Is my best friend/biggest client putting me in a dangerous financial situation?
July 31, 2010 1:22 AM   Subscribe

My best friend is the largest client of my business. He would like me to purchase a car for his use through my company. Is this a terrible situation for me and how should I handle it?

Background: My best friend of 18 years is an eminently trustworthy and loyal good guy. He comes from a well-off background but is currently in a tight financial spot. One part of his plan to help his situation involves moving in with his parents and buying a car since NYC transit will no longer be enough to get him to work while living there. A previous home foreclosure of his has made a good car loan rate a major issue.

I'm the sole proprietor of an S-corp in New York state. This BF of mine works for a pretty big company (call them X-corp) as a VP, and has been able to use me as a vendor for a few years now, he's basically made X-corp my angel client. I've provided them with great work on-time and on-budget that makes BF look good, and he keeps the business flowing for me, even though more prestigious companies are vying for the work he sends my way.

Over the last year or so he's been asking me to have my company buy certain things he'd like, and having me over-bill X-corp to pay for his new toys. I know this situation is not very ethical on his end of the deal, but as far as my company goes, I consider the purchases client gifts and have never tried to file them as tax deductions or do anything besides buy them with my company money and give them to friend. My basic reasoning is, if he's willing to take a risk on his end, that's his deal, but I'm trying to keep my company books clean. Although I've charged X-Corp more than I might have charged someone else for the same work, I've always charged them the price agreed upon in advance by BF and I.
He's always encouraged me to file these purchases as "business expenses" and "write them off" since they have mostly been gadgets that my company could reasonably be expected to need, but I never wanted to further muddy the waters of my company financials and so I haven't done this.

So now the current situation: the "gifts" he's wanted in the past have mostly been in the $1000 and under range, one was about $3000.
Now he'd like to use our financial arrangement to cover the cost of the new car that he needs. He'd like me to have my company purchase a car for his sole use, and use our over-billing arrangement to cover as much as possible of the car payments. He's promised that if in a particular month we don't do enough business to cover the payment, he'll pay me personally in cash for the balance. He intends to carry full collision/liability insurance that he will pay for.

I want to help him as he's been my closest friend for a long time and also my current biggest client. A car is a much bigger commitment than a one-time gadget purchase, and it's making me uneasy. He wants to have all the benefits of having a paid-for car and also wants me to be able to use it as a business expense and write it off with depreciation and so on.
I've agreed in principle to helping him out with this scenario, I am up at 4AM nervousing about it.

I guess my big questions are:
1: How bad is this situation for me? What are the pitfalls of having my company buy a car for his use?

2: Assuming he's got full insurance coverage on the car, would I or my company be liable in any way in a worst case scenario accident?

3: Would I be better off just offering to personally co-sign for his car-loan so he can get a decent rate and leaving all the business stuff out of it?
That would negate his plan to have me overbill X-corp so I can make his car payments, but if this is something that I REALLY shouldn't do through my company, at least it would be a way for me to help him get a decent car loan.

4: Is there something else I'm missing here that I should be wary of (aside from the ethical issues between my BF and his employer, X-corp)?

Sorry for the length and multiple questions. I really feel like I'm in a weird situation here. He's my dearest friend, I trust him to make it right to the best of his ability once an arrangement is reached, but I know there can be some ramifications here that I'm missing and I fear I'm out of my depth.
posted by anonymous to Work & Money (39 answers total) 22 users marked this as a favorite
1) Bad. It smells like fraud.

2) If you hold the title it's possible you hold some of the liability, probably depends on the state.

3) You can help out a friend, but honestly your friend sounds shady. What you have been encouraged to do is a bad idea.

4) It's more than just an ethical issue and this dude is going to eventually get you in legal trouble.

You are being overly trustworthy, friends do not do this kind of stuff.
posted by iamabot at 1:54 AM on July 31, 2010

Wow. If my mom asked me to do this, I'd run like the wind. If this weren't creepy and wrong, would you really be up thinking about it at 4 in the morning?

Nobody is going to stand up on your behalf here but you. Your friend is using his client status to his advantage and asking you to take on 100% of the risk in a shady dealing in which he receives 100% of the reward.

