You meet your new client in the conference room for an initial interview. Her story has a familiar ring: She’s middle-aged, with two children, a comfortable home and lifestyle, and her husband suddenly announced that he is moving out because he "isn’t happy." He’s a dentist who earns a good living, but she has no idea exactly how good. They have brokerage and savings accounts and a college trust fund for the kids, but beyond this bare-bones understanding, she’s clueless about their finances.
You marshal your weapons of mass discovery, sending out the ususal notices to produce, subpoenas, and interrogatories that seek corporate and individual tax returns, financial statements, pension information, etc. You also take the additional precaution of hiring a trusted private investigator, who runs standard computer checks using the husband’s basic identifying facts-date of birth and social security number-to check for property, business associations, vehicles, boats, and other possible valuables. If you have a substantial war chest, your investigator may check for financial accounts and safe deposit boxes, once again using the industry-standard personal identifiers as the basis for the search.
After the dust settles, you feel reasonably confident that you have a handle on the family’s finances. His income from the professional practice totals around $125,000 annually, with assets in the $500,000 range.
Negotiations begin. Eventually, you settle the case with a 60/40 split of the known assets. The husband picks up any remaining credit card debt, and your client obtains what you believe to be a healthy maintenance and child support figure based on the uncovered income.
In reality, you’ve just cost your client hundreds of thousands of dollars. What you investigation didn’t reveal was:
• The owner of the dental practice’s building, the Gotcha Corporation, was actually controlled solely by the husband. How did your investigator miss this? Because it was incorporated in Nevada, a state that allows nominee corporate officers and shareholders. The investigator could have run limitless computer database property checks and never picked up on the husband’s connection to Gotcha.
• Don’t Look Now, Inc., a medical supply company, is on the list of the dental corporation’s list of vendors. This you knew. What you didn’t know is that this corporation is also controlled by the husband out of Wyoming, a state that not only offers corporate anonymity, but also offers the scoundrel the added incentive of no state income or sales tax.
• Not surprisingly, the expensive dental equipment owned by the practice was highly leveraged and was secured by collateral, a fact the investigator discovered when she ran a Uniform Commercial Code check on both the husband and the corporation. But your sleuth failed to take the next step, which was to unearth the secured creditor. Had she done so, she would have found that is a corporate shell for an asset protection trust that once again was controlled by the dentist.
Bottom Line: Using these simple strategies, the husband decreased his line net income (a figure that many attorneys rely on) by over $100,000. More importantly, the net worth of the dental practice, and hence the marital estate, was grossly undervalued.
Whether you are dealing with a professional practice or a closely held corporation, every attorney and investigator should be aware of a number of red flags, including:
• Suppliers, landlords, lessors or finance companies associated with the spouse’s business that have no record with Dunn & Bradstreet or other business recording agencies.
• Abnormally high rental or equipment financing rates.
• Payroll records in which your client notices names of employees, vendors, or subcontractors with which he or she is not familiar, or salaried relative who perform no legitimate function for the business ( but funnel money back to the spouse).
• Out-of-state attorneys, numbered financial accounts, long distance calls
to Nevada, Wyoming, the Carribean or Europe, and checks written to individuals or business entities in those areas.
• Spousal trips to the Caribbean, Europe, or other areas that serve as asset protection shelters or banking havens.
Any of these red flags may very will indicate ongoing income and asset stripping. If they remain undiscovered, they can have a colossal impact on asset allocation, support and dissipation issues.
Any good investigator will work with you to look deep into the financial status of a spouse, paramour, or relative. With the onset of professional specialization in asset protection and concealment, however, every attorney must, in appropriate cases, work with their investigator to go the extra mile down the paper trail. When a spouse’s income, employment, and lifestyle warrant a closer look, the usual methodology must be kicked up a notch. Failure to do so can cause serious repercussions for the client, and can also reflect on the quality of the lawyer’s representation.
William P. Lloyd is a member of Equity Investigations LLC. He is a graduate of Northwestern University (B.A., 1971; MBA, 1973) and Kent College of Law (1977). He is also a licensed private detective.