Defending the Devil
An Expert Witness Tells All
Martin H. Abo, CPA, ABV, CVA, CFF shares the story of a fraud engagement, where he was retained to analyze the business practices of FirstPlus Financial. Mr. Abo shares his experience getting the engagement and testifying in the racketeering case.
Using Financial Forensics in the Defense of White-Collar Crimes
Preparing an Expert Report and Being and Expert Witness
The Expert Witness: The Rogue, The Bad, and The Ugly
The Art of Survival When Things Go Wrong: Dealing with Disaster on the Witness Stand
In spite of our constitutional right to a fair and unbiased hearing, some defendants are perceived guiltier than others, even before their day in court.¬† High profile cases involving celebrities, government officials, or people with ties to organized crime‚ÄĒto name a few‚ÄĒcan be tried and convicted in the media‚ÄĒboth conventional media and social media.¬† Popular opinion cannot be easily dismissed; in varying degrees, it can influence the participants in the judicial system from the jury pool to the presiding judge.¬† This prejudice‚ÄĒwarranted or otherwise‚ÄĒcan make the role of an expert witness for the defense a carefully negotiated minefield of protocol.
A case in point is one which involved known members of a Philadelphia-based crime family, a businessman with legitimate successes, but with unsavory ties to the crime family, racketeering charges, and an accountant from New Jersey, Martin Abo, CPA, CVA, ABV, and CFF.¬† This is his story.
It Ain‚Äôt Personal.¬† It‚Äôs Business
In 2013, Nicodemo S. Scarfo‚ÄĒson of jailed mob boss ‚ÄúLittle Nicky‚ÄĚ Scarfo‚ÄĒand eleven associates were brought to trial by the federal government.¬† The 108-page federal criminal indictment for racketeering charged, among other things, that Scarfo and his associates (including friend and businessman, Salvatore Pelullo) took over the Texas-based firm, FirstPlus Financial, by illegal methods.¬† By using fear and intimidation, the government alleged the defendants had stolen at least twelve million dollars from the company.¬† This money, it was charged, had gone to furnish lavish lifestyles that included expensive homes, a plane, and a yacht.
According to FBI Special Agent Joe Gilson, ‚ÄúEssentially, Scarfo and Pelullo used extortion and other illegal means to gain control of the company.¬† And then they systematically looted the company.‚ÄĚ
Take the Business Documents; Leave the Engagement Letter
Martin Abo was approached by the Criminal Justice Act (CJA) -appointed defense attorneys regarding the business practices of Salvatore Pelullo.¬† After much debate and discussion with his partner and others, Abo decided to accept the appointment. ¬†He knew this was going to be a long, involved case.¬† There were thousands of financial documents seized by the government, which included accounting programs/ledgers, hundreds of bank statements, tax and regulatory filings, appraisals, pertinent communications, to name only some of the documents that needed to be analyzed and corroborated.
The question was deceptively simple: Did Pelullo observe legitimate business practices in the takeover of FirstPlus Financial? ¬†Abo‚Äôs challenge was to review and assess the indictments alleging:
- Personal gain to the defendants through the takeover and alleged looting of FirstPlus
- Lack of disclosure and transparency by the defendants to avoid detection by the SEC, the public at large, the shareholders, and law enforcement
- Wire fraud in connection with the several consulting and legal services agreements
In choosing Abo, defense counsel was looking for an experienced and impartial expert witness who could provide a strong defense for Pelullo.¬† Abo, a practicing CPA for forty years, has been involved in numerous business acquisitions and dispositions, has been a business appraiser‚ÄĒa past acting interim CFO/Consultant to a public company‚ÄĒa director of a thirty-five-million-dollar healthcare enterprise, and has served on the board of a bank and as head of its audit committee.
In spite of its notoriety, Abo approached it like any other case.¬† ‚ÄúAs I have said in multiple conversations and presentations, it all begins with the engagement letter,‚ÄĚ says Abo.
‚ÄúThe basics still apply: set the parameters of what you will and will not do, get everyone to agree to that concept, determine the facts.‚ÄĚ
The Engagement Letter
In any business situation, communicating the scope of your work is a way to manage expectations of the client and to minimize risk.¬† The engagement letter allows you to:
- Define the services you are being engaged to perform
- Identify the responsibility and authority to avoid potentially severe penalties
- Explain fees, billing, and payment terms
- Assure the client that additional services will not be initiated without advance approval
This holds true whether you are dealing with the office of the CJA or with a private client.¬† In this case, Abo wanted the client, the attorneys, and the judge to understand what he would and would not be doing.
