When Philip Crosby was pulled out of the conference room, the news was disturbing: it seemed $250,000 was missing from the company's account. But by the time the company was finished counting, close to a million dollars was gone.
When Philip Crosby was pulled out of the conference room, the news was disturbing: it seemed $250,000 was missing from the company's account. But by the time the company was finished counting, close to a million dollars was gone.
IN 1985, JOHN C. NELSON FOUND THE PERfect job. Philip Crosby Associates Inc. (PCA) hired him to serve as director of finance in the consulting firm's new international unit. During its first year, the division had posted $2 million in sales, and management expected that figure to double in 1985. "We needed a person to keep us out of trouble," says president Larry McFadin.
After an exhaustive search -- all PCA searches involve at least a full day of interviewing for a handful of finalists -- eight executives agreed on Nelson. He had an M.B.A. and an impressive grasp of the technicalities of the international marketplace. The personal chemistry clicked. "He seemed like the kind of honest individual we'd want to hire," says Steve Balash, vice-president of human resources.
But John C. Nelson wasn't an honest individual. He wasn't even John C. Nelson.
HIs real name was Robert W. Liszewski. After six months of studying PCA's ledgers, he set up a dummy company and began stealing money, as much as $80,000 at a time. He got away with nearly $1 million and was caught only by accident. Police believe he had bigger plans. "The betrayal of trust was the hardest part," says company founder Philip Crosby, 61.
Trust, after all, is the core of Crosby's business. Years ago, he began preaching that quality was the only way for U.S. companies to remain world-class competitors. Instead of having to repair so much, managers should aim to do it right the first time.
Then came Quality Is Free, or rather, then came 1979, when manufacturers began taking a licking from the quality-conscious Japanese. Crosby's book, which showed that producing error-free products could be profitable, sold 1.5 million copies. Confident that he had found his audience, Crosby gave up his job as corporate vice-president at ITT and started PCA in Winter Park, Fla. Fortune 500 executives trekked to his Quality College, paying as much as $1,800 each to spend a few days with Crosby or one of his disciples. Between 1980 and 1984, PCA grew at a compound annual rate of 86%, earning the 188th slot on the 1985 INC. 500, and reaching sales of $20 million.
PCA became a unique reflection of its founder's values. The company prides itself on having the sort of supportive and communicative environment in which even Leo Buscaglia might feel at home. Crosby started an employee newspaper when he had only 12 employees. Every month, he presides over a "family council," a cozy get-together for about 170. He even offers a rumor-answering service for employees, all of whom own stock. "You have to have an environment of mutual respect," he says. "If people have pride in working for the company, and feel that it is open and honest with them, they don't steal from it." It's that simple.
Or so Philip Crosby thought, until last March.
Business owners always get upset when they find a theft," says Alan Sklar, president of Creative Services Inc., a security firm. "But the truth is that if they had better internal controls, these thefts probably wouldn't happen."
Security experts say that in most cases of theft, a procedure breaks down or a system fails -- or worse, none ever existed. This is especially true at small companies, where the strains involved in fast growth can leave lots of windows unlocked for a potential thief. Once the window is opened, more is likely to disappear than a typewriter or a dozen reams of paper; with computers and electronic-fund transfers in greater use, thousands of dollars can move out of a company's account with a single keystroke. "I'm sorry to say it," says Sklar. "But you often have to put the blame back on management."
Philip Crosby's company was an easy target for a thief like Liszewski. Revenues were rising faster than a rocket at neighboring Cape Canaveral, the company was expanding its business overseas -- and management controls were always a step behind.
In February 1985, PCA opened an office in Brussels. Company president Larry McFadin saw the need for a financial whiz who could deal with each country's reporting rules and then translate those numbers into U.S. accounting language. "Growth stresses systems," says McFadin. "So we make sure our systems are forward-looking."
At PCA, the future belonged to the man who identified himself as John C. Nelson. Fortyish, with thin, graying hair, Nelson was described by references as rock-solid reliable, with a keen mind to boot. His last employer, for whom he claimed he had worked for seven years, was particularly generous. We were so sorry to lose him, the woman said, and you are so lucky to have him. The glowing reference was provided by Liszewski's wife, Patricia, who was working part-time in that company's personnel department.
Upon moving into his office, Nelson decorated it with an Illinois CPA license which, it was later found, had been created on a home computer.
