On Friday, December 16, 2016, James Carey, 49, a CPA and owner of Carey & Company was indicted by federal grand jury on December 14, for filing an income tax return failing to report as income $594,217.19 that he had embezzled from an insurance company client. Carey & Company is a forensic accounting firm supplying accounting-related services to insurance companies for claims. After his indictment, Mr. Carey was arrested on December 16, 2016, on a warrant issued on the indictment and brought before a federal magistrate to plead to the indictment.
Mr. Carey and his company were forensic accountants providing insurance support services
Forensic accountants are a relatively recent addition to the arsenal of professionals that insurance companies may use in assessing complex losses. Loss of business income is the classic area where an insurance company might engage a forensic account to value the projected loss payment. In many cases, the forensic accountant adds insurance contract knowledge to their accounting and financial analytic skills with an ability to justify their opinions in contested claims before referees, arbitrators or juries.
Mr. Carey’s company, Carey & Company, which for a number of years was located at the offices in the Faneuil Hall Marketplace described itself as a:
…a multi-service forensic accounting and certified public accounting firm with a staff of professionals who have many years of experience providing insurance support services. We strive to provide accurate, reliable, and timely service to our clients. We aim to assist our clients in the most cost effective means possible.
Monies held in escrow used in business and to reimburse other escrow accounts
One of the services forensic accountants may provide to insurance companies relates to escrow accounts involving funds on claims that might include expense allocation among multiple insurers or parties.
As alleged in the indictment, Carey & Company administered escrow accounts on behalf of insurance companies. Payments could be made for claim related expenses on behalf of the insurance companies from these accounts. In November 2009, a client company of one of the insurance companies sent Carey & Company a payment of $594,217 intended for an insurance company, that the indictment only identified as “Insurance Company 1.”
Mr. Carey’s company was to act as the intermediary that was to hold the money intended for the insurance company in escrow. However, following the receipt of the payment into an account administered by Carey & Company for the benefit of the insurance company, Mr. Carey transferred almost all of this money out of the account between its receipt in November 2009, and March of 2010, for other purposes, including:
- A $100,000.00 payment to Carey & Company’s business and operating account.
- Approximately $330,000.00 to an unrelated bank account that Mr. Carey was administering for a separate group of insurance companies.
- An additional $114,000.00, in January 2010, from Insurance Company 1’s escrow account to Carey & Company’s business account..
- A final $50,000.00 payment to another unrelated bank account that Mr. Carey administered for additional separate group of insurance companies.
The charging statute provides for a sentence of no greater than three years in prison, one year of supervised release and a fine of $100,000. Actual sentences for federal crimes are typically less than maximum penalties. Sentences are imposed by a federal district court judge based on the U.S. Sentencing Guidelines and other statutory factors.
Internal Revenue Service considers embezzled funds as taxable income to the embezzler
The money Mr. Carey misappropriated from Insurance Company 1 was money that Mr. Carey failed to report as income on both his U.S. Individual Income Tax, Forms 1040, and U.S. Income Tax Returns for S Corporations, Forms 1120S, for 2009 and 2010.
It may sound strange, but the Internal Revenue Service requires the reporting of money required by illegal means such as, in Mr. Carey’s case embezzlement on the embezzler’s tax return. IRS Publication 17, that advises tax payers on what and how to report their income, has an extremely detailed section on “Other Income” that lists a number of items for other income such as: “bribes”, “dealing illegal drugs” or “stolen property.
The IRS publication advises that:
If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to the rightful owner.
The publication then helpfully advises that these illegal activities should be placed on Item 21 of a person’s 1040 tax return as “Other Income (See IRS Form below).” Unfortunately, the IRS does not publish any indication of how many criminally inclined taxpayers fess up and pay taxes on their ill-got gains.
Axis Specialty and LLoyd’s of London sued Mr. Carey and his company in 2012 for failing to return escrow funds
A Suffolk Superior Court suit, that Agency Checklists found, seems to indicate that Mr. Carey had a problem with handling insurance company escrow funds.
Whether Insurance Company 1 ever recovered its $574,000.00 from Mr. Carey or his company does not appear in the court papers for the charge against Mr. Carey for filing a false tax return. However, the moving of money from one of Mr. Carey’s account to another may explain a 2012 civil suit brought by three insurance companies: Access Specialty Limited Insurance Company, Certain Underwriters at Lloyd’s of London; and Axis Reinsurance Company.
In this May 2012 Superior Court suit in Boston, these three insurers filed a verified complaint seeking an emergency temporary restraining order and preliminary injunction against Mr. Carey and Carey & Company, P.C. transferring any assets and the recovery of $219,351.34 that supposedly remained in an escrow account the insurers had entrusted to Mr. Carey and his company for a claim..
In 2008, Mr. Carey had agreed to act as an escrow administrator for several insurers to pay litigation expenses involved in a suit in New Orleans with multiple insurers. The funds had been paid in escrow for Mr. Carey to monitor the account, to remit payments to experts and other fees, to audit invoices submitted for payments to ensure the reasonableness of the expenses, and to provide an accounting of the funds.
In March 2012, Mr. Carey’s companies informed the insurers that they were withdrawing as manager of the escrow account they advised. As a result, they would forward an accounting of the remaining balance in the account which was represented by Mr. Carey to total $219,351.34.
After repeated promises and the delivery of a check drawn on Mr. Carey company’s account for $219,351.34, which was returned due to insufficient funds, a partial payment of $21,935.00, insurers claimed that at least $197,416.34 of the funds in the escrow account were negligently administered and improperly converted.
The companies suing claimed Mr. Carey and his company had diverted the escrow funds, without authorization and converted the funds to purposes other than those which had they had entrusted the defendants to hold. Mr. Carey and his company never filed an answer to the complaint, but instead requested and obtained several extensions from the court. During these periods of extension, the parties to the suit apparently resolved the unpaid escrow issue as approximately five months after filing the suit, in November 2102, the insurance companies reported to the court the matter as settled. Soon after the report had been filed with the court, the insurance companies filed a voluntary dismissal of the suit with prejudice.
Three year jail sentence and $100,000 fine
The charge of Making and Subscribing to a False Tax Return carries a sentence of no more than three years in prison, one year of supervised release, and a fine of $100,000. The actual amount of the false statement as alleged in the indictment was that Mr. Carey and his wife’s joint taxable income in 2009 was $403,770, when in fact, as the return should have shown approximately $300,000 in taxable income resulting from the monies converted from Insurance Company 1.
