Jerry Azarkman likes to say he built Curacao, a Pico-Union retailer that largely caters to the Latino market, into a $350 million-a-year business based on trust. After all, Curacao has grown to an 11-store chain by extending credit to customers who might not qualify for credit cards.
Now, the company claims, its trust has been betrayed – not by a customer, but by one of its own.
ADIR International, the company that does business as Curacao, has alleged that an audit conducted last month found that its former purchasing manager bilked the company out of $1.5 million.
The company claims Miguel Vega, who approved Curacao’s bills from vendors, set up a false-front business that acted as a middle man between the retailer and its suppliers. Vega’s business, it alleges, bought goods at discounted prices and resold them to Curacao at steep markups – with Vega approving those invoices at Curacao and pocketing the profits.
The principals in the dispute aren’t talking – ADIR’s lawyers declined to comment and Vega could not be reached – but the hit allegedly taken by the retailer, which has stores throughout Southern California and Arizona, is not uncommon among businesses of its size.
One reason small and midsize companies are most vulnerable to fraud, said David Wall, president of the Association of Certified Fraud Examiners’ L.A. chapter, is a reliance on trust that does not exist at big corporations that have more formal systems for financial controls.
“A control procedure can be something as simple as having the boss balance the checkbook every month rather than allowing the bookkeeper to do so,” Wall said of small businesses. “So those small companies operate in an environment of trust, where they are reliant on the trustworthiness of key personnel. In large corporations, trust is not liberally dispensed; it’s carefully measured.”
Curacao’s L.A. roots date to the 1970s when Azarkman said that he moved to California from Israel with only $20 in his pocket.
He managed to scrape together enough money to buy merchandise from electronics and appliance wholesalers downtown, selling them door to door, primarily to Latino immigrants.
Azarkman was soon joined by his brother, Ron, and eventually they opened what was then called La Curacao in the heavily Hispanic neighborhood of Pico-Union in 1983.
Jerry Azarkman, named Ernst & Young’s Los Angeles Entrepreneur of the Year last year for building Curacao, is still a board member but handed the reins of the business to his brother, who serves as chief executive of the 2,000-employee company.
Until last month, Vega was one of them.
He joined Curacao in 2006, according to his LinkedIn profile, and had been responsible for purchasing merchandise from vendors and approving payment invoices, according to the company’s lawsuit.
But Curacao said its audit, concluded last month, found that Vega had been defrauding the company for roughly three years, according
to a complaint it filed in Los Angeles Superior Court late last month. He was terminated after the audit was completed.
The company said the audit revealed Vega had created purchase orders using the name of a business called ADR International – similar to Curacao parent ADIR International – that included Curacao’s logo. Vega’s ADR issued the purchase orders to Curacao’s suppliers to buy goods at wholesale prices. ADR Inter-national was registered to do business in 2011 by Vega’s brother, Christian, who’s also named as a defendant.
In May, for example, Miguel Vega allegedly placed an order valued at nearly $34,000 with a dinnerware supplier, promising payment within 45 days, according to the complaint. Had the vendor not been led to believe it was selling to Curacao, it would not have extended those credit terms, the company alleges. Vega, it says, then sold the goods to Curacao at a 38 percent markup over what he was to pay, with payment due within 30 days.
The company says that in his role as Curacao’s purchasing manager, Vega approved those bills; as a principal at ADR International he pocketed the difference.
Mauricio Fux, Curacao’s executive vice president and general counsel, declined to talk about the impact the alleged scheme had on the company. Multiple calls to Vega’s home were not returned.
The alleged scheme is not terribly complicated and not uncommon, said Randy Leff, a partner at Beverly Hills law firm Ervin Cohen & Jessup who reviewed the complaint for the Business Journal.
“We represent a lot of midmarket businesses, and in that sector there’s a really high percentage of this happening,” Leff said. “I’ve had cases where frauds go on for four of five years where really trusted people, for whatever reason, go south.”
But, he said, one thing that stands out about Curacao’s claims is that they landed in court. Companies often decide against litigating fraud claims because the perpetrators generally spend the money in short order, making recovery difficult. It is unclear whether a criminal investigation is proceeding in Curacao’s case.
The factors that likely allowed Vega’s alleged scheme to continue for so long, Leff said, were the combination of the power he held in the company coupled with an apparent lack of oversight. It is a situation common among many small and midsize companies.
“This one guy was responsible for buying and for approving invoices as well, and that’s where the real problem is,” he said. “There’s no one watching over him.”
In general, the best way to avoid fraud, Leff said, is to segregate duties among multiple employees. Another trick is to require workers to take a vacation every year.
“If they’re out for a two-week vacation, it’s hard to keep a fraud going,” he said. “If someone takes over their desk, they’ll start asking questions. And if someone is really resisting taking a vacation, there’s probably a reason.”