Episode 96: Partnership Disputes with Natalie Lewis, CPA, CFF, CFE
In this season of The Data Sleuth Podcast, titled "Conversations about Fraud," guest host Justin Burns, managing partner of Space Coast Forensics in Brevard County, Florida, tackles topics including embezzlement, collaborative divorce, economic damages, construction fraud, and more. In each episode, Justin is joined by an industry expert to help tell the story behind the numbers and explore the latest in fraud detection and prevention.
In today’s episode we discuss partnership disputes with Natalie Lewis, CPA, CFF, CFE. Our conversation includes:
The risks of weak internal controls in business partnerships.
Navigating complex ownership structures when multiple entities are involved.
The importance of documenting everything.
A compelling case study highlighting why silent partners should remain actively involved in their business’s operations and decision-making.
GUEST BIO
Natalie Lewis specializes in forensic accounting and the analysis of economic damages. Ms. Lewis provides expert witness and consulting services in the areas of accounting, investigations, and litigation. She has specific expertise in fraud examinations, asset tracing, and investigating Ponzi schemes and has testified in deposition and trial as an expert witness.
Ms. Lewis is experienced in litigation disputes and is often hired by attorneys to assist clients with forensic accounting analysis and other damages and conduct internal investigations. She has participated in numerous engagements in various industries including hospitality, government, wholesale, oil and gas, healthcare, and professional services.
Ms. Lewis holds several leadership positions in the accounting and anti-fraud community, such as ACFE Board of Regents Chair, ACFE – Georgia Chapter board member, AICPA CFF Credential Committee member, AICPA CFF Champions Task Force co-chair, board member of the City of Atlanta’s Governing Board of the OIG and Ethics Office, and American Bar Association TIPS Vice-Chair. In 2019, Ms. Lewis received the AICPA Forensic and Valuation Services (FVS) Standing Ovation Award.
LinkedIn: Natalie Lewis, CPA, CFF, CFE
Website: jsheld.com
RESOURCES MENTIONED IN TODAY’S EPISODE
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CONNECT WITH JUSTIN BURNS, CPA, CFE
Website: www.spacecoastforensics.com
LinkedIn: @space-coast-forensics
LinkedIn: Justin Burns, CPA, CFE
Transcript
Leah Wietholter:
Hi, I'm Leah Wietholter CEO and founder of Workman Forensics, and this is the Data Sleuth Podcast. For the 2024 season, we are changing it up a bit. I've invited Justin Burns, a forensic accounting professional and fraud fighter, to guest host the episodes. He's one of the friendliest and most personable professionals I've met in this space, and I'm excited for you all to meet him and his guests.
Justin Burns:
Hi, everyone. As Leah mentioned, I'm Justin Burns, managing partner of Space Coast Forensics in Brevard County, Florida, and I'm your host for this season of the Data Sleuth Podcast. I'm excited to host this season titled Conversations About Fraud, where we'll tackle topics including embezzlement, collaborative divorce, economic damages, construction fraud, and more. In each episode, I'll be joined by an expert to help tell the story behind the numbers.
In today's episode of the Data Sleuth Podcast, Natalie Lewis and I are going to be talking about partnership disputes. Natalie is a senior vice president for JS Held, working in their Alpharetta, Georgia office. Natalie specializes in forensic accounting and the analysis of economic damages. She provides expert witness and consulting services in the areas of accounting, investigations, and litigation. She has specific expertise in fraud examinations, asset tracing, and investigating Ponzi schemes. Natalie is experienced in litigation disputes and is often hired by attorneys to assist clients with forensic accounting analysis and other damages, and to conduct internal investigations. She has participated in numerous engagements in various industries, including hospitality, government, wholesale, oil and gas, healthcare, and professional services.
Hi, Natalie, thanks for joining me on today's episode of Data Sleuth Podcast. How are you doing?
Natalie Lewis:
I'm doing great. Thanks, Justin.
Justin Burns:
All right. Natalie, I know you've worked on all kinds of investigations throughout your career, including embezzlements, Ponzi schemes, internal investigations, but today I want to talk about partnership disputes. Is there anything in particular that you find fascinating or more interesting than your other work when you're working a partnership dispute?
