When Recovery Cost Exceeds Loss

The aftermath of a library bid-rigging scam illustrates how a success in the eyes of prosecutors may yet result in an extended loss for the victimized organization. As the most recent coverage of this local story by the Sacramento Bee indicates, “Prosecutors want a receiver to look into two houses, two rental properties, seven cars and more than 20 bank accounts in search of $815,000 they say was looted from the Sacramento Public Library Authority by three people, including two former library officials, who were convicted last year in a kickback scheme.” (Details available at http://www.sacbee.com/2012/05/12/4484789/sacramento-library-attempts-recoup.html)

The story of the event is an old, if unremarkable, tribute to avarice. Two public servants abused their respective positions of facilities director and security director to operate a scheme where they rigged bids for contracted work to pad prices in exchange for kickbacks. A third crony, the security director’s wife, operated the billing service which generated padded invoices. The case itself took five years to wind its way through the legal system, resulting in criminal convictions for all three crooks. Meanwhile, at the first hint of being exposed, one of the crooks, the facilities director, did his best to transfer his assets into a trust that would provide at least some insulation from legitimate efforts of the victimized library system to recover its stolen funds.

So far, so good. Authorities who followed up on the whistle-blower information that led to the arrest and conviction of the crooks in question may declare victory and administer well-deserved pats on the back for their public service. This service contributed to the larger public security objective of proving that crime does not pay and of criminal convictions that are sending all three embezzlers to jail for several years. Why, then, would the taste of victory elude the victimized library system? The answer lurks towards the end of the article in a little note about the cost of hiring a receiver to facilitate asset recovery.

At $300 an hour, the receiver’s billings may easily eclipse the library’s losses – regardless of whether this effort ends up yielding all or even a portion of the original $815,000. Calculate it this way. Receivers exercise significant authority in administering the affairs of the entity or interests assigned to their care. Their work can and does frequently extend over years, not hours or days. If a receiver is an attorney or judge, $300 looks like a good deal, as billing rates go. However, what has to happen for this work to bear fruit? Someone has to track down assets, which often begins with the more mundane kind of search in which certain investigators and court-records experts specialize. In this particular case, there may well be enough work to employ two people at half-time for a year. This works out to 20 hours per person, times 2, for at least 50 weeks. And this is a conservative projection, amounting to 2,000 hours. Such talent may normally charge $75 an hour, but expect the billing rate to remain $300, which brings the working total to $600,000 in billable fees for just the first year. But wait, there is more. The attorney or other senior individual overseeing this work must also bill to this effort – legitimately so – for things like case management and directing of searches, interpretation of results, and ongoing reporting to the court that appointed the receiver in the first place. Conservatively, then, this means at least another 20 hours per month for case management at $300 an hour. This makes up another 240 hours (or $72,000) to add to the working total. Result? The first year ends up costing at least $672,000 – regardless of how much of the original $815,000 has been recovered. The more complicated the sheltering of assets by the crooks, the more difficult and time-consuming it will be for the receiver to lay hands on them. Consequently, this process is likely to extend well past one year. Look at how long it took to get to this point from the initial legal action in 2007. At this rate of work and expenditure, by the end of Year 2, the recovery process may well have cost $1,344,000 (which is $672,000 times 2) for an unguaranteed recovery of $815,000.

Alternatively, one can argue that it would have been much more cost effective for all individuals involved in library facility contracting to have done their jobs properly, including paying close attention to contracting and independent periodic audits to detect early signs of foul play. If the people who should have done this did not perform this function, then they were stealing their paychecks. And one could argue that they owe the library system recompense. Perhaps it would be too impractical or too difficult to seek this form of restitution. How about garnishing the retirement checks of the two library officials while they are serving time? If they have comfortable public pensions (since both are now at least 65), then the incarcerated facilities director and security director could well be receiving annual payouts of $100,000 or more. Given their prison sentences of 5 and 14 years, garnishing these pensions while the two directors serve just 10 years between them as guests of the state would average $500,000 from each, with a total of $1,000,000. This sum represents almost $200,000 more than the amount of the loss they inflicted. Under the circumstances, it would appear more beneficial to the victimized library to go after the pensions this way than to take on the uncertain return of receivership.

It may feel better to undergo the travail of retrieving ill-gotten gains of these crooks, but the effort may be out of all proportion to the expense. Alternatively, the more unspectacular option of finding a way to garnish their pensions – even if only for the time that they spend behind bars – would yield better and more certain returns. Either way, the societal message remains transmitted that this crime did not pay after all.

-- Nick Catrantzos