This year, the “Special Issue” of The Value Examiner is devoted to challenges in valuation. We all know that, as Americans, we have a constitutional right to a fair and unbiased hearing when we are accused of a crime. In the attached case study we look at the role of the expert witness faced with the challenge of explaining a defendant’s business practices when that defendant has all but been tried in the court of public opinion. This case in point is one which involved known members of a -based , a businessman with legitimate successes, but with unsavory ties to the crime family, racketeering charges, and an accountant from New Jersey, Martin Abo. This is his story. We hope this article will make you think about how the role of a valuation professional is changing even as the core values stay relevant and important. Nancy McCarthy Senior Editor The Value Examiner Nancy McCarthy has been the senior editor of The Value Examiner since 2013. She is a writer, editor, and marketing professional with twenty-five years’ experience in financial services. She is also a teacher; she has taught business courses at NYU and New York Institute of Technology, where she earned her MA. A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES

VALUATION • Defending the Devil: An Expert Witness Tells All • With Martin H. Abo, CPA, CVA, ABV, CFA, CFF

n spite of our constitutional right THE RIGHT TO A FAIR TRIAL to a fair and unbiased hearing, some defendants are perceived One of the very basic tenets of the American judicial system is that defendants guiltier than others, even before are guaranteed the “right to a speedy and public trial.” Specifically, the Sixth their day in court. High profile cases Amendment to the Constitution states: Iinvolving celebrities, government of- In all criminal prosecutions, the accused shall enjoy the right to a speedy ficials, or people with ties to organized and public trial, by an impartial jury of the State and district wherein crime—to name a few—can be tried and the crime shall have been committed, which district shall have been convicted in the media—both conven- previously ascertained by law, and to be informed of the nature and tional media and social media. Popular cause of the accusation; to be confronted with the witnesses against him; opinion cannot be easily dismissed; in to have compulsory process for obtaining witnesses in his favor, and to varying degrees, it can influence the have the Assistance of Counsel for his defense.1 participants in the judicial system from the jury pool to the presiding judge. Over the past 250 years, the rights guaranteed in the sixth, seventh, and other This prejudice—warranted or other- amendments have been clarified, refined, explained, and codified. In the twentieth wise—can make the role of an expert century, landmark decisions regarding rules of evidence gave interpretations of witness for the defense a carefully ne- what could and could not be used as “expert evidence.” Starting with Frye2 in the gotiated minefield of protocol. 1920s, to the development of the Federal Rules of Evidence in 1975,3 to the Daubert4 Standard increasingly used in modern court proceedings, have attempted to give A case in point is one which involved the courts as much information as possible to render fair and unbiased decisions. known members of a Philadelphia- based crime family, a businessman with Further ensuring that defendants are given fair representation, both the federal legitimate successes, but with unsavory government and the states have striven to guarantee that defendants are provided ties to the crime family, racketeering with professional legal counsel. The Criminal Justice Act (CJA), first enacted in charges, and an accountant from New 1964, has ensured this representation. In 1970, Congress established a full-time Jersey, Martin Abo, CPA, CVA, ABV, federal defender service within the judicial branch. Today, nearly ninety percent and CFF. This is his story. of federal criminal defendants are aided by lawyers, investigators, and experts paid IT AIN’T PERSONAL. for under the CJA. IT’S BUSINESS In 2013, Nicodemo S. Scarfo—son of 1 U.S. Const. amend. XI. Sec. 2. 2 Frye v. United States,293 F. 1013 (D.C. Cir. 1923). jailed mob boss “Little Nicky” Scarfo— 3 Rule 702. Testimony by Expert Witness (Pub. L. 93–595, §1, Jan. 2, 1975, 88 Stat. 1937; Apr. 17, 2000, and eleven associates were brought to eff. Dec. 1, 2000; Apr. 26, 2011, eff. Dec. 1, 2011.). 4 Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993).