I'd tell him no, regardless of what understanding you've had in the past, and consider this a major red flag about a friend who, however trustworthy in days gone by, is behaving unethically and taking advantage of you today.
posted by mynameisluka at 2:12 AM on July 31, 2010 [6 favorites]

This does not sound good. I realize you already have enough to worry about, but consider also the possibility of BF's higher-ups getting wind of this and not liking it. Per your description, BF's company is a major source of your income, can you survive losing them?
posted by Dr Dracator at 2:14 AM on July 31, 2010

Here's a clue...He is not your friend. He is using your business relationship to scam you out of as much as he can.

Just say "no".
posted by Thorzdad at 2:16 AM on July 31, 2010 [3 favorites]

IANAL -- get one. What he is asking you to do is fraud. What you have already done for him is fraud.

"Although I've charged X-Corp more than I might have charged someone else for the same work, I've always charged them the price agreed upon in advance by BF and I."

I think there's is a technical term for this: kick-back; or maybe you like the word Bribery better.
posted by Some1 at 2:25 AM on July 31, 2010 [9 favorites]

Not only do I think you shouldn't do this, I think you should see a lawyer and find out exactly how exposed to criminal charges you already are. Right now I would not be worried about keeping my buddy happy, I would be worried about how much time I might do.
posted by Justinian at 2:43 AM on July 31, 2010 [14 favorites]

I hate to be that person who's super alarmist on very flimsy evidence, but your friend is acting in a way that seems grimly familiar to me from being very close to an addict or two. Your friend may have a gambling addiction, for example. Seemingly eminently trustworthy and loyal good guys can have addictions that lead them to take cruel advantage of their nearest and dearest, even leading them into criminal activity. I bring it up merely because, if true, nothing you do to ease his financial plight will serve any use. Nothing. Anything you give him will go down the very same hole that led him to default on his mortgage, etc.

Just something to think about if it hasn't already occurred to you.
posted by taz at 2:47 AM on July 31, 2010 [2 favorites]

Not only do I think you shouldn't do this, I think you should see a lawyer and find out exactly how exposed to criminal charges you already are. Right now I would not be worried about keeping my buddy happy, I would be worried about how much time I might do.

Abso-fucking-lutely this. IANAL but what you've done already doesn't sound remotely legal, regardless of your intentions of keeping things above-board on your end.

Seriously, the price of a consultation with a lawyer will be the best money you ever spent, if only for the peace of mind of finding out for sure everything you've already done and are planning to do is A-Ok with the legal system (doubtful.)
posted by Serene Empress Dork at 2:59 AM on July 31, 2010 [2 favorites]

I agree that this is an ethical and possibly legal nightmare you're getting yourself into, but that's already been covered. I'm going to skip down to this part: 'He's my dearest friend, I trust him to make it right to the best of his ability once an arrangement is reached, but I know there can be some ramifications here that I'm missing...."

What you're missing is that you and your friend have each, independently, been abusing the friendship for independent, short-term personal gains for some time. At this point, it sounds as if your unethical arrangements may have consumed much of your original, real, friendship, and the resulting entanglements may be all that's holding your relationship together anymore. You're afraid to deny him his request because you suspect, probably quite rightly, that what's left of the friendship will unravel if you do. At this point, that might be for the best.
posted by jon1270 at 3:29 AM on July 31, 2010 [4 favorites]

Oh my goodness. Yes, get a lawyer and get your name taken off this question.

Your friend is defrauding his company; you are conspiring with him; and by using company money to purchase them you have actually created a paper trail demonstrating this. Any audit would show this up.

About the proposed purchase of a car - oh my goodness. You would be liable for the loan, secured only by an asset not under your control and an unenforceable promise from your BF that he'll continue to funnel work your way. What would you do if he reneged? Sue him for failing to defraud his employers? What would you do if he were fired? Go to his employers and explain that you had a deal with him?

Refuse this deal and all similar deals. A good excuse might be that you're being audited, or that your accountant has threatened to terminate your relationship if it continues, or anything - but stop overcharging your client and get a lawyer!
posted by Joe in Australia at 3:30 AM on July 31, 2010 [5 favorites]

Do not do this - it's unethical and risky. And your friend is behaving in a dangerous way - if other vendors are being denied a shot at the work, his sweetheart deal with you will be discovered and scrutinized.

