ALBANY — This weekend marks the one-year anniversary of the collapse of one of the biggest fraud schemes in Capital Region history.
Kiting money between an array of companies he controlled including MyPayrollHr in Clifton Park, Michael Mann, 50, of Edinburgh caused more than $100 million in losses to hundreds of businesses and individuals, triggered an array of lawsuits, and left a complicated tangle for authorities trying to find money for victims’ restitution.
In its final days, Mann’s sleight of hand reached a fevered pace, with more than $1 billion worth of rapid-fire transfers among his legitimate, semi-legitimate and shell companies in August 2019 alone.
Mann last month pleaded guilty separately to state and federal charges that could net him eight to 24 years in state prison and multiple terms of up to 30 years in federal prison. The length of the prison terms and whether they will run concurrently will be determined by the judges in the respective cases.
Of greater interest perhaps to the people and businesses victimized by Mann is the $101 million in restitution he will be ordered to pay.
The U.S. Attorney’s Office for the Northern District of New York this week said more than 1,000 victims have contacted investigators. But how much money they will see is far from certain.
After Mann's guilty plea, his attorney said he didn’t have that much money. Prosecutors say Mann recycled much of the $101 million into his failing businesses, and it is believed to be gone. About $15 million has been seized in various accounts controlled by Mann but the chances of recovering the rest are questionable.
Also, the Internal Revenue Service has dibs on about $7 million that was withheld from employees’ paychecks for income tax but never remitted to the federal government as such.
And finally, the definition and degree of victimhood is determined by federal law, not by dollar amount of loss.
A business that failed at great cost to its owner because of Mann’s actions could claim a loss equal to the money Mann took, for example, not an amount equal to the value of the ruined business or the amount of resulting expenses. In another example, an employer who had to cover taxes withheld from employees is no longer a victim if the IRS is successful in prying loose that tax money from one of Mann’s accounts.
So Mann’s guilty pleas are not the end of the ordeal for his victims.
And they may not be the end of the criminal prosecution, either. One of Mann’s co-conspirators pleaded guilty in February. But another co-conspirator known to authorities has not been publicly identified or charged.
The U.S. Attorney’s Office would not say whether conspirator No. 3 — or anyone else — is likely to be charged. Nor would it say whether authorities think there are additional crimes and/or perpetrators yet to be uncovered. The plea deal precludes further charges against Mann based on the incidents he pleaded guilty to but does not preclude his being charged on other matters.
It has been a heavily re-active case for investigators and prosecutors — they did not start it based on leads they developed, they reacted to the situation being revealed by chance.
Banks froze Mann's accounts, the scheme was exposed, authorities swung into action, Mann very quickly sat down with federal investigators and laid out the details, one of the co-conspirators came in then almost immediately pleaded guilty, and Mann pleaded guilty without being indicted.
How long the scheme would have continued if the banks hadn't exposed it can only be speculated, prosecutors say; where the investigation goes now is something prosecutors won’t discuss.
State and federal prosecutors laid out details of Mann's crimes in court documents and news releases as the case against Mann and the co-conspirator progressed to the point of guilty pleas. The following summary is excerpted from these sources:
Mann operated ValueWise Corporation and numerous subsidiaries including MyPayroll. These subsidiaries ranged from legitimate and quasi-legitimate businesses to shell and shelf companies. (Shell companies serve as a vehicle for business transactions but have no real assets or operations; shelf companies are entirely dormant, created in case their owners suddenly need a legal business entity in the future.)
By kiting money — moving it rapidly among more than 35 separate accounts, sometimes hundreds of times per week — Mann was able to make it appear lthat he had more money than he did.
By creating bogus invoices for the various companies, Mann made it appear his accounts receivable were much larger than they actually were. Based on this, three financing companies in New York, Colorado and California loaned Mann tens of millions of dollars and Pioneer Bank (later joined by Berkshire Bank and Chemung Canal Trust Co.) issued a line of credit that grew from $2 million to $42 million from 2009 to 2019.
One of the co-conspirators — Luke Steiner — was involved in this effort through his position at OptumInsight in Minnesota, vouching that the invoices were legitimate. The third co-conspirator, who previously worked at OptumInsight, went to work for ValueWise in 2013 and helped Mann recruit Steiner for the scheme.
