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Journal of Education for Business
ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20
Playing the Ponies: A $5 Million Embezzlement
Case
Martha A. Howe & Charles A. Malgwi
To cite this article: Martha A. Howe & Charles A. Malgwi (2006) Playing the Ponies: A $5 Million Embezzlement Case, Journal of Education for Business, 82:1, 27-33, DOI: 10.3200/ JOEB.82.1.27-33
To link to this article: http://dx.doi.org/10.3200/JOEB.82.1.27-33
Published online: 07 Aug 2010.
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ABSTRACT.Fraud is a pervasive
prob-lem, and educating future business leaders,
managers, and auditors about fraud is one
way to attack the problem. This
instruction-al fraud case chronicles the actuinstruction-al details
surrounding a major embezzlement at a
regional high school (RHS) that culminated
in long federal and state prison sentences
for the school’s treasurer. Names have been
changed, but otherwise the case is factual.
This case can be used in an auditing class
or a fraud examination class to help
stu-dents understand the dynamics of financial
fraud, including identifying (a) the
ele-ments of the fraud triangle and the red flags
and internal control weaknesses that existed
in this situation, (b) the steps that could
have prevented the fraud, (c) the auditing
issues related to the fraud, (d) the
investiga-tion process, and (e) the resoluinvestiga-tion of fraud
through the justice system. Discussion
relating the case to these learning objectives
is included.
Keywords: auditing, embezzlement, fraud
Copyright © 2006 Heldref Publications
Playing the Ponies:
A $5 Million Embezzlement Case
MARTHA A. HOWE CHARLES A. MALGWI BENTLEY COLLEGE
WALTHAM, MASSACHUSETTS
necdotal evidence of the preva-lence of fraud abounds (e.g., Enron, WorldCom, Tyco). Rigorous sta-tistical evidence is more difficult to obtain, partly because of the very nature of fraud as a hidden crime, but existing studies do suggest that fraud is extreme-ly costextreme-ly in the American economy. Probably the most comprehensive data comes from the Association of Certified Fraud Examiners (ACFE; 2002) via its periodic survey of its members. On the basis of the most recent survey data, the ACFE (2004) stimates that annual loss-es from fraud, on average, cost 6% of the firm’s revenues. Extrapolating from that estimate, the ACFE further states that the cost of fraud for the U.S. econ-omy as a whole may approach $660 bil-lion per year (ACFE, 2004).
The recent wave of corporate frauds in the United States has attracted the attention of the American public, vari-ous regulatory agencies and associa-tions, and the government. Responses include calls for more extensive review and documentation of corporations’ internal controls, improved corporate governance, and expanded training of corporate managers and external audi-tors. The Sarbanes-Oxley Act of 2002 was enacted to address some of these concerns, as was SAS 99, an auditing statement titled “Consideration of Fraud in a Financial Statement Audit” (Amer-ican Institute of Certified Public
Accountants [AICPA], 2002). This statement offers a list of red flags that may signify fraudulent financial report-ing (AICPA). However, one has to understand what fraud looks like before one can identify it and instructional fraud cases are highly recommended as a means of gaining that understanding (Albrecht, Wernz, & Williams, 1995; Wells, 2000).
Although fraud occurs in not-for-profit settings as well as corporate set-tings, many of the existing instructional fraud cases relate mainly to corpora-tions rather than to public or govern-mental entities (Beasley, Buckless, Glover, & Prawitt, 2003; Boocholdt, 2000; Calderon, Conrad, & Green, 2000). In addition, many relate to fraud in the financial statements, which tends to be a more costly fraud that receives more publicity, but is far less prevalent than employee fraud, such as embezzle-ment (Bondy, 1998; Wells, 1997, 2000).
“Playing the Ponies” chronicles an exceptionally large ($5 million) embez-zlement involving a public school sys-tem (RHS). Despite governmental over-sight of the school system through normal regulatory processes in the state, the fraud nevertheless continued for many years before it was detected. The case allows instructors to focus stu-dents’ attention on normal audit and fraud examination issues, as well as the issues that are unique to public entities.