Nelson's job required him to develop financial controls for PCA's fast-growing international operations. Units in Belgium and the United Kingdom were up and running; France was just coming on-line. What we want you to do, explained James Gunshanan, 38, then chief financial officer, is facilitate the flow of data from those units into PCA, so they can be easily consolidated into the parent company's financial statements. Every month, Nelson was to produce a balance sheet and P&L for each office.
Four months into the job, Nelson flew off to Europe. Gunshanan wanted him to meet his overseas colleagues: the general manager, lawyers, auditors, and accountants who ran the divisions. Nelson also bought some software that, he declared, would ensure a smooth flow of data.
But the meetings and the software didn't help very much. Gunshanan quickly noticed that Nelson was slow in converting numbers from foreign currency to U.S. dollars, not usually a tough task for a CPA. And the monthly reports were up to three weeks late.
After a second trip to Europe produced no visible improvements, Gunshanan's irritation grew. "It's not my style or the company's to sit down like fourth graders and say, 'Here's what you'll do at three o'clock and here's what you'll do at four," he says. Instead, he asked Nelson what he could do to remove some obstacles. But Nelson was hard to read. The overseas managers told Gunshanan they hadn't been able to develop much of a rapport with him. That new guy is quiet, they said; he sticks to himself. Nelson was that way at headquarters, too. He didn't come to many company functions. When he did, he often offered an excuse in order to leave early. Nobody was ever invited to his house, though according to rumor, it was expensively furnished.
About a year into his job, Nelson faced his first big test. As the internal deadline for the company's third-quarter numbers passed in September 1986, he seemed to hit one stumbling block after another. Why don't we have the numbers from the division in Belgium? asked Gunshanan. Because of the outside bookkeepers, Nelson answered. They haven't yet computed the final receipts. Another time, Nelson blamed a computer crash. "His answers sounded plausible," recalls Philip (Skip) Crosby Jr., executive vice-president and Philip Crosby's son.
The third-quarter financials weren't ready until right up to the Security and Exchange Commission's deadline. Skip considered going to Europe and stepping into the situation himself. But, he decided, that just wasn't PCA's style. "It would have completely mixed him up," says Skip, "and it would have disrupted the operations of a group."
Skip reassured himself that Nelson was performing better on other projects. He was helping the subsidiaries with budgeting, developing revenue projections, and monitoring expenses. "He was coming across as learning very quickly," says Skip.
In December 1986, Nelson's bookkeeper quit, leaving him solely in charge of all the money that flowed through the international subsidiary -- some $12 million that year. "When that bookkeeper quit," says Skip, sighing, "Nelson was sitting there with total control over the process."
With the fourth quarter drawing to a close, Nelson was hopelessly behind on the books. He was coming into work less and less, sometimes missing a week at a time.
Fed up, Gunshanan called Nelson into his office. I can't put up with your excuses anymore, he said. I've got people working around the clock to save your ass.
I'm sorry, Nelson replied, but I've got a personal problem. I need to pull my thoughts together. Can we talk tomorrow?
The next morning, Nelson marched into Gunshanan's office and sat down. His eyes filled. I'm a sick man, he said in a quavering voice, a very sick man. Then he burst into tears.
I've never had a man cry in my office," says Gunshanan, who felt horrible that he'd been so hard on a man as ill as Nelson. "Here he was, a man with cancer, and he felt he couldn't just come to me and tell me. I was ashamed."
Nelson said he had only three months to live, and wanted to spend them with his son. What will you do for money? Gunshanan asked. He remembers Nelson's answer word for word. It still keeps him awake some nights.
"Don't worry about me," Nelson said. "I've always believed in socking something away."
The investment community didn't know about Nelson's illness, nor would it have cared. For two consecutive quarters, PCA had struggled to produce its numbers. The company had gone public the year before, in 1985, and seemed to be making an unusually rocky transition. PCA stock, which had soared to $20 in 1986, plummeted to the $12 range.
On Monday, March 2, Gunshanan and Skip Crosby were meeting with a group of Wall Street analysts in St. Petersburg. Just before the meeting, Gunshanan had received some unsettling news from controller Pam Forrest. Gunshanan had tried to move half a million dollars from one account to another. You don't have that much in the account, the banker told Forrest. What? she replied. We have at least one million dollars there. Not according to our records, he said.
Upon hearing that, Forrest started scanning ledgers of wire transfers from that account. Sure enough, she came across an unposted transfer that didn't look right: $82,353 to a U.S. company called Allied Exports for shipping product to Brussels. Why would Nelson have used a wire transfer to send money domestically? And what was he doing sending materials through South Bend, Ind., to Brussels? It looked fishy to her, especially since she had heard Nelson talk of South Bend as his hometown. "This can't be," Gunshanan responded, after hearing the story. "But pull together as much information as you can, and we'll talk about it when I get back."