Natalie Lewis:
For me, I love the complexity of the partnership disputes, in that it can really touch on so many areas in our matter. For instance, when we're looking at these, we're looking at all activities that the business may have encountered. So with that, you may see the acquisition or the sale of a portion of the business or one of the related entities, you may see the sale or acquisition of property or other assets, and various parties involved. So to me, it's really fun as the forensic accountant to get to dig into this and all the different parts of the business and unravel what has transpired.
Justin Burns:
Yeah. So we're talking about partnership disputes. I want to just kind of clarify, are you seeing more of large shareholder class disputes or are you working more smaller business partnerships where the ownership group is maybe 10 or below or something like that?
Natalie Lewis:
It's more of that. It's absolutely more the business partner versus business partner dispute. So with that, some of these may already be in the litigation stage, but sometimes I get called in when it's more the allegation. So I get brought in to conduct an internal investigation where one partner suspects that his or her business partner, or multiple, have been either mismanaging the business or misappropriating funds.
So in that case, I do conduct an investigation, try to see if there's any... I can substantiate those allegations. And oftentimes though, it's already made that dispute all the way through to legal proceedings and is in the form of litigation. In those situations, I get brought in as either the consulting or the testifying expert and I get retained to look at those allegations and try to dig in to see what's transpired.
It's really interesting to me. I've got various types of those cases, one civil Rico case in federal court. And with that, one of the business partners, there's two, 50% owners for each of them. And in that one, it's a dispute between one partner versus the other, where he's alleging that the other partner was misappropriating funds. And with that, it's not like he was embezzling, because you can't embezzle from your own company that you are an owner, but he was using it for personal expenses. So that's the allegation and I get brought in to look into that and look at documents and records, maybe invoices, checks, bank statements, credit card statements. Also looking at the operating agreement, seeing how things are outlined, especially in terms of approvals and what's required. And these are common cases for me to see, especially these days, I've been seeing an uptick in those.
Justin Burns:
Yeah, you talked about reading through the partnership documents and approval processes and things like that. Do you tend to see that internal controls are a little bit looser?
Natalie Lewis:
I do, absolutely. Especially when you've got just a handful of partners, whether it's two or three, they do tend to have looser internal controls. And I have found that historically, this is often when friends or relatives go into business together. They never suspect that over time, the relationship's going to sour or that one is going to do something to harm the other one. So they tend to split and divide duties and responsibilities for the business based upon each partner's strengths.
So I had a previous case that I was retained as the expert, it was a litigation. And with it, I testified in court for it, and it was a couple of different companies. And they were within the healthcare space, but one was providing accounting services to another company that was healthcare related, and they had related parties. In that particular situation, they were great until they weren't.
So with that, they had an agreement from years ago on a fee arrangement for providing services. My client was a CPA and he was the owner of one business that provided accounting and bookkeeping services to healthcare companies, but he was also a part owner in one of the healthcare companies to which he was providing services. And they had an agreement between these two entities. And with that, it was great. They outlined what their responsibilities were and what the fee arrangement was in terms of whether it was weekly or monthly, here's the amount that the healthcare company was going to pay that bookkeeper.
And over time, the responsibilities changed. It expanded. All of a sudden, that healthcare company decided they were going to sell one of their companies, and so they had the CPA with the related company doing M&A due diligence. Then he was also doing payroll, and it just expanded. Unfortunately, they did not update the fee agreement, and so they ended up having a dispute, went to court, and one of the issues was that they were tied, the allegations were from one of the partners that they were tied to paying X amount of dollars per month based on this very outdated fee arrangement. And it's a case that it was kind of a verbal agreement that they would take on these additional services, whereas they didn't update in writing what that would entail and the fees for this.
Justin Burns:
Yeah. I feel like that's what we see in partnership cases all the time is, "Yeah, no, no, no, we talked about this. We're good." And that's the extent of it, right? "Yeah, yeah, we talked about it." And then once you go to court, all of a sudden, somebody says, "Oh, no, we never talked about that. I don't remember this." And then you're fighting over the he said, he said side of this and that's no fun.
And then yeah, you mentioned, oh, man, anytime there's family members involved, those seem to kind of be the most vicious cases that I get is it's family members. Those are the ones where you get into it and you're like, "Man, they're not going to settle this because they just can't admit that they're wrong to each other." So you end up going to court with those more often than your other cases.
Natalie Lewis:
And it divides the family, so it's not just affecting the business, it then affects the family dynamic too, when it's got relatives involved, which is unfortunate.
