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The FBI said Monday it arrested the head of MyPayrollHR and charged him with $70 million in bank fraud. The arrest is gratifying to some victims, who saw their paychecks vanish from their bank accounts just a few weeks ago.
But the FBI's arrest of Michael Mann, 49, doesn't answer many of the questions hanging over this case, including where the still-missing funds have gone. Mann ran the parent company of MyPayrollHR, which suddenly shuttered Sept. 5.
The FBI complaint, filed in U.S. District Court in Albany, accuses Mann of creating businesses that were used in a scheme to obtain loans and lines of credit. It alleges the fraudulent activity may have dated as far back as 2010 or 2011 and may have totaled about $70 million. The complaint went on to say that Mann "wished to accept responsibility for his conduct and confess to a fraudulent scheme that he had been running for years."
Mann also told the FBI that MyPayrollHR, which was founded in 2006, was legitimate. Indeed, customers had no inkling of the fraudulent behavior until the payroll money vanished. Funds were "reversed" or withdrawn from accounts used for direct payroll deposits.
"Now that Mann has been arrested, that will help shed a little light on things," said Brad Mete, managing partner of two recruiting and staffing firms with 800 employees in Fort Lauderdale.
What happened to the money?
"But I still don't know where the money is -- especially the taxes we paid," said Mete, a nearly three-year customer of MyPayrollHR.
Mete has more than $75,000 in withholding taxes from one pay period that disappeared with MyPayrollHR. But the government will still want its money, he said. He manages Affinity Resource, an employment agency, and IntellaPro LLC, a professional staffing firm. He doesn't know whether the money has disappeared or is sitting frozen in a bank account.
Mete is trying to recoup the missing withholding taxes through a fraud complaint with the bank. He is investigating possible insurance coverage.
The National Automated Clearinghouse Association (NACHA), which develops rules and standards for the automated clearinghouse (ACH), an electronic funds transfer system, said its "ongoing investigation" of the incident "continues to show that fewer than 400 companies and approximately 8,000 employees experienced unauthorized payroll reversals." This was in a written response to questions from SearchHRSoftware.com.
NACHA said that, as of Sept. 19, it estimates that "about 97% of people that had unauthorized reversals have had their funds restored." The FBI put the total number of MyPayrollHR clients at about 1,000.
New regulations may be on the way
Mete questions NACHA's claim that only 8,000 employees were affected. "There is no way it's that little," he said. Out of his two firms, 600 of his 800 employees were impacted by reversals, and he knows anecdotally from other firms that they had hundreds affected.
Mete suspects the industry will downplay the impact of the MyPayrollHR incident possibly to avoid new regulations. Regardless, new regulations may be on the way.
Last week, the New York State Senate announced a package of bills in response to MyPayrollHR. They include new criminal penalties for intentionally misappropriating payroll, tax credits for victims and restrictions on deductions from employee accounts.
NACHA defended the ACH system. It "has strong consumer protection measures in place. There are rules in place to prevent unauthorized withdrawals, and to allow consumers to be re-credited in the event that there are unauthorized withdrawals," it said in an unsigned statement.
"This is an unprecedented and isolated incident, and obviously, these rules were circumvented in this case," NACHA said in its statement.
MyPayrollHR's ACH provider was Cachet Financial Services in Pasadena, Calif. Cachet's services include direct deposit for payroll processing firms. It provided the services to MyPayrollHR for about 12 years, it said in an earlier interview with SearchHRSoftware.com.
MyPayrollHR uploaded a file instructing Cachet to take money out of employer accounts. The money should have been put into a Cachet settlement account. But that didn't happen. To fulfill the transaction, the ACH system took money out of Cachet's holding account to pay employees. Cachet says it is out $26 million and is a victim of fraud.
Cachet initiated reversals to get its money back from employee accounts. Some accounts had two reversals, because the reversal was not coded in accordance with NACHA standards. It then changed direction, and started a process urging banks to reject both its reversals.
Reversals were outside the rules
In its statement, NACHA said that "Cachet should not have sent any reversals in this incident. This is not permitted by the NACHA Rules, and is not in keeping with any industry standard or best practice."
Lawsuits seeking class action status are now being filed against MyPayrollHR, and the ACH firms involved, including Cachet, which declined further comment.
The payroll problem is not completely resolved for Tanya Willis, executive director at Agape Animal Rescue in Nashville, but her organization may be in better shape than most.
Most of the seven shelter employees have been made whole by banks, which can take 45 to 60 days to fix the problem, according to Willis. One employee had a nearly $1 million deduction in a checking account. Tennessee Bank, whose name appeared on the screenshot showing the negative $999,193.75 balance, declined to comment.
In an interview Monday, Willis said it appeared that the employee with the $1 million deduction had access to her accounts, but she wasn't completely certain of the employee's status.
Animal rescue is rescued by its supporters
The apparent fraud has cost Agape about $10,000 in withholding taxes for a calendar year quarter. But Agape appealed to the community for help.
"Our supporters and our donors stepped up and made us whole and we're out saving dogs again," Willis said. The shelter has been able to raise the money to pay their tax due Oct. 1, she said.
Willis worries about the for-profit businesses that can't turn to donors to get help. "I know that there are still so many people in worse situations, and I'm thankful that we've been able to go to the community and raise the funds needed to get us back on track -- but I want that for everybody," she said.
Willis was contacted by the FBI, and she sent them every document she could think of to help the investigation.
Mann is cooperating with authorities
On Sept. 10, Mann met with the U.S. attorney in Albany, less than a week after MyPayrollHR closed.
Mann started cooperating with the FBI before the investigation began. It was about two-and-a-half weeks ago that his attorney, Michael Koenig at Hinckley, Allen & Snyder LLP, reached out to authorities.
In an email statement, Koenig said that he "pro-actively called the United States Attorney's Office before any law enforcement or regulatory agency contacted Michael Mann."
Mann "has been cooperating with authorities since that initial meeting, and will continue to do so, in order to fully and accurately detail what occurred," Koenig said.
The five-page FBI complaint only hints at motive. The court filing said that Mann claimed "he committed the fraud in response to businesses and financial pressures, and that he used almost all of the fraudulently obtained funds to sustain certain businesses, and purchase and start ones."
Mann faces up to 30 years in prison and $1 million fine, according to the Justice Dept.
But the court document does provide insight into what might have triggered the sudden problem at MyPayrollHR.
Melanie O'MalleyOwner, O'Malley's Oven
Mann told authorities that Pioneer Bancorp Inc. was his largest creditor. The decision to siphon off money "was precipitated by [Mann's] decision to route MyPayroll's clients' payroll payment to an account at Pioneer instead of directly to Cachet. He did this in order to temporarily reduce the amount of money he owed to Pioneer. When Pioneer froze Mann's accounts, it also (inadvertently) stopped movement of MyPayrollHR's clients' payroll payments to Cachet."
In a U.S. Securities and Exchange Commission filing Sept. 11, Pioneer described the "potentially fraudulent activity" without naming MyPayrollHR.
Much remains unsettled
A closed Facebook group for victims of MyPayrollHR now has over 2,000 members.
A moderator of the group, Melanie O'Malley, owner of O'Malley's Oven, an Albany, NY bakery, and a MyPayrollHR customer, said much remains unsettled.
"Some employees are still missing money, and employers are at a complete loss," O'Malley said.
She described the general reaction to news of Mann's arrest as relief.
"There are still so many questions that employers have," O'Malley said. "I think seeing charges gives us hope that perhaps we'll get some answers, and a sense of our chances of recompense."