Financial Fraud: Top 13 Crimes, by Prof. Brad Reid - Guest Blogger

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Financial Fraud:

Top 13 Crimes

By Prof. Brad Reid - Guest Blogger

We've greatly admired Brad's articles 

for the  Huffington Post, and asked him to 

guest blog for prisonist.org.

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Violating a federal fraud statute easily becomes a personal and business disaster. 

Many years ago I provided commercial banking legal representation to a bank president. One day, out of the blue, he asked me to backdate some documents. Thankfully, I declined. Some years after I entered the academic world, he and the bank's leadership team were convicted of federal fraud offenses. Additionally, the bank collapsed. A number of families were devastated. The president was an energetic businessman and doubtless never imagined this outcome to his career. What happened? My observation, at a distance, is that he was caught-up in the emotional high of great success and came to believe that cutting a few corners was okay because rapid growth would cover any issues. The "just this once" rationalization is a powerful seduction.

Sometimes, individuals stumble into legal violations that may occur very rapidly, on the spur of the moment. See, for example, #12 on the list below. I think that we all need support systems and sources of affirmation that are not simply measured in dollars. When we know that we are valued and respected for simply being ourselves, it becomes easier to resist the temptations of illicit and illegal gratifications. Reciprocal love and concern is both a powerful preventive and provides powerful healing. Our networks of family and friends are priceless.

This blog provides a brief and incomplete educational overview of common federal fraud offenses. In the interest of brevity, specific punishments and/or civil penalties and potential private lawsuits for each offense are not discussed. Note that many contemporary statutes have anti-retaliation and whistleblower protection provisions, also not discussed. Many federal statutes have a state statutory equivalent. It does not violate double jeopardy for prosecutors to pursue both federal and state criminal offenses. Always consult an experienced attorney in specific personal and business situations.

1. Mail fraud and wire fraud (18 U.S.C. Sec. 1341, 1343) have become widely utilized and ever-adaptable general purpose federal offenses. As judicially interpreted, proof of mail fraud requires a scheme or artifice to defraud involving the mailing of a letter for the purpose of attempting or actually executing the scheme. Specific intent to defraud must be proven and the falsity must be material (influencing a reasonable person). "Mail" includes both public and private carriers, such as UPS or FedEx, and the item need not cross state lines (may be intrastate). The use of mail is broadly interpreted so, for example, the fraudulent use of an employer's credit card and resulting mailed statements satisfies the mail requirement. Every act of mailing is a separate offense. Additionally, it is a separate offense to use a fictitious name in schemes involving the Postal Service (18 U.S.C. Sec. 1342).

Wire fraud is closely related to mail fraud but includes virtually all media including radio, television, facsimile, telex, internet, and email.

2. Bank fraud (18 U.S.C. Sec. 1344) involves attempting or executing a scheme to defraud a federally insured financial institution. This includes funds, securities, or any property owned by or in the custody of the institution. The institution need not suffer an actual loss. It is enough for the institution to be at risk of civil liability. Liability occurs in a broad array of situations involving, for example, check offenses, false statements on loan applications, credit card fraud, student loan fraud, ATM fraud, vehicle title fraud, mortgage fraud, fraudulent credit card receipts, and "shell" bank transactions.

3. Bankruptcy fraud (18 U.S.C. Sec. 157) requires proof of a scheme or attempt to defraud involving a petition, document, or any fraudulent representation in connection with a bankruptcy proceeding. A number of related offenses involve mail and wire fraud, tax fraud, money laundering, perjury, and Sarbanes-Oxley offenses such as destroying, altering, or falsification of records.

4. Health care fraud (18 U.S.C. Sec. 1344, 1347) requires proof of a scheme or attempt to defraud any health care benefit program (public or private). This includes the delivery or payment for services. Additionally, there is a separate statute (42 U.S.C. Sec. 1320) involving making false statements to obtain payments from a federal health care program. Related offenses involve the federal False Claims Act and making false statements. The Stark Act (42 U.S.C. Sec. 1395) provides a complex set of regulations generally prohibiting physician referrals to entities (such as rehabilitation centers) in which a physician or immediate family member has a financial interest.

5. Securities legislation (15 U.S.C. Sec 77a and related provisions) contains numerous antifraud provisions related to the purchase and sale of investments whose return to the investor is primarily dependent of the efforts of a third party. "Security" is a broad term, including Florida citrus groves in a famous 1946 Supreme Court case (S.E.C. v. W.J. Howey Co.). Trading on nonpublic "insider information" (information that will influence the price of a security) is one example of a commonly charged offense.

