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Pasadena Payment Processor Files for Bankruptcy After $26 Million Loss in Payroll Fraud Scheme

Published on Tuesday, January 28, 2020 | 6:23 am
 

Cachet Financial Services, the Pasadena-based payment processor caught up in the fallout from the MyPayrollHR scandal, has filed for Chapter 11 bankruptcy, about three months after it reported taking a $26 million hit due to fraud allegedly committed by Michael Mann, MyPayrollHR’s CEO.

Neither Cachet or any of its staff has been accused of wrongdoing.

As a national third-party automated clearing house processing company, Cachet was contracted with payroll processors like MyPayrollHR to process around $150 billion in direct deposit money a year for more than 110,000 employers.

That process was disrupted in September 2019 when thousands of workers across the United States received text messages saying their payroll checks were being withdrawn. In total, tens of millions of dollars in direct deposit payments suddenly disappeared from employees’ accounts.

The paychecks were supposed to have been electronically routed through MyPayrollHR, which would transfer the funds to Cachet Financial Services as the corporate middleman. Cachet would then distribute the direct deposits to employees nationwide.

It later turned out that Mann had redirected those payroll funds, about $26 million in all, into his personal accounts, authorities said.

Finding the transfers suspicious, Mann’s banks froze his accounts, and MyPayrollHR ceased to operate.

Cachet apparently continued to distribute payments into employees’ direct deposit accounts, until it realized it had allocated non-existent funds.

The company then reportedly reversed the transactions and took back money from thousands of employees.

Mann was arrested in late September on a federal bank fraud charge after reportedly admitting he had been “kiting” workers’ checks for decades.

On October 25, 2019, Cachet Financial Services said it had to cease processing of ACH (automated clearing house) payments through their sponsor bank.

“We are diligently searching for a new processing source and remain committed to helping our clients through this difficult time,” Aberash Asfaw, President Of Cachet Financial Services, said in a statement. “I sincerely apologize to all parties who have been affected by our crisis. Following the fraudulent activity perpetrated against Cachet Financial Services, Cachet began planning for and implementing additional stringent security measures. Our goal was to stop any unauthorized activity and adhere to bank oversight requirements. However, these requirements were contrary to standard processing required by the industry and placed unreasonable demands on our payroll providers.”

Cachet Financial Services filed a lawsuit against MyPayrollHR alleging breach of contract, fraud and unjust enrichment, among other accusations. The company alleged $19 million meant for Cachet’s settlement account had been diverted by Mann and MyPayrollHR into other accounts.

Cachet said MyPayrollHR and Mann manipulated Cachet’s transfer instructions to make it appear as if the money were being transferred from various entities, including MyPayrollHR, to Cachet’s settlement account.

Instead, Cachet’s lawsuit alleged that the $19 million was transferred from Cachet’s settlement account to accounts owned and controlled by MyPayrollHR at Pioneer Bank, Bank of America, Key Bank, Wells Fargo and Axos Bank.

The bankruptcy filing said Cachet had received claims totaling almost $750,000 from creditors – including $147 claimed by the City of Pasadena for a response to a false alarm. The bigger claims include about $692.6 million filed by Verde Human Capital in Seattle, Washington.

The National Automated Clearing House Association later said about 90 percent of workers affected by MyPayrollHR’s shutdown have had their money returned.

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