A
Instructional Objectives
This case (see Appendix) was initially developed as a result of interest generat-ed by a fraud examination course’s stu-dents and guest speakers. The case lends itself to use in either a fraud examination course or an auditing course. Students are exposed to a real fraud situation, including information about the actual investigative and judicial processes. Instructional objectives are to enhance students’ ability to (a) understand and apply the fraud triangle concept, (b) identify red flags in a potentially fraudu-lent situation, (c) identify internal con-trol weaknesses that contributed to the fraud and identify appropriate steps to remedy these weaknesses, (d) under-stand and research applicable auditing standards and procedures, especially in the regulated environment of a school district, and (e) understand the investiga-tive and judicial processes that are rele-vant to a fraud case.
Learning Objectives
Objective 1: Understand and Apply the Fraud Triangle Concept
The fraud triangle concept was devel-oped by sociologist and criminologist Donald Cressey (Cressey, 1973). It posits the idea that fraud is unlikely to occur in the absence of the three ele-ments of the fraud triangle (i.e., “per-ceived opportunity,” “per“per-ceived pres-sure,” and “rationalization”), and fraud becomes relatively more or less likely depending on the strength of the ele-ments (Albrecht, 2003). Perceived pres-sure, such as financial or economic need, provides the motivation for fraud.
Perceived opportunitymay be the result of poor or nonexistent internal controls that give access to perpetrators, whereas
rationalization allows perpetrators to adjust their perceptions of what they are doing (Cressey).
According to Cressey (1973), fraud can occur when individuals who are in a position of trust perceive themselves as having nonshareable financial pressure and eventually come to believe that the pressure can be resolved through the violation of their financial trust. One of the most fundamental observations of Cressey’s study was that it took all three
elements or conditions of the fraud tri-angle for the trust violation to occur. At the base of the fraud triangle is a finan-cial pressure or incentive to steal. This pressure is not limited by income, net worth, or a lack of the same. When the pressure builds up, it isolates the affect-ed employee, who begins to internalize the pressure rather than sharing it with colleagues. As a result, the employee looks for opportunities to commit finan-cial fraud to relieve the pressure. The individual then goes through a process of rationalization and learns to justify the theft. Therefore, the bridge between pressure and opportunity takes its shape when one is able to rationalize the fraudulent behavior.
In the RHS case, Philip Chartier clear-ly had abundant opportunity, meaning that pressure and rationalization could be relatively low and the likelihood of fraud would still be reasonably high. In addition, Chartier also had fairly high levels of perceived pressure, which con-tributed to the strong likelihood of fraud. The three elements of the fraud triangle, as they pertain to Philip Chartier, are dis-cussed in the next sections.
Perceived Opportunities
To be able to perpetrate a fraud as extensive as the RHS embezzlement, a complete knowledge of the system in which the organization operated was required. Chartier worked with the school district for 26 years, sufficient time for him to have thoroughly mastered the operation of RHS’s financial systems. However, Simon Dorman, the superin-tendent who was Chartier’s boss, was rel-atively new to RHS and probably was not fully aware of the workings of the sys-tem. Although highly knowledgeable about education, it is also possible that neither Simon Dorman nor the members of the school board were particularly knowledgeable about accounting, leaving them unable to make independent judg-ments about Chartier’s performance.
With his long-standing service and dedication to RHS, Chartier had earned the trust of his boss and the school board and was allowed to handle virtu-ally all aspects of RHS’s financial oper-ations, with little or no oversight. The lack of internal controls, as discussed
later in Objective 3, contributed to the ease with which Chartier perpetrated this fraud. All of these factors undoubt-edly contributed to his apparent belief that he could embezzle without detec-tion, and, in fact, he was able to do so for many years.
