ARMORED AND DANGEROUS
The demise of Revere Armored Inc. last February was full of drama. The armored-car company closed its doors after its major insurer, Lloyd's of London, learned of irregularities and canceled its insurance, and the Federal Bureau of Investigation descended on its Long Island offices. Revere's owners, Robert and Susan Scaretta, were charged with bank fraud and are awaiting trial. And bank clients, who used Revere to transport and store cash, claimed millions of dollars in missing funds, which may not entirely be covered by insurance.
Now, though, the focus of the Revere drama is moving in new directions. For the past several months, federal investigators had their sights on Revere employees. But sources close to the investigation say prosecutors are now also looking into the activities of bank employees. One Revere employee, William J. Butler, who joined that company from National Westminster Bank PLC, already has pleaded guilty to taking a bribe while at the bank. Prosecutors are examining other banks as well.
Evidence produced by the government probe and private investigators is providing new details about the apparent laxity of Revere's clients in dealing with the company. Several banks appear to have audited Revere's activities only loosely and overlooked warning signs of problems detectable in its publicly available financial statements. "My question is why didn't they get as much information about Revere as they would have gotten had I walked in to get a $10,000 loan," says Peter F. Wright, president of West Hartford (Conn.) insurance broker Kelly Associates.
WARNING SIGNS. NatWest, a major client of Revere, appears to have been particularly casual about the relationship. Officials of the bank conducted an audit of its holdings at Revere in May, 1992, and found $6 million missing. Three days later, a NatWest officer sent a memo to an audit committee of senior officers saying: "A decision by the outside vendors to take funds can easily be made, regardless of the controls that exist within the location, since the vendor has total control over the funds." Even so, NatWest continued to do business with Revere, which made up the shortfall by depositing about $6 million in NatWest's account at the Federal Reserve Bank the following day. A spokesman says NatWest closely monitored its holdings at Revere after discovering the shortfall. But the bank never returned to Revere to audit its account.
Marine Midland Bank also apparently ignored warnings. Early in the year, an industry source says, bank officials were warned that Revere's insurance was being canceled. But the bank, the source says, circulated an E-mail message telling staff to disregard the information. A Marine Midland spokesman declines comment on the bank's relations with Revere, citing ongoing litigation, but says that, in general, the bank believes it thoroughly checks on any outside vendor it uses.
Even without specific warnings, though, banks who contracted with Revere could easily have detected that things might not have been as they seemed. Some red flags already have been reported: Revere's bids for new business were sometimes a mere fraction of what competitors were charging, for one thing.
SHODDY REPORTS. But more telling signs of problems were overlooked, especially Revere's financial statements. Like any trucking company, Revere was required to file publicly available annual financial reports with the New York State Transportation Dept. Industry experts say Revere's filings should have raised some questions in bankers' minds. Partly handwritten, they said that between 1990 and 1991 Revere's revenues more than quadrupled, from $3.7 million to $16.3 million. While operating expenses nearly quintupled, the company's accounts payable barely budged. Depreciation costs also were unusually high.
Unfortunately, the banks appear to have focused not on Revere's financial condition but on its low prices. "The banks could have asked for background to do in-depth financial checking, but they didn't," says Francis M. Mullen, a private investigator who investigated Revere for Lloyd's of London. "Really, I fault the banks in this case. They should have questioned the low prices."
It's not yet clear how costly their lax attitude will be to the banks. Federal prosecutors, in a superceding indictment against Revere's owners, allege they committed insurance fraud in addition to bank fraud. Francis X. Casale Jr., an attorney for the Scarettas, says they deny any wrongdoing. If the Scarettas are found guilty of the new charge, say lawyers, Lloyd's might not have to make good on the Revere clients' claims. An officer at one client bank, though, says he is confident the bank's insurance will cover any losses Lloyd's does not cover.
Nor is it clear whether banks are working to avoid similar situations. Investigators, though, say that banks could take several measures to insure that Revere-type problems don't arise in the future. Banks could start storing their money and their clients' money in their own facilities. Companies have been using outside vendors more and more for this service because it is more cost-effective, but at least one large bank still keeps its money in its own facilities because of security concerns.
Banks also could check on armored-car companies more effectively by conducting joint audits. Revere's clients included many individual merchants in addition to the banks--there have been hundreds of loss claims filed--so getting them together for an audit would have been extremely difficult. Even so, says Assistant U.S. Attorney David Hattem, who is handling the federal case against Revere, "the Scarettas were able to accomplish their scam because the various banks conducted their audits independent of each other."
Bankers say they are wary of joint audits because they don't want to reveal confidential information about their operations to competitors. But it seems that instead of exposing themselves to competitors, they exposed themselves to possible fraud.RED FLAGS AT REVERE
LOW BIDS Revere was often the lowest bidder for money-transport jobs. Some
bids were allegedly a fraction of the next-lowest bid.
CURIOUS FINANCIALS Annual financial statements with the New York State
Transportation Dept. seemed questionable. Former competitors claim figures may
have suggested an improbable rate of growth. And huge increases in reported
operating expenses, they allege, may have disguised diversion of funds from the
PROBLEMATIC AUDITS Several clients of Revere audited their cash holdings
only rarely. Though NatWest officials found a $6 million shortfall in a 1992
audit, the bank never undertook a subsequent audit or questioned in detail how
Revere made up for missing funds.
DATA: BUSINESS WEEK
Kelley Holland and Lori Bongiorno in New York