Determining the Facts
After sifting through thousands of pages of testimony and business documents, Abo concluded that the government was wrong in its assessment of how FirstPlus was handled as a business.¬† He determined that the charges against the defendants did not adequately consider the business and strategic logic behind the multiple acquisitions and the amount of credible due diligence undertaken.¬† Says Abo, ‚ÄúThe impression the government was giving was, ‚Äėit‚Äôs organized crime; it‚Äôs all bad,‚Äô and that wasn‚Äôt necessarily the case.‚ÄĚ ¬†In terms of the paper trail, he concluded, Pelullo did everything by the book.¬† ‚ÄúI was hired to review Pelullo‚Äôs actions, and, on paper, he made exhaustive efforts and performed due diligence to bring the company into complete compliance.‚ÄĚ
Martin Abo testified in open court for five days.¬† Over the course of the five days he was questioned at length about the hiring of outside professionals, the consulting and other professional fees paid, the investment value of the business and various acquisitions, and other aspects of this public company.¬† Based on his exhaustive analysis, especially in light of Pelullo‚Äôs prior business experience and following the ‚Äúsuccessful‚ÄĚ logic employed, Abo concluded that: the defendant utilized a business model that had help turn around other businesses, that the government‚Äôs allegations were not substantiated, and lack of prudent judgment by Pelullo‚ÄĒin terms of a business perspective‚ÄĒwas not supported.
Conclusion: The FBI Ruins Everything
In the end, the jury went for the conviction.¬† Both Scarfo and Pelullo along with the Maxwell brothers (John, former FirstPlus CEO, and William, special counsel to FirstPlus) were convicted of racketeering and conspiracy to sell and possess firearms.¬† Scarfo and Pelullo were later sentenced to thirty years in federal prison; John Maxwell received ten years and his brother, William, received twenty years.¬† The other defendants‚ÄĒthe SEC attorney, the business/tax attorney, and Scarfo‚Äôs personal attorney were found not guilty.
Martin Abo stands by his conclusions.¬† ‚ÄúIt‚Äôs no exaggeration to say that this case included about as much data as did the ENRON case.¬† For a trial spanning four days a week from early January through the first week of July, there was just so much financial and often sophisticated information for the jury to get its head around.¬† And, frankly, some of the defendants had shady pasts and really questionable associates.¬† I think it was difficult to make the distinctions,‚ÄĚ says Abo.
Would he encourage other practitioners to take on a case of this scope?
‚ÄúYes,‚ÄĚ he says. ¬†‚ÄúBut it is important you know what you don‚Äôt know, and then get the help you need to compliment your skill set.‚ÄĚ¬† As a practice pointer, he also stresses the importance of the engagement letter in outlining the scope of what you will do, and the ability to bring in resources to help you deliver on your promise.¬† Although this was a high profile criminal case, at the end of the day, it was about a business and opining on whether or not legitimate business practices were followed.¬† Says Abo, ‚ÄúAside from his unfortunate associations, Pelullo took steps that any prudent business owner would and, even more so, dictated by what a public enterprise must adhere to.¬† That is what I was brought in to assess.¬† And that is how I called it.‚ÄĚ
This article originally has been edited to accommodate the scope of QuickRead.¬† To view the entire article, please refer to the September/October 2016 issue of The Value Examiner.
 Scarfo Sr. died on January 14, 2017 while serving a 55-year prison sentence at a federal medical center in North Carolina. ¬†He was 87.
¬† According to the bylaws, the company was based in Nevada, but doing business in Dallas, Texas.
With Martin H. Abo, CPA, CVA, ABV, CFA, CFF, and Nancy McCarthy, Senior Editor of The Value Examiner.
Martin Abo is founding Member of Abo & Company, LLC and Abo Cipolla Financial Forensics, LLC. Both offices are in Mount Laurel, N.J. He has comprehensive experience in individual and corporate financial, business, and tax planning. His previous experience includes several years with the tax department and audit staff of a Big Four CPA firm as well as regional firms before he founded the present enterprise.
Mr. Abo can be reached at (856) 222-4723 or by e-mail to Marty@abocompany.com.