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trial by the federal government. The 108-page federal AMERICA’S FASCINATION WITH criminal indictment for racketeering charged, among ORGANIZED CRIME other things, that Scarfo and his associates (including The fascination with organized crime—in particular with the long-time friend and business man, Salvatore (Sal) Mafia—reached its peak in the early 1970s with the release of the Pelullo) took over the Texas-based1 firm, FirstPlus movie, The Godfather, and with the novel on which it was based Financial, by illegal methods. By using fear and by Italian American author, Mario Puzo. Puzo’s book, and the intimidation, the government alleged the defendants subsequent movies directed by Francis Ford Coppola, whetted had stolen at least twelve million dollars from the America’s appetite for knowledge about the secret organization. company. This money, it was charged, had gone However, almost from the early days in this country, the Mafia has to furnish lavish lifestyles that included expensive held a certain appeal with the general public. The organization homes, a plane, and a yacht. itself was shrouded in mystery in those early years and, to some extent, still is. According to the website Complex http://www. According to FBI Special Agent Joe Gilson, “Essentially, complex.com/pop-culture/mafia-influence-on-pop-culture- Scarfo and Pelullo used extortion and other illegal today), the Mafia has been in America since the late 1800s: means to gain control of the company. And then they systematically looted the company.” The Mafia has always relied on secrecy and misdirection... AN OFFER THEY COULDN’T REFUSE This extends even to the mention of its criminal activities in common conversation. For the Mafia, there is no Mafia. In the mid-1990s, FirstPlus was a successful multimillion- There is only Cosa Nostra, or “our thing.” Within the nascent dollar mortgage company specializing in second of the early 1900s, this term came to signify a mortgages. In 1999, its leading subsidiary went bankrupt— new order in its new home.5 primarily because Wall Street’s appetite for sub-prime loans which were packaged and sold as securities to While a defendant’s prior behavior or connections should not institutional investors had soured. By 2006, the company have a bearing on a current court case, it can be difficult to was receiving money into a trust. The trust had a total of ignore. This is nowhere more apparent than when the defendant forty-one million dollars. According to the government, has ties to organized crime. Popular culture has made the world Scarfo, with the help Pelullo, took over the ailing company of “dons” and “” almost accessible. Movies such as in 2007. According to Scarfo and Pelullo, it was their The Godfather or TV series’ such as The Sopranos, give a peak intention to restructure the company and build it back into a world where respect is gained through fear, and where into a viable, multi-integrated operation. Pelullo put in force and intimidation are signs of strength. In its series on the place a business model that had been successful in turning Mafia, entitled From Bootleggers to MCs: The History of the around another company he had acquired in 2005. He Mafia in Popular Culture, the website Complex says: also recommended friends and associates with expertise …the Mafia quietly embedded itself in all phases of American in business to serve on the company’s board of directors. life, and popular culture was no exception. Hollywood was In its indictment, the government alleged that the enamored with gangsters and the early days of American defendants and several others—including Scarfo’s cinema saw countless depictions of mob life… One of the father who gave his blessing from the confines of earliest gangster hits was the film, The Public Enemy, released federal prison—had several meetings about taking in 1931, starring Jimmy Cagney. Close to sixty years later, over FirstPlus, and they threatened the existing Public Enemy (the rap group) would be one of the most management. The government further alleged that important groups in hip-hop, speaking for a generation of Scarfo and Pelullo then coerced FirstPlus to purchase, 6 inner city youth. in exchange for millions of dollars, companies owned and controlled by the two defendants. 5 From Bootleggers to MC’s: The History of the Mafia in Pop Culture, Complex, www.complex.com/pop-culture/mafia influence-on-pop-culture-today. 6 Ibid. 1 According to the bylaws, the company was based in Nevada, but doing business in Dallas, Texas.

