Each day, thousands of audit and payment firms process millions of transactions for billions of dollars in freight bills. Most of these go off without a hitch. The carrier cuts an invoice, the freight charges are reviewed for accuracy, legitimate discrepancies are addressed and usually resolved, and the audit firm pays the carrier with the funds the shipper has entrusted to it.
But when that trust is broken due to malfeasance rather than incompetence or oversight, the consequences can be devastating. Lives and careers are ruined. Companies operating for decades are destroyed almost overnight. Long-standing relationships are irreparably ruptured. And an industry's reputation takes a nasty hit.
In a span of less than 30 days this spring, two audit and payment firms with a combined 80 years in business and that handled an estimated $20 billion to $25 billion in annual freight spending filed for bankruptcy protection. The firms, Greenville, S.C.-based Trendset Information Systems and Branchburg, N.J.-based TransVantage Solutions Inc., shared two characteristics: Both are accused of diverting or embezzling more than a combined $100 million in shippers' funds that were due their carriers. And both companies, and the monies that vanished with them, aren't coming back.
On June 14, just two months after its April 15 bankruptcy filing, Trendset, a 28-year-old firm that processed 90 million invoices a year worldwide, was acquired by AFS, a Shreveport, La.-based firm, for the fire-sale price of $1.1 million. The transaction was handled under Section 363 of the federal bankruptcy code, which allows for an expedited auction of firms with distressed assets.
TransVantage, founded in 1964, filed for protection May 3 under Chapter 11 of the federal bankruptcy code. However, on May 29, Alfred T. Giuliano, a trustee appointed by a federal bankruptcy court in New Jersey, asked to convert the case to a Chapter 7 liquidation. According to court records, Guiliano said TransVantage has no funds to continue business and there is no reorganization for him to propose.
According to documents, TransVantage listed about $71.2 million in assets against $41 million in liabilities. But $71 million of that asset base is pegged to what is seen as a highly dubious claim against its largest creditor, industrial giant Johnson Controls Inc. (JCI). JCI, for its part, sued TransVantage, saying it was defrauded to the tune of $17 million over a multiyear period. The bankruptcy filing stayed JCI's petition, however. JCI has also lodged a $15 million claim against TransVantage.
The narratives seem torn from the scripts of the popular cable television show "American Greed." At Trendset, shipper funds earmarked to pay carriers were instead allegedly used to fund lavish lifestyles of top executives, including its CEO. Court records show that about $62.5 million of shipper funds due their carriers were never paid.
At TransVantage, the scam involved an alleged money float that went on for nearly two decades to conceal a perpetual multimillion dollar balance sheet shortfall. Its president, Shirley Sooy, seemed to be unaware of the alleged deficiency until 2010, when she took over the firm upon her husband's death, according to court papers.
However, Sooy told employees at Ernst & Young, which conducted an on-site examination of TransVantage, that the shortfall existed as far back as the mid-1990s, and that JCI's funds were used from then on in an effort to fill the hole, court records show.
Early in 2013, JCI was told by some of its truckers that they weren't being paid, court records show. JCI then required TransVantage to establish an account controlled by Johnson, according to court records. At that point, the scam began to unravel.
The Trendset scandal is leavened with tragedy. Julie G. Tucker, a 15-year employee who left in 2011 as director of administration, admitted in court to using shipper funds over a 15-month period to finance an opulent lifestyle for herself and her husband, James, a former employee of the U.S. Department of Homeland Security. On April 11, Julie Tucker was sentenced to 33 months in federal prison on two counts of filing false income tax returns and one count of wire fraud. She was also ordered to pay more than $590,000 as restitution to Trendset.
Tucker, who had access to Trendset's accounts and was authorized to write checks and make wire transfers, testified at her trial that she followed the leads of CEO Gary Selvaggio and his brother Mark, a principal of the company, according to court records. The brothers used shipper funds to buy stocks for personal gain; to purchase real estate and expensive cars; to fund country club fees and vacations; and to pay the mortgage of their late mother, according to her testimony. All of this was concealed from Trendset clients, court records show.
On May 2, Mark Selvaggio was found dead at his home, reportedly from a self-inflicted gunshot wound.
IS IT COMMON?
There have been more than a few cases of scamming and stealing since third parties began auditing and paying freight bills in the early 1960s. Still, the scale of the frauds, the size of the two companies involved, and the fact that the bankruptcies occurred so close together have stunned the industry. "We were shocked by this," said Steve Applebaum, CFO of Cass Information Systems, Inc., a St. Louis-based company that is the largest freight billpayer in the nation, processing $22 billion in payments a year.
