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Fraud in Hollywood: Stealing From Media Companies Has Never Been Easier

Variety logo Variety 1/11/2017 Cynthia Littleton

Until she was arrested, Jennifer Choi seemed to have, as she would later describe it, “a fairytale life.”

She’s the mother of two — son Nikko, 6, and daughter Naomi, 2. She had a job at HBO that put her squarely in the glitzy world of Hollywood and celebrities. Her husband, Alex Harris, was a groomsman at Lamar Odom and Khloé Kardashian’s 2009 wedding. Judging by her Twitter and Instagram feeds, Choi enjoyed trips to the beach, taking her kids to Disneyland, and socializing with a wide circle of friends.

Those who know Choi, 39, describe her as vivacious and playful, warm and nurturing. She could be counted on to volunteer at the Halloween carnival and other events at her son’s preschool in Studio City.

“She was just a really normal, sweet, involved mom,” says a staff member at Sunnyside Preschool who asked not to be named.

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Brian Stauffer for Variety

The image Choi projected to friends and colleagues only magnified the shock when the news broke last January that the former talent relations manager had admitted to stealing nearly $1 million from HBO over a seven-year period. She has pleaded guilty to two counts of wire fraud and one count of tax evasion. Sentencing in federal court in Los Angeles is scheduled for Jan. 12; prosecutors are seeking a prison sentence for Choi of four years and two months, plus three years probation.

In sharp contrast to the image she projected to the outside world, Choi has told U.S. District Judge John Kronstadt that she embezzled from HBO in order to support a lifestyle she could not afford, and that her life began to spin out of control a decade ago when she learned she was HIV-positive. She declined comment, as did her attorney.

Choi’s case is a prime example of the alarming number of incidents of criminal fraud prosecutions and fraud-related litigation roiling the entertainment industry. Security experts say film and TV production is riper for ripoffs than ever because the increasing volume of financial transactions conducted entirely through digital communications make it easier for enterprising embezzlers to stage fake yet legitimate-looking businesses. And Hollywood is especially vulnerable because of the extravagance that surrounds high-profile talent and the array of outside vendors that contribute support services.

“Whenever you give a lot of discretion to people with large amounts of cash, controls are going to be lacking.”
Daniel Karson, Kroll Associates

“It’s incumbent on all of us to put a stop to it,” says a senior TV executive who has witnessed shady activities over many decades in the industry. “Wrong is wrong.”

Choi’s theft came in the form of invoices submitted for wardrobe, hair, makeup, and styling services for HBO talent that were never actually performed. In late 2007, she incorporated a company, Shine Glossy Group, that used the names of real stylists and talent on bills. HBO wire-transferred payments to a Citibank account she used to pay for everything from shopping trips to Target, Whole Foods, and Petco to rent on the family’s Sherman Oaks apartment to season tickets for the Los Angeles Clippers, according to the criminal complaint against Choi filed in August 2015. The relatively small amounts of money involved with each invoice — usually less than $10,000 — allowed Choi’s theft to go undetected for years.

In all, Choi stole $940,000 from HBO from 2008 to 2014. From 2011 to 2014, she also helped herself to about $63,000 worth of car services for her family and friends, all charged to HBO’s account in clear violation of company policy.

“The brazenness of it was the most shocking,” says a former colleague at HBO. “That took a lot of confidence.”

After a co-worker questioned some of the invoices she’d submitted, Choi was fired from HBO while on maternity leave in September 2014, weeks after giving birth to her daughter. From the start, Choi admitted her guilt and cooperated with prosecutors. She has been out on $50,000 bail since her formal arrest in September 2015. Her close friend, Deva Kehoe, director of special events at Fox Searchlight, guaranteed the bond for her bail. Choi is obligated to make restitution payments: $1,002,036.97 to HBO and $283,706 in back taxes to the IRS.

Renee Howdeshell, a founder of the Los Angeles-based accounting firm Fulcrum Inquiry and a member of the Assn. of Certified Fraud Examiners, says there is heightened awareness across all businesses of the need for forensic accounting and fraud prevention measures.

“There’s an increase in efforts toward data-mining and using technology that can help capture some of these problems,” Howdeshell says. But it’s a chicken-and-egg conundrum as to whether fraud is rising in the entertainment industry, she says. “The question is always: Is the problem occurring more often, or are we doing a better job at catching it?”

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Brian Stauffer for Variety

The entertainment industry’s culture of largess, for talent and executives, makes it ripe for thievery, according to Daniel Karson, chairman of investigations and disputes at Kroll Associates, which has conducted numerous forensic accounting investigations for major entertainment firms over the years.

“Whenever you give a lot of discretion to people with large amounts of cash, the controls are going to be lacking,” he says, declining, for confidentiality reasons, to disclose his company’s clients.

Industry insiders say part of the problem is that contemporary media conglomerates have grown so big that financial departments are overwhelmed and are relying on automated systems for approving routine financial transactions.

“It’s not the same when you just have to click, [rather than] handle a bill and receipts on an old-fashioned piece of paper and put your signature on it,” says a longtime industry executive.