Forrest scoured the files for any documents on the $82,000 transfer to South Bend. Was there a contract? A purchase order?
By the time Gunshanan and Skip Crosby returned that evening, Forrest had uncovered other wire transfers to South Bend. At least $200,000 was involved. And the mysterious Allied Exports -- interchangeably identified as Allied Services, Allied Management, Allied Management Service, and other variations -- seemed to be engaged in an unlikely mix of activities. The company shipped books, provided consulting, even made travel plans. A contract found later but never charged to PCA showed Allied providing the company with $25,000 worth of "consulting services for cash conservation."
The next morning, PCA's executive committee was meeting at a downtown hotel to hash out a five-year strategic plan. Skip Crosby told McFadin that he couldn't stay. In the hall, Skip informed him that they had found "some funny wire transfers, maybe $250,000 worth." McFadin darted back into the conference room to get Phil Crosby. Crosby listened calmly and asked Skip to keep him informed. "I've faced a lot of crises in building a business," he says. "Nothing surprises me."
McFadin returned to the meeting, mumbling some excuse about how he had sent Skip back to the office to meet Gunshanan and fix up "those damn books." Inside, he felt numb. What will this do to earnings? he wondered, as the meeting went on around him. At 11:00 a.m., he got a message from Skip: the wire transfers now totaled $425,000.
Skip had decided that he and Gunshanan should go through all records starting well before Nelson was hired. They looked for bills, letters, invoices, any reason for PCA to be paying Allied. They traced every transfer to First Interstate Bank, in South Bend. They went over every entry on PCA's accounts-payable ledger, looking for payments to a company with the word Allied in its name. They combed every entry on every bank statement. Had Nelson forged any checks? He hadn't, probably because an accounts-payable manager would have had to authorize them.
They called the Indiana secretary of state's office to check Allied Export's incorporation papers. Who was the president of the company? Skip wanted to know. Someone named Patricia Fox, the clerk said. Skip remembered that Nelson's wife was named Patricia Fox Nelson. He now knew for sure they had been taken.
His worry only increased. Could Nelson have transferred money from Brussels, say, to an account in Switzerland? He told Gunshanan to call all the overseas managers. Strike Nelson's name from your accounts, he ordered, and search your bank statements for irregularities. "I was scared to death that he had all sorts of schemes going," says Gunshanan.
But Nelson had only one simple scheme, and it worked perfectly. With help from his wife, he had created a dummy company in South Bend. To thwart the bookkeeper -- PCA's only check on him -- he had copied Gunshanan's name on all of the authorization documents. It had worked like this: he photocopied Gunshanan's signature and affixed it to the contracts he devised. He then copied the whole sheet, and showed that to the bookkeeper. The original is in my files, he assured her.
Over eight months, he steadily increased the money he funneled to South Bend, spreading it over a range of expense categories. On August 12, 1986, he wired $23,286 for "living and product analysis expenses" in Italy. On October 20, Allied received $59,193 for "starting costs" of a subsidiary. On December 30, he sent $37,250 for "product development costs." The executive committee met monthly to review operations, but none of the payments raised questions. "Our main focus was looking at growth and revenue," says Skip Crosby. "We glanced through the expenses."
They had let $961,606 slip past their eyes.
Skip didn't feel any better about the stolen million when he met Gary Collins, a detective on the Winter Park police force. Although he spent 50 minutes explaining the crime to Collins, he wasn't sure he was being understood. Collins didn't ask any questions. He seemed almost bored. We've had it, Skip thought, we're stuck with a real small-town cop.
So what do you think? he finally asked Collins.
First, Collins said, get yourself an attorney in South Bend and put an emergency freeze on Allied's account. Don't forget to lock his office, and we'll take fingerprints from everything: the phone, the desk drawers, even his ashtray. Remember, Collins continued, if any arrests are made, the arrest affidavits will be on the public record. You'll have to provide details to make sure those who are arraigned are highly bonded. Once that finds its way into the newspaper, think about how you'll deal with the media. Your employees will also be shaken up, so you need to talk with them to kill rumors.
After 20 minutes of this, Skip realized that appearances had fooled him again. Collins was a sophisticated cop.
Last but not least, Collins added, keep in mind that you've just been robbed and the amount you lost is tax deductible. "People usually forget that," he noted coolly.