Justin Burns:
Yeah, you're talking about siblings, cousins, family members that are only talking through lawyers now, and that's just not good for any family.
Natalie Lewis:
What I've also found is, like the case I was just describing, I tend to see more, I'll say allegations of fraud or misappropriation of funds coming from healthcare related companies. There tends to be a lot of the partners that are physicians, like in the matter I was just discussing, at least one of the other partners was a physician. They're busy doing patient care, they're not focused on what's going on on the business side. They're relying on others, people that they trust, and oftentimes, that's their business partners. And they just believe that it will go smoothly, and that's not always the case, unfortunately. They do tend to have a lot looser internal controls than some of the other industries that I have found over time.
Justin Burns:
Yeah, and then you have the classic case of partnerships where you've got one person is really managing the business, the day-to-day of the partnership, and then you've got another one who's maybe a silent partner. You get that sort of rationalization from the one who's handling all the day-to-day business of, "Well, I'm the one that's doing all the work. I should be able to spend some of this money on my own private stuff." They kind of get that in their head of like, "Well, I'm the one that's really making this partnership money."
Natalie Lewis:
That rationalization? Yes.
Justin Burns:
Yeah. Oh, yeah.
Natalie Lewis:
Totally.
Justin Burns:
Right, so I think that's going to us into our ad break.
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Justin Burns:
All right, so we are back with Natalie Lewis. I know before the break, right when we were opening up the podcast, you mentioned that you enjoy partnership dispute cases because of the complexities. And one of the complexities that I've seen in partnership disputes is when one of the partners maybe owns another business or they have transactions with related entities of maybe just one or a few of the partners, but not the entire partnership group. How do you handle those situations in your investigations?
Natalie Lewis:
Sure, Justin. So I find these cases interesting just based on the types of transactions that are involved, and with this, also the variety of businesses that can be involved in these types. Because it's not usually just a set of partners that are involved in one entity. Often, they have multiple entities for which they may all be partners in each of those entities, or there may be a couple that are partners in another one that doesn't include some of the other partners. So you really have to look at who's involved, what type of business, and what they're providing.
So there was a previous case that I had that was quite interesting because there were multiple entities. And with that, there were entities that, for whatever variety of reasons, one may be paying business expenses on behalf of another, and you would see transfers that would go out. And on the face of the statements, all you see is the transfer going out to another party, and you're trying to determine what's the reason?
So with this, it's interesting to kind of unravel web of transfers and then figure out and dive in about the purpose and the nature of those transfers. So the commingling of funds, unfortunately, a lot of times, the transactions are not arm's length transactions. And then depending on what has transpired with some of these businesses, and one particular one, there was one that sold an aspect, like a portion of the business. It was an asset sale and certain partners were excluded from the waterfall sale's proceeds and they did not receive their portion of the sale. And with that, it wasn't just looking at the business operations, it was also looking at that particular sale. And we're talking a multi-million dollar sale of a business, and looking at what each partner should have received and what they actually received.
And it kind of spurred another litigation. So this particular company had multiple cases going on, and another partner ended up suing another partner in that business for not distributing funds appropriately. And with that, it was interesting because we could actually tie the partner who failed to distribute funds appropriately to his business partner, ended up using funds close to the time that the transaction occurred. Very shortly thereafter, he purchased a very extravagant home. So by building the case and showing that particular partner failed in his duty to distribute funds appropriately to his business partner, and, oh, by the way, here is this lavish purchase that he happened to take, enter into soon after the sale of the business.
So it's fascinating to me how it can evolve. It's not just a dispute between two business partners based on one used the company credit card for personal expenses. It can become very complex in the situations and you really have to look at more than just what's going on day to day in the business. And I find it interesting in that we have to dig into the actual documents so much of the time.
So with the case of paying expenses on behalf of the other one, I testified on this one in state court and the opposing expert was alleging that my client, one of the business partners, was receiving distributions from the company that he was not entitled to. However, we were able to show that his entity had failed to pay their expenses. My client's company or related entity was paying those expenses on that one's behalf. So those transfers, I was able to tie them to invoices and bank statement checks for which my client's other company had paid those expenses and he was just getting reimbursed to the penny. So looking at that, you have to dig into everything to see both sides of the story. It's just not looking at one side of the transfers out, it's also what transpired that led to that transfer out.