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The government noted, although Scarfo and Pelullo were TAKE THE BUSINESS DOCUMENTS; LEAVE THE running and controlling the company, their names never ENGAGEMENT LETTER appeared on any company documents, or on filings with Martin Abo was approached by the (CJA)-appointed defense the SEC, or other government agencies. Testimony from attorneys regarding the business practices of Salvatore Pelullo. former employees and associated professionals, including a After much debate and discussion with his partner and top Pelullo aid turned , Cory Leshner, helped the others, Abo decided to accept the appointment. He knew this government build its case. According to the indictment, the was going to be a long, involved case. There were thousands men used both “physical and financial threats” to take control of financial documents seized by the government, which of FirstPlus in order to plunder the company for their own included accounting programs/ledgers, hundreds of bank financial gain. Scarfo, Pelullo, and their partners replaced the statements, tax and regulatory filings, appraisals, pertinent company’s board of directors (which at one time included communications, to name only some of the documents that former vice president Dan Quayle and pro-football great needed to be analyzed and corroborated. Dan Marino) with their own cronies. They then named their accomplice, lawyer William Maxwell, as special counsel to The question was deceptively simple: Did Pelullo observe FirstPlus so that Maxwell could use that position’s authority legitimate business practices in the takeover of FirstPlus to funnel millions back to, whom the government termed, Financial? Abo’s challenge was to review and assess the “the mobsters.” In a raid of a yacht owned by the Scarfo and indictments alleging: Pelullo Family Trust, the FBI found a cache of handguns, • Personal gain to the defendants through the takeover rifles, a shotgun, and more than 2,500 rounds of ammunition. and alleged looting of FirstPlus • The case, which took six months to prosecute, included expert Lack of disclosure and transparency by the defendants testimony from both sides, extensive presentation of bank to avoid detection by the SEC, the public at large, the documents, and wiretap recordings. Assistant U.S. Attorney shareholders, and law enforcement • Steven D’Aguanno and FBI Agent Joseph Gilson lead the Wire fraud in connection with the several consulting probe which also included the SEC; The Department of Labor; and legal services agreements and the Bureau of Alcohol, Tobacco, Firearms, and Explosives. Paul Fishman, U.S. attorney for New Jersey, prosecuted the In choosing Abo, defense counsel was looking for an case. According to Fishman, the defendants gave new meaning experienced and impartial expert witness who could provide to the term “corporate takeover.” a strong defense for Pelullo. Abo, a practicing CPA for forty years, has been involved in numerous business acquisitions Lawyers for the defense argued that the prosecution was and dispositions, has been a business appraiser—a past acting capitalizing on Scarfo’s father’s association with organized interim CFO/consultant to a public company—a director of a 2 crime. The defense also argued FirstPlus was in turmoil thirty-five-million-dollar healthcare enterprise, and has served well before Scarfo and Pelullo took control in 2007. They on the board of a bank and as head of its audit committee. maintained FirstPlus—and the defendants—were impacted by the poor economy, cash flow, and growing pains typical In spite of its notoriety, Abo approached it like any other case. of any “main street” business and even public companies. “As I have said in multiple conversations and presentations, it Finally, they contended the defendants were victims of the all begins with the engagement letter,” says Abo. crippling and purposely timed raid by the FBI. Significantly, “The basics still apply: set the parameters of what you will and they argued that the negative coverage of the company’s will not do, get everyone to agree to that concept, determine woes was exaggerated in the press and other media once the the facts.” federal investigation became public.

2 The elder Scarfo (who is serving a life sentence at the U.S. Penitentiary in Atlanta, Georgia) was a member of the Philadelphia-based crime family and is widely seen as the most violent mob boss of his era.

