What is known in the commercial world as a "factor" played a prominent role in the opening day's testimony on corporate misconduct involv­ing check cashers. Indeed, a factor-Michael A. Formisano of Rutherford Commercial Corp.-was a significant witness during the proceedings in connection with the cashing of more than $2 million in Rutherford Commercial checks at check cashers in payment for phony invoices that the factoring company had purchased from certain trucking companies. Formisano was asked at the outset to explain his factoring operation, which is headquartered at another business in which he has an interest, Rutherford Sporting Goods on Park Avenue, Rutherford. As he described it, Rutherford Commercial buys the bills or re­ceivables of a company at a discount, customarily 10 percent, which is the factor's profit after the bills are collected in full. In the meantime, the company that sold its invoices thus has money available, a cash flow, for its day-to-day oper­ations without having to wait up to three months for payments from its customers. Questioned by Counsel Gaal, Formisano testified:

Q. In essence, then, is it fair to say that factoring is purchasing the receivables of a business at a discount?
A. Yes.

Q. And would you as the factor make your money when the receivables were paid?
A. Were collected, yes.

Q. Are the receivables of a business typically rep­resented by their invoices?
A. Yes.

Q. As a factor when you purchased the re­ceivables of a business would you pay them in the form of a check?
A. Yes.

Q. By what percent did you generally discount invoices?
A. The maximum would be 10 percent and it could go as low as 6 percent.

Q. Just so we all understand, could you take us through an example using, say, a $100 invoice or a $1,000 invoice just so we all understand. Let's assume a customer walks in with­
A. With a thousand dollar invoice, we would give them a check for $900.

Q. Okay. And at some point when the invoice was paid you would receive the thousand dollars?
A. The thousand dollars, correct.

Q. Generally how long was the invoice good for?
A. [In] 90 days we would charge back an invoice if it wasn't paid.

Q. And just so we all understand, "charge back" means you would charge it back to the cus­tomer?
A. Against [a] new invoice.

Q. Why did you decide to go into the factoring business?
A. It seemed like a pretty good way to make money.

Hidden Partner Was Fraud Key

Formisano had at least one reason to be more conservative than he was about the profit pros­pects of the factoring business so far as his Rutherford Commercial partnership was con­cerned. That reason was the presence of Vincent J. Murphy of Somerset as a hidden partner in the company, whose 30 percent interest was held by a "good friend," Patricia Englehardt. The other key partner was a Ralph Lucignano Sr. For some reason, Formisano at the public hearing refused to describe Miss Englehardt as a "front" for Murphy in Rutherford Commercial, even though she did nothing but lend her name to Murphy's stock shares. Finally Counsel Gaal had to produce a transcript of Formisano's private testimony at the SCI last December 22, 1987, to point out to him, and for the hearing record, his sworn testi­mony on his hidden factoring partner:

Q. Mr. Formisano, do you recall testifying before the Commission in private session?
A. Yes, I do.

Q. Do you recall being asked with respect to Miss Englehardt's shares the following question:

"Whose idea was it ... to give her her 30 per­cent," and your answer was, "Well, it was Vin­cent Murphy. He didn't want the shares in his name for some reason so he told us to put it in her name." Question: "Mr. Murphy, in essence, was going to be a partner in the business," and again your answer: "If I could guess as to what was really going on, which I would be doing, I don't know for sure. I would say that he might not have wanted his partners in the trucking com­pany to know that he was going to have any­thing to do with [a] factor, which at that time and even now didn't make any difference to me ..." Do you recall giving that answer?

Murphy, a convicted check kiter, ultimately was responsible for causing Rutherford Commercial to suffer such huge losses that it almost went bankrupt. For example, he steered to Rutherford Commercial the trucking and warehousing re­ceivables of Cardinal Container Co. of Elizabeth, in which Murphy was a principal. That obvious conflict of interest suggests why Murphy may not have wanted some Cardinal Container associates to know that he was also, in his girl friend's name, a part-owner of the factor that was purchasing Cardinal's bills. Ultimately, most of the Cardinal Container invoices purchased by Rutherford Commercial were found to be false and the fac­tor's payments for these bills disappeared after being cashed at an organized crime-connected check casher in Jersey City. As a result, Cardinal Container went out of business-another bust-out victim involving the check cashing industry. And Rutherford Commercial itself all but went broke. The $300,000 with which Rutherford Commercial bought Cardinal Container's receivables van­ished.

Rutherford Commercial suffered an even larger loss, approaching $1 million, in yet another scam involving the improper cashing of checks at an organized crime-affiliated check casher company. This episode also involved a trucking company, L.A.T. Transportation, Inc., of Newark, whose re­ceivables were also factored by Rutherford Com­mercial; L.A.T.'s biggest customer, Evergreen In­ternational, and phony invoices purchased from L.A.T. by the factor.

These scams were described in detail at the public forum by a series of witnesses, beginning with the episode about the now bankrupt Cardinal Container.

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