There was no time to waste. The next day, Skip and Gunshanan flew to South Bend. Their corporate attorney had contacted a lawyer, who met them at the airport. Skip presented documents to the president of First Interstate Bank tracing the flow of funds. Invoking a little-used Indiana law, the president agreed to freeze the account for 24 hours. After that, he told Skip, you'll need an injunction.
As Skip was making his case in Superior Court the next day, a secretary ran into the courtroom with a note. A woman, later identified as Nelson's wife, had just called the bank looking to remove the rest of the money, about $230,600, from Allied's account. The bank stalled her. Because of a mechanical problem, they claimed, we can't do it until tomorrow.
By then, a judge had agreed to freeze the account for 10 days. Skip returned to Winter Park, telling his father and McFadin that they'd probably get that money. "It didn't exactly put a smile on their faces," Skip recalls. "But it helped."
While Skip was cornering the money, Detective Collins was trying to corner the alleged thief.
The afternoon of Skip's return, Collins obtained a search warrant and paid a visit to Nelson's house, located in the ritzy part of nearby Longwood, Fla. A heavyset, short-haired woman, who identified herself as Nelson's wife, answered the door. Collins presented her with the warrant. He also arrested her on probable cause of grand theft. "She was in shock," Collins recalls.
Collins and his men emptied closets and drawers. In a file cabinet, they found PCA's 1984 ledger pads, which the company had reported missing. In the shower of the master bedroom, they hit pay dirt. There, they unlocked a plastic lockbox with all of Allied Management Service Inc.'s monthly statements, canceled checks, and incorporation papers. "It was worth going out and getting a six-pack to celebrate," says Collins.
It wouldn't have been much of a party without the guest of honor; Nelson had escaped. While they were searching the house, a uniformed officer out front reported spotting him drive by in a white Porsche. Hopping into a cruiser, he briefly chased -- and lost -- him.
There was one particular document that Collins thought might prove valuable, an Air Force discharge form. The name on the document had been painted over with correcting fluid. He decided to send it to the lab to see if they could read the original name. Who knows, he thought, maybe John C. Nelson isn't John C. Nelson at all.
Now that the police had arrested Nelson's wife, there was no way to suppress the story. And the company was required to inform the SEC of any accounting error that would have a "material" effect.
Skip and other managers drafted a four-paragraph press release describing a "possible embezzlement." After sending a copy to each employee on March 6, Crosby and McFadin visited the company's eight buildings and met with groups of employees. Is the company in trouble? workers asked. Will we still have jobs? A couple of them burst into tears, and a few suggested that they might like to break Nelson's legs. PCA is sound, Crosby told them, and we are working toward recovering both the money and the thief.
When they returned to their offices, phones were ringing madly. "I dreaded the phone calls," says McFadin. "I wished I could go to sleep, wake up, and it would all have gone away." Phil Crosby, Skip Crosby, and McFadin spent two days answering questions from reporters and stock analysts.
During that week, the stock fell about 30%, to $7 per share.
Two weeks into the investigation, Detective Collins got a break that he couldn't believe. A computer search showed that John C. Nelson had just obtained a new driver's license in a Winter Park suburb. The physical description and Social Security number matched perfectly. Collins rang up Gunshanan. "We've got him," he declared. He invited Gunshanan to watch as his former charge was arrested and handcuffed.
The detective then called the suspect. Nelson claimed to be a loan officer at a bank. Collins was confused: could this be Nelson's father? He decided to check him out.
When he knocked on the door, Collins found himself toe-to-toe with John C. Nelson.
The gray hair. About 5 foot, 10 inches tall. Medium build. Just like the description in the arrest warrant. Collins turned triumphantly to Gunshanan.
"That's not him," Gunshanan said flatly.
Later, inside the house, Collins showed Nelson a book of mug shots. Nelson pointed to one. "That's Bruce Fox, my old boss," he said.
Nelson explained that they had worked together at a bank in Indiana in 1983. Bruce Fox was eventually fired because the bank found out he had previously served an 18-month jail sentence for embezzling $400,000. As he left, he had apparently grabbed John C. Nelson's personnel file and decided to help himself to his identity, too.
Collins was taken aback. If John C. Nelson wasn't the man he was after, then who was? Should he be looking for Bruce Fox?
He had one lead, and, lucky for him, it panned out. The police lab discovered a name under the correcting fluid on the Air Force discharge form. The Air Force verified that a man with that name had been with them; his fingerprints, therefore, were on file in Washington, D.C. Collins retrieved the fingerprints and matched them with the fingerprints taken from Nelson's office. They belonged to Robert Walter Liszewski.
