Tuesday, October 27, 2020

MyPayrollHR ex-CEO Michael Mann pleads guilty to $100M fraud

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Former MyPayrollHR CEO Michael Mann pleaded guilty to federal charges on Wednesday, admitting to an elaborate and decade-long swindle of banks and finance companies across the country that caused the collapse of his payroll processing business.

The massive scheme left thousands of workers across the country without paychecks and Mann’s lenders struggling to survive massive financial losses totaling more than $100 million.

Mann faces anywhere from 17 years to 32 years in federal prison under sentencing guidelines, although his attorney Michael Koenig will argue for a much shorter time.

Mann will also be ordered to pay $101 million in restitution to his victims.

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Mann pleaded guilty Wednesday to 12 charges, including bank fraud, wire fraud, identity theft and filing false tax records, as part of an agreement with federal prosecutors. The 50-year-old Edinburgh man agreed to waive his right to have the case presented to a grand jury.

“The object of the conspiracy was to obtain tens of millions of dollars in loans from (lenders) by misrepresenting the financial condition of Mann’s companies,” the charging document filed with the court Wednesday states. “Mann then used the fraudulently obtained loans to operate his companies and enrich himself.”

Mann, who has never spoken publicly, said little in court, mostly answering “yes” or “no” to questions from the judge.

U.S. District Court Judge Lawrence Kahn, who set Mann’s sentencing for Dec. 10 and allowed him to remain free on bail, will have the final say on how much time Mann spends in prison.

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The abrupt shutdown of MyPayrollHR last September left thousands of people around the nation missing paychecks and facing negative bank balances, as well as tax bills for unpaid payroll taxes.

In a 12-page document outlining the charges Mann was facing, prosecutors outlined a virtual pyramid scheme that Mann perpetuated by giving his bankers fake financial documents, creating bogus companies, diverting payroll money into his own accounts and even impersonating a business partner.

And while the collapse of Mann’s payroll company and the loss of paychecks by thousands of workers across the country have grabbed all the headlines of the case, that was only the tip of the iceberg for Mann’s scheme, which involved a much-larger attempt to trick lenders across the country into giving him millions of dollars in loans without providing any real collateral.

The missing payroll payments ended up being part of a last-ditch attempt by Mann to seize money to repay his lenders and to keep them from uncovering his fraud.

It didn’t work.

Prosecutors with the U.S. Attorney’s office in Albany say Mann, who earned an MBA from the University at Albany and owned a consulting company called ValueWise based in Clifton Park, began the scheme in 2013 during a period when he was creating and acquiring many different companies to try and expand ValueWise. That included the legitimate purchase of MyPayrollHR.

The key driver of the fraud was Mann’s creation of fake invoices that showed his companies – some of which were fake or didn’t have any revenue – were owed millions of dollars in consulting fees by other companies.

Those invoices could then be used by Mann to obtain millions of dollars in loans from finance companies that used the invoices – and the cash flow they appeared to represent – for collateral.

But Mann didn’t need to just create fake invoices to fool the bankers.

He also needed a company that would verify the invoices and show his lenders that his companies indeed were owed millions of dollars in consulting fees.

That company was Optum, a subsidiary of the Minnesota health insurer UnitedHealth Group, although the company’s name was unwittingly used by Mann without its permission.

Mann, who did actual consulting for Optum at the time, hired an Optum employee in 2013 to come work for ValueWise. That person, who prosecutors only identify as a co-conspirator No. 3, introduced Mann to a 20-something Optum employee named Luke Steiner who would verify the fake invoices with two of Mann’s financing companies that were located in New York and Colorado. Prosecutors did not reveal the two firms’ names.

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At one point, Mann impersonated Steiner using a fake email address to obtain a loan from a third financing company in California.

The three loans were in the “tens of millions of dollars,” although the charging documents against Mann do not reveal the exact amount. Mann still owes those three firms a total of $17 million.

Mann compensated Steiner for his role in the scheme with $11,300 in Amazon gift cards.

Steiner, who pled guilty to wire fraud in February, is set to be sentenced in September. He faces up to 20 years in prison.

Meanwhile, Mann couldn’t repay the loans from his lenders because his companies were not actually being paid millions of dollars in consulting fees from Optum.

So Mann started tapping into a revolving line of credit that he had established with Pioneer Bank in 2009.

Back then, the line of credit was for $2 million. In order to increase that line of credit so that he could borrow more money to pay off his other loans, Mann went back to his fake invoice ploy and created new fake companies that would issue fake invoices that alleged consulting not only for Optum, but also nationally known companies like 3M, Best Buy and T-Mobile.

As a result, Pioneer increased the line of credit to $15 million in 2015. Berkshire Bank and Chemung Canal Trust Co. later came on in stages to go in on the loan with Pioneer, increasing the credit line to $42 million by August of 2019.

Mann also admitted to using corporate credit cards he had obtained from Bank of America to repay his lenders.

The most visible of Mann’s schemes happened in late August of last year when Mann needed cash to pay down his line of credit with Pioneer. He diverted payroll funds from MyPayrollHR client companies away from his electronic payments firm, Cachet Financial Services, to his own account at Pioneer.

Cachet was the company that would deposit the payroll into the accounts of the employees. But when Mann diverted the money away from Cachet to himself, those employees – at more than 1,000 companies – didn’t get paid. Cachet later repaid those workers $7.2 million in lost pay and has since filed for bankruptcy.

Documents filed with the court by prosecutors reflect that Mann largely kept the fraud going to pay off his loans, which he had sought to fund legitimate ventures and business operations in some cases.

The documents do not describe any of the personal purchases Mann might have made with the loans, although he is required to forfeit $14 million he holds under the name of his companies in various Bank of America accounts. He also has to forfeit 30,000 shares of Pioneer Bank stock and a black 2020 Jeep Gladiator, both of which he purchased in July of 2019.

Mann also diverted $3.8 million in payroll tax money from the clients of MyPayrollHR and another payroll firm that Mann owned in Oklahoma to his Pioneer Bank account, also to try and pay down his line of credit with his banks.

The demise of Mann’s companies sent shock waves through the banking community. Pioneer Bank told federal regulators that it faced the loss of millions of dollars due to potentially “fraudulent activity” related to MyPayrollHR’s collapse. Berkshire Bank last year reported it expected to lose up to $12 million due to “fraudulent activity” by Mann.

After Wednesday’s plea hearing, Koenig, Mann’s attorney, held an impromptu news conference outside the courthouse, explaining how his client has been cooperating with federal prosecutors for a year now to help them understand the scheme. Mann, who stood off to the side, did not speak.

Koenig said he planned to submit a memorandum to Kahn that would present another side of his client to the court. He said that although sentencing guidelines would put Mann behind bars for as many as three decades, those guidelines are only advisory and no longer mandatory after a 2005 Supreme Court decision.

Koenig said his sentencing memo would lay out reasons to “mitigate,” or reduce, the potential prison term that Mann should face.

“Judge Kahn can do whatever he wants,” Koenig said. “We’re going to give (Khan) a much more complete and broader picture of Michael Mann and his life.”

When asked how Mann would repay $101 million to his victims, Koenig replied that Mann didn’t have that much money available.

“He is going to do what he can,” Koenig said.

As part of the plea agreement with the federal government, Mann also agreed to plead guilty in Saratoga County Court to one count of money laundering. The charge was brought by the state attorney general’s office.

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