Divorce and the Doctored Documents

When husband filed for divorce before the ink was dry on the sale of the couple’s business, wife smelled a rat

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.

Despite being a little rough around the edges and occasionally exhibiting questionable judgment, Glenn and Shirley seemed to possess that rarest of business qualities – the ability to turn to gold every enterprise they touched. Together this husband-and-wife team was an entrepreneurial powerhouse.

Their latest success story was the sale of their apparel manufacturing company, San Tan Gear, LLC, a turnaround project that Glenn and Shirley had bought for $2.2 million. They assembled a top-notch management team, developed exciting product lines, expanded into international markets, and cultivated an extensive distribution network. In five years under their ownership, San Tan Gear’s market value soared, and they sold the company to a private equity group for, according to the grapevine, a whopping $9.5 million.

Surprise. While they were planning their next acquisition – or so Shirley thought – Glenn filed for divorce. Just like that, Shirley’s idyllic personal and business life was turned upside-down, and while she wasn’t overly concerned about how she would fend for herself as a single woman, the combination of being a jilted spouse and a jilted business partner doomed this divorce to be anything but amicable.

Adding to Shirley’s angst was the fact that Glenn had always managed the couple’s bank accounts, investments, etc. He was also the managing member of their various limited liability companies, and his signature alone was generally all that was required in their business transactions. Shirley had never thought much about that, since she trusted Glenn and money was plentiful. But now, amid property settlement negotiations and divisions of income, Shirley’s scrutiny of their respective financial situations sharpened.

Red flag. Shirley also noted the uncharacteristic urgency that Glenn was displaying in trying to finalize their divorce. In their business purchases and sales, he had always been the model of patience, letting their deals assume lives of their own and proceed at whatever pace seemed to occur naturally. However, in this instance Glenn seemed to be rushing to get the decree. What is he up to? Shirley wondered. She was about to find out.

Even though the financial records that Glenn produced showed plenty of money for both of them, Shirley was convinced that there were – all together now – hidden assets. She didn’t know how much he was hiding or where, but her keen business sense elevated her suspicion beyond the normal divorce-related paranoia.

In the hunt for hidden treasure, among the first places that Shirley’s attorney looked was the recently completed sale of San Tan Gear. After all, a $9.5 million transaction would seem to offer ample opportunities for an about-to-be-divorced spouse to squirrel away large sums of cash. To Shirley’s disappointment, the copy of the sales contract that Glenn provided led nowhere, and the San Tan deal looked like a dry hole. The attorney pressed forward with his review of the couple’s finances, but he continued to strike out. He deposed Glenn twice but unearthed no testimony to support his client’s suspicions.

Investigation

Shirley still smelled a rat. She asked the court to appoint a forensic accountant to investigate the couple’s personal and business finances, and the court appointed Pappas & Company.

What we found during the early stages of our investigation was, while mildly entertaining, not particularly revealing. Glenn had been spending large sums of the couple’s cash on a variety of escort services, exotic nightclubs, and other forms of irresolute living. But he had made no effort to obscure his nocturnal escapades, and we weren’t finding any large piles of missing money.

In reviewing the results of the investigation conducted by Shirley’s attorney, we concluded that he had done a solid job and had examined nearly all of the possibilities that were on our list. But unlike the attorney’s effort, our investigation was shaped by Pappas & Company’s guiding principle: Something is wrong. Someone is bad. Ergo, if Glenn is bad, let’s not rest our investigation on documentation that he provided.

Gotcha. Just to be safe, we subpoenaed the buyer’s copy of the contract. Comparing that copy with the one that came from Glenn, we noticed one pretty significant difference: On the buyer’s copy, the purchase price was $11 million.

Armed with two conflicting contracts for the same sale, we scheduled an interview with Glenn. When we confronted him with the $1.5 million difference between the two documents, his response was almost comical: “Oh, yeah, that’s right. I was wanting to get this divorce done before anybody could put that together.” He proceeded to explain that he told Shirley all along that the sale price would be $9.5 million, figuring that she would be so thrilled to get that price for the business – far more than they anticipated when they bought the company – it would never occur to her to wonder if there was more.

Outcome

We reported our finding to the court. In the end, after protracted, rancorous and fruitless property settlement negotiations, the judge ordered that Shirley receive, among other assets, an extra $750,000, representing her share of the withheld proceeds from the sale of San Tan Gear.

The moral to this story is, at least for attorneys and their investigators, never depend solely on information that is provided by the target of the investigation. When there are third-party sources, get it from them. ●

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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