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Archive for Monday, August 9, 2004

Topeka district pursuing $515K stolen in scheme

Audit team studying ways to prevent future scams

August 9, 2004

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— As the Topeka school district sues to recover more than $500,000 lost to an international check fraud scheme, a state audit team will study how Kansas' 300 other school districts can be protected against similar scams.

Public inquiries prompted Unified School District 501 to announce last month that it filed suit March 10 in Shawnee County District Court against U.S. Bank, which administered the district's checking account.

There is no claim that anyone in the school district or the bank participated in the scam. Rather, the lawsuit asserts that the bank negligently processed checks with outdated signatures and inaccurate numbers. The bank has not commented publicly.

In all, 17 counterfeit checks -- deposited at banks in China, Hong Kong, Latvia and elsewhere -- were posted against the district's account from May 2001 through December 2003. The checks were replicas of those used by the district and ranged in amount from $9,852 to $64,918, for a total $554,000.

Embarrassing situation

Topeka Schools Supt. Tony Sawyer acknowledged last week that the episode had hurt the district's image. The lawsuit was publicly revealed shortly after the district cut $5 million in programs and staff for the upcoming next school year.

"We made some mistakes. We're not hiding anything," Sawyer said. "We're trying to ensure we get back as much of the dollars that were lost in this process as humanly possible."

At the request of Shawnee County lawmakers, the Legislative Division of Post Audit agreed Thursday to join the Topeka Police Department and the Federal Bureau of Investigation in looking into the case.

"We'll look at things like, what are their normal procedures for essentially reconciling their check book? And then, did they follow them? If not, why not?" said Barb Hinton, a legislative post auditor.

Hinton said an audit team also would assess what procedures should be in place to expose any similar scams in the state's 300 other districts.

Detailing checks

The Topeka district was reimbursed for one phony check that was discovered in 2002, still leaving a loss of about $515,000. The district has been able to collect only about $25,000 in insurance money.

According to court documents, district officials and attorney Ed Bailey, who is representing the district in the lawsuit, at least five of the counterfeit checks were made out to Best Grade Trading Ltd. of Hong Kong, including one for $15,269.74 posted against the school district's account in August 2001.

In August 2002, a check originating in Shanghai, China, for $38,249.60 caught the attention of the Wachovia Corp., an agent for Mercantile Bank of Topeka, a predecessor of U.S. Bank Corp. Contacted by Wachovia three months later, the district identified the check as a forgery.

But several more phony checks were posted against the district's account over the next 13 months, according to the suit.

Mike Jones, the district's general director of fiscal services, said he alerted Topeka police and the district's auditors to the scam after it became apparent in November 2003. He said the fraud became known when an accountant who had previously reconciled bank statements left the district and other employees took over that responsibility.

District mistakes

A district audit prepared by an outside firm faulted the district for not reconciling bank statements in the 2002-2003 school year.

Sawyer said the district's former accountant apparently had attributed the fraudulent checks as being outstanding checks when balancing monthly statements. The district writes thousands of checks in a month and typically has $1 million to $5 million in outstanding checks each month, Jones said.

"You can hide a substantial amount of money in $5 million of outstanding checks," he said.

Since the scheme emerged, Jones said, the district has moved its checking account to Commerce Bank.

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