Case of Asset Misappropriation, Skimming, or Cash Larceny

Caseof Asset Misappropriation, Skimming, or Cash Larceny

Caseof Asset Misappropriation, Skimming, or Cash Larceny

of the case

Misappropriationof assets is a type of fraud that affect both the private and thepublic sectors of the economy. The Dargey case that involved themisappropriation of about $ 46 million is among the recent instancesof fraud affecting private investors. The case as reported by EmilyParkhurst in the article “SEC alleges Dargey misappropriated $ 46million in investor fund for Belltown tower” in October 7, 2015.Dargey is an American assets developer, who is the owner of thecompany named Dargey Development. Dargey’s company was contractedby a group of investors (including a group of Chinese businessmen) toconstruct a 40 story building named Seattle Towers in Belltown.However, the developer only spent $ 17 million for the project outthe $ 63 million availed by investors, where the rest was spent inprivate expenses and finding other projects.

Keyissues

Thereare two major issues that arise from the case of Dargey. The firstissue regards the misappropriation of funds meant for investment inthe real estate. Dargey took advantage of the fiduciary or the trustthat the Chinese investors had in him to use their funds to financeprivate expenses and projects. The case is similar to U.S.v. O’Hagan, 1997,which implies that Dargey can be held criminally liable for betrayingthe trust of the foreign investors (Young, 2004). The second issue isthe misuse of the opportunities offered by the government to attractforeign direct investment. The affected investors intended to getGreen Cards as promised by the federal government in a programreferred to as the EB-5 immigrant investors. A lack of adequatecontrols on how foreign investors can take advantage of the programcreated an opportunity for the fraud to take place.

Stakeholdersand their choices

Thereare three major stakeholders involved in the case of Dargey’sfraud. The first group is the Chinese investors, who had the choiceof letting the money go or making a suit against Dargey. A legal suitmight take long, which might delay their Green Cards. Letting theirmoney go would mean that the Chinese investors have to invest inother projects for them to get permanent residency or Green Cards.The second stakeholder is the Securities and Exchange Commission,which had the option of taking a disciplinary action against theDargey Development under § 10 (b) of the Securities Exchange Act orletting the investors make the legal suit against Dargey. Taking anaction would enhance the image of SEC as an agency with the capacityto prevent misappropriation of assets invested through fiduciaryrelationships. Lastly, Dargey, the owner of the development companyhad the option of returning the investors’ money or proving thatthe money will be spent on the project as per the initial plan. Fromthe case, the Seattle Towers project is under construction, and theallegedly misappropriated money could still be used to bring theproject to completion, thus protecting the image of the developer.

Resolutionand the affected stakeholder

TheDargey’s fraud issue was in the process of being resolved by theSEC by the time the article was published. The SEC’s process ofaddressing the issue started with freezing of Dargey’s assets andinitiating investigations that will lead to criminal prosecutionagainst Dargey. This is correct procedure because it is in line withthe Securities and Exchange Act that provide procedures for resolvingfiduciary issues (Young, 2004). The Chinese investors will beaffected the most because they are at the risk of losing their moneyand the right to become permanent residents of the U.S. or acquirethe Green Cards. After reading the case of Dargey’s fraud, onewould ask, can the government put in place measures to help foreigninvestors establish safe fiduciary relationships with the localdevelopers in order to prevent the misappropriation of their money asthey take advantage of the EB-5 program?

Personalopinion

Inmy opinion, the fraud occurred because the owner of the developmentcompany, Dargey, had a lot of influence in the decision making. TheChinese could avoid getting into risk of losing funds through fraudby investing in firms with internal controls that delegate theprocurement decisions making functions to more people (Office ofMental Health, 2016). In addition, the SEC ought to ensure thatcompanies have sufficient internal control (such as a fiscal policythat has been approved by the company’s BOD), which is the only wayto ensure that investors’ funds are not spent on personal expenses(Office of Mental Health, 2016).

Conclusion

Inconclusion, misappropriation of investors’ funds is classified as afraud that is addressed by evoking provision of the Securities andExchange Act. The act defines the fiduciary relationship existingbetween investors and the company, where the directors of the havethe fiduciary duty to spend investors’ money to meet the intendedexpenses. Failure to perform the fiduciary duty, like the case ofDargey, leads to criminal liability and litigation.

References

Officeof Mental Health (2016). Topten internal controls to prevent and detect fraud.Albany, NY: Office of Mental Health.

Parkhurst,E. (2015, October 7). SEC alleges Dargey misappropriated $ 46 millionin investor funds for Belltown tower. PugetSound Business Journal.Retrieved March 20, 2016, fromhttp://www.bizjournals.com/seattle/blog/2015/10/sec-alleges-dargey-misappropriated-46-million-in.html

Young,R. (2004). Fiduciaryissues in federal criminal prosecution.San Francisco: Farella Braun.