Whoever he was -- obviously, John C. Nelson and Bruce Fox were assumed names -- he had certainly spread plenty of money around. Through the bank's canceled checks, Collins discovered that Liszewski had bought a $100,000 sports car and a $25,000 trailer to house it in. And he had purchased and remodeled three local auto-parts stores -- businesses in which he could launder lots of cash without raising suspicions among neighbors or co-workers.
Back at PCA, top executives were trying to figure out how to prevent this from happening again.
Fingerprinting, that's what we'll do, McFadin said; we'll fingerprint everybody in the whole place, so this can never occur again. Along with Skip Crosby, he sent someone off to investigate the possibility. "When something like that happens, your tendency is to clamp down, stop communications, distrust employees," admits Skip.
Fingerprinting turned out to be impractical, so the executives considered a lie detector next. But the senior Crosby disliked that idea. "All of that stuff just makes people mad," he says. Crosby wasn't about to dismantle the company's familial environment. They would still hold family council and have a bash for employees every April. Crosby would continue to hand a walnut-block pen holder to each new employee. "There's no sense in beating up on employees. It's not their fault," he says. "Management has to accept responsibility for employee theft, in that they create opportunities and motivation for it."
But Crosby himself has trouble accepting the company's role in creating an opportunity for Liszewski. He compares Liszewski to a mugger, and claims that blaming PCA is blaming the victim. "To me," he says, "it's like some guy waiting for someone to come out of the bank with an envelope full of money."
It might be more accurate to say that PCA threw its money on the sidewalk and turned away. Maybe it's true that Liszewski was a "world-class swindler," as McFadin claims, but he didn't need to be one. The company gave him every opportunity to strike. He had full control over PCA's international accounts. The only check on him was a subordinate, whom he could easily sway. Crosby attributes the lack of controls to PCA's hectic growth. "He stepped into an area where there was nothing," concedes Crosby. "It was the perfect setup for him."
Even Crosby, who had tried to create "a prevention-oriented management culture world-wide," isn't fully willing to face up to his company's lack of controls. "I don't know whether you can prevent someone as sophisticated as the guy we had," he claims.
In the embezzlement's aftermath, PCA decided to hire an internal auditor. Crosby had previously balked at such an expenditure. But he admitted later that "spending $50,000 on [an accountant] looks quite different when you've just lost $1 million." The auditor's job is to make sure all procedures are being followed. The managers also quickly tightened up the system for hiring and for approving wire transfers. Three people participate in every wire transfer; PCA hopes to limit their use in the future.
So far, PCA has recovered $238,000 from Liszewski's bank account and $250,000 from a bond the company held on him. The embezzlement "never interfered with the pulse beat of the company," Crosby says, because it didn't change its assumptions about the bottom line. Crosby claims it didn't touch the way he thinks about employees, either. "A situation like this may change some systems and controls, but it doesn't damage my faith in man's humanity, or make me cynical," says Crosby.
PCA's managers realize the company is not immune; embezzlement could occur again. "This kind of thing is happening everywhere," says Jack Gallagher, who has replaced Gunshanan (now senior vice-president) as chief financial officer. "Things are going on here, at this company, right now. You can be sure of it."
Where are they now?
JOHN C. NELSON: After establishing the real Nelson's innocence, Detective Collins gave him a business card with his phone number on it. "I call it my get-out-of-jail-free card," says Nelson. The card is meant to rescue him if an overeager rookie tries to haul him downtown. Other matters are more difficult to resolve. "He [Liszewski] has pretty thoroughly destroyed my credit," says Nelson. Speaking of which, the Internal Revenue Service wants taxes it says Nelson has owed since 1984. Nelson says it's Liszewski's debt.
ROBERT W. and PATRICIA LISZEWSKI: Robert's whereabouts unknown. Last June, Chicago police towed a car he owned. Last spring, Detective Collins reached a hotel where Liszewski was staying -- right after he had left. "We'll get him sooner or later," Collins vows. On November 19, 1987, Patricia Liszewski pled guilty to grand theft. Because she had already served eight and a half months awaiting trial, the judge sentenced her to five years probation.
PHILIP B. CROSBY: He now owns a small warehouse full of some products from the three auto-parts stores that Liszewski bought with the stolen money. Soon, Crosby may be running specials on oil filters, wiper blades, transmission fluid, and WD-40.