In the previous post, I left off by saying that Keadle Lumber’s wood procurement system included most of the business controls I would recommend for procurement. But you may also remember that Keadle Lumber suffered millions of dollars of losses in their fraud case.

How did that happen when it seemed their business control environment was secure? Were there any warning signs or red flags that could have alerted Mr. Keadle to cracks in his procurement system?

Let’s briefly remind ourselves of the way work was done in Keadle’s operation. We’ll start with Joe Garrard’s duties. If you recall, Garrard was in effect a one-man wood procurement department with two helpers working for him that assisted in cruising and managing the logging force. As the man in charge, he submitted tract purchase information to his boss, Mr. Keadle, in order to get checks to purchase timber. Garrard also coordinated where and when tracts were cut and he directed his loggers on what information to submit at the scale house while unloading. This allowed him to move “on paper” wood from one tract to another, a practice known as kiting. In layman terms, kiting is often thought of as “robbing Peter to pay Paul.”

Now, with that background in mind, let’s review this case some more to determine how the fraud was conducted, how the scam was finally exposed and the warning signs that would have stopped the problem much sooner.

How did the Fraud Work in This Case?

To pull this off, Garrard did not work alone.

Over the years he enlisted the help of timber buyers, wood dealers, secretaries, attorney’s, and loggers to assist him in shaking money out of the Keadle Lumber supply chain. In the end, thirty-three indictments were issued in this case, including the one for Joe Garrard. Over the course of his 14-year employment at Keadle, Garrard persuaded thirty-two others into taking part in a fraud while purchasing or selling timber. Mostly, because it benefited them or their companies to participate.

Garrard utilized a variety of fraud games and each of the players had their role in at least one of the games. Here are some examples:

• In some cases, the game consisted of Garrard selling Mr. Keadle’s standing inventory to other companies and pocketing the proceeds himself.
• In other cases, Garrard sold timber to Keadle Lumber from landowners that did not actually exist except on the fraudulent timber deed contracts submitted to Mr. Keadle.
• In other cases, timber was stolen from landowners without their knowledge. The mills purchasing the wood were duped into paying Garrard or a conspirator of his who would then pay Garrard a kickback.
• In other instances, timber was stolen from landowners by Garrard underestimating the tract’s actual value. The actual values would then be harvested and that “extra timber” would be kited to other tracts where Garrard needed to cover losses or where he could get a kickback.

In short, if you can think of a fraudulent game, it was being exercised by Garrard and his fellow crooks.

Not only were they stealing timber by fraudulent means, they were buying influence by hosting extravagant parties for local attorneys, law enforcement personnel, judges, timber dealers and logging contractors including hiring prostitutes for the parties. In addition, his preferred timber dealers were using straw buyers to provide the illusion of competition, when in fact the same dealers were behind the timber deals.

How did the scam finally get exposed after 14 years?

As you may recall, it took a natural disaster in another state to expose the games being played. With the threat of a potentially dangerous hurricane, Mr. Keadle was motivated to reduce his standing inventory in an effort to mitigate his potential losses if a hurricane struck his property.

In that process, he asked a lot of questions and inadvertently forced Mr. Garrard into a confession. There was no suspicion on his part that anything fraudulent was happening and no planned investigation to uncover theft. It was just by chance he realized the problem.

Warning Signs or Red Flags of Collusion

I’ve gotten a few questions asking if there were any red flags or warning signs present in Keadle Lumber operations prior to the discovery of the fraud? As it turns out there were warning signs.

Here’s a partial list:

1. Delays in getting contracts signed and recorded. Mr. Keadle’s records indicate that many times it would take weeks to have a contract recorded and returned to the file.
2. Timber tract sheets and contracts were missing from the files. Office staff reported this and suspected Garrard of removing them.
3. Complaints from loggers of improper mileages and changing of the miles on the timber tract sheets.
4. Hardwood or Pulpwood being delivered from tracts that had no such wood types on the cruise summary listed in the timber tract sheets.
5. Changing of tract names on the scale tickets well after the timber had been delivered.
6. Moving loggers frequently and having more than one logger on one tract.
7. The discovery that a logger had sold some pulpwood in his own name which was against Keadle policy.
8. Numerous tracts showed they had been partially cut on the standing inventory reports.
9. A steady increase in the standing timber inventory approved by Mr. Keadle because of Garrard’s representation of the purchase prices.
10. Tract locations were steadily getting farther from the mill increasing the freight costs and management problems because of logistics.

Many times, over the years, Mr. Keadle’s office staff would report these discrepancies to him. Mr. Keadle would then question Garrard and each time Garrard was able to provide “logical answers” that Mr. Keadle accepted. Usually he would blame the loggers for not reporting things properly and that would be the end of the discussion.