Applebaum said such massive deception is rare. Others, though, are not so sure. Stephen Craig, managing partner at enVista, a Carmel, Ind.-based firm that generates about one-quarter of its revenue from freight audit and payment services, said that while he hoped incidents like these were uncommon, "I suspect there is more of it than this."
For the dozens, perhaps hundreds, of affected shippers, the legal ramifications are unclear. The freight audit and payment sector is not a regulated entity like insurance. Firms can buy "fidelity bonds" to cover policyholders for losses stemming from fraudulent acts by specific individuals. But the premiums are often too costly for an industry that operates on thin profit margins. Most audit and payment specialists are smaller concerns that handle transactions totaling hundreds of thousands of dollars, not the billions of dollars controlled by players like Cass, US Bank, and enVista, among others in an elite group.
Shippers can't offload the liability to other parties if their payment vendor goes bust. Brokers and third-party logistics firms that arrange the transport generally don't handle invoice auditing and payment, even though they have the capabilities to do so. Charles W. Clowdis, Jr., managing director, transportation advisory services for consultancy IHS Global Insight and who helped manage audit and payment services for 20 years while at Ernst & Young, said many shippers are loath to consolidate a transaction's physical and financial components. Clowdis said shippers often want to use a different company to audit and pay their invoices than the partner that managed the carrier selection process.
As it stands, shippers may be on the hook for double payments as bilked carriers rightfully demand their money. The exception could be if the shipper is a large enough customer to justify the carrier's eating the charges in order to maintain the relationship.
"At this point, I'm not sure if there is any other recourse," said Stephen M. Beyer, an attorney closely following both cases. Beyer said the situation represents uncharted legal territory for the industry.
CONTROLS LACKING OR NONEXISTENT
If anything positive can emerge from the dual fiascos, it's that it may force shippers to take a hard look at a process that many outsource and then put on autopilot. At both vendors, internal controls were nonexistent or, if they were present, routinely flouted. Shippers' funds were commingled instead of being siloed in dedicated accounts, making it easy for those in authority to wreak havoc.
For that reason, reputable audit and payment firms will never consolidate funds for the sake of expediency or out of some misguided sense of efficiency. "We know exactly where all of our accounts stand," said Applebaum.
Multinational companies are complex creatures with many moving parts. As a result, it is simple for an already-outsourced process like freight auditing and payment to fall through the cracks. It took Johnson Controls more than 17 years to uncover the TransVantage scam. The shippers allegedly defrauded by Trendset were unaware of its scam until Gary Selvaggio notified three of them in a March 25 e-mail.
Clowdis said it may make sense for shippers with big-time freight spend to invest in internal payment resources. That way, they retain control of the funds and make payments directly to carriers based on the outside audit reports. Applebaum said, however, he doesn't see much evidence of shippers' switching from a "freight audit and pay" model to a "freight audit to pay" approach. Craig added that while some companies may take their treasury functions in-house in the wake of the scandals, they will eventually migrate back to outsourcing once they realize a reputable third party can perform blended audit and payment tasks more cost-effectively than they can.
A better solution, according to Applebaum, is for shippers to fully vet their partners before engaging them. "You have to know your vendor and understand the controls they have in place" to prevent disasters like these, he said.
Fidelity bonds could give third parties and shippers peace of mind. But it comes at a cost. While at Ernst & Young, Clowdis advised shippers to work with third parties that purchased fidelity bonds. He said many large auditors today have coverage that are at least up to, and often far exceed, $5 million. However, these are big firms handling multi-million dollar accounts that are able to pass on the premium costs through their sizable fees, he said.
Craig said third parties could take some relatively low-cost steps to minimize their risk before considering the bonding option. Establishing separate bank accounts for each customer is a logical move, he said. So is giving shippers "read-only" access to their accounts so they can track the amounts the banks said were paid, and match the figures on outgoing checks with the amounts showing how much was paid with each invoice. The proliferation of online banking has made these visibility tools less expensive than ever to implement, Craig said.
Bonding, if it's used at all, could then be more narrowly targeted at those individuals who would have the authority to pull a scam or to those large accounts where the cost is justified, Craig said.
Effective communications could also be a hefty ounce of prevention. Beyer, the attorney, said shippers need to own part of the process by regularly contacting their carriers to see if payments routed through a freight payment service are going directly to them, and how long, if at all, the funds are being held. "A few days [of delay] does not necessarily indicate a problem, but a few weeks does," he said.
The world of freight payment mirrors the world in general. No one can completely snuff out risks. The best that can be done is to minimize them. As Beyer said: "It is easy to [advise someone] to only deal with reputable companies, but most every company appears reputable until it is too late."
Editor's note: For more tips on how to avoid becoming a victim, see Cliff Lynch's FastLane column "Investigate, analyze, and verify."