Perceived Pressure
Probably the greatest pressure that Chartier faced was the result of his reported addiction to gambling and his related expenditures on horseracing and other sports. Even aside from any gam-bling that might have been occurring, the capital required to purchase and maintain his large stable of racehorses was certainly far beyond what his salary at RHS would support. Chartier also had a strong and expensive interest in other sports. He was a season ticket holder for a major league football team, and he often went to the Super Bowl. His sports memorabilia business may also have furthered his interest in sports and possibly in sports betting.
Chartier was under the normal pres-sures of a family man, including raising and educating his three sons. His salary was probably adequate to maintain his family responsibilities, but not suffi-cient to allow for many frills. Although Chartier did not openly display an ostentatious lifestyle to his colleagues at RHS or to his neighbors, in his other life as a racehorse owner and sports fan he may have felt some financial pressure to improve his lifestyle. In addition to his own house, he owned a house for his mother, a cottage on the ocean in Maine, and a condo in Florida. He had large amounts of cash on hand at his home, perhaps either for gambling purposes or to live up to the image of a big spender.
Once the fraud was under way, the fraud itself exerted pressure on Chartier. Over the years, Chartier was forced to continually juggle the books and find even larger fraudulent sources of funds, while at the same time concealing the increasing magnitude of the fraud.
Rationalization
Chartier made no public statements about the case, and we can only guess at the rationalizations he employed. It is
possible that he felt that he had been with the school system long enough to deserve better treatment than his salary and title supplied. Because he had such extensive control over the financial sys-tems at RHS, he perhaps thought of the school as his own private business. He may have felt that it was all right to take the funds because his bosses were not competent enough to detect the fraud. As he juggled funds and rolled over loans, he also may have rationalized that no one was being hurt because he was able to cover the shortfall and keep the school running properly. He may even have told himself that he would repay his embezzled funds in the future.
Objective 2: Understand What Red Flags Are and Be Able to Identify Them in a Given Situation
Red flags often exist in documenta-tion, so Chartier tried to ensure that no one else had reason to check RHS’s accounting books and detailed records. Had anyone ever looked at the bank statement or check register for various RHS accounts, and particularly for the student activity accounts, the number of checks made out to and endorsed by Philip Chartier would have been an immediate red flag. In addition, the lack of supporting documentation for those checks would have raised strong suspi-cions. In fact, if anyone had examined the student activities account at all, the sheer size of the balances and the exces-sive volume of activity in that account would have demanded instant attention. A review of RHS’ loan documentation undoubtedly would also have raised questions, as Chartier continuously rolled over the short-term loans. In essence, they became permanent sources of funding, with no real autho-rization from the school board.
Another clear source of red flags is weak or missing internal controls. The lack of effective internal controls at RHS, as discussed in detail later in Objective 3, contributed greatly to Chartier’s opportu-nity to commit the fraud.
Red flags can also be related to lifestyle cues. Chartier was apparently fairly successful at hiding his lifestyle from his colleagues at RHS. They may not have been aware of his extensive real estate holdings and probably did
not know that he owned a stable of race-horses. Still, had his coworkers been attuned to it, it seems likely that some hint of his extensive interests in gam-bling, horseracing, and sports probably existed.
Objective 3: Identify Internal Control Weaknesses and Understand How They Could Have Been Remedied
Chartier was successful in carrying out the fraud for a long period of time before it was detected because of the poor control structure in place at RHS. There are basically three elements of the control structure that are relevant in this case (a) the control environment, (b) the accounting system, and (c) the control procedures or activities. The control environmentis the atmosphere in which individuals in the organization carry out their various functions, and it stems from management’s role and example. When management begins to model unacceptable behavior, it often leads to an ineffective control environment (Albrecht, 2003). As the supervisor to whom Chartier was accountable, the superintendent of RHS was negligent and irresponsible. The RHS clerical employees certainly could have shed some light on Chartier’s activities but did not do so, probably due to poor communication between the superinten-dent and these employees. The school board similarly failed in its responsibil-ities by allowing Chartier to handle all financial matters without ever demand-ing clear records and appropriate docu-mentation from him. It seems likely that the State Department of Education (SDOE) was also remiss in its review of RHS’s audit and loan activities. The low level of upper-level scrutiny, combined with the weak internal controls, was a clear invitation for fraud at RHS.
