Both Weiner Man and Empty Vessel used this particular scheme. In hindsight it’s amazing to see the similarities these two investors share, so much so that it reads more like a standard process than a freak anomaly.
Weiner Man
You may recall from Rent Rort # 1, that when we closed the investment in A Corp with Weiner Man, he immediately said, “we have spare space, don’t waste your money on rent”. Similarly, Weiner man said we have “HR, accounting staff etc., just use our office staff and save hiring people”. Brilliant, another headache I don’t need to deal with. This would be cheaper and more efficient. Well, that was the idea.
After a few months a number of anomalies started to appear, service providers costs seemed to have increased, higher IT costs, higher printing costs etc. Enough for me to notice, and I try anything to avoid micro-management. Yet explanations were vague about overall cost increases, upgrading services etc. While busy trying to build a business, you tend to not sweat the small stuff, so much of this continued unnoticed.
It so happened that one day I went to pick up a printing order, and I’d never personally been to the printers before. They asked me what my role was in the business and seemed really friendly. I’m the founder I said, and commented on the great work they had been producing. They then seemed to be a bit uneasy and said, look, we can tell you something but you didn’t hear if from us. Ok, I said. They then told me that Weiner Man and his office ordered significant amounts of printing for their own business, and told the printers to just put it onto A Corp’s account!!
This was significant enough, that a printer, with nothing to gain, and in fact something to lose by potentially losing WeinerMan’s business, thought the extend of the misappropriation was so ethically inappropriate, that they just couldn’t ignore it. What great standards of ethics and professionalism. It hopefully ended up paying off through the positive referrals I gave about their company.
This was the trigger to realise there was deliberate theft going on by WeinerMan in A Corp and we realised that various bills were being inflated by incorporating the investors own business expenses.
I quickly exited from this business, for less than it was likely worth, but felt I could not ethically remain. This was a very fortuitous decision. A year later A Corp was sold to a public company. You may think that if WeinerMan took over A Corp and sold it to a public company, that he won out in the transaction and I lost. But in fact this was the best decision both financially and morally.
Financially it was a good decision, because when I left, all the key senior staff came with me to my new start-up. The business I then started went on to sell for 5 times what A Corp sold for.
More importantly, morally it was the right decision. The sale of A Corp was actually a fraud. WeinerMan happened to be a director of, and the largest shareholder of, the public company he sold A Corp to. He cooked the books in A Corp, and the public company he was a director and shareholder of then acquired A Corp. At the time some very angry shareholders wrote scathing letters about the conflict and how the whole transaction was only in the benefits of WeinerMan and not the shareholders. However, Weiner man had the voting support, and the sale went through. The transaction was disgraceful.
Empty Vessel
When I founded C Corp many years later, I thought the relationship, and the perceived reputation of Empty Vessel, was such that I was confident when we got the same line “we have HR resources, accounting resources, let us take care of that and you focus on the business”, that this time, it was the real deal. In fact the cost with Empty Vessel was significantly higher. Perhaps I naively keep making the same mistake because I will do almost anything to avoid administrative and office tasks. My passion is innovation and marketing the business. But these seemingly mundane aspects of the business, can really come back to bite.
Empty Vessel’s office provided a number of resources including using their HR manager for all our office management requirements, and their CFO, Elmo, was providing financial oversight. For about a year Empty Vessel’s HR manager contracted recruiters for all our staff hires, and purchased all office items. In a poor decision on my part, I did not closely monitor these payments and transactions. I assumed that there were layers of oversight that would be sufficient. These were:
- A seemingly professional and experienced HR manager employed by a reputable investment group
- Empty Vessel’s CFO, Elmo, oversaw the accounts
- C Corp had it’s own CFO employed full time
- A national Accounting firm managed all of the accounting
This could be seen even as over the top for a start up. For about a year things ticked along with no thought from my end. Until something unusual was discovered by one of my admin staff. They came to me and said, look, I have been trying to make sure that I have checked the situation thoroughly before bringing it to your attention but I think we have a significant problem. The admin worker went on to say that there was an issue with a recruitment hire that she wanted to look into. She asked the HR Manager to provide a copy of the recruitment companies invoice for the particular hire. Strangely, she was told by Empty Vessel’s HR manager that she didn’t need to see it, and not to worry about it. But to my staff member’s great testament, she did worry about it, and kept on asking again and again. She was fobbed off for weeks, but finally got hold of the invoice. She told me that within 2 seconds she could see a problem. The invoice looked like a poor photocopy, there was no website and no physical address.