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A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES THE ENGAGEMENT LETTER were convicted of racketeering and conspiracy to sell and In any business situation, communicating the scope of your possess firearms. Scarfo and Pelullo were later sentenced to work is a way to manage expectations of the client and to thirty years in federal prison; John Maxwell received ten years THE ENGAGEMENT LETTER minimize risk. The engagement letter allows you to: wereand hisconvicted brother, of William, racketeering received and twenty conspiracy years. to The sell otherand possess firearms. Scarfo and Pelullo were later sentenced to In •any business situation, communicating the scope of your defendants—the SEC attorney, the business/tax attorney, Define the services you are being engaged to perform thirty years in federal prison; John Maxwell received ten years work• is a way to manage expectations of the client and to and Scarfo’s personal attorney were found not guilty. minimize Identify risk. the The responsibility engagement and letter authority allows to avoidyou to: potentially and his brother, William, received twenty years. The other severe penalties Martin Abo stands by his conclusions. “It’s no exaggeration • defendants—the SEC attorney, the business/tax attorney, • DefineExplain thefees, services billing, youand arepayment being termsengaged to perform to say that this case included about as much data as did the • and Scarfo’s personal attorney were found not guilty. • IdentifyAssure thethe responsibility client that additional and authority services to avoid will potentially not be ENRON case. For a trial spanning four days a week from early severeinitiated penalties without advance approval MartinJanuary Abo through stands the by first his conclusions.week of July, there “It’s nowas exaggeration just so much • Explain fees, billing, and payment terms tofinancial say that andthis oftencase includedsophisticated about information as much data for asthe did jury the to • Assure the client that additional services will not be ENRONget its head case. around. For a trial And, spanning frankly, somefour days of the a week defendants from early had Thisinitiated holds truewithout whether advance you approval are dealing with the office of Januaryshady pasts through and reallythe first questionable week of July, associates. there was I justthink so it muchwas the CJA or with a private client. In this case, Abo wanted the financialdifficult andto makeoften the sophisticated distinctions,” information says Abo. for the jury to client, the attorneys, and the judge to understand what he get its head around. And, frankly, some of the defendants had Thiswould holdsand would true notwhether be doing. you are dealing with the office of shadyWould pasts he encourage and really other questionable practitioners associates. to take I thinkon a case it was of theDETERMINING CJA or with a private THE FACTS client. In this case, Abo wanted the difficultthis scope? to make the distinctions,” says Abo. client, the attorneys, and the judge to understand what he “Yes,” he says. “But it is important you know what you don’t wouldAfter siftingand would through not bethousands doing. of pages of testimony and Would he encourage other practitioners to take on a case of business documents, Abo concluded that the government know, and then get the help you need to compliment your skill DETERMINING THE FACTS this scope? was wrong in its assessment of how FirstPlus was handled set.” As a practice pointer, he also stresses the importance of the Afteras a business.sifting through He determined thousands that of pagesthe charges of testimony against andthe “Yes,”engagement he says. letter “But in it outliningis important the scopeyou know of what what you you will don’t do, businessdefendants documents, did not adequatelyAbo concluded consider that the the businessgovernment and know,and the and ability then to get bring the helpin resources you need to to help compliment you deliver your on yourskill wasstrategic wrong logic in its behind assessment the multipleof how FirstPlusacquisitions was handledand the set.”promise. As a practiceAlthough pointer, this was he aalso high stresses profile the criminal importance case, of at the the asamount a business. of credible He determined due diligence that undertaken. the charges Says against Abo, “The the engagementend of the day, letter it was in aboutoutlining a business the scope and of opining what you on whetherwill do, defendantsimpression didthe governmentnot adequately was consider giving was, the ‘it’sbusiness organized and andor not the legitimate ability to bring business in resources practices to were help followed.you deliver Says on yourAbo, strategiccrime; it’s logic all bad,’ behind and thatthe multiplewasn’t necessarily acquisitions the andcase.” the In promise.