Vanguard Embezzlement Incident Underscores Need for Security

Criminals blaming others for their actions is, sadly, nothing new. But Scott Capps, a former Vanguard employee, who was convicted of embezzling millions of dollars from the Malvern, Pa. fund giant, did at least come up with a novel excuse: He only stole all that money after Vanguard higher ups did not heed his repeated warnings that certain accounts were poorly secured.

Capps was convicted earlier this year of embezzling $2.1 million from dormant accounts held at the company—accounts whose owners hadn’t contacted Vanguard in several years. Often, accounts become dormant when an owner passes away and heirs aren’t aware of the account’s existence. While company-sponsored retirement plans and funds managed by financial advisers were generally scrupulous about contacting heirs, accounts managed by individuals or on behalf of small non-profits were more likely to become dormant, according to an interview Capps gave The Philadelphia Inquirer.

Most U.S. states have laws saying that such unclaimed funds should be turned over to tax authorities after a set period of time, a practice known as escheatment. Vanguard, Capps claims, had become lax about its escheatment procedures—both failing to chase down account holders who had gone radio silent and failing to turn over the funds to tax authorities. The result was millions of dollars sitting in Vanguard accounts with no one looking after it. Money that could easily be siphoned off by an insider, Capps said, since Vanguard’s byzantine software system and slack internal security meant employees often kept handwritten lists on their desks of the 17-odd passwords (yes, that many) for the various systems they needed to do their jobs.

When Capps was sure that his bosses weren’t paying attention, he struck, using the security holes he’d identified to steal millions of dollars.

While his rationalizations are no excuse, Capps’ case should serve as an important warning to investors to review their estate-planning documents and make sure they’ve named heirs on all of their accounts. Remember, when it comes to investment accounts, the designations on file with your financial institution will supersede your will.

For more on how to make sure your hard-earned money goes where you want it to after your death, please check out our Estate Planning Checklist or our recent podcast on setting up trusts. And contact us to learn more about the measures Adviser Investments takes to protect our clients and their hard-earned assets from online fraud.