Business Insurance, Embezzlement, and Minimizing Risk

Signing business insurance contract

Business Insurance, Embezzlement, and Minimizing Risk

On June 25, a federal court in California sentenced one of Gulfstream’s executives to eleven years in prison for embezzling company funds.[1]

The Savannah-based private aircraft company hired Marvin Jay Caukin in 2000 and immediately put him in charge of finance and accounting for two of its facilities. Right away, Caukin asked friends and family for help setting up shell companies. He then used the shell companies to launder money he was pilfering from Gulfstream. By the time the authorities caught up with him in 2013, Caukin had bought two homes and used company money on escorts, jewelry, and luxury hotels.

Embezzlement occurs when someone entrusted with money withholds it for personal use. It is generally premeditated. The perpetrators, often entrusted to oversee significant financial decisions, can be meticulous. And because embezzlement can take place over a period of years, courts and affected companies often run into trouble figuring out the true extent of financial losses.

Aside from handing down its sentence, the court also ordered Mr. Caukin to forfeit his houses and reimburse Gulfstream for the $10 million he took from the company.

It will not be Mr. Caukin’s first time in prison. Just four months before applying to Gulfstream, he had been released after a three-year stint in federal prison for embezzling from another company.

In Gulfstream’s case, careful accounting and an outside audit paid off. It will recover at least some of the money Mr. Caukin stole.

But a conviction for embezzlement does not always entitle the victim to reimbursement. Sometimes, even when businesses try privately to minimize the risk of embezzlement, they make themselves more vulnerable. In fact, on June 22, the Eleventh Circuit court, sitting here in Atlanta, commented on the effect of embezzlement on business insurance.

In 2004, Martinez, Inc., a Birmingham building maintenance company, had created a position for an in-house accountant, instead of outsourcing the work. By 2006, Brenda Walters, their hire for the new position, was embezzling from the company. She used funds from Martinez’s bank accounts to cover personal expenses. By the time she was fired in 2011, she had become the corporation’s CFO and CEO, and had stolen about $2 million.[2]

Eventually, Martinez found out. It fired Walters. The government indicted her on criminal charges. Martinez was not concerned about recovering its money. Long before, it had taken out a policy with Scottsdale Indemnification, guaranteeing reimbursement for losses caused by employee theft of fraud.

But Scottsdale refused to pay out. The policy held applicants responsible for honestly reporting company financial practices. Their answers factored into the coverage Scottsdale offered. Walters, trying to cover up her embezzlement operation, had told Scottsdale she did not have access to company accounts. Scottsdale claimed that nullified the policy’s criminal loss provision.

The Eleventh Circuit agreed.[3] Since Scottsdale relied on the truthfulness of the information Walters provided, it could not reasonably have expected the loss, the court said.

Money is highly liquid, and that presents a real challenge to lawyers working on embezzlement cases. It can be hard to track. And there is no guarantee that, once an embezzler is caught, he will still have all the cash he took. So it is important for businesses to make sure to hire trustworthy employees and to carefully negotiate the terms of their insurance policies.

People facing embezzlement charges need to recognize how crucial it is to retain an experienced defense attorney to work on their behalf. Criminal investigations generate immense stress, financial and personal. But good defense attorneys give clients the peace of mind that comes along with knowing their finances and financial history remain as private and intact as possible.


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