Our admin staff member went on to discover that the apparent recruitment company engaged by C Corp, was not a real company, and actually a front for the HR manager’s own husband. He had no recruitment background and performed no reference checks or interviews, they simply sent candidates, and charged 15% of annual revenue per candidate. They also purchased all office goods, itself strange that the one company would recruit an interstate manager, and then supply office furniture. But worse is that purchases were a scam. Such as $400 for an office plant that in reality cost $50. Or invoicing for numerous whiteboards when the office only received a couple of them. Tv’s where we were invoiced thousands of dollars, where a quick Google search reveals that the online retail cost is actually under a thousand dollars. All told the embezzlement and deceptive invoices totalled over $300,000!!!
How could such a monumental failure of governance have occurred. Well let’s go back to the list:
- The seemingly professional HR manager (Employed by Empty Vessel)
- Empty Vessel’s CFO, Elmo (Employed by Empty Vessel)
- Our own CFO (Recruited by and a best friend of Elmo)
- National Accounting firm (Engaged by Empty Vessel and their accounting firm for over a decade)
So when peeling back the onion, what was seemingly layers of oversight, was a list of people all working for and connected to Empty Vessels office. When we confronted them with the evidence of embezzlement, they said that they knew nothing about it and promptly terminated the HR Managers employment. It is not possible to know or determine whether there was any broader collusion or if this was an isolated individual’s deception. But either they were clued into what was occurring, or were so overwhelmingly incompetent, that the entire group of resources were unable to pick up what our admin staff member said she could see was fishy in moments.
Legally the HR manager in question was employed by empty Vessel. Even if they had no direct fraudulent knowledge of what was occurring, a company is liable for the actions of its staff member. If a staff member at McDonalds leaves a spilt drink on the floor, and a customer trips and falls, who is responsible? McDonalds of course. They could never get away with saying, well that’s not our fault you can blame the staff member who left the drink on the floor. So what responsibility did Empty Vessel take? Well out of the over $300,000 C Corp lost, we were reimbursed a grand total of $0. Even worse, Empty Vessel actually charged us a percentage of the HR managers salary and Elmo’s salary to ensure proper oversight. So we literally payed service fee’s to watch over the embezzlement. Just to clarify, we didn’t obtain any refund of the oversight charges either. You might think this sounds more like science-fiction than reality. It is startling what can happen in the real world. I have come to a point where I genuinely believe nothing would surprise me anymore.
Why does this happen? Well this might sound like I am just being unnecessarily critical, but this is my honest opinion. Elmo is the most incompetent accountant I have ever come across. Utterly useless with not a single intelligent solution or piece of advice in the years we dealt with him. Empty Vessel has never had a single intelligent business innovation or idea in his career. It was like watching the blind leading the blind. Being unintelligent isn’t a crime, but what is, is employing staff as stupid as you are, just so that you can look smarter within your own office. If it were me, I would be far less concerned with ego, and try to employ the smartest people I could find.
What does the stupidity have to do poor business practices. Well let me give an analogy. I hate getting parking tickets. Probably everyone does. But what frustrates me so much is not the futile waste of a $70 fine I have to pay. Rather, it’s that the council’s have parking inspectors on every corner, like vultures waiting to pounce within a second. The frustration, is that with all the millions of dollars at their disposal, and the extensive resources at their disposal, the most intelligent way they can come up with to generate revenue, is to fine its residents and customers. You can imagine a council meeting going like this:
Councillor A: We generated $x million dollars this year in parking fines.
Councillor B: Our overall budget is running at a loss of $Y million dollars, what can we do to address the gap?
Councillor C: I know. Lets fine more of our residents.
Pathetic!
Where there is a real lack of intelligence and innovation, and Empty Vessel and Elmo are only surpassed in feeble-mindedness possibly by Weiner Man, the only option they see at their disposal is to charge and over charge companies as far as they possibly can.
KEY LESSONS:
- What may seem like cheaper resources and help with non core business activities, will likely cost you much more money and turn into much more of a headache. Always get third party suppliers. Even if they are a bit more expensive up-front, they will save you a lot more in the long run.
- Ensure that checks and balances have real stop-gap measures. If the checkers are within the same organisation or group or social network, they may not be providing the objective oversight you are expecting.
- Never rely on a partner to simply do the right thing. Hope for the best, but work on the basis that you need to check every aspect of the business directly.
Being too trusting, unfortunately, can be a real weakness!