Dive Brief:
- Developer Beck Properties Minnesota sued the general contractor it hired to build a warehouse and office project, as well as its escrow agent, after a $735,000 payment vanished.
- Beck is suing Mendota Heights, Minnesota-based contractor R.J. Ryan and Stillwater, Minnesota-based FSA Title for negligence, civil theft and fraud after they allegedly allowed the funds, which were intended to pay subs on the job, to be rerouted electronically without following proper protocols.
- The diversion came at the behest of “one or more insiders” who improperly accessed an executive’s email account and doctored a notary’s form to approve the transfer, court documents claim. The funds were sent to a Capital One account that had no connection to the contractor in August 2023 and haven’t been recovered, according to the suit.
Dive Insight:
Beck also blamed R.J. Ryan for failing to adequately protect its employees’ emails and other sensitive information. The plaintiff claimed that R.J. Ryan didn’t become aware of any misconduct — despite the contractor checking weekly for unauthorized access — until a month after the funds disappeared and liens from unpaid subcontractors started to pile up.
The U.S. Secret Service is investigating the potential fraud, according to the Minneapolis Star Tribune. In addition to R.J. Ryan and FSA, Beck also named several subcontractors in the suit to get the liens against its property removed.
The case illustrates the double-edged nature of the increasing use of technology in the construction industry, a sector that’s often portrayed as a tech laggard that relies on antiquated, paper-based processes. In this instance, it appears a request to reroute a traditional, paper check to an electronic payment led to the alleged fraud.
In its lawsuit, Beck alleges that FSA’s lack of due diligence included a failure to adequately scrutinize the request to transfer the funds electronically.
According to the suit, just hours after Beck received a legitimate invoice from R.J. Ryan’s project manager for work performed on the job, someone else used the same email account to request electronic payment and asked what needed to be done to receive funds electronically.
Beck forwarded the request to its bank, which in turn sent it on to FSA. The escrow company responded by sending an authorization form that it said needed to be filled out and notarized. When that form came back completed, FSA released the funds electronically, but the suit claims the form should have looked suspicious, as a notary stamp partially blocked the notary’s signature.
Beck alleges R.J. Ryan is also at fault for its failure to accurately monitor its company emails and adequately train its employees in fraud avoidance and maintaining secure computer and email systems. The suit comes to that conclusion after citing R.J. Ryan’s own internal investigation that didn’t find any evidence of its system being hacked, according to court documents.
Thus, the suit claims one or more insiders are responsible, which could include employees and representatives of the company, or third-party contractors that perform services like bookkeeping or accounting.
“Upon information and belief, R.J. Ryan or its authorized employees, agents, and/or representatives stole $735,099.33 in Loan funds from Plaintiff,” the lawsuit claims.
Back and forth
R.J. Ryan and FSA Title didn’t respond to requests for comment. But according to the Star Tribune, FSA pointed the finger back at R.J. Ryan, Beck and the developer’s bank in court papers.
Neither Beck nor the bank “did anything to validate the email request despite it being inconsistent with previous payments. … FSA would have no reason to doubt the veracity of the email and the [payment] request,” FSA wrote in a letter between attorneys, the paper reported.
Beck has requested a jury trial, according to the lawsuit, and is seeking damages, paid legal fees and interest.