I would be clear with him that these side deals must stop, and branch out your client list ASAP. This person is headed for a fall, and is not acting in your best interests.
posted by mozhet at 3:47 AM on July 31, 2010

I think most people here will convince you that what you've been doing is giving him a kick-back (it is), which might make you look at this option more closely:

3: Would I be better off just offering to personally co-sign for his car-loan so he can get a decent rate and leaving all the business stuff out of it?

Do this only if you like the car and can make the payments, because you will surely own it (and maybe he'll pressure you to give him the car while you make the payments). Lots of people have trusted him -- banks, mortgage companies, his employer (and I bet you can think of at least half a dozen more) -- and he's let every single one of them down.

There's something really strange going on here. He's a VP of a large corporation -- I assume this comes with a VP-of-a-large-corporation-salary. And yet he's dead broke, moving in with his parents, doesn't have the money or credit for a car... or even these little toys you've been giving him as a kickback. Probably, you aren't the only one he's taking for a ride. Where's all that money going?

You feel compelled to do this (and participate in the kickbacks in the past) because if you don't he will take his company's business elsewhere, and won't be your friend. You'll have the same pressures if you cosign a loan and he skips out on it -- pay up or else.

Broke, irresponsible with money, unethical liar and fraudster.... He will never make payments on that car. He probably won't even carry insurance. You'll be left holding the bag.
posted by Houstonian at 4:17 AM on July 31, 2010 [15 favorites]

Everyone has already made the ethical/legal issues quite clear, so I won't pile on. Instead, as someone who also is an S-corp with an angel client, let me address the issue of what you can do to preserve your business relationship with the client even while the relationship with your BF unravels.

If you haven't already (and I bet you haven't, or at least not enough), get your face in front of everyone in that client company who is impacted by what your business does or is a decision-maker about continuing the contract with your business. Take them to lunch. Set up a meeting with them to get feedback about your business and determine if there are any ways you can improve the service you provide them. Do whatever you can to build and stabilize relationships with the people around your BF so that, when he crashes and burns (and he probably will), your business won't be destroyed as well.
posted by DrGail at 4:52 AM on July 31, 2010 [20 favorites]

Consider the damage you're doing to your relationship with this *company*. The small kick-backs, they will probably never discover. But if someone noses around a bit and determines that they overpaid by just the right amount for a car for their employee, shit would hit the fan.

Depending on the nature of any contracts you've entered in to, you could find yourself having legal action taken against you.

Consider yourself lucky at this point and hope that your friend doesn't bring you up in that capacity, ever, and do not do not do NOT introduce a $20,000+ overbilling that could possibly end up costing you bankruptcy. His "friendship" is not worth it.

Explain to him that you just can't take the risk of tax problems, potential audit problems, and paper trail that come with what he's asking you to do, as much as you'd love to help him. Suggest a ZipCar for chrissakes. But don't do this.
posted by disillusioned at 4:53 AM on July 31, 2010

Follow the lead suggested by disillusioned. Let him know that you would very much like to help, but that this one is rtoo big a risk for both of you. It is more likely to be discovered, because it's an ongoing thing.
posted by megatherium at 5:04 AM on July 31, 2010

You will be the first person this guy throws under the bus when things go sour. Not if things go sour. When.

Frankly, I am wondering what this guy is into that makes him struggle so hard while being a VP of a "pretty big company."

Rethink your relationship to this man.
posted by milarepa at 5:06 AM on July 31, 2010 [4 favorites]

Clearly you have to say no, and if he really is your best friend he is going to understand.
posted by pwally at 5:47 AM on July 31, 2010

Jesus no. Comes from a well-off background, is VP of a major corporation, and yet he's had a house foreclosed, is going to move in with his parents, is committing fraud at his place of work, and can't get a car loan? I don't think "eminently trustworthy" means what you think it does. Don't touch any financial transactions involving this guy with a 100 foot pole, and do what others have suggested about strengthening your company's connections with his company, so you're not out on your ass whenever what he's doing collapses around him.
posted by MsMolly at 5:52 AM on July 31, 2010 [1 favorite]

You're up at 4am, nervousing about it? Take the hint that your body is sending you.

