White-collar crime can include a myriad of schemes, but one particularly insidious method is the “Bust Out” scheme. The plot operates with the intent of taking control of target businesses, financial institutions, or retail establishments, and exploiting them for financial gain to the point of causing bankruptcy, while leaving a disastrous trail in their wake.
We have all heard of infamous fraud actors such as Bernie Madoff, the Ponzi scheme master, Jeffrey Skilling of Enron, and Jordan Belfort, who was portrayed in the film The Wolf of Wall Street. There is one individual, Robert Brennan (“Brennan”), a former commodities broker, whose infamy is based on executing a significant “Bust Out” scheme. Thankfully, the common denominator between these individuals is that they all were eventually “busted” (i.e., arrested).
What is a Bust Out Scheme?
A Bust Out scheme is a fraudulent financial scheme where an individual (or group) strategically acquires a business or financial institution and subsequently drains its assets and resources. One may ask, how could that result in financial gain for the perpetrator? The goal is to maximize profits and raise capital before operational collapse, leaving creditors and investors with substantial losses. Robert Brennan did just that through the brokerage firm, First Jersey Securities.
How was the Bust Out Scheme Executed?
In the late 1980’s Brennan acquired First Jersey Securities, a small brokerage firm. Throughout the firm’s existence, Brennan and his associates were involved with manipulating stock prices, engaging in unauthorized trading, and providing clients with poor advice regarding the risks associated with specific investments.
Brennan was also maliciously strategic in conducting “churning” activities with his client’s funds, wherein he actively traded their accounts to make substantial commissions. However, his scheme was short-lived when the Securities and Exchange Commission (SEC) initiated an investigation into his conduct, which ultimately exposed fraudulent activity causing First Jersey Securities to file for bankruptcy.
Common to most fraudulent cases, investors suffered substantial financial losses and Brennan was required to pay a settlement and fine of $2.5 million. The consequences of his illicit actions also included his indefinite ban from the securities industry.
Red Flags to Keep in Mind
- Accumulation of Assets: Once control of the business has been established, the individual(s) involved start to accumulate assets through the inflation of inventory, ordering large quantities of goods or obtaining significant credit lines and other financing.
- Rapid Asset Liquidation: One major red flag is obtaining as much cash as possible through rapid liquidation of assets.
- Bankruptcy: Once cash has been obtained through the business, the cash is often misappropriated from the entity and the individual(s) file for bankruptcy, leaving unpaid debt, creditors, and financial ruin.
So, how do lenders, suppliers and investors mitigate the risk of becoming engulfed in a Bust Out scheme? Although it may be easier said than done, there are a few considerations to keep in mind prior to becoming a stakeholder to any business.
Key Measures to Consider
- Due diligence: It is vital to conduct thorough due diligence activities to establish the financial stability of the business and business partners. Ensure that due diligence activities encompass an in-depth background check on the business partners involved.
- Auditing: Obtain and review audited financial statements of the business and carefully review disclosures and notes to the financial statements.
- Rapid Transactions: Where possible, review transactional data and be extra mindful of large rapid transactional activity.
- Legal protections: Implement legal protections, including stringent contracts and collateral for the purpose of safeguarding any interests.
The Bust Out scheme is a complex form of white-collar crime that requires critical thinking and awareness to mitigate, specifically in relation to fraudulent activities. Proactive measures should be implemented to reduce the risk of becoming an unsuspecting party to this type of scheme. Through a robust understanding of the mechanics of this fraudulent operation and remaining vigilant, businesses, creditors, and investors can better protect themselves from the devastating consequences of a Bust Out scheme.
GG Observations
Our team of fraud professionals have experience in uncovering complex fraud maneuvers, such as the Bust Out scheme. We know what to look for to identify the red flags associated with white-collar crime activity, and pride ourselves on being experts within this area. Please contact us if you would like to learn more about how we can help you and your stakeholders.