Justin Burns:
Yeah, so you've got the other side saying, "Here he is taking distributions," and you guys are coming in going, "No, no, no, he paid expenses and he's just being reimbursed for those. Those aren't distributions at all, that's simply a reimbursement."
Natalie Lewis:
Yes.
Justin Burns:
And then talking about untangling the web of all these different ownership interests, then you get into, well, you have some owners who say they have a one-third ownership in the partnership that you're looking into, but they've got a 50% ownership over here, so maybe they're kind of shifting sales around and doing things in a way that's getting them more money in the entity that has a higher... Maybe they're shifting sales around in a way that's moving money into a business where they have a higher ownership interest in it.
Natalie Lewis:
Correct. In one situation, there were a couple of entities involved where one was taking on the payroll because they could get better rates on benefits and running kind of through a master payroll agreement through that form. So part of the dispute was related to which company were the employees actually employed by. And you had to look at the situation involved of why they decided to do it that way. And was the other company, who was actually employing those companies, were they reimbursing the entity for those appropriate payroll costs? So if they are running payroll through one entity, you need to make sure that they're appropriately allocating to the responsible party those payroll costs. And are they getting reimbursed?
Justin Burns:
Yeah, and we had a case years ago, this one just comes to mind, where you had all these different partners, all these different family members who all had part-ownerships in these two closely related business. One was basically a dock and the other one was a boat storage facility. So one of the family members had bought out some of the other ones to where he had a higher ownership percentage in the dock than he did over in the boat storage facility. But they all ran, he was running it basically as one consolidated entity, and he was kind of shifting some of the revenues over to the company where he had a higher interest, or allegedly that's what he was doing. They ended up settling not too long ago. But yeah, something like that, with these partnerships and the sort of tangled web of these ownership interests and how money is moving through these entities, it's definitely an interesting puzzle to have to get into.
Natalie Lewis:
Right, and you brought up about feeding certain expenses through, strategizing to put certain expenses through one entity versus another one. I've seen that before where they're trying to run certain expenses through an entity to have lower taxable income on that particular one. And I've got a current case that that's a very real situation that we're looking at and trying to determine what of those expenses were business related.
Justin Burns:
Yeah. We kind of talked about this earlier, when you were talking about the fee arrangement that never got updated from the original. And I feel like every single partnership dispute case that I work, the main issue is just poor documentation. A lot of cases can just be avoided if they just did a better job of just getting things down in writing, signing off on it, like, "Hey, here's our agreement, here's what we agree to do." It sounds like you're kind of encountering the same thing where it's just like, "Guys, did y'all write this down anywhere?"
Natalie Lewis:
Well, and sometimes the agreements are so vague that it doesn't really simulate what should be done under advisable terms. So for instance, the operating agreement may say that all partners have to agree. Well, do they have to agree in writing or can they agree verbally? Because that then may become a he said, she said situation if it's verbal only. So that comes into play as well.
But then I've seen so much where the documentation is either lacking sufficient detail as to how things should be laid out and handled, or also it's just outdated in terms of they really never went back and updated it, and so then there becomes this complete discrepancy between what they believe should happen and what actually happens.
So with that, there was a case that I did about a year ago that was related to a oil drilling operation in Texas, and it was about four or five business partners [inaudible 00:24:31]. And they were taking two oil wells that were existing, and then they were contracting that they were going to build and operate four additional wells. And what we found, they came to us in a pre-litigation dispute, they very much wanted to take this to litigation, but unfortunately, the information was not exactly in their favor. They were going to have some issues with that because their concern was that costs had... One of the partners had mismanaged the cost completely for these new oil wells that were going to be created.
And when we started looking at the fee estimate to which they were saying, "It was supposed to be 13 million apiece for these, and now we're over 25 million apiece." And we were looking and we were trying to figure out why are costs so radically different from what the estimate was versus what it ended up costing our clients? And as we started digging into the data, we were looking, and this was the dispute happened, and a lot of the manufacturing for the oil well happened, give or take, around 2022, 2023 time period.
Starting to look at the estimates, we see that it was dated February of 2020. Well, as you can imagine, that timeframe, costs were a lot different in early 2020, prior to COVID, than what they were in 2022 and 2023. So we started seeing that it wasn't necessarily the allegations of fraud happening, it was truly really tied to inflation and what the market was doing for a lot of those materials, that costs just increased that much.