Follow your gut instincts. He may be a life-long friend, but he is horrific at managing finances.

Unless your business can afford to buy a car and then drive it into the nearest body of water uninsured, don't do it.
posted by malibustacey9999 at 5:53 AM on July 31, 2010

You need to hit the abort button on this arrangement as fast as you can. Hell hath no fury like a large corporation scammed and internal audit or someone is going to catch up to this one of these days and they're gonna call their lawyer and then they're gonna call law enforcement.
posted by ghharr at 6:04 AM on July 31, 2010

4: Is there something else I'm missing here that I should be wary of (aside from the ethical issues between my BF and his employer, X-corp)?

Well, for starters, when his company finds out that he's been fraudulently paying for his car through corporate money and fires his ass, you're both:

a) Out of work, and probably publicly outed as having had part in the fraud, damaging your reputation, and;
b) In possession of another car payment.

How's that situation work out for you?

You might think you're doing the right thing, but everyone except you and the BF are going to see it TOTALLY differently. Is that a risk you want to take to your livelihood so that he can get a car?
posted by Hiker at 6:09 AM on July 31, 2010 [2 favorites]

It's simple: This is corruption.

To begin with- in most industries, if your best friend is a major client of your company- this must be disclosed and documented.

The rest of it, to me- sounds like a person trying to argue themselves into doing something unethical.

A friend of mine did something similar- a 'friends type deal' involving IT hardware. He's currently pending trial. Internal auditors work.
posted by mrdaneri at 6:24 AM on July 31, 2010 [2 favorites]

How do you know your "friend" has not been caught already and this is part of his plea deal?
posted by Yorrick at 6:30 AM on July 31, 2010 [11 favorites]

See also this previous question which might help you see the dangers of technically owning a car that someone else drives.
posted by galadriel at 6:34 AM on July 31, 2010

Once, during the early days of working for IBM, we had the company's lead fraud investigator come in and give us a long presentation on what fraud looks like in a corporate environment, how it's first discovered, how it's investigated, etc.

The situation you describe with your best friend already could have come from that presentation, word for word. Not just the car -- the gifts you're already giving him already represent fraud on a significant scale especially when coupled with overbilling.

You are admitting to engaging in what is probably a felony, using an account that appears to be attached to your real name, and which carries what appears to be your real email address.
posted by jacquilynne at 6:46 AM on July 31, 2010 [8 favorites]

In addition to worrying about criminal charges of fraud, you also need to worry what an IRS audit of your company's books would look like. Lawyer up immediately.
posted by ImproviseOrDie at 7:25 AM on July 31, 2010

Holy shit, I can't believe you colluded with this guy on over billing and delivering kick-backs. Don't you know that you've been helping him embezzle from his employer? When this unravels, your "friend" (I would say accomplice) is going to go either go to jail (if the client wants to crucify him) or be thrown under a financial train. Either way, you're going to lose that client and you may never work in your city again once word gets around.

You're in a heap of trouble already.
Document everything you've done.
Take that information to a vey, very good lawyer.

And for god's sake, anonymize this post.
posted by seanmpuckett at 7:26 AM on July 31, 2010 [4 favorites]

It's not uncommon that when a "friend" talks yo into dong something illegal, they ultimately use it to get leverage over you.
posted by bonobothegreat at 8:22 AM on July 31, 2010 [1 favorite]

I just attended a seminar on fraud last weekend. The biggest thing that companies are cracking down on right now is vendor selection, looking for the kickbacks you are talking about. I advise you to anonymize, and take this information to a lawyer immediately. Do not pass go, don't even contemplate doing this for him. This is a massive conflict of interest and outright fraud. Protect yourself, even if it means losing this "friend".
posted by Zophi at 9:34 AM on July 31, 2010

I agree with everyone above and want to add: don't co-sign for a car unless you are prepared to be completely on the hook for all the payments in the event he defaults.
posted by Majorita at 10:31 AM on July 31, 2010

If a client walked into my office (as a civil business lawyer) and described this situation to me, I would immediately recommend that a white collar criminal defense lawyer be brought in to consult or refer the client outright. Get a good lawyer now and follow his/her advice.

