Incarceration or Restitution?: Your internal investigation turned up evidence – now you need a goal

Friday, August 25, 2017 - 16:12

Brian Bauer, chief executive officer of PHENIX Investigations, Inc., followed a unique path to a career in corporate investigations. He didn’t come from law enforcement, as so many investigators have. That has enabled him to use his business acumen and strategic thinking to resolve cases of internal corporate theft. As he sees it, most investigators with a background in law enforcement use procedural steps that often miss the business point of an investigation. In contrast, Bauer boasts that his team delivers great value. “Our clients are amazed to learn that we can get an employee to admit to their wrongdoing, voluntarily resign from their position, pay restitution as damages and even pay for the cost of our investigation,” he says. The interview has been edited for length and style.


Have you seen an uptick in internal theft investigations?

Brian Bauer: Yes. It kind of goes up and down, depending upon the economy and depending on the industry you are in. It has changed over the last two years. Our experience, over 20-plus years of doing this, is that it’s cyclical, and when the economy is down, companies are penny-pinching and trying to look for any cuts or savings. And when profits are up, the deterrents go down and more and more employees have the ability to steal.

What do individuals steal?

Bauer: They will steal pretty much anything that is not bolted down or not being monitored. They will steal the raw materials and tools used to manufacture their product. They’ll steal the finished product that the manufacturer sells. They will steal cash, embezzle money, take intellectual property. And the biggest one is theft of time. That’s the number one theft across corporate America. You’re paying someone for an eight-hour day, and they’re only working half of that, or they have other people punching their timecards or getting paid overtime for not being there. That’s a big problem companies have: time abuse. You can imagine a manufacturing facility of 1,000 employees – what that payroll might be every two weeks. It’s a big number.

So who steals? Where are the biggest risks?

Bauer: We tell clients typically that you’re going to have 10 percent of the population that, given the opportunity, are going to steal from you. It’s just inherently who they are. Another 10 percent would never consider stealing anything. And then there’s the rest, the 80 percent. If you don’t have any deterrents, and you make it very easy for people to steal over time, what happens is they take one or two things and then it becomes a justification. And they start to steal more and more. The justification is: “I didn’t get a pay raise” or “I deserve another week’s vacation.”

It sounds like we’re talking about the general workforce in most instances. What about the top echelon? 

Bauer: What we see a lot in the executive arena is embezzlement of cash. They incorporate other businesses and, because they’re in a position to approve invoices and vendors, they create dummy companies and approve those services. We see that lots of times. You create ABC Truck Washing Company, and it’s a remote facility. He’s the manager and nobody else sees how many trucks we wash, so he just creates a bunch of dummy invoices, stamps them as approved. Corporate headquarters is 1,000 miles away, the manager approves it and those checks are sent to that company and deposited. Once they clear, then the owner takes them out of cash. There are lots and lots of different fraud schemes when it comes to management. They understand the system very well and are able to bastardize different products, selling them as something they’re not. There’s lots of different ways. It’s estimated that we all pay roughly 20 to 25 percent more for goods and services just due to corporate theft.

What about suppliers? Do they represent a threat as well?

Bauer: Suppliers and vendors: From a risk management perspective, there’s many issues there. Typically, you work for a corporation, I’m a supplier and we have a relationship. We cook up a scheme to where I’m supplying you more widgets than you need, or I’m supplying you much less but I’m changing the invoicing bills of lading to reflect how the company views it. I say I’m sending you 1,000 units, but I’m only sending you 800 and getting paid for 1,000. Then you and I split the proceeds.

Let’s talk about your company. What makes PHENIX different than other investigative shops?

Bauer: Lots of times a company thinks they have a theft, but they’re not really sure. Or somebody comes forward and says, “Hey, we think Johnny’s stealing.” The company calls the police, and the police say, “As much as we’d like to help you, unless you know for a fact that Johnny took something, we don’t have the manpower or the resources to get to the bottom of it.” Many times companies get stuck and they just go ahead and terminate Johnny. They don’t get restitution, don’t get the information, don’t get to the bottom of it.

Where we’re different is not only will we come in and do the investigation, but we will also talk to the rank and file that aren’t involved – that have been there for a long period of time – and say, “Hey, what do you see on the factory floor? We know this is uncomfortable to talk about, but you’ve signed a confidentiality agreement that says I’m not going to give your name to Pedro and say that Mary told me you steal on the factory floor.” In other words, we try to get them to be comfortable with a confidential conversation behind closed doors. And we ask them: “How do we clean up your little city where you work? How do we get to the bottom of it?” And if they say, “I’m going to tell you what I know, but I don’t want you to bring my name into it,” we say, “Not a problem.”

And where do you go from there?

Once we start to accumulate information, we work with individuals to get written admissions. If I interviewed you, I’d say, “Hey look, everybody takes from here because it’s very loose.” I had a client who manufactured DVDs. If an employee took five out of there that only cost 25 cents to manufacture, and he took them home and gave them as Christmas gifts, shame on him. But it’s loose and everybody does it. And once someone starts to steal hundreds and puts an ad in the paper to sell a new DVD before the movie is even due to be released – and this is a real-life scenario – the customer says, “Hey, that’s a $10 million order, we’re not going to give you any more orders until you can prove that you’ve secured our intellectual property and it’s not out there in the marketplace.” It’s not small anymore.

