It takes one to know one

James “Jimmy” Scalzo tried creating his own rules when he was a high-ranking loans officer; within six years, he was facing lifetime imprisonment. His is a cautionary tale to anyone considering committing fraud.

If it’s true that it takes a thief to catch a thief, then the following cautionary tale should help fraud investigators better understand what can drive a seemingly honest person to commit a fraud that sends him to prison and destroys his career.

James “Jimmy” Scalzo would like anyone considering the commission of a fraud to know what it can be like when the consequences of his or her crimes catch up with him or her.

In July 2013, the then 46-year-old former high-ranking loans officer at two banks in Wisconsin and Illinois was sentenced to 35 months in prison and ordered to pay restitution in the amount of US$679,737.23 after he pleaded guilty to one count of bank fraud and one count of money laundering for having carried out frauds totalling US$1.4 million. He had faced up to 30 years’ imprisonment on the fraud charge and an additional 20 years on the money laundering charge.

Three days after he began his sentence in the medium-security Federal Correctional Institution in Terre Haute, Ind., the married father of four children decided his life was no longer worth living. “I wrapped a telephone cord around my neck and I was determined to throw myself on the floor and either break my neck or lacerate it and bleed out,” he told CPA Magazine.

Fate intervened in the unlikeliest of people. “As I had this cord around my neck, a guy with tats from his earlobes to his feet — the kind of guy who, if we were in a pub, I’d say, ‘Fellas, let’s get the cheque because I don’t want to stay here’ — asked me what I was doing and told me to come talk with him.”

After Scalzo explained how he had lost a high-paying job (when arrested he was a senior vice-president, commercial banking) and his reputation and, most of all, feared losing his family, which he had terribly embarrassed, the man told him he couldn’t give up on the people who had supported him (which his family had done since he accepted a plea agreement in 2013). “You have to leave here a better man than the one who came in,” he said. He also urged Scalzo to work out, which the well-spoken Scalzo continues to this day (he served 27 months of his sentence and is on probation). “This guy just changed my whole perspective on life,” he says.

FROM GOOD BOY TO BAD BANKER

A self-described good Catholic boy from an Italian family, Scalzo grew up in Kenosha, Wis., on the southwestern shore of Lake Michigan, not far from Milwaukee and Chicago. While pursuing a degree in English and communications at the University of Wisconsin, he took a summer job in the mail room of a local bank in 1989, at age 22. Uninterested in the banking industry, he changed his mind when the president of the bank, who was a family friend, asked him how much he was making. “US$3.75 an hour,” Scalzo replied. “Our job pays US$23,000,” the president said. Scalzo suddenly loved banking.

During a training period, which included a stint working as a teller, Scalzo learned an insightful lesson about how things actually worked in banks, one that should get the attention of anyone working in a supervisory position in the financial industries. “I was, unequivocally, beyond a shadow of a doubt, the worst teller in history,” he says. “I could not get the drawer to balance no matter what I did.” As a result, all the tellers who were itching to leave at the end of the day had to wait on him as he tried to balance the numbers. “These people were pissed at me beyond belief.”

One of them told him to carry a plastic sandwich bag with some change in it so he could add or subtract whatever amount was required to make the numbers balance. “They said that if I wasn’t able to balance the till a report would have to be sent re the discrepancy and then I’d be watched or maybe moved. That stuck with me.”

He also noticed that although everyone told him banking was the most regulated and rule-oriented industry, no one training him seemed to do things the same way. In other words, a person might be able to create his or her own rules, as long as no discrepancies were ever reported.

Charismatic and driven, Scalzo quickly moved up the ranks in the banking industry as a loans officer. He was a closer, who easily outperformed the other officers. By the late 2000s, he had sole-signing authority for loans “of about US$750,000 to one million,” he says, describing a working environment that was intensely focused on making loans happen.

In the early 2000s, Scalzo decided he wanted a source of income to supplement or possibly even replace his banking job, which he had soured on to a degree. He had inherited a considerable amount of money following his father’s death and used it to purchase some investment properties, mostly in residential real estate. He partnered with two first cousins, who ran the operations while he was “the financial backstop.” All went well until he discovered one of the cousins had been using “our operating account as a personal piggybank.” He says he’s unaware of what the cousin was using the money for.

Some time in either 2006 or 2007 (he isn’t quite sure of the date), Scalzo took the first step on a path that eventually led to prison. He approved a US$67,000 loan to one of his cousins, without providing any legitimate documentation or collateral, and redirected the money to himself to cover the losses from the cousin’s wrongdoing, concerned that the bank would find out his business was faltering. “I was desperate because in my mind my career was accelerating and I knew that if it appeared that I couldn’t be fiscally responsible for myself, how was I going to get to the senior level or president’s job and be fiscally responsible for the bank and customers if I couldn’t be [that way] for myself.”

If he had stopped after that first fraudulent loan, he might never have been caught.

But he didn’t.

The recession in mid-2008 played havoc with his investment properties. “In a matter of months I went from a positive net worth in real estate value to one that was completely upside down,” he says.

Describing himself as arrogant and conceited about his ability to work the system, Scalzo embarked on a series of eight additional fraudulent loans to cover his losses and also allow him to lead the life of a seemingly wealthy bank executive. “He forged borrowers’ signatures on loan documents, redirected funds from the loans to his personal use without the knowledge of the borrowers, and took funds from some fraudulent loans to pay off balances on previous fraudulent loans in order to conceal the original fraud,” a court document would later note.

One of his schemes was to mortgage the home belonging to the parents of his cousin-partners. He rationalized it by thinking that the parents had helped out in the past if money was short. When the parents discovered the fraud, and after Scalzo was unable to cover the loan, they went to the FBI. It wasn’t long before the bureau came knocking on Scalzo’s door.

WILD WEST BANKING

During his time in prison Scalzo thought a great deal about the banking industry. He believes the Wild West atmosphere that existed in the banking industry prior to the 2008 recession might now be returning, noting that the Trump administration is committed to repealing vital aspects of the Dodd-Frank financial reform act. He also sees a return of the “low to no-doc loan,” which brought on the sub-prime mortgage scandal in the US.

Scalzo also confesses that he could never have authorized US$1.4 million in fraudulent loans if two signatures had been required for every transaction.

He advises forensic investigators and auditors to look for loans officers who are skittish about being subjected to loan reviews or having their own cash flow analyzed. “Also really watch out for people who are always putting loans in the ‘exception-to-policy’ category. That’s a key phrase in banking: ‘We’re going to make this loan but it’s an exception to policy.’ It’s perfectly legal but someone who constantly operates with loan exceptions means that their deals are in the gray area.”

Although some fraudsters and con artists have turned their criminal past into a business — notably Frank Abagnale, whose life of crime was the basis of the Steven Spielberg film Catch Me If You Can — Scalzo says that is of no interest to him.

“I don’t have a book, no podcast, nothing on YouTube,” he says, adding that he now works in “operations management” at a Gold’s Gym in Wisconsin.

Since his release, Scalzo has accepted two unsolicited and unpaid speaking engagements, which have afforded him the opportunity to publicly take full responsibility for his actions and, perhaps more importantly, talk about how and why he turned to fraud. “If my talk can stop even one person from [committing fraud] then my whole suffering might have some sense of value,” he says.