Norwalk announces $515K recovered from loss to fraud scheme

Updated, 5 p.m. Thursday: More information. 2 a.m.: Minor edit.

NORWALK, Conn. – Norwalk has recovered more than half the money lost in October 2016 to scammers, a press release said Wednesday.

“So far, Norwalk has successfully recovered $515,000.00, thereby reducing its total loss to less than $335,000.00,” the release from Norwalk Communications Manager Joshua Morgan said.

The Common Council in November approved a legal settlement with Hanover Insurance Group stemming from an October 2016 wire transfer to scammers. Mayor Harry Rilling and Corporation Counsel Mario Coppola said at the time that a statement would be released once the settlement was finanlized. NancyOnNorwalk asked for the statement Tuesday.

Wednesday’s press release states that “Norwalk is still pursuing additional funds from an additional entity in order to add to the recovered amount.”

“It is important to remember that this recovery exceeds the amount of insurance coverage that was available to recover this type of incident,” the release states.

“In early November 2016, it was discovered that a payment of $849,741.59 that was made by Norwalk to a vendor for work performed under a City contract, using the Automated Clearing House (ACH) system, was never received by the vendor,” the release states. “The Norwalk Police and the FBI were notified, as was Webster Bank, which Norwalk uses for banking services related to this project. Because of this prompt notification, a second ACH payment, which would have also gone to the criminal party, was stopped.”

Court documents in the lawsuit filed against Hanover Insurance Group include a letter from Deputy Corporation Counsel Jeffry Spahr to a claim consultant stating that the loss was $894,464.83.

Morgan did not immediately reply to an email asking about the discrepancy. Spahr on Thursday indicated that the figure is $849,741.59.

“I believe that I signed that letter based on information provided to me. I do not believe that I drafted the letter,” Spahr wrote. “I did not do an independent calculation of any amounts owed. I would rely on the calculations of others.”

C.H. Nickerson Construction, Inc. was doing construction work for Norwalk in 2016 and the City was contractually obligated to wire installment payments to the company, the City’s lawsuit states.

In September 2016, Norwalk received and followed email instructions to change Nickerson’s payment account information, and send future payments to Nickerson’s “new account.”  After the change, the next installment of $894,464.83 was transferred to the “new account” on Oct. 6, 2016, court documents say.

A chart included in the documents shows that the Crime Policy has a $500,000 limit for each instance of computer fraud, with a $10,000 deductible.

“Farmington was similarly duped into directing a $2.04M payment due to C.H. Nickerson to a criminal network based in China,” Attorney David D. Dowd of Curley and Curley PC wrote on Feb. 24, 2017, in a letter presented in April as an exhibit in the lawsuit.

Morgan’s press release explains:

“Local, State and Federal law enforcement officials, including the FBI and Norwalk Police Department, have concluded that the City of Norwalk was the victim of a sophisticated computer fraud scheme in October of 2016 that resulted in a theft from City accounts. Another Connecticut municipality was also a victim of the same fraud scheme. As a result of this incident, Norwalk’s Comptroller’s Office immediately instituted new procedures to prevent similar thefts in the future. In addition, Norwalk commenced claims, complaints and a lawsuit, against multiple insurance companies to recover as much of the stolen funds as possible. To date, Norwalk has successfully recovered a significant amount of the funds and continues to pursue additional avenues of recovery to further minimize this loss.

“… Investigating law enforcement entities determined that an international network had targeted municipal customers of this vendor, including Norwalk and another Connecticut municipality. The criminals had fraudulently manipulated customers of this vendor to send payments using the ACH system to a false account. This criminal investigation is still ongoing. Law enforcement authorities informed Norwalk that no one in the City’s government had any involvement in the scheme to intercept payment to the vendor. Norwalk Police continue to work with the FBI to track down anyone involved in this theft with the goal of recovering additional funds.

“A thorough review of this incident concluded that all proper procedures concerning use of the ACH system were followed by the Norwalk’s Comptroller Department. Despite this finding, Norwalk reviewed its ACH procedures and further strengthened these procedures to provide additional protection immediately after the incident. The additional policies and procedures that Norwalk implemented following this incident have been endorsed by Webster Bank and its cyber-security experts.

“Within days of detecting this sophisticated computer fraud scheme, Norwalk immediately contacted all potential insurance companies that might provide coverage for such a loss. Over the course of the following two years, Norwalk pursued these insurance companies by filing claims, complaints and a lawsuit.”