Payroll processor exec charged in $70M bank fraud

Dive Brief:

Michael Mann, the owner of payroll processing company MyPayrollHR, faces up to 30 years in prison and a $1 million fine after he admitted he fraudulently obtained about $70 million in a bank fraud scheme, the Justice Department said in a complaint filed Friday. Mann appeared in court Monday.
A pair of banks, Pioneer Bancorp and Bank of America, froze Mann's accounts early this month when they suspected him of "kiting" funds. Kiting involves writing checks drawn on one bank account and depositing them in an account at a different bank, then reversing the process, so the account holder appears to have more money than he does, the government said.
The freeze caused roughly 8,000 employees at nearly 400 companies nationwide to be left temporarily without paychecks Sept. 4, according to NACHA, which oversees the Automated Clearing House (ACH) electronic payment network. MyPayrollHR shuttered the next day, according to NBC News. The missing payroll funds have been returned to about 97% of those affected, NACHA said Monday.

Dive Insight:

Mann drew suspicion when he routed about $30 million that was meant for paychecks and tax payments to an account at one of the banks instead of to Cachet Financial Services, a firm that manages the flow of funds through the ACH system. The move was designed to temporarily reduce the amount of money Mann owed Pioneer, according to the filing. "When Pioneer froze Mann's accounts, it also (inadvertently) stopped movement of MyPayroll's clients' payroll payments to Cachet," the filing said.

Cachet said it reversed paycheck deposits after it discovered it couldn't access the designated funds. Some employee accounts were debited twice because Cachet discovered an error and issued a new set of orders, the company said, according to The Wall Street Journal. Cachet later instructed banks to return the money to employee accounts.

Alan Shafran, owner of Shafran Realty Group in Carlsbad, California, told NBC San Diego his company's 15 employees received their paychecks, but the money later disappeared from their bank accounts. Shafran said he then received a notice from Mann's company indicating he needed to find a new payroll processor. Shafran said he paid his employees himself, although that money was also withdrawn after banks froze Mann's accounts.

Mann "claimed he committed the fraud in response to business and financial pressures, and that he used almost all of the fraudulently obtained funds to sustain certain businesses, and purchase and start new ones," the filing said.

MyPayrollHR was legitimate, Mann said in the filing, although he "admitted to creating other companies that had no purpose other than to be used in the fraud," which the Justice Department said dates back to 2010 or 2011. Mann said he obtained loans and lines of credit by borrowing against "non-existent receivables," according to the filing.

Pioneer was Mann's largest creditor. In a Sept. 11 filing with the Securities and Exchange Commission, the bank said its "potential exposure" included a $16 million commercial loan secured by business assets and $19 million of deposit activity.