“Aside from Although his unfortunate this was associations,a high profile Pelullo criminal took case, steps at that the amountterms of of the credible paper trail,due diligence he concluded, undertaken. Pelullo Says did everythingAbo, “The endany prudentof the day, business it was aboutowner a would business and, and even opining more onso, whetherdictated impressionby the book. the “I governmentwas hired to was review giving Pelullo’s was, ‘it’s actions, organized and, orby notwhat legitimate a public enterprisebusiness practices must adhere were to. followed. That is Sayswhat Abo,I was crime;on paper, it’s allhe bad,’made and exhaustive that wasn’t efforts necessarily and performed the case.” dueIn “Asidebrought from in to his assess. unfortunate And that associations, is how I called Pelullo it.” tookVE steps that terms of the paper trail, he concluded, Pelullo did everything any prudent business owner would and, even more so, dictated diligence to bring the company into complete compliance.” This article appearedMartin in theH. specialAbo, CPA, issue ABV,of the CVA, VALUE CFF, has by the book. “I was hired to review Pelullo’s actions, and, by what a public enterprise must adhere to. That is what I was EXAMINER, a publicationcomprehensive of the experienceNational Association in individual of onMartin paper, Abo he testifiedmade exhaustive in open courtefforts for andfive performed days. Over due the brought in to assess. And that is how I called it.” VE Certified Valuatorsand and corporate Analysts financial, (NACVA). business, and tax diligencecourse of to the bring five the days company he was into questioned complete compliance.”at length about the hiring of outside professionals, the consulting and other MartinMartinplanning. H. H. Abo, HisAbo, CPA,previous CPA, ABV, ABV, experience CVA, CVA, CFF, CFF,includes has has Martinprofessional Abo feestestified paid, the in investmentopen court value for fiveof the days. business Over and the comprehensivecomprehensiveseveral years experiencewith experience the tax in individualdepartmentin individual and and corporate financial, business, and tax planning. coursevarious ofacquisitions, the five daysand otherhe was aspects questioned of this publicat length company. about andaudit corporate staff of afinancial, Big Four CPAbusiness, firm asand well tax as the hiring of outside professionals, the consulting and other Hisplanning.regional previous firmsHis experience previous before includes heexperience founded several includesthe years pres- Based on his exhaustive analysis, especially in light of Pelullo’s with the tax department and audit staff of a Big professional fees paid, the investment value of the business and severalent enterprise. years with Mr. theAbo tax has department also developed and prior business experience and following the “successful” Four CPA firm as well as regional firms before variouslogic employed, acquisitions, Abo and concluded other aspects that: the of this defendant public company.utilized a audita specific staff expertiseof a Big Four in performingCPA firm litigationas well as heregional founded firms the pres-ent before enterprise. he founded Mr. the Abo pres has- Basedbusiness on modelhis exhaustive that had analysis, helped turn especially around in other light businesses,of Pelullo’s support and otheralso consulting developed services.a specific Clients, expertise as inwell performing as the ent enterprise. Mr. Abo has also developed priorthat the business government’s experience allegations and werefollowing not substantiated, the “successful” and banking, insurancelitigation and supportlegal community, and other consultinghave increasingly services. logiclack ofemployed, prudent Abojudgment concluded by Pelullo—in that: the defendantterms of a utilized business a Clients,called upon as well him asa to thespecific provide banking, expertisetechnical insurance in assistance, andperforming legal arbitrationcommunity, litigation businessperspective—was model that not had supported. helped turn around other businesses, supporthaveor expert increasingly and testimony other called consulting on financial upon himservices. accountingto provide Clients, technicalmatters, as well assistance, businessas the banking, insurance and legal community, have increasingly thatCONCLUSION: the government’s THE allegations FBI RUINS were EVERYTHING not substantiated, and arbitrationvaluations, orstructuring expert testimony buy-ins on and financial buy-outs, accounting divorce, estatematters, lack of prudent judgment by Pelullo—in terms of a business calledbusinesscontroversies, upon valuations, him insurance to structuringprovide claims technical buy-insand other assistance, and forensic/investiga buy-outs, arbitration divorce,- perspective—wasIn the end, the jury not supported.went for the conviction. Both Scarfo orestatetive expert analysis controversies, testimony covering oninsurance a financial wide range claims