And if you haven't figured this out by now, this is super-shady at best and your "friend" sucks on so many levels, I lost count. Protect yourself because he isn't and won't.
posted by murrey at 10:39 AM on July 31, 2010

but as far as my company goes, I consider the purchases client gifts

But they are not. You didn't pay for them; his company did. You need a lawyer.
posted by rtha at 10:59 AM on July 31, 2010 [2 favorites]

He's not eminently trustworthy, he's been committing fraud against his company and extorting kickbacks from you. So forget that nonsense right now. One has to imagine the foreclosure wasn't based on honest finances either. But then you're not coming off as innocent either.

Best advice yet is to consult an attorney. You've engaged in on-going fraud against that company. You've conspired with someone else to do it. If/when your friend implodes and he gives you up there's a strong chance you could be facing civil or even criminal charges. You need to get out in front of this now, before things go (any further) off the rails.

The question of the car is irrelevant, that would just be compounding already bad decisions with new, worse ones. The real question is how do the both of you avoid going to jail or losing your shirts because of your criminal behavior. Stop now and get out from under it before worse things happen.
posted by wkearney99 at 11:03 AM on July 31, 2010 [3 favorites]

Oh, and have a talk with an attorney FIRST. There may be things that you specifically should or shouldn't do with regard to your 'friend'. Like getting him to incriminate himself. There's no friendship here, not when there's been kickbacks and, basically, extortion involved.

The business will, in all likelihood, have to cease between you and that company. You may be lucky to be able to bow out gracefully. Or you may have to throw your extorting friend under the bus in order to save your own hide. A discussion with an attorney should clarify what's necessary.

With luck you'll eventually be able to say to the guy that you've both been lucky to have ridden that gravy train for so long, but that it has to immediately come to an end. And hopefully nothing further will become of it. If he's truly your friend he'll understand and be grateful for not getting totally screwed. Otherwise, it's you or him.
posted by wkearney99 at 11:12 AM on July 31, 2010 [2 favorites]

Dude, 2nding the possibility you are being set up as part of a plea deal. A couple of grand in gifts/kickbacks/bribes is one thing, but a car is way different. I bet he's not asking for a Ford Focus either, probably something in the $30-35k range, I'd say. Which would make you a much bigger fish for the authorities to land. Tell your "friend" you'll be crazy busy for the next couple of weeks because of business. No meetings with him, no phone calls - they can be recorded; no emails, no nothing. Use that time to see a lawyer and make plans for how you will survive without your business, since it seems a forgone conclusion that you'll be losing your biggest client. Was it Barretta that said "Don't do the crime if you can't do the time"?
posted by mikedelic at 12:25 PM on July 31, 2010 [8 favorites]

Your friend has been making financial mistakes over past few years, with losing his home and having to move in with his parents, despite of the fact that he has a good paying job, and likely a higher salary than the average person these days. The thing is, he is dragging you along with him, and trying to use your friendship and the business he is giving you as a tool for convincing you and put you in a weak spot to help him. In a way he knows you will do more for him than anyone else, because you dependent on him for more business. At this point, you would be a good friend by saying no to him and help him stop his further financial "down hilling", and put some sense into him.
posted by TKL0125 at 2:31 PM on July 31, 2010

I spent $1000 on lawyers in the past two weeks because I trusted a friend. In two short weeks they sent a vastly inflated invoice and put a lien on my house. I am now preparing to defend against a possible lawsuit intended to force a sale of my house to pay it. Trust is a funny thing.
posted by slidell at 3:31 PM on July 31, 2010

If he comes from a "well-off" background, why are you the one that needs to buy him a car? He can bloody well ask mommy and daddy for one.

You're getting played.
posted by klanawa at 12:15 AM on August 1, 2010 [3 favorites]

Holy cow we, too, have a yearly 'FRAUD IS BAD' training we have to go through, and this reads like one of the little scenario quizzes we have to do.

You need a lawyer immediately and no, this guy is not your friend, even if he was at one time. Friends don't lead friends into situations which result in jail-time. We had someone at my company pulling a similar stunt, and she is still in jail seven years later.
posted by winna at 5:18 PM on August 1, 2010 [2 favorites]

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