The accounting system at RHS was, in theory, in accordance with the model established by the State Board of Edu-cation. What was not in order, of course, was the process related to the account-ing system. The school board and the superintendent both share the blame for not ensuring the proper functioning of the system.
The control procedures and activities at RHS were also a problem. Chartier performed a number of incompatible
functions of custody and record keep-ing, which clearly violated the basic principles of segregation of duties. For example, he was entrusted with exclu-sive control of RHS’s operating accounts and RHS’s student activity account. He also had custody of RHS’s checkbooks, allowing him to make sys-tematic transfers to himself. Chartier also reconciled the bank statements with RHS’s books, a function that should have been performed by an inde-pendent person who had no authority to write checks, make bank deposits, or execute transfers between accounts.
There was no system of authorization in place at RHS. Consequently, Chartier did not have limits on his authority and did not need approval to handle any aspect of RHS’s finances. For example, he was the main signatory for most of the checks that RHS issued and was apparently the sole signatory for the transfers he executed. He was also in charge of negotiating loans and had the authority to handle all aspects of RHS’s financing without any required approvals or secondary signatures from the superintendent or the board. There-fore, Chartier was able to extend and roll over short-term revenue anticipation loans to cover the shortfall of funds as a result of his embezzlement.
Lack of an audit trail was also a fac-tor in this case because Chartier destroyed both the bank statements as well as the returned checks for the stu-dent activities account. The absence of these crucial documents made it unlike-ly that anyone in the RHS business office would notice what was occurring. It is not clear whether Chartier was actually authorized to hire the auditor for RHS’s books, or whether he simply overstepped his authority, but it is obvi-ous that no one else, including the school board, took any responsibility for the audit. There was no attempt at communication with the auditor by any-one other than Chartier, allowing Chartier to completely fabricate the existence of the auditor and the audit.
Thus, the multiple functions per-formed by Chartier were not checked or verified in any way—not by an auditor, his boss, or the school board. In addi-tion, Chartier did not take vacations, and he made sure that he completed his
duties himself, even if it required long hours at the office. With no effective oversight, there was no brake on Charti-er’s activities, and he was able to embezzle increasingly larger amounts over a period of many years.
To improve the controls and strength-en fraud prevstrength-ention at RHS, Simon Dor-man and the school board should have taken steps to split up Chartier’s duties. Other remedies that should have been implemented include the establishing of dollar limitations on Chartier’s check-signing authority, requiring second any signatures on bank transfers, mandating board approval for all loans, and speci-fying that auditors be selected by and monitored by the Board—all are com-mon sense internal controls that were absent at RHS, but would have prevent-ed Chartier’s embezzlement had they been in place.
Another preventative measure is to reduce pressures on employees. Charti-er was apparently in the grip of a gam-bling addiction and financial problems, both of which can be addressed by an Employee Assistance Program. In addi-tion, open communication between management and employees can be effective in allowing employees an out-let to discuss their problems, while also alerting management to any potential problem areas.
Management also needs to ensure that employees will not be able to easily rationalize committing fraud. Effective measures include establishing a clear ethics policy that all employees are directed to read and discuss periodically, stressing the responsibility that all employees have to detect and report fraud, and clearly specifying that all fraud perpetrators will be subject to criminal prosecution. Establishing a hot-line can also be effective, particularly if employees (such as those who reported to Chartier) are able to anonymously express their concerns about possible fraud to a third party (Malone, 2004).