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COURT MATTERS: Epix former chief digital officer Emil Rensing denies accusations of fraud; Jennifer Choi will be sentenced Jan. 12. rensing: Eliazov/BFA/REX/Shutterstock; Choi: Michael Kovac/WireImage

Take, for the example, the case against Emil Rensing, 42, the former chief digital officer at Epix, the premium cable venture controlled by Paramount Pictures, MGM, and Lionsgate. Rensing stands accused in New York of an elaborate scheme to defraud his employer of more than $8.5 million through phantom vendor companies he controlled. He has pleaded not guilty to one count of wire fraud and one count of aggravated identity theft.

According to federal prosecutors, Rensing used the names of real people, including executives with whom he’d worked in the past, on invoices for digital and technological services never provided. Those who were cited as key personnel on the Epix paperwork later told an FBI investigator they’d never heard of, nor worked for, the companies for whom they’d allegedly signed invoices.

Sources familiar with the Rensing case caution that the $8.5 million figure cited in the federal government’s complaint likely includes some legitimate expenses for the division he oversaw. One knowledgeable source predicts that the final figure will drop considerably when the government’s investigation and discovery process is complete.

Prosecutors allege Rensing — an established figure in digital media before he joined Epix in 2009 — went so far as to provide the address of another legitimate business he owned as the headquarters for one of the Epix vendors. When an Epix executive paid a visit to that address but couldn’t find any sign of the vendor, Rensing told him the company was undergoing a “rebranding,” according to the federal complaint. Confronted in August 2015 by Epix executives with suspicions that some payments had been sent to phantom vendors that he controlled, Rensing denied all wrongdoing, according to the complaint.

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*U.S. accounted for 48.8% of cases in the study. Source: Assn. of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Study

As indicated in the indictment against Rensing, security experts note that billing fraud is often found among people in charge of procuring a highly specialized service — something that is not easily understood by the accounting department. Prosecutors allege Rensing used his authority as Epix’s chief digital officer to convince the company that he was working with outside contractors on technical services related to Epix’s digital distribution, navigation, and metadata tracking systems. In fact, most of the work Rensing’s fictitious vendors charged to the company was completed by staff employees or other outside vendors, according to the complaint.

Prosecutors maintain that Rensing used the names of nine people, most of them former co-workers from previous jobs in digital and internet businesses, in establishing work orders and invoices for his phantom services. When contacted by the FBI, none of those nine had heard of the two vendor firms Rensing created, let alone signed invoices billing Epix for services, according to the complaint. Payments from Epix to the firms went to bank accounts controlled by Rensing, according to the complaint. Henry Mazurek, an attorney for Rensing, did not respond to multiple requests for comment.

Larry Crumbley, editor of the Journal of Forensic and Investigative Accounting and an emeritus professor of accounting and taxation at Louisiana State University, is surprised that routine internal audits didn’t turn up questions about the Choi and Rensing cases sooner. “If it’s a huge corporation and the boss says, ‘It’s OK to pay this,’ you can see how they’d get away with it,” he says. “But these lower-level employees saying that invoices are OK’d as is — that’s surprising.”

Billing schemes such as the ones Rensing and Choi are alleged to have employed are among the most common types of workplace theft. But the largest losses tend to come from the kind of financial-statement fraud that rocked the close-knit world of unscripted TV in recent months. Allegations of fraud have been leveled against two prominent production entities, Gurney Productions and LMNO Productions.

“Certainly some companies don’t want the reputational damage or tarnish of fraud being associated with their company name. Other companies want to set a tone and send a strong message.”
Renee Howdeshell, Fulcrum Inquiry

Scott and Deirdre Gurney are accused in a lawsuit filed by their parent company, ITV Studios, of creating a new company that was kept secret from ITV in order to artificially inflate Gurney Productions’ earnings. The lawsuit also alleges that the married couple treated Gurney Productions as “a personal ATM machine” to pay for household goods, country club memberships, and family vacations, among other items. The Gurneys responded Jan. 10 by filing a $100 million lawsuit against ITV Studios and its top executives.

According to ITV’s lawsuit, the Gurneys earlier this year established a company, Snake River Productions, based in Wyoming, separate from the L.A.-based Gurney Productions, without disclosure to the other board members that oversee the Gurney banner for ITV Studios. Scott and Deirdre Gurney then sold the international rights to a Gurney Productions program, “Northern Territory,” to Snake River for $3,613,473. “Northern Territory” was canceled after one season on Discovery Channel. Discovery had previously held international rights to the show but, with all of its marketplace clout, was only able to secure deals in two territories valued at a total of $268,000.

The seven-figure sale to Snake River of international rights to a canceled show was a clear instance of self-dealing, ITV contends. The deal had the effect of inflating Gurney Productions’ earnings in the months before ITV was poised to calculate the value of the couple’s remaining 38.5% stake in Gurney Productions, according to the suit.

The Gurneys’ attorney, Michael Weinsten, says the couple has ample evidence of wrongdoing by ITV Studios in an effort to depress the price it would have to pay to acquire the remaining 40% of the company under the terms of the original 2012 sale agreement.

