Arson and the Forlorn Firebug

Why would the owner of a growing and profitable company torch it?

Andrew D. Pappas, CPA

The following article is based on an actual Pappas & Company engagement. All factual references have been changed to protect the privacy of the parties. Any references to an actual person or company are unintended and purely coincidental.

Casa de Mueble was a Tucson-based manufacturer of high-end southwestern furniture and home accessories. A long-time southern Arizona family started the company in the early 1950s; over five decades, the founder and, later, his sons and daughter painstakingly built it into a very successful business that employed more than 200 workers and consistently reached $15 million in annual sales.

In 2002 the company was sold to Mel Bartley, who, before moving to Arizona, made a modest fortune in the commercial waste hauling business. His plan for Casa de Mueble contrasted sharply with that of the founders: lower the company’s pricing and quality standards to appeal to a broader market and increase volume and cash flow. Consistent with that plan, he changed the name to Mundo Barato.

Bartley’s strategy looked like a good one. Sales were brisk, more employees were hired, and the company’s value seemed to increase.

Then, early one Sunday morning in the spring of 2006, Mundo Barato burned to the ground.

Bartley was on a ski trip when the fire occurred, and one of his first actions upon returning to Tucson was to file a $7 million claim with Mundo Barato’s insurance company. However, fire department investigators found evidence of an accelerant in the area where the fire started and classified the fire as arson. While investigators could not say for certain who set the fire, Patagonia Property & Casualty Co. refused to pay the claim until they were satisfied that Bartley had no role in the apparent arson.

Investigation. Patagonia engaged the services of Pappas & Company to investigate whether Bartley would have been financially motivated to destroy his company.

It is important to note that, when it comes to suspicion of fraud, Pappas & Company does not embrace the principle of “innocent until proven guilty.” Rather, we approach every forensic investigation with the presumptions that:

• something is wrong and

• someone is bad.

Thus, as we began digging into Mundo Barato’s finances, our guiding principle was “Bartley is bad.”

But what was his motive? Why would the owner of a growing, well-established, multi-million-dollar, seemingly profitable company torch it? Why was he better off burning the place down and collecting the insurance proceeds than selling it or continuing to operate it? And why would he do it now?

Findings. The answers weren’t long in coming. While Mundo Barato’s offices and computer equipment had been destroyed in the fire, their computerized financial records, correspondence and other data had been backed-up daily to an off-site server. The company’s financials confirmed growing sales and accrued profits; however, they also revealed that sustaining cash flow was a constant battle.

The causes of Mundo Barato’s cash flow problems were readily apparent, as we found large and frequent disbursements to payees that had no apparent connection to the manufacture and distribution of furniture.

For example, during the two years preceding the fire, there were large checks written to a title company in Eagle County, Colorado (for a condo in Vail), to Cessna Finance Corporation (for monthly payments on a turbo-prop aircraft), to someone named Chuy Rosario (the notation was “Cabo place”), to Tiffany Bartley (a $250,000 loan on which no repayments were recorded) and to various jewelers, auto dealerships, travel agencies, ticket brokers, and so on.

As a consequence of the siphoning of cash from the business, suppliers that had enjoyed prompt payment from the previous owners were forced by Bartley to wait 90 days or longer to get paid. We discovered that one major supplier had recently put the company on a cash-on-delivery basis. Others were refusing to fill new orders until back invoices were paid.

We also discovered that the company was not depositing with the IRS the income and payroll taxes withheld from employee paychecks. It had been using those funds to pay selected suppliers to keep the plant open.

Finally, we found that, on the day of the fire, there were insufficient funds and lines of credit available to meet the payroll that was due the following week.

Our public records search was equally enlightening. We learned that Mundo Barato had been a defendant in a products liability suit (we didn’t know that using southwestern furniture could be so dangerous). Bartley had agreed to a settlement, but it was clear that the company had no way to pay the settlement.

Aftermath. As a result of our investigation, we concluded that Bartley had a financial motive for the arson. He had been experiencing cash flow problems for some time, but they became particularly acute immediately before the fire.

Based on our findings, Patagonia Property & Casualty refused to pay any amount to Bartley on his insurance claim – a financial consequence that he could ponder as he awaited his criminal trial for arson and related charges. ●

While the preceding account is based on an actual case, the facts have been simplified and the names of all parties have been changed.

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