The Sarbanes-Oxley Act of 2002, although it directly applies to corporate entities rather than not-for-profit entities like RHS, is still relevant in its goals for improving internal controls. Some of the relevant goals are to (a) upgrade reporting disclosures, (b) strengthen governance, (c) increase enforcement
and oversight, (d) broaden penalties, and (e) heighten external auditor inde-pendence. Section 404 of the Sarbanes-Oxley Act (2002) suggests that entities should implement quarterly updates, and monitor, evaluate, and perform cor-rective actions. These would require entities to (a) assess changes in the processes, the systems, and the business environment and review the impact of these changes on controls; (b) validate continuing operational effectiveness of controls by testing their operations; and (c) push control consciousness and responsibility to operating personnel.
Control self assessment (CSA) is par-ticularly required as an ongoing process in all entities (for profit and not-for-profit). CSA is a process by which every department of an entity, with assistance from internal audit, assesses the adequa-cy of their internal controls and identi-fies opportunities for improvement. Had these steps been taken by RHS, the weakness of the internal controls would undoubtedly have been recognized and corrected, and Chartier’s embezzlement would not have been possible.
Objective 4: Understand and Research Applicable Auditing Standards and Pro-cedures, Especially in the Regulated Environment of a School District
As governmental units, school dis-tricts are audited under Generally Accepted Government Auditing Stan-dards (GAGAS; Comptroller General of the United States, 1972). Several simi-larities exist between GAGAS and SAS 99 (AICPA, 2002) as they pertain to fraudulent activities. Although refer-ence to specific state laws and regula-tions for various governmental entity audits is recommended, GAGAS gener-ally contains standards for audits of government organizations, programs, activities, and functions. GAGAS requires that the audit be designed to provide reasonable assurance of detect-ing material misstatements resultdetect-ing from noncompliance. Also of signifi-cance, GAGAS provides internal con-trol evaluation standards that call for the following: (a) established of internal controls to ensure compliance with applicable laws and regulations; (b) mandated tests of controls to evaluate the effectiveness of the design and oper-ation of the controls in preventing or
detecting material noncompliance; and (c) formal written reports regarding the internal controls and the assessment of control risks.
Going beyond GAGAS, SAS 99 (AICPA, 2002), Consideration of Fraud in a Financial Statement Audit, not only requires auditors to be reasonably sure that financial statements are free of material misstatements, whether caused by error or fraud, but it also gives them focused and clarified guidance on meet-ing their responsibilities to uncover fraud (Brickner & Pearson, 2003). Reminiscent of the three sides of the renowned fraud triangle (perceived opportunity, pressure, and rationaliza-tion), SAS 99 typically refers to incen-tive or pressures, opportunities, and atti-tudes or rationalizations. Like GAGAS, SAS 99 specifies procedures the auditor should perform, including making inquiry of management and others about risks of fraud. Management should be questioned about their aware-ness of fraud or allegations of fraud; their understanding of the entity’s fraud risks, including any specific risks iden-tified; their programs and controls that they have implemented to prevent, deter, and detect fraud, including how they monitor the performance of these programs and controls; their monitoring of multiple locations or business seg-ments; and their communications to employees about business practices and ethical behavior.
Different states further regulate school districts in different ways, but most states have some form of regula-tion that may be similar to that govern-ing RHS. In terms of the specific regu-lations that applied in this case, in which the RHS fraud occurred has an Audit and Compliance Unit (ACU) that manages and coordinates all financial and compliance audit functions for the SDOE. This unit also serves as liaison for the department with state, federal, and independent auditors. The SDOE requires every school, as part of a gen-eral audit, to have the financial state-ments independently audited by a pub-lic accounting firm. The audit is to be based on the compliance requirements, audit objectives, and suggested audit procedures contained in the compliance supplement for the state school districts.