accounting of andtopics other and matters, forensic/ industries. E- business and Pelullo along with the Maxwell brothers (John, former CONCLUSION: THE FBI RUINS EVERYTHING valuations,investiga-tivemail: [email protected] structuring analysis covering buy-ins a and wide buy-outs, range of topicsdivorce, and estate FirstPlus CEO, and William, special counsel to FirstPlus) controversies,industries. E-mail: insurance [email protected] claims and other forensic/investiga- In the end, the jury went for the conviction. Both Scarfo tive analysis covering a wide range of topics and industries. E- and Pelullo along with the Maxwell brothers (John, former mail: [email protected] 24 FirstPlusSeptember/October5 CEO, and 2016William, special counsel to FirstPlus) the value examiner

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THE DEFENDANTS IN USA V. SCARFO ET AL the FirstPlus case, they had no idea he was involved with Scarfo and Pelullo were the most prominent of the the crime family. His neighbors knew him as a family man twelve defendants, but the other defendants included a who worked in construction. former FirstPlus CEO, and four attorneys—one of whom BUSINESS MAN OF THE YEAR was the brother of the former CEO and special counsel In his CV, Salvatore Pelullo describes himself as having to the company. “more than twenty years of finance and management DON’T ASK ME ABOUT MY experience with small to mid-size companies as a principal FATHER’S BUSINESS and consultant. His diverse experience encompasses Nicodemo Scarfo Jr. is the son of Nicodemo “Little operational, managerial, and financial administration Nicky” Scarfo. He grew up in South Jersey and, by all functions in multi-market multi-product areas.” At the accounts, was not involved in his father’s business until time of his indictment, he was a forty-five-year-old after he graduated from high school. In 1988, Little Nicky business man with a tenth grade education and a string Scarfo was convicted on more than thirty-two counts of businesses he had successfully turned around. His of racketeering, which included eight counts of murder, strategy was to identify struggling companies, and supply four counts of attempted murder, two counts of illegal the management and cash assistance to pull them out of distribution of methamphetamine, one count of loan bankruptcy. Then he would either sell or run the newly sharking, fourteen counts of extortion, and one count of constructed company. illegal gambling. Pelullo and Scarfo were childhood friends—their families On Halloween night in 1989, Scarfo was dining at an were close when they lived in the same Italian restaurant in Philadelphia. When a man wearing neighborhood. In high school, Pelullo developed a a Batman mask and holding a bag of candy entered the dependency on alcohol. His father placed him in a school restaurant, no one paid much attention. That is, until he for troubled teens in Orlando, Florida, where the family had approached Scarfo’s table, pulled a MAC-10 machine moved while the elder Pelullo worked on a hotel project. pistol from the bag of treats and pumped eight rounds into In the late ‘80s, Pelullo borrowed $30,000 from his father Scarfo’s neck, arms, and torso. Remarkably, no vital organs and, with a partner, started Express Real Estate. While were damaged and Scarfo recovered from the attack in the company made a great deal of money buying and fewer than nine weeks. According to newspaper accounts, selling houses, Pelullo blew the profits on cars, partying, after the shooting, Scarfo moved back to Philadelphia and and alcohol. “I grew up fast because everyone was older sought the protection of the Lucchese family. His father, it than me; I tried to compete with my (older) brothers, but is alleged, arranged for him to become a “made” member couldn’t,” he is quoted as saying. He also seemed to live in of the New York-based crime family. the shadow of a much older brother Leonard, a business Later, Scarfo moved to New Jersey and was an active consultant convicted of defrauding a Stockton, California member of a Lucchese crew. Law enforcement believed savings and loan company he controlled of $2.2 million. a rival, former Philadelphia mob boss, Joseph “Skinny Prior to his trial, Pelullo would blog inappropriate and Joey” Merlino, was the shooter in the hit on Scarfo. They inflammatory comments about the proceedings and, in believed that Merlino and his crew were looking to take particular, the judge. His lawyer argued that his medical control of the Philly-based mafia, and that Scarfo was a and psychological records demonstrated that Pelullo was possible proxy for his jailed father. suffering from bi-polar disorder and was therefore not When residents of Galloway, New Jersey—the town where responsible for his actions. The judge disagreed. Scarfo and his family lived—learned of his indictment in

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