Office bandits can
cause legal jamA local embezzlement case
brings to light problems
associated with suspicious
hires
Before Toni Freitas was hired by Merrill Lynch's local office in 2000, the financial services giant did an extensive background check on her.
The check, routinely done on prospective employees of banks, stock brokerages and other companies that handle client funds, turned up nothing unusual.
"Her record was clean," said Judith Perry, managing director of Merrill Lynch's Hawaii and Guam operations.
While Freitas' record had no criminal blemish at the time, her employment history was hardly clean.
Two years earlier, Freitas had been fired from Pacific Century Trust, a division of Bank of Hawaii, after the bank conducted an investigation into suspicions that she was stealing money from a client account.
Based on Freitas' actions, the bank also filed with the federal government a "suspicious activities report" -- required whenever a bank knows or suspects an employee of embezzlement. Federal authorities also began investigating Freitas.
Yet none of those red flags showed up when Merrill Lynch did its background check. Unaware of her checkered past, the brokerage firm hired Freitas in November 2000 as a client associate.
By the time she abruptly resigned from Merrill Lynch more than two years later, Freitas left behind a trail of additional wrongdoing.
While with the brokerage, Freitas used a prospective client's name and Social Security number to fraudulently obtain several credit cards and racked up roughly $14,600 in illegal charges, according to court documents.
Her take at Pacific Century was even greater.
As an administrative assistant there, Freitas stole $71,600 from an elderly couple's trust account from March 1996 to August 1998, court records show.
In December, Freitas, 44, pleaded guilty to bank fraud, access device fraud and identity theft. She faces up to 55 years in prison when sentenced Oct. 4 in federal court. Efforts to reach her for comment were unsuccessful.
The Freitas case underscores a shortcoming in the system that banks and other financial services companies use when hiring people who may have access to customer funds or confidential information.
Unless a person has been arrested, charged or convicted of workplace misconduct, a prospective employer often will not be aware of any serious blemishes in his or her employment record. That's because the majority of employers today -- not just those in the banking industry -- are reluctant to give negative references about past employees for fear of being sued, according to labor attorneys, personnel specialists and others.
So when Merrill Lynch contacted Bank of Hawaii to check on Freitas' past employment, nothing was mentioned about her firing, according to Merrill Lynch spokesman Bill Halldin.
The kind of information that normally is verified includes employment dates, job titles, work responsibilities and sometimes salary information.
Even though the law doesn't prohibit disclosing other kind of information, such as firings, many companies steer clear of such disclosures to avoid the potential for discrimination or defamation claims, said Jeffrey Harris, a labor and employment attorney.
"There are good reasons why many employers are reluctant to disclose information," Harris said. "But there are also very good reasons why employers should disclose truthful, factual information, particularly if the employee engaged in violence, theft, sexual harassment or other behavior that hurt other employees or the employer."
If a previous employer fails to disclose such factual information, the new employer could have grounds to file a negligent-reference claim against the prior employer if the worker engages in the same type of behavior, harming the company or other workers, Harris said.
Merrill Lynch and other companies say they do as thorough a job as possible checking backgrounds based on what's in the public record and what previous employers will say.
"We rely on information that's legally available to us," Merrill Lynch's Halldin said.
But as in the Freitas case, certain information often doesn't become available until law enforcement takes action -- a process that can last at least a year or two depending on how complicated the case is.
Financial crimes are known for being especially difficult to prosecute.
If Freitas had been fired for embezzling money from a brokerage client, however, that likely would have been made public by regulators before she was criminally charged. Regulators in the securities industry issue monthly public reports of disciplinary action against employees accused of violating industry regulations.
The Freitas case was unusual for a variety of reasons. Insider thefts involving such large amounts are rare in Hawaii's banking industry, officials say.
But the case also was noteworthy because Freitas used insider information while working for two large, reputable companies and because of the scheme's duration, especially while at Pacific Century.
Court documents show Freitas forged 38 checks -- most for $2,000 each -- over a 29-month period while at Pacific Century. The pilfered account belonged to an elderly couple who lived at a local retirement home and were physically and mentally infirm, records say.
Freitas oversaw the day-to-day affairs for that account and others. Her duties included opening clients' mail, depositing checks into their accounts and paying their bills.
For any payments less than $10,000, Freitas had sole discretion to approve them, according to the court records.
To carry out the embezzlement, Freitas forged the signature of one of the elderly clients on 38 so-called "convenience" checks (blank ones received in the mail), made them payable to "cash," deposited the funds into her account at another bank and authorized the trust to pay the company that issued the checks, the records show.
Bank of Hawaii suspected something was amiss in mid-1998 -- roughly two years after her scheme began -- and launched an internal investigation. It also filed the suspicious-activities report with the Financial Crimes Enforcement Network, a federal agency that collects information for law enforcement nationwide.
Network information is not available to private companies, a spokeswoman said.
Freitas was fired by the bank in the last quarter of 1998.
After her scheme was discovered, the bank reimbursed the elderly couple and took measures to strengthen its internal safeguards, including requiring more than one bank signature for trust transactions of less than $10,000, said George Fillion, executive vice president of the bank's trust and private banking division.
"We obviously take this very, very seriously," Fillion said. "The confidence our customers have in us is paramount in importance."
Once at Merrill Lynch, Freitas got personal information on a prospective client and used it to obtain three credit cards from three different banks, the court records say. From November 2002 to January 2003, Freitas purchased merchandise and services and obtained cash using the bogus cards, she acknowledged in her plea agreement.
The company believes Freitas was the only one from Merrill Lynch who had contact with the victim.
Once Merrill Lynch learned of a potential problem in January 2003, Freitas was confronted on a Friday and resigned the following Monday, the company said.
