Small Businesses Left Scrambling After $35 Million Disappears In Massive Payrolls Fraud

A rumored fraud at a small payrolls processing company located in remote Clifton, New York, drained the bank accounts for thousands of employees at companies that use its service. According to WSJ, money intended for employee paychecks and tax payments disappeared after an online payrolls company known as MyPayrollHR mysteriously folded.

All of a sudden, roughly 8,000 workers at 400 companies who relied on the service to get their paychecks by direct deposit saw hundreds of dollars taken out of their accounts instead of being deposited into their accounts, according to Nacha, the organization that oversees the ACH Network used to move money from one bank account to another.

James LaFlamme

Small business owners were left scrambling, CBS News reported. And many of their employees couldn't pay their rent.

The Hometown Diner in Rindge, New Hampshire, is closed on Tuesdays - that's when owner Bonnie Rosengrant pays her 23 employees. Today was the first time in days she was able to do that.

"It was very hard because I know a lot of my employees are paycheck to paycheck," she said.

Rosengrant was surprised to learn that none of her employees had been paid because MyPayrollHR had folded, taking its customers' assets (some $35 million) with it.

The FBI have launched an investigation into a suspected fraud at the company, and a team of agents have raided the upstate New York home of Michael Mann, MyPayrollHR's owner.

In a tweet sent earlier this week, the FBI's Albany bureau asked all business owners impacted by the fraud to fill out a questionnaire.

Mann's attorney, Michael Koenig, said his client is cooperating with investigators, and will continue to do so. "Michael Mann has voluntarily and proactively met with and is cooperating with the U.S. attorney’s office in order to fully address the consequences of recent events."

What exactly happened remains unclear, and some of the employees impacted by the MyPayrollHR's closure are joining a class-action lawsuit, arguing that the incident caused them to be late with rent and credit-card payments.

Meanwhile, many of the business owners who were impacted were forced to take out loans to cover the shortfall, per WSJ.

Mike Walls, the owner of a home-care agency and an assisted-living facility in Lake Jackson, Texas, said he took out a $50,000 line of credit to deal with any short-term problems.


Mr. Walls said he wrote checks to five of his 75 employees so that they could pay urgent bills and provided workers with letters they could show landlords or creditors. All except two employees have had their money returned, Mr. Walls said Monday.

"I can deal with this as a business owner, but my employees are profoundly affected," he said. "The snowball that could come from this is so scary."

Another employer, James LaFlamme, said he threw down $100,000 of his own money to cover employees.

James LaFlamme said he advanced about $100,000 to replace missed paychecks for the roughly 60 employees of his two Vienna, Va., businesses. Mr. LaFlamme said he immediately filed a fraud claim with SunTrust Banks Inc. after $14,000 of his own pay was withdrawn from two personal bank accounts.

While Mr. LaFlamme said he still isn’t sure when the bank will reverse those withdrawals, he said many of his employees had money returned to their accounts Friday. Some of those employees came to the office Monday with checks to repay the advances.

"We were able to scrape enough cash together to make the last payroll this past Friday, but if all the money doesn’t come back to the employees, then there could be a problem with payroll coming up," Mr. LaFlamme said.

WSJ said the incident will draw attention to a critical but lightly regulated area of the economy: The payroll-processing industry, which is both sprawling and lightly regulated. Competitors in the space range in size from publicly traded giants like ADP and Paychex to smaller players like MyPayrollHR.

Cachet, one of the firms that manages the flow of payroll funds through the ACH system, said it found evidence of fraud in MyPayrollHR's file that caused some of the purportedly stolen money to be diverted to accounts controlled by MyPayrollHR, instead of the employees of its clients.