It became a vicious cycle: Mann used the banks' line of credit to repay the loans from the financing companies and used the loan proceeds to pay down the line of credit, repay other debts and cover operating expenses.
Mann also misled Bank of America N.A. to obtain corporate credit card services to, among other things, meet expenses and perpetrate his fraud scheme. Bank of America was left with $850,000 in unpaid credit card bills when the scheme collapsed.
MyPayroll contracted with Cachet Financial Services of California to electronically transmit payroll dollars from MyPayroll’s business clients to their employees’ bank accounts through the ACH, or Automated Clearing House.
Mann changed the ACH files that MyPayroll provided to Cachet so that payroll funds were deposited into accounts he controlled at Pioneer, then used those funds for his own purposes. Mann routinely also misappropriated money withheld from employee paychecks for income tax that was supposed to be paid to local, state and federal taxing authorities.
In 2015 Cachet detected Mann was routing payroll through his personal accounts at Pioneer. He told Cachet he would stop. He didn’t.
The collapse started in the last days of August 2019.
On or around Aug. 30, 2019, Pioneer and Bank of America halted outgoing transfers from Mann’s accounts, freezing payroll funds in the process. As a guarantor of those funds, Cachet was required to pay $7.22 million in payroll to employees of MyPayrollHR’s clients.
At approximately the same time, as Mann was kiting funds to sustain his fraud, he submitted a transfer order for $19.2 million to Cachet, which distributed the money to his accounts at Pioneer and Bank of America, and the accounts of those to whom he owed money. When Cachet attempted to debit that money, it could not because Mann’s accounts were frozen.
When the scheme went off the rails, it imploded rapidly, and in a more publicly visible manner than many white-collar crimes, because so many people’s weekly paychecks disappeared.
MyPayroll notified clients Sept. 5 via email that it could no longer process payroll payments and abruptly ceased operations.
Word spread rapidly as business owners and their employees took the impact — The Daily Gazette, Times Union and Albany Business Review each published their first stories on the situation online Sept. 6.
Cachet greatly exacerbated the situation by attempting a clawback of direct-deposit paychecks when it realized what had happened to the $7.2 million. In some cases, it initiated multiple clawbacks of a single paycheck due to a technical glitch, draining the bank accounts of these employees.
Prosecutors say Mann admitted to the scheme in an interview Sept. 10 and was arrested two weeks later.
Lawsuits flew after the scheme was shut down and revealed. Employers and workers sued MyPayroll and Cachet, Cachet sued MyPayroll, an insurer sued MyPayroll, Berkshire and Chemung sued Pioneer, Pioneer sued MyPayroll.
Cachet later filed for Chapter 11 bankruptcy protection.
Most recently, the U.S. Department of Justice took Pioneer to court to get an accounting of — and to seize with accrued interest — what it expects is about $7.3 million worth of income tax money withheld from paychecks issued by more than 800 employers who contracted with one of Mann’s companies for payroll services. The money was never Mann’s, so he could not use it as collateral for his line of credit, so Pioneer can’t hold onto it to limit its loss, the feds say.
Mann pleaded guilty Aug. 12 in federal court to nine counts of bank fraud and one count each of conspiracy to commit wire fraud, aggravated identity theft and filing a false tax return. He resolved the state investigation by pleading guilty to a single count of money laundering in Saratoga County Court on Aug. 25.
As part of his federal plea, he will forfeit $14.8 million in three Bank of America accounts, 30,000 shares of Pioneer stock, and a 2020 Jeep Gladiator.
Mann will also face a monetary judgment of $101.04 million in restitution to allocated among the three financing companies ($3.06 million, $4.13 million and $9.91 million); Bank of America ($850,545); Berkshire, Chemung and Pioneer ($35.84 million total); and parties to be announced at his federal sentencing ($47.25 million).
But as prosecutors noted, this $101 million is mostly gone, and there is no certain prospect of getting it back in the near future to distribute to victims.
Nonetheless, the state Attorney General’s Office urged that anyone defrauded by Mann and his entities who has not yet been made whole contact the New York State Police Financial Crimes Unit by email at [email protected]
Meanwhile, Steiner, who pleaded guilty Feb. 5 in federal court to one count of wire fraud, faces up to 20 years in prison when sentenced March 25, 2021. He also faces an order for $12.79 million in restitution and a monetary judgement of $11,300 — which is the value of Amazon gift cards that Mann sent him from December 2017 through August 2019.