The Downside of A Healthy Economy in California

BY JAMES J. MITCHELL
Mercury News Staff Writer

Embezzlement, theft, and other kinds of white-collar crime against corporations are growing in this region, keeping law enforcement officials busy and creating demand for sophisticated, and expensive, private investigations.

"Whenever you have good economic times, controls loosen up" says Santa Clara County District Attorney George Kennedy.

White-collar criminals are taking advantage of the relatively permissive Silicon Valley culture.

"It's far easier for dishonest people to steal here than in many other places because the notion of business security is not as advanced as it is in, say, the Northeast" says one member of a fraud squad in San Jose. "Part of the valley's culture is to empower people. You don't get 20 people to sign off before you buy something. And it's relatively easy to steal information. It goes on a floppy, a cartridge or an e-mail, and it's gone" he says. So much of the valley's wealth is concentrated in R&D and information. The DA's office is prosecuting a record dozen cases involving the theft of intellectual property, and its major fraud unit has been working on crimes in which savvy crooks have stolen hundreds of thousands of dollars from companies, says Mark Hames, a deputy DA.

In one case, a phony computer company stole the identity of ComputerEZE in Auburn and used it to buy more than $100,000 worth of merchandise. In another, an employee of the Tandem Computers subsidiary of Compaq Computer Corp. falsely billed the company for more than $500,000.

Businesses aren't as reluctant as they used to be to report such crimes to law enforcement officials, Hames says.

Nonetheless, many companies want their own investigators. That's why one of the Big Five accounting firms recently hired two experienced federal officials to beef up its offices in San Jose and San Francisco.

Large accounting firms have employed investigative accountants for years, one executive says, and his department sometimes uses them. But hiring former U.S. attorneys is something he hadn't seen before. It adds a whole new dimension, he says.

Since joining the firm in January, the two investigators have worked on a broad variety of cases. One involved a senior officer of a large publicly traded company who charged more than $250,000 in personal expenses to his corporate expense account. In another case, thieves used a corporate computer network and an ally in the loss prevention department to steal tens of thousands of dollars in high-ticket items and return them for refunds.

Businesses turn to private investigators for many reasons. Public resources are stretched thin, and violent crime usually has a higher priority than white-collar crime. They can probably service a client, in general, faster than law enforcement. Investigators aren't encumbered with subpoenas and federal rules of criminal procedure, though we have to observe privacy rights. Companies may also want to avoid publicity, which can lead to questions about management. And they may not want to lose control of the case, which usually happens when law enforcement is involved.

Cases are addressed differently depending on how much has been stolen. Sometimes the right answer is to put improved controls in place and move on. Sometimes it's trying to get the money back informally. Sometimes people are civilly sued, or criminally prosecuted. And sometimes it's all that, and the Securities and Exchange Commission or another regulatory agency will be brought in. This type of work isn't cheap. Fees in these cases can start at $25,000. ``Some grow and become monsters,'' one investigator says, and can cost a company up to $500,000.

Terry MATTHEWS. Commercial Crime & Business Intelligence Manager acdUK Security/Investigations pp LG 09 Libra House, Sunrise Parkway, Linford Wood, Milton Keynes, MK14 6PH

CBI Specializes in Venture Capital Due Diligence, specifically entity existence and owner/partner ethical history.