Fraud and the Conniving Divorcée

The nearly successful plundering of a community estate provides a vivid reminder of the importance of sharing financial information between spouses

Andrew D. Pappas, CPA

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

This is the story of “Pete” and “Kate,” an Arizona couple whose divorce, if it serves no other purpose, should permanently lay to rest the presumption that, in a failed marriage, the husband is always the villain.

Pete owned a very profitable fabricating business, and Kate was the executive director of a social service agency for troubled teens. The couple’s assets, beyond Pete’s business ownership, consisted of several rental properties (three of which had substantially appreciated), some joint bank accounts and a joint brokerage account.

One would assume that, as the successful entrepreneur, Pete would have been responsible for the family’s finances while Kate pursued her philanthropic work. That would be a flawed assumption. During their 22 years of marriage, Pete was usually so immersed in running his business that it was left to Kate to manage their personal finances – a responsibility that she gladly accepted.

As far as Pete was concerned, everything was fine: Business was great, Kate seemed happy, and their four children were good students who kept busy with various extracurricular activities.

So it came as no small surprise to Pete when, one day in the parking lot at his plant, he was served with a divorce petition.

For whatever reason – the lingering shock of the divorce, his continuing trust in his wife, the business’s demands on his attention – after Kate filed for divorce Pete took no steps to safeguard his share of the couple’s personal finances. Consequently, Kate retained total control over their bank accounts, brokerage accounts and rental properties.

That turned out to be a bad move on Pete’s part, since, as he later learned, Kate had been planning to divorce him for over a year, and she had used that time to prepare.

Missing Assets. Pete did wake up long enough to notice that Kate had sold their three greatly appreciated rental properties. When it occurred to him that he had a joint tenancy interest in all three properties, his investigation into how she could sell real estate that he partially owned revealed a couple of interesting facts: First, she (or someone) forged his signature on the sale documents; second, all three properties were sold to the same buyer, a corporation called Bianca Properties, Inc.

Now convinced that Kate was not entirely deserving of the trust that he had placed in her, Pete expanded his investigation into their bank and brokerage accounts. He discovered that the balance in the brokerage account was a fraction of what he expected; from that, he concluded that Kate was both hiding funds and rapidly spending or hiding the monies they had accumulated during their marriage.

At that point, the court ordered Pete and Kate to hire a third party to perform a forensic accounting investigation to determine, among other things, the amount of cash that Kate had received, the source of that cash, the amount of the disbursements that she had made, and the purpose of those disbursements. The couple jointly retained Pappas & Company to perform the investigation.

Investigation. Our examination revealed a number of actions that Kate took at Pete’s expense.

Before she filed for divorce, Kate opened bank accounts in her name only and transferred almost all of the funds from the joint accounts to her newly created separate accounts.

We reviewed the couple’s joint bank accounts and brokerage account and Kate’s separate bank accounts to determine the destination of the cash that Kate transferred out of the accounts and the balance of the accounts as of the date of dissolution.

We found that Kate had made frequent transfers of cash among her separate bank accounts, and that she had made frequent use of cashier’s checks.

We discovered transfers of cash from the couple’s brokerage account to an account owned by Bianca Properties, the corporation that purchased the couple’s three rental properties. When we subpoenaed Bianca Properties’ bank records, we found that Kate was the signer on the account. Upon obtaining additional corporate records, we further discovered (but were not surprised) that Kate was Bianca Properties’ sole shareholder. When we contacted the Arizona Corporation Commission, we learned that no articles of incorporation had been filed for Bianca Properties.

It was clear that, in preparing to file for divorce, Kate had transferred large amounts of cash to her bogus corporation. Also, she had sold the appreciated rental properties to her corporation for a fraction of their fair market value.

Remedy. As a result of our investigation, the parties, based on the advice of their respective attorneys, agreed to a division of the marital assets. The division took into account the amounts already taken by Kate related to the rental properties, the joint brokerage account and the joint bank accounts. The settlement also reflected Kate’s bad-faith actions; consequently, she received somewhat less than she would have had she not behaved so badly. Apparently, her attorney advised her that the settlement that Pete was willing to make was far more generous than the division that a judge would impose.

Pete ended up with full ownership of the fabricating business, while Kate, through Bianca Properties, got to keep the rental properties. In hindsight, due to the rapid collapse of the residential real estate market, that turned out to be a pretty good decision on Pete’s part.

Lessons Learned. Kate’s methods for siphoning off the marital assets were not very sophisticated and, once we were hired, were easily detected. Had Kate not been so aggressive with the amount of assets she took, Pete may never have suspected her, we may have never been engaged, and she may have gotten away with it.

In the vast majority of marriages, one spouse takes responsibility for paying the bills and managing the financial and investment assets. However, the other spouse should periodically (no less than once a year) receive a summary of their financial picture. This could take the form of a balance sheet and a reconciliation of net worth at the beginning of the year to net worth at the end of the year. The reconciling items would include income, expenses, changes in values, etc. It doesn’t need to be very detailed, but it should make sense.

This exercise will discourage the type of siphoning performed by Kate, and it educates and prepares the other spouse to take over if something happens to his or her mate.

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

Printable Version