So we’ll go get written admissions, and then as we get them, we’ll say, “Look, this could be a criminal offense. But we want to continue to work with you, and you know and I know that you didn’t just take five, because we have other written admissions that say you were involved in much more. We assume, if you want to be honest, you’re willing to pay back let’s say $1,000 worth of restitution to the company and maybe save your job.” So there’s an art form to it. The $1,000 becomes $10,000 or $100,000 as you continue to peel back the layers of the onion. In that DVD case, I think 38 employees gave me written admissions of theft.

What if the company wants to press criminal charges?

Sometimes clients will say. “I want the person arrested.” We’ll obtain all the information, written admissions, and then meet with law enforcement and hand those over. But we try to educate the client. What’s more important: that your employee, who’s never had an issue before and is involved in a $5,000 loss might get an ankle bracelet but will never see a day in jail – or working with him to give us all the information, because what’s most valuable to this major corporation isn’t the $5,000 recovery but how that product is being removed from the facility, how employees are circumventing its security system and how they can fix it so that the customer doesn’t fire the company and terminate its $10 million contract because it can’t secure their intellectual property.

How are you able to keep the information you’ve obtained in your investigations confidential?

Bauer: When we go in and talk with an employee, we have them sign a release form that says a few things. It says, “We’re agents of the company. We want to ask you questions. But you need to understand that, because we’re an extension of the company, if it’s determined that you lied to investigators or are being dishonest, that could lead to disciplinary action up to termination.”

In other words, we put them on notice: “You may know that people are stealing. You’re not involved to begin with, but you have a duty to inform. This means if you see somebody stealing, you have an obligation to go to your employer and say, ‘This is what I’ve witnessed.’” If 30 minutes into the interview they say, “Well, I don’t feel comfortable, I don’t know anything, I’m not going to tell you anything.” Well, I can remind the person  that he signed a form that said he was going to be honest, and I can prove from written admissions and other people’s information that he’s not telling the truth. And he doesn’t want to lose his $100,000 job or $80,000 job. So I would strongly encourage him to tell the truth.

What kind of response do you get?

Bauer: It works very well. Some employers wonder, “Why on earth would this guy tell an investigator about all this bad stuff?” Employers say that to me all the time: “I just don’t believe you, Brian.” We tell them that there’s a method to our madness. We leave the company in a much better place than it was before. In over two decades, we’ve never been involved in a legitimate legal claim that resulted from our work, and that’s really important to us.

Sometimes clients pay us six figures to do a two-week, three-week, four-week investigation, but many times we’ve had restitution three, four, five times that amount. We target restitution first and foremost because we educate them on the criminal process. If you go ahead and prosecute them criminally, many times you’re not going to get your restitution, and there’s not going to be much teeth in what ultimately happens to that person. It’s not a strong enough deterrent.

If an employee embezzled $100,000 from your corporation, tell him you want $150,000. When I say to him, “Look, you have a written admission, we caught you dead to rights, you took $100,000. I assume you’re willing to pay that back.” He agrees. And then I say, “OK, the company’s calculated you owe them $150,000.” He says, “What? I only took $100,000.” And I say, “Well, this investigation isn’t free. All the administrative time and heartburn and loss of production is also associated with that. They deem the number at $150,000. But, if you don’t think that’s a fair number, the company is prepared to go all out, and if you’re prosecuted criminally for a felony, that might be treble damages. If you took $100,000, you’re actually responsible for $300,000 in repayment.”

If clients ask how they can come up with the amount, we help them along. Say this person has worked for your facility for 20 years. They have a 401(k). They can tap into that, into their pension, take a second mortgage out on their home. We’re not really concerned. What we’re concerned about is making our client whole for the loss. You’d be surprised how many people can come up with large sums of money when they’re facing possible prosecution. But you have to be careful. You can’t say you’re going to put them in jail. You can’t use the threat of criminal action to get a civil result. You have to leave it open-ended. But at the end of the day we’re very successful in not only getting full recovery for the client but also paying for the cost of the investigation as well.

How does your approach differ from other investigative agencies you’re familiar with?

Bauer: Many companies will just come in and go directly to the bad guy for information, and say, “We know that you were involved. Tell us all about it.” But they deny involvement and say that there’s no proof. Now the company is in a quandary because they can’t prove it. Do they fire the individual with not enough information and maybe have a wrongful termination on their hands? Most companies will come in and go to the root of the problem and try to confront it, which is a big no-no.

They’re in too much of a hurry. They don’t build a case from the ground up.

Bauer: Exactly. Too much of a hurry. They don’t have the experience, and many times the client simply says, “I only want to spend $2,000 to get to the bottom of it.” We would say, “Look, you just can’t do it for that. But don’t worry about the money because we’re very confident that, in the end, we’ll get you your money to pay for the investigation.”  

I had one CEO in particular who apologized to me after I got to the bottom of the case. And I said, “What are you apologizing for?” And he said, “When you left, after you told me what you were going to do, I told my HR director, “He’s full of shit. He’ll never get to the bottom of it. And not only did you get to the bottom of it, you got us an $80,000 restitution on a $50,000 theft.”

How do you bill clients? Are there flat fees, contingency fees, billable hours? How does it work?

Bauer: We bill just like an attorney would. We just bill by the hour for our services. What’s good is that typically when we’re doing these theft investigations, we’re right there with the client and we’re updating them on a daily basis. So they see the meter running and know what their overall costs are. My experience is that, as we get into it, the client says, “I don’t want to spend more than X.” And then we get there, they’ve used up that amount, and we say, “Look at all these people we have written admissions from. But what are you going to do with these people you still need to interview?” That’s when they say, “Please, please, don’t leave. We need to see it to the end.”