Further, the auditor is directed to com-ply with the professional standards included in Standards for Audit of Gov-ernmental Organizations, Programs, Activities and Functions Adopted by the Comptroller General of the United States in the Conduct of the Audit
(Comptroller General of the United States, 1972).
Objective 5: Understand the Relevant Judicial and Investigative Processes
Criminal law involves a wrong against society. It is based on statutes and the remedies include incarceration as well as fines. Because the sentence can include prison time, guilt must be agreed upon unanimously at trial, and the standard is beyond a reasonable doubt. By contrast, guilt in a civil law case is based on the more easily met standard of preponderance of evi-dence. Chartier was prosecuted crimi-nally because his crime went far beyond a civil offense against one indi-vidual or organization. Although it is harder to prove guilt in a criminal trial than in a civil trial, there was ample evidence in this case, and the egre-gious nature of the fraud made crimi-nal prosecution and a prison sentence the appropriate alternative.
Prosecution for fraud is often pursued through state-level courts because most of the statutes dealing with fraud reside at the state level. However, larger frauds may end up in federal court, either because they cross state lines or because they run afoul of federal statutes, such as tax or money laundering statutes (Albrecht, 2003). In Chartier’s case, prosecution proceeded at both the state and the federal level, because statutes that were applicable to the fraud existed at both levels.
Federal law enforcement authorities (i.e., the Internal Revenue Service [IRS] and the Federal Bureau of Investigation [FBI]) and state law enforcement authorities (state police and state audi-tor’s office) worked together in their investigation of Chartier’s fraud. This is an efficient and effective way to quickly marshal strong evidence against a fraud perpetrator. In this case, investigators probably primarily relied on documen-tary evidence, buttressed by testimonial evidence retrieved via interviews of
Chartier’s colleagues at RHS and in the racing business.
A federal search warrant is issued by a federal judge or magistrate on the basis of evidence of probable cause pre-sented in an affidavit (IRS, 1998). Using this warrant, the federal agents were able to search Chartier’s house for evi-dence of the embezzlement, including evidence of assets and expenditures that may have been related to the embezzled funds. Within the limits of the search warrant, they were able to confiscate pertinent evidence. Most of the evi-dence recovered in the search of Charti-er’s residence was probably documen-tary in nature, although physical evidence may also have been obtained. Based on the evidence amassed, the next step is an indictment, which is a finding that probable cause exists to arrest and charge the suspect. In the RHS fraud, federal prosecutors received an indictment in the fall of 2000 on one count of embezzlement and five counts of federal tax evasion. The state indict-ment was for 123 counts of larceny in excess of $250, and three counts of filing false state tax returns. Chartier probably knew that the evidence was overwhelm-ing, and he pleaded guilty to the federal charges in January of 2001, about a year after the fraud was first detected.
Sentencing for federal crimes is based on relatively strict sentencing guidelines and prisoners generally serve their entire sentences. Sentencing at the state level is more variable, and prisoners can be released early based on good behavior. Sentences on various charges can run consecutively, meaning that the sentence for one crime has to be served in full before starting the sentence for another. Alternatively, the sentences can run con-currently, meaning that sentences for all offenses are satisfied at the same time, as was true in Chartier’s case.
Conclusion
Use of instructional fraud cases in business courses can better prepare future managers and auditors for situa-tions that they are likely to face at some point in their careers. The RHS case provides students with factual details from a large fraud that occurred in a not-for-profit setting, thus highlighting
issues unique to public entities. The case allows students to gain experience in identifying red flags and internal con-trol weaknesses, and to improve their understanding of investigative methods and the processes of the justice system.
NOTES
The authors gratefully acknowledge many help-ful comments by workshop participants at Bentley College, two anonymous reviewers, and partici-pants at the annual American Accounting Associ-ation, Northeast Region meeting as well as Ron Huefner, Jim Hunton, Jay Thibodeau, David Schwarzkopf, Priscilla Burnaby, and Mahendra Gujarathi. They are grateful to their students for their assistance with this case. They are also indebted to several professionals who spoke to the class and whose enthusiasm prompted their inter-est in developing this instructional case.
