Finance director retires in wake of $2.3M scam

  • The Peterborough Town House Staff photo by Ben Conant

For the Monadnock Ledger-Transcript
Published: 9/1/2021 5:25:31 PM

Leo Smith, who supervised the financial affairs of Peterborough, retired effective Tuesday, eight days after the announcement that the town had been scammed out of $2.3 million.

Smith, who worked for the town for 11 years, two as finance director, did not immediately return requests for comment.

Town Manager Nicole MacStay said some staff members targeted in the fraud were placed on leave while the U.S. Secret Service investigated the crime. She didn’t release their names.

As a supervisor, Smith, 69, had responsibilities under fraud prevention requirements in the town code book, including being aware of what could go wrong, and putting in place effective monitoring, review and control procedures to prevent wrongdoing or to detect it if it should occur.

The town was hit by a cyber crime known as business email compromise in which a request by email to change the financial routing of a vendor payment is acted upon without first calling the vendor or otherwise authenticating it.

Such verification is a basic accounting best practice and is recommended by the FBI, which has seen tremendous growth in this type of crime. It is also a standing procedure in Peterborough, said MacStay.

She provided a town form that is to be filled out for changes in vendor payments. It requires a notarized signature from an authorized person at the vendor, and a phone number and contact at the vendor’s bank to call to verify account information.

It also includes a warning:

“IMPORTANT! To protect your identity and financial information, please do not email this form. Only original notarized forms will be accepted.”

Citing the ongoing investigation, MacStay declined to say what safeguards were followed, if any, in the $2.3 million scam, which involved fraudulent changes to vendor payments for the ConVal School District and to Beck and Bellucci.

Meanwhile, some in town are shocked that local officials could fall victim to such a scam, or that a payment change request could be acted upon without proper verification.

James Gates, of Peterborough, said in a phone interview that this fraud should never have been allowed to occur.

“Anybody who works in finance and is custodian of millions of dollars of public money should not be scammed by a phishing email,” he said.

Phishing is pretending to be someone else in an email in order to take financial advantage of the recipient.

Gates said he’s shocked that the emails had their intended effect and that the scam wasn’t stopped before it could happen.

“I’m just flabbergasted,” he said. “It’s 2021. Anybody in a position of responsibility should be wise to email phishing.

“To my mind, it’s just as irresponsible as a surgeon leaving his watch inside a patient and sewing him back up. This isn’t some naive granny that’s been scammed out of $50 dollars by some crank phone call. This is the finance department in the town offices.”

A barber at the Feel the Steel shop, who asked not to be named, said some customers have expressed concerns.

“The majority of people say that’s just crazy, and some people say this could cause Peterborough’s taxes to go through the roof again.”

He also said people have questioned whether this incident could affect a proposal to build a new fire station and municipal campus.

MacStay said a tax increase would not be necessary because there is $3 million in a fund balance that could be applied to any portion of the loss not covered by insurance.

Peterborough is insured through Primex, the New Hampshire Public Risk Management Exchange. The policy lists computer fraud and funds transfer fraud coverage for up to $500,000. It also has separate coverage through a cyber policy by the Beazley Syndicate listing the cyber crimes of fund transfer fraud and fraudulent instruction, and coverage at $75,000 each.

It’s not clear exactly what coverage would apply, or whether conditions in the policy could affect whether the town receives payment. That is subject to an ongoing analysis of the insurance and investigation of the crime.

Published reports and interviews with officials in several towns that have been the subject of cyber fraud indicate that the full loss is often not covered.

MacStay said she isn’t sure of coverage limits, or qualifications for coverage.

Data from the New Hampshire Public Risk Management Exchange indicate municipalities in the state have filed 23 insurance claims for cyber claims losses so far just this year. That compares to 14 such claims last year and four in 2019.

Mike Ricker, general counsel for the insurance carrier, said he couldn’t provide further information. The uptick correlates with FBI statistics that show major growth in all categories of cyber crime, particularly business email compromise, which is what occurred in Peterborough.

The FBI’s 2020 Internet Crime Report shows $1.6 million dollars in this category of cyber crime last year in New Hampshire, with 69 victims, and $1.8 billion in losses nationally.


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