Financial Fraud, Scam and Identity Theft


Bankruptcy Fraud: How To Identifying And Wich Are Common Fraud Schemes


Common Fraud Schemes Involving Bankruptcies



A bustout is conducted by a company that is set up to fail from the outset. The operator obtains merchandise from creditors, disposes of the goods (usually for cash) and does not pay suppliers. A bustout can also be conducted by buying an existing company and using that company’s good credit to obtain goods, without the intent to pay, and then disposing of the goods immediately for cash.

Examples Of Bustouts

Distributors of Consumer Products (including cigarettes, diapers, etc.): Company operates for a short period of time and establishes good credit ratings with large consumer goods manufacturers. Orders increase suddenly, and payments are not made. Lulling techniques are used to forestall creditors.

Goods are sold to retailers at below cost for cash. Afterwards, a bankruptcy petition is filed. Schedules filed by the debtor after the bankruptcy filing report trade debt owed to consumer products manufacturers with inventory unusually low compared to the date the debt was incurred.

Retail Bustouts: The merchant rents retail space and does not pay rent or suppliers. He files bankruptcy to stop eviction and to gain additional time to run the illegal operation. Oftentimes, retail stores are part of the distributor bustouts because they provide outlets for the consumable goods. (Examples include retail jewelry stores, oriental rug stores and discount stores.)

Tax Bustouts: An individual operates a series of businesses in the same industry and never pays taxes. He usually files Chapter 11 bankruptcy for the company just prior to or at the time the IRS files a lien on the debtor’s assets. He operates the business for a brief period of time while in Chapter 11 before the case is converted or dismissed. He starts a new business with the debtor’s assets. (Examples include restaurants and employee leasing services.)

Credit Card Bustouts: Individuals contemplating bankruptcy run up large consumer credit card debt and then file bankruptcy. The purchases and cash advances occur within a short period of time. Frequently, the same individual files bankruptcy several times, using false social security numbers and aliases. Or the fraudulent perpetrator assumes another person’s name or social security number. False statements are usually made on credit applications, and the assets acquired from the fraud are concealed when the bankruptcy is filed.

Travel Agency Bustouts: Travel agency opens and secures authorization plates from the airline cooperative agency to write tickets. After paying the first few bills, a tremendous number of tickets, often overseas tickets, are written and not paid for. These tickets are sold for cash in bargain sales. Travel agency may also report the authorization plates stolen and then continue the scheme. Authorization plates and blank ticket stocks are often missing when the trustee or airline tries to recover.

Red Flags/Common Characteristics


· Company with a short life
· Well-established company with good credit recently taken over by a new group trying to hide the change in ownership
· Fraudulent financial statements
· False credit references
· No receivables listed on schedules (cash basis operation)
· Inventory scheduled is very low
· Warehouse full of high-volume, low-cost items
· Disproportionate liabilities to assets
· Mainly temporary employees
· Fake social security numbers used to obtain credit
· Leased equipment
· Few local creditors, and unsecured debt is primarily comprised of trade creditors
· Lulling letters to creditors (mail/wire fraud)
· No corporate bank account, or existing account has no funds
· Cash paid up front to rent location
· Same individuals involved in previous “failed companies”
· Unusual banking activities (check kiting, bank fraud, money laundering and structured transactions)
· Schedules and statement of financial affairs are incomplete or not filed
· Person unfamiliar with debtor’s operations testifies at 341 meeting of creditors
· Taxes not paid
· The same attorney repeatedly represents these types of debtors

Civil Responses To Consider

· Immediate appointment of a Chapter 11 trustee
· Immediate appointment of a “gap” trustee for involuntary cases
· Motion to compel filing of schedules and statement of financial affairs
· Motions designed to expedite debtor’s compliance with 704 duties, i.e., 2004 exams prior to 341 meeting of creditors; motions to compel immediate filing of list of bank accounts, inventory and creditors. Seek contempt if orders are not obeyed
· Adversaries to freeze bank accounts and prevent further disposition of estate assets
· Adversaries against insiders for preferences and fraudulent conveyances
· Objections to discharge in individual bustout cases
· Motion to dismiss and prohibit the re-filing of the case
· Waiver by the trustee of attorney/client privilege of corporate debtor’s counsel

Criminal Responses To Consider

Mail Fraud, 18 U.S.C. Section 1341: Misrepresentations to suppliers and the use of U.S. mail.

Wire Fraud, 18 U.S.C. Section 1343: Misrepresentations to suppliers and the use of interstate wires.

Bankruptcy Fraud, 18 U.S.C. Section 152: Concealed assets or false statements.

“bustout” or planned bankruptcy where goods are moved out the back door with the plan of filing for bankruptcy are usually charged as concealment “in contemplation of bankruptcy.”

Bankruptcy Fraud, 18 U.S.C. Section 157: If any act of the fraud occurs after October 22, 1994, this statute may be used. The use of bankruptcy must aid the fraud scheme in some way. Delaying creditors, allowing the debtor to continue to operate or covering up the scheme are examples. The statute will be easier than the use of 18 U.S.C. 152, “concealment” or “in contemplation”, because it allows a fuller statement of the scheme. False statements under oath are the same under either statute, although 157 will allow a broader description of the fraud.

Use of False Social Security Number, 42 U.S.C. Section 408: If used to obtain credit or in bankruptcy filing.

Credit Card Fraud, 18 U.S.C. Section 1029: One thousand dollars or more charged on one unauthorized card in one year, or possesses more than 15 fraudulent cards.

Tax Fraud, 26 U.S.C. Sections 7201-7203: Failure to pay withholding taxes, other taxes, or to file returns. IRS should be notified so they may investigate.

Next: Bleedouts

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