Correspondence concerning this article should be addressed to Dr. Martha Howe, Senior Lectur-er, Bentley College, 175 Forest Street, Waltham, MA 02452-4705.
E-mail: mhowe@Bentley.edu
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APPENDIX Case Study
Setting the Stage
The regional high school (hereinafter RHS), located at the summit of a hill, offers breath-taking views of the surrounding towns that it serves. In this seemingly unlikely setting, a major fraud was perpetrated, starting prior to 1995 and ending with its detec-tion in January of 2000.
RHS is a vocational high school that serves seven towns and enrolls about 1,000 stu-dents. Calvin Lucette was the superintendent during the late 80s and early 90s, followed by Simon Dorman, who is the current superintendent. Philip Chartier was hired in the mid-70s as the assistant superintendent for business, and was promoted to treasurer and business manager in 1990. The remaining business staff consisted of several clerical workers, supervised by Philip Chartier.
At some point in the late 80s, Chartier became very involved in a sports memorabil-ia business that he owned with a friend, Eugene Youmans. The business quickly grew and was apparently lucrative. The staff at RHS was fully aware of the existence of this side business. In fact, Calvin Lucette, Chartier’s boss at the time, complained about the amount of time that Chartier was spending on the sports memorabilia business to the detriment of his RHS responsibilities. By the time Lucette left the superintendent job and was replaced by Simon Dorman in 1992, Chartier and Youmans had cut back sig-nificantly on their sports memorabilia business because of the increased level of com-petition that made the business less profitable.
Without the distraction of the sports business, Chartier worked hard at RHS. He put in long hours and took vacations only when the entire office was shut down. He is variously described as being well liked by the staff, and alternatively, as being disliked and difficult to work for. In the 1990s, Chartier was handling virtually all aspects of the business end of the high school, including overseeing the expenditures from RHS’ general funds, making deposits, reconciling bank statements, authorizing payments to suppliers, acting as a sig-natory for all checks issued by RHS, making funds transfers, arranging and signing for short-term loans, preparing the school budgets, maintaining student activities accounts, arranging for regulatory reports and audits, and receiving federal and state funds. Simon Dorman, Chartier’s boss, depended heavily on him and trusted him completely.
By January 2000, when everything fell apart for him, Chartier was 47 years old, mar-ried, and had three sons. He appeared to live modestly, drove an old car, and splurged on tickets to his favorite team’s professional football games. He owned his house and another one nearby in which his mother resided. Active in his community, at various times Chartier coached Little League, chaired the School Board Committee, and worked as a volunteer firefighter. He earned about $75,000 a year in his RHS position, and he also ran a tax preparation business in his spare time.
These were the facts as colleagues at RHS and neighbors in Chartier’s hometown knew them, but by 1997, there was another side to Chartier. At racetracks up and down the East Coast, he was known as a partner in a large and very successful stable of race-horses. However, those who knew Chartier from horseracing were not familiar with his modest lifestyle and his job at RHS. The rumors among the racing set were that he had won the lottery or had inherited a great deal of money.
The Fraud Is Detected
In January 2000, Chartier drove to a local bank branch and attempted to cash an RHS check drawn on the student activity account and made payable to himself. Unfor-tunately for him, the teller had worked in another branch of the bank and remembered Chartier cashing similar checks at that branch. The teller brought the situation to the attention of the branch manager and a quick review showed that Chartier had cashed other RHS checks at other branches over the past few days. Chartier’s boss at RHS, Simon Dorman, was notified that same day. By the end of January, Chartier had resigned from his job at RHS.
The Investigation and Its Results
A forensic accounting firm was contacted and the firm quickly began its efforts to uncover the true status of RHS’ financial situation. As it became apparent that a major fraud had occurred, authorities from the state police, the state auditor’s office, the Federal Bureau of Investigation, and the Internal Revenue Service joined the investigation. In June of 2000, a federal search warrant was executed at Chartier’s residence and at his mother’s house.
