both cases broke for the same reason. Somebody reconciled, then asked a question. The auditor and the curious property owner were the detection system.
Fraud is a paper war
Catching the anomaly is the easy part. Proving it is a different fight.
When a patrol detective works a liquor store robbery, the owner wants the guy caught and hands over the video. Fraud investigators have to pry records out of what Chris calls “disinterested third parties” like banks, phone companies, and internet service providers. These companies “don’t really care whether you solve your case or not.” They take their time. The records come back incomplete. So you go back again.
That’s why you learn to write narrow, specific search warrants. You learn to interview victims and suspects. And above all, you learn to absorb and organize huge amounts of messy data. On the $1.6 million case, that meant thousands of pages of bank records spanning three years. “You can’t just give that to the DA,” Chris says. Instead, it’s 100-plus hours pulling the relevant transactions, sorting them, and laying them out in a spreadsheet a prosecutor can actually follow.
Then prosecutors screen it. They may reject the case outright, or send it back and ask for more work first. And they watch the clock. In California, you generally have four years from the date of discovery to bring fraud charges, but case law says the clock can start when a victim should have discovered it. Chris shared an example of a fraudulent deed mailed to a victim in March, but they didn’t call the police until August. Delays like that can sink a case.
Doing more with less
That painstaking work is being done by a unit that keeps shrinking.
When Chris moved into major fraud in 2007, Los Angeles County had a little over 90 investigators spread across the county, including a southwest team, a north team, an east team, two elder abuse teams, a real estate team, and identity theft teams north and south.
When he left 17 years later, they were down to a little over 40. “Two people would retire, and then they would hire one to take your place.” Priorities shifted, and budgets tightened. The real estate fraud team alone went from six investigators to four.
With fewer investigators and more cases, screening tightens, and anything not complicated enough gets kicked back to station detectives. The math does not favor victims.
When a neighbor is all that stands between you and losing your house
Nowhere is that clearer than in equity theft. Fraudsters comb public real estate records for properties loaded with equity. For example, a property bought in 1975, paid off in 2001, and now worth $1.5 million with no loan on it. Then they steal the owner’s identity and either borrow against the property or sell it outright.
The damage adds up fast. Real owners get evicted, sometimes by buyers two transactions downstream. In one Long Beach case, an older woman was evicted from a home she still legally owned, and it took about a year to unwind.
But the transaction takes time, and that creates a window. In one case, an appraiser showed up at a rental house. A neighbor chatted him up, noting he wasn’t aware the property owner was selling. The appraiser said the property owner was selling. So the neighbor called the owner, who wasn’t selling anything. Investigators got a warrant, traced the imposter’s burner phone to a Starbucks, and found him sitting there with a laptop and a fake ID, working the sale. He’d been laundering the proceeds by directing escrow funds to out-of-state gold dealers, then having the coins shipped to mail drops in Southern California.
Caleb notes that embezzlement is almost a sad story. It’s usually a boneheaded decision by someone in over their head. Real estate fraud is something else. “Diabolical is the word that comes to mind,” Chris says. “It’s calculated, it’s cold, and it takes place over an extended period of time.”
Which raises the question Chris lived with every day: even when you catch them, what does justice look like?
You’re the tripwire
Look at the pattern across every case. An auditor reconciled goods to sales. A property owner asked for the $250,000 report. A neighbor chatted up an appraiser. Fraud surfaced because someone close to the numbers, or close to the property, noticed the story didn’t add up.
Then consider what happens next. Point a gun at a liquor store clerk for $100 in California, Chris says, and you’re probably going to state prison. Put together an elaborate fraud and take “grandma’s last $100,000,” and there’s a good chance you get probation. People love to say it’s only money. “Well, is it only money to grandma who’s gonna have to eat cat food for the rest of her life?” Early in his career, Chris taped the Serenity Prayer next to his monitor. It encouraged him to do thorough work, then accept that charging and sentencing belong to prosecutors, judges, and juries.
Here are the lessons for those of us who live in the books:
- Reconciliation is often the only detection tool that works
- A prosecutor needs clear, chronological records. Fraud hides in sloppy ones.
- Ask the question. Asking for a copy of a report turned a line item into a conviction.
- Don’t count on the system. Fewer investigators, a four-year statute, and probation sentences mean enforcement is the backstop, not the front line.
Law enforcement is unlikely to catch the fraud in your client’s books. In most cases, you’ll notice it first and speak up. Listen to the full episode to hear Chris’s full account of life inside LA County’s major fraud unit.