“This is a blatant, desperate attempt at intimidation by ITV, a classic greedy corporate grab, solely for the purpose of enriching one shareholder at the expense of the founders who built this company into the highly valued, sustained financial success story that it is,” Weinsten says. “The claims against the Gurneys are completely baseless and fraught with contradictions, inconsistencies, and outright falsehoods.”

The Gurneys’ breach of contract suit, filed in Los Angeles Superior Court, asserts that ITV Studios president Brent Montgomery and others mounted an “outrageous campaign of intimidation and extortion” designed to tarnish the Gurneys’ reputation in the industry. ITV in its response to the Gurney suit vehemently denied the allegations and vowed to “vigorously” pursue its claim against the couple.

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*U.S. accounted for 48.8% of cases in the study. Source: Assn. of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Study

LMNO, headed by reality TV veteran Eric Schotz, has been accused in a lawsuit filed by Discovery Communications of inflating production expenses on some of its shows and maintaining a separate set of books. LMNO, in turn, has accused its longtime accountant, Paul Ikegami of Torrance, Calif., of stealing at least $1.5 million from the company in addition to attempting to extort $800,000 in connection with the Discovery dispute.

The allegations leveled at Gurney Productions and LMNO reflect the higher financial stakes for producers and networks active in the unscripted arena. The rising demand for content has turned a handful of busy companies into super-indies that juggle far more cash flow than they ever did before.

Linear TV channels are closely scrutinizing programming costs as they feel the pressure from declining advertising and affiliate revenue. That tension has led to calls from trade associations representing producers for uniform standards on accounting practices in unscripted TV shows. The accusations against Gurney and LMNO extend far beyond what network execs say is a typical “padding” of budget expenditures.

While the intricacies of digital-based transactions make fraud easier to execute, the culture of companies like HBO, operating amid the glamour of Hollywood, can enable scams to go undetected. Choi’s scheme hinged on the fact that at the time there were few checks and balances in place to verify that a specific actor or executive received grooming services for a specific event.

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*U.S. accounted for 48.8% of cases in the study. Source: Assn. of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Study

During Choi’s 2005-2014 tenure, HBO’s talent relations department had a lot of money at its disposal — sometimes even spending on people unaffiliated with the network to gloss up HBO parties and red carpet events, or to shepherd the invited guests of HBO stars, showrunners, directors, and producers. Former associates of Choi say she often seemed to usher in a number of questionable guests to HBO parties at events such as Comic-Con.

It was also typical that invoices were processed weeks after the service was provided. For as many times as an HBO star would be called on to make a talk-show appearance or attend a charity dinner, it wasn’t surprising to see bills for clothing, styling, and limos pile up.

One of the unusual aspects of the Choi and Rensing cases is the fact that the companies chose to prosecute. In many instances, firms prefer to avoid negative publicity. Multiple industry sources contacted for this story offered anecdotal tales of employees caught engaging in billing and expense-account theft, or receiving bribes and kickbacks from vendors and suppliers that never resulted in legal charges.

“Certainly some companies don’t want the reputational damage or tarnish of fraud being associated with their company name,” Howdeshell says. “Other companies want to set a tone and send a strong message.”

For HBO, which is part of publicly held Time Warner, there was concern that not disclosing Choi’s crime would be bad form from the perspective of corporate governance. Moreover, there was no keeping Choi’s abrupt departure a secret within the company.

Perhaps the longest-lasting impact of the kind of fraud perpetrated by Choi is the blow to the sense of trust and teamwork among employees. That feeling of betrayal can be especially acute at companies like HBO, where many of the staffers have worked together for years, if not decades. Even the process of investigating fraud — poring over the books, interviewing employees — is disruptive. The probe of Choi’s scheme at HBO took more than a year.

As details of Choi’s scheme came out, HBO insiders were surprised by the weakness of the company’s internal oversight of routine spending. It’s no accident that Choi’s fraud was uncovered around the time HBO began to tighten its purse strings, and more attention was paid to departmental budgets. Since Choi’s firing, a new layer of finance executives have been put in place at HBO to scrutinize payments that used to be put through to accounts payable with minimal approvals. The billing process has become more meticulous. Says an HBO exec, “She couldn’t have gotten away with it today.”

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Fraud Busters

There’s no substitute for old-fashioned human- detection efforts when it comes to preventing workplace fraud. Security experts offer some

basic tips.

Separate the responsibilities for billing and recording of goods and services received to minimize the risk of a single employee having the ability to perpetuate and conceal the misappropriation of funds.

Do your homework when a new vendor comes online. Make sure the company is reputable and real by verifying that it has a legitimate tax ID, telephone number, and physical address. Do a reverse address search online, visit the site, and insist on speaking to an employee contact at the vendor

phone number.

Cross-check the ZIP codes of business addresses for new vendors and suppliers with the home ZIP codes of employees.

Establish strict budgets for all third-party transactions and insist on detailed invoices. Conduct spot audits and trend analysis by vendor and expense type to spot unusual payments.

Establish a whistleblower hotline to allow employees to report suspicions anonymously.

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