APPENDIX—Continued
The investigation found that the embezzlement probably began in about 1993, and final tallies of the amounts taken came to $5,465,000. It was the largest embezzlement of school funds ever in the entire state. Chartier wrote more than 1,900 checks to him-self during the 5-year period preceding the detection of the fraud. All were drawn on the student activity fund, over which he had complete control. Chartier also maintained the bank statements; he destroyed those as well as the returned checks for the student activ-ities account so that his cashed checks would not be discovered by anyone in the RHS business office.
Although the student activities account would not normally have maintained large cash balances, between 1993 and January 2000 Chartier continuously and systemati-cally moved funds totaling $6,435,494 from the school’s operating accounts into the student activity fund. He then covered the shortfalls in the operating accounts by rolling over or taking out new short-term revenue anticipation loans. These loans were meant only to cover short-term needs, but they became a permanent and growing source of funds for Chartier’s increasing involvement in his horseracing stable.
The investigation also found that Chartier prepared fictitious audits of RHS’ financial statements from 1993 on, using samples from other school districts and from prior years. He forged the name of a Certified Public Accountant (CPA) who had done legit-imate work for RHS in previous years, and submitted the phony audits and other regu-latory paperwork to the State Department of Education and the Department of Revenue. It is interesting that the CPA whose name Chartier forged was the daughter of Charti-er’s old friend and former business partner in the sports memorabilia business, Eugene Youmans.
The investigators were able to document a lifestyle that Chartier had kept quiet from his colleagues and his community. In addition to the two houses that he owned in his town, Chartier also owned a cottage on the ocean and a condo near a Florida racetrack. He had season tickets to a professional football team’s games, and he often attended Super Bowl games, but his largest investment was C & P Stables, which he owned with a partner. At the time the fraud was detected, C & P owned at least 40 racehorses. From about 1997 on, the stable was a major player at several second-tier racetracks on the East Coast, with 1999 winnings totaling more than $400,000 from two of those race-tracks. Chartier also gambled on horses and sports, and his attorney would later claim that he suffered from an addiction to gambling.
The Resolution
Both state and federal officials were involved in the investigation, and both brought charges against Chartier. In August and September of 2000, Chartier was indicted in state court on 123 counts of larceny in excess of $250, and three counts of filing false state tax returns. Later that fall, he was indicted in federal court on one count of embez-zlement and five counts of tax evasion. Over the period of 1994–1998, he allegedly omitted $3,976,328 from his reported gross income.
On January 9, 2001, Chartier pleaded guilty to the federal charges of embezzlement and tax evasion. On September 10, 2001, he was sentenced to 4 years and 9 months in federal prison, and ordered to pay restitution of $5.4 million to RHS. On February 9, 2002, he pleaded guilty to the state charges, and was sentenced to 7–10 years, to run concurrently with the federal sentence. Chartier negotiated to serve the bulk of his sen-tence in federal prison. Thus, only the last 27 months of his state sensen-tence would be served in state prison, after he served his federal sentence of 57 months in federal prison. Chartier is currently at Fort Dix federal prison in New Jersey.
Chartier forfeited his condo in Florida and his seaside cottage in Maine, which were sold by authorities and netted $492,000. Also forfeited were his pickup truck, $15,500 in cash that was found during the search of his property, and the proceeds (about $250,000) from the sale of 11 horses belonging to C & P Stables. What remained of his portion of the sports memorabilia business was also claimed and sold off by federal officials.
In all, $918,612 was recouped and returned to RHS by authorities. Once out of prison, Chartier will remain responsible for repayment of his debt to RHS. On the brink of bankruptcy because of the fraud, RHS has survived because of a special clearance passed by the state legislature allowing the district to borrow up to $5 million.
