Fulton Bank, Fraudulent Loans, Worley & Obetz

Video File

Situation

This case study shows how white-collar crime caused a family-owned Pennsylvania fuel supply subcontractor to file bankruptcy and 275 people lost their jobs.

While serving as executives at Worley & Obetz (W&O) Jeffery Lyons, the company president and Judith Avilez, the company controller, schemed to defraud Fulton Bank out of more than $65 million. The executives created fake monthly financial statements that deceived the lenders at Fulton Bank into thinking the business had significant accounts receivable.

The information in this case study comes from two Department of Justice (DOJ) press releases and several news articles.

Learning Objectives

Upon completion of this Case Study, participants should:

Understand how the defendants participated in a scheme to defraud the US Government;
Describe the criminal activity that occurred at Worley & Obetz;
Identify penalties for Bank Fraud and Tax Evasion;
Explain how a written, internal compliance program protects business;
Learn more about prosecution tactics of white-collar crime.

State of the Industry

Businesses are susceptible to both internal and external fraud. Losses from fraud result in great societal harm, including loss of employment, loss of tax revenues that support communities, and personal stress for both the victims and the perpetrators of the crime. People that do not understand the implications of white-collar crime may unwittingly participate in crimes without fully understanding the risk or collateral consequences of their actions.

Background and Analysis

Founded in 1946, W&O operated in central Pennsylvania for longer than 72 years. W&O supplied home heating oil, gasoline, diesel, and propane to its customers.

According to the DOJ, Jeffery Lyons masterminded a scheme to defraud others to fund his lavish lifestyle and his other investments. Lyons induced W&O’s controllers to help him facilitate the scheme. Lyons’ position as president of W&O permitted him to engage in this fraud. His relationship with W&O’s prior customer, Giant Supermarkets, further allowed his scheme to develop. According to prosecutors, Lyons created fake financial statements misrepresenting that Giant Supermarkets accounted for roughly 85% of W&O’s revenues.

Despite performing work on one or two projects for Giant Supermarkets, Lyons misrepresented that he performed many jobs for Giant. Lyon’s deception allowed him to hide W&O’s actual business losses. He deceived Fulton Bank about his credit worthiness to borrow more than $66.7 million.

When the accountants for W&O asked questions, Lyons lied. If they asked for meetings with W&O executives or representatives with Giant, Lyons misled them to believe that he could not participate in the meetings with lies that his father had died, or that he had contracted a disease.

The owners of W&O independently hired accounting consultants that discovered the fraud. According to prosecutors, the defendants created fake financial documents each month for more than 15 years. The defendants then turned the fake statements over to Fulton Bank to secure additional loans. According to the DOJ, Fulton Bank then relied on that information in filling other loan requests from W&O.

Tax Evasion

The federal bank fraud statute, Section 1344 of Title 18, US Code, makes it a crime to execute or attempt to execute a scheme or artifice:

To defraud a financial institution; or
To obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.

The white-collar crime of tax evasion falls under Section 7201 of the Internal Revenue Code, and it provides as follows:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Three elements to the crime of tax evasion include:

An attempt to evade or defeat a tax or the payment of a tax,
An additional tax due and owing, and
Willfulness.

Jeffery Lyons:

During his tenure as CEO of W&O, Lyons reportedly earned an annual salary of more than $500,000. Investigators at the Internal Revenue Service found that Lyons failed to report more than $1.4 million in income derived from the scheme. As a result, Lyons faced white-collar crime charges for bank fraud and tax evasion.

Lyons eventually pled guilty to one count of defrauding Fulton Bank of more than $65 million. Lyons also pled guilty to one count of tax evasion. Judge Jeffrey L. Schmehl sentenced Lyons to 14 years in prison and ordered him to pay $53 million in restitution to Fulton Bank and $550,000 to the IRS.

Judith Avilez:

According to DOJ officials, Avilez took over her part of this scheme from a prior W&O controller. Avilez had an opportunity to recognize the ongoing nature of the fraud and report it to authorities. Instead, she actively participated in the crime over the course of several years. According to reports, Avilez aided and abetted Lyons’ scheme in falsifying W&O’s financial statements to appear that W&O had more than $55 million in accounts receivable from Giant supermarkets. The reality showed Giant rarely purchased fuel from W&O. The falsified financial statements made W&O appear to be financially stable.

The court sentenced Avilez to three years in prison, resulting from her participation in this scheme. The court also ordered her to serve five years of supervised release and to pay $15 million in restitution to Fulton Bank.

Recommendation

We recommend training on understanding white-collar crime so business leaders and team members can more effectively lessen their vulnerability to internal and external fraud.

A company should undergo a thorough risk analysis for every functional area within the organization. We recommend compliance training programs that address those risks. The more a company trains on the costs and consequences of white-collar crime, the stronger an organization becomes at lowering risk levels.

Try it free! Compliance Mitigation Learning Management System

Sources

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