Five-Year Fraud Scheme Raises Questions About Scam Protection

The sentencing of former MGT Construction executive, Patrick Lindsey, for a five-year fraud scheme has Chris Ring, of NACM's Secured Transaction Services, considering ways material suppliers or subcontractors could have protected themselves better in this situation.

Over the five-year period, Lindsey served an integral role in the large-scale corporate accounting fraud scheme designed to conceal the fact that MGT Construction was more than $20 million in debt.

Lindsey's fraudulent actions went undetected from 2011 to 2016; and he even was promoted to vice president during this time frame. Ultimately, his actions were the impetus for the firm's bankruptcy liquidation in 2018.

"That deceit not only maintained the defendant's job and padded his annual compensation package, but it also proved devastating to the individuals who worked on MGT Construction projects and were left holding the bag after the fraud scheme was uncovered and the company subsequently collapsed," said Raj Parekh, acting U.S. attorney for the Eastern District of Virginia.

According to court documents, Lindsey engaged in a fraudulent accounting scheme that sought to conceal MGT's true financial position through job-cost manipulations within the company's accounting software system.

Lindsey had primary day-to-day management of the accounting scheme, which involved the regular movement of job-cost invoices from nearly finished projects to more recent construction projects. This cost-shifting falsely inflated profit margins and concealed losses, which generated a wholly inaccurate picture of MGT's profitability. MGT and its parent company submitted the products of these fraudulent accounting manipulations as part of MGT's application packages to banks and insurance companies for lines of credit and bonding coverage.

During the conspiracy, Lindsey moved or deleted thousands of job cost invoices, concealing the fact that, by the time the scheme was uncovered in November 2016, MGT Construction was over $20 million in debt. When the accounting fraud was exposed, MGT Construction owed millions of dollars in outstanding invoices that it could not pay to dozens of contractors, subcontractors, and vendors who had provided their services or products to MGT Construction. As a result, MGT filed for Chapter 7 bankruptcy in early 2018.

A consistent influx of new projects is critical to continue this type of scheme. "This necessity for continued accounting manipulation meant that MGT operated under the perverse incentive of acquiring new projects at any cost—even if that required MGT to submit deliberately under-valued project estimates in order to ensure that MGT would underbid other construction firms when competing for new projects," the U.S. District Court for the Eastern District of Virginia wrote in its statement of facts.

Prosecutors don't believe Lindsey acted alone, but no one else has been charged as of yet.

The fact that only Lindsey reportedly dispersed funds should serve as a red flag, Ring said. "He was savvy; he must have been a skilled manipulator. But when only one person controls how the money from these projects is distributed, that's a problem."

Under a plea agreement, Lindsey agreed to pay $18.7 million to companies hindered by the fraud. Of that amount, MGT's parent company, Morton G. Thalhimer, is claiming $14.9 million after repaying debts on its behalf.

It is not clear whether material suppliers were getting paid or not, but Ring emphasized how important it is for material suppliers to practice their lien rights, as well as using a Section 43-11 notice.

Under the state of Virginia's Section 43-11 notice "an owner or general contractor could be made personally liable to subcontractor, laborer or materialman."

The use Section 43-11 makes the owner or general contractor liable for the debt, Ring said. While the section serves to protect material suppliers and others, it has been under used, he added. The code states "two notices are required to perfect the Section 43-11 requirements."

In addition, Section 43-11 states "a general contractor's liability to a sub-tier subcontractor or supplier is limited to the amount the general contractor owes his subcontractor at the time of filing. It is important that suppliers and subs provide notice to the owner and prime sooner rather than later before funds are exhausted."

Despite these laws being in place, Ring explains, "There's no way to completely eliminate fraud; we just have to mitigate it as best we can. Sticking to your rights is a must in order to keep pressure on general contractors to make sure everyone is being paid and to put yourself in the best position as possible in case of nonpayment."

Bryan Mason, editorial associate 

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Saturday, 30 September 2023

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