But these people went into these agreements and they signed onto their partnership believing that they were going to be on the hook for 13 million an oil well. Instead, it was almost double that, and they were very upset and ready to litigate. So we had to somewhat talk them off the ledge and show them that the documentation, unfortunately, that they signed was outdated. And had they looked at that and requested an updated estimate prior to commencing the operation, they probably wouldn't be in this situation.
Justin Burns:
Yeah, and talking about operating agreements maybe being, or partnership agreements being too vague from the outset or just not as detailed as they should be, it's a lot cheaper to get a lawyer involved at the creation of an agreement than it is to have them involved in the litigation over an agreement. So pay your legal fees upfront and it'll hopefully save you some on the back end.
Natalie Lewis:
Absolutely. And it's shocking, you get into a legal dispute and the fees associated with legal counsel and then us as forensic accountants, that they're better off paying the money to update those documents on the front end and even taking some steps to mitigate by putting things in writing or reviewing those documents periodically as well.
Justin Burns:
Yeah, and touching on the poor documentation that leads to a lot of these cases, what do you recommend people do to help solve that problem?
Natalie Lewis:
So for me, I always think it's better to have it in writing. And it's somewhat of a CYA situation. I think I mentioned earlier that a lot of these partners don't anticipate the relationship going sour, and they think everything's going to be great, until, unfortunately, it isn't and they find themselves in a dispute. Whereas I feel, maybe I'm a bit jaded by what we do, but I think it's better to always have agreements in writing, have approvals in writing as much as possible, any sort of concurrent notes that you can have. If you're having leadership meetings, partnership meetings that you are meeting and discussing operations of the business, take minutes. Keep those on hand in the electronic documents for the company, make sure that each partner has a copy of that, to prevent any sort of disputes later that could face a he said, he said situation.
Justin Burns:
Yeah, and you just said it. You get into this partnership thinking, "Well, everything's going to be fine." Nobody goes into a partnership thinking like, "Oh, I'm about to get screwed over on this deal." You go into it with the best of intentions, but always have the documentation there as that insurance policy in case things go bad or in case a question comes up, or in case somebody's memory's just fuzzy. "Whoa, hold on. Did we talk about 25 for a well? I thought we said 13?" "Well, then we adjusted the prices and the estimates in a meeting and you were there." "Oh, okay. Yep. Here it all is. Here it is in notes."
Natalie Lewis:
And I think reviewing your documents throughout versus getting down months or years later and all of a sudden, raising a red flag of, "Hey, this doesn't look right." Because in the situation with the oil well, they had been paying those costs over and above the 13 for well over a year and had not complained about the costs until all of a sudden, then it was, "Oh, wow, look how much I've paid out already." And at that point, they're over 20 million and you're going, "Well, 20's a whole lot different than 13. Why didn't you say something as you noticed that your progress of completion was nowhere near done and you're already well exceeding that $13 million estimate?"
Justin Burns:
Yeah. Yeah, just pay attention to what's going on and-
Natalie Lewis:
Be an active partner. Be an active participant in the business that you are reviewing documents in a timely fashion, I think will prevent a lot of issues as well. It's not advisable to just turn a blind eye and assume that everything's going to work out okay.
Justin Burns:
Right. And I think that's a good note to end our conversation on. It's just I hope people do a better job of documentation and also just be active. Active listener, active participant. Thank you for joining me today, Natalie. If our listeners want to get in touch with you, what's the best way to do that?
Natalie Lewis:
I would love to get in touch with anyone who has an interest in what we do or is interested in learning more about partner disputes. Feel free to reach out to me through LinkedIn or you can look at JSHeld.com, where I'm a senior vice president. But I'm very active on LinkedIn, so look forward to connecting with you there.
Justin Burns:
All right. And we'll include links in the show notes for this episode so you'll be able to follow those and get in touch with Natalie. All right, thank you for joining us today. Had a great time speaking with you.
Natalie Lewis:
Thanks, Justin. Appreciate it.
Justin Burns:
All right.
Leah Wietholter:
Thank you for listening to the Data Sleuth Podcast. If you enjoyed this episode, please leave us a review wherever you listen. The Data Sleuth Podcast is a production of Workman Forensics. To learn more about our investigation services and resources, please visit Workmanforensics.com.
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