6. The False Claims Act (31 U.S.C. Sec. 3729) is frequently applied to Medicare, Medicaid, and defense contractor fraud. The statute involves fines and civil penalties for knowingly making or conspiring to make false financial claims to the government. The original legislation was signed by President Lincoln to address fraudulent Union Army suppliers. "Knowingly" includes actual knowledge, deliberate ignorance, or reckless disregard for the truth. Each false statement on a bill may be a separate offense. Private individuals may sue on behalf of the federal government in a "qui tam" (short for a Latin phrase 'who as well as for the king as for himself sues') action and receive a reward. Corporate inside whistleblowers may act. Potential false claims include billing, false affirmative certifications of compliance with regulations or conditions, or claims that implicitly represent compliance with contract terms, regulations, or statutes. A "worthless services" standard involves providing services that are so deficient as to be the equivalent of no performance.

7. The Foreign Corrupt Practices Act (15 U.S.C. Sec. 78dd-1) prohibits direct or indirect payments to foreign officials or governments to gain business advantages such as contracts. It broadly applies to U.S. companies, subsidiaries, and companies listed on stock exchanges, or that must file reports with the SEC. "Foreign" is also broadly defined and includes international charitable or regulatory organizations. Internal accounting controls are required as well as compliance programs. Lawful payments under foreign law and bona fide promotional expenses are allowed but narrowly interpreted. Companies are liable for actions by intermediaries. Certain facilitating or "grease" payments to minor foreign officials are allowed, but narrowly interpreted. Successor companies may be liable for the actions of a predecessor.

8. The Sarbanes-Oxley Act of 2002 (15 U.S.C. Sec. 7201 and related provisions) contains eleven "Titles," each with sections, enacted in reaction to corporate scandals such as Enron. Only the broadest of overviews is possible in this brief comment. Private boards, accounting firms, and public agencies have additional responsibilities. It regulates auditor independence and mandates enhanced financial disclosures. Criminal penalties are imposed on the manipulation, destruction, or alteration of financial records or the interference with investigations. It also has whistleblower protections. Executives must certify the accuracy of a variety of financial statements and tax returns. In 2015 the U.S. Supreme Court reversed (5:4) the conviction under a federal false record provision (18 U.S.C. Sec. 1519) of a commercial fisherman. The fisherman ordered a crew member to toss undersized fish overboard to prevent their detection by federal authorities (Yates v. U.S.). The application of Sarbanes-Oxley continues to unfold.

9. The Dodd-Frank Act of 2010 (12 U.S.C. Sec 5301) was enacted in response to the Great Recession. It amends the regulatory structure and contains sixteen "Titles," each with sections. Only the broadest of overviews is possible in this brief comment. It is designed to achieve greater Wall Street transparency and accountability, investor protection, and mortgage reform. At intervals, executive compensation is subject to shareholder vote. A variety of financial derivatives regulations have been enacted or are pending before the SEC. A Constitutional challenge to Dodd-Frank is active in the federal court system. The unfolding of Dodd-Frank continues.

10. The Computer Fraud and Abuse Act (18 U.S.C. Sec. 1030) prohibits obtaining national security information, compromising computer confidentiality, accessing a computer to defraud, damaging transmissions or access, password trafficking, and extortion involving threats to damage a computer. Cell phones may be considered computers. The statute also allows a civil lawsuit for economic damages greater than $5,000 but some courts have not allowed recovery for lost personal contact information, photos, and text messages generally.

11. Immigration fraud (18 U.S.C. Sec. 1546) involves the fraudulent use of immigration documents such as visas, border crossing cards, and permits. A variety of federal agencies have regulatory authority. Employers may find legal issues associated with undocumented workers, workers who have overstayed a valid visa, or applications for permanent alien labor certifications when the employer or industry generally has terminated or furloughed workers in a same or similar position within the past six months.

12. Making a material false statement to a federal official or a false record entry (18 U.S.C. Sec. 1001), even if not in court or otherwise under oath, is a criminal offense. The contact might be with an investigator or very casual. One has the legal right to remain silent but not to lie. Anticipate that an investigator already knows the answer to the question being asked. This provision convicted Martha Stewart and appears in many situations where the prosecutor is unable to prove an underlying offense, such as securities fraud, that is the actual subject of the investigation. The U.S. Supreme Court in a landmark 1998 decision, Brogan v. U.S., said that one does not have the legal right to an "exculpatory no" (a false denial of guilt) under this provision.

13. Another, primary state issue, under the Uniform Fraudulent Transfer Act, involves fraudulent conveyances. While this may occur in the context of bankruptcy, the statutes are broad enough to encompass any activity designed to hinder, delay, or defraud a creditor. The courts typically discuss "badges of fraud" that include ownership transfers to family members or insiders, inadequate consideration or lack of "reasonably equivalent value" (inadequate payment), continuing to use the item transferred, the existence or threat of litigation, becoming insolvent as a result of the transfer, secrecy, and the overall chronology and circumstances. The look-back period in which such transfers are invalidated depends upon the specific legislation and circumstances and may be as long as six years. Proving intent to defraud may be unnecessary and some cases consider gifts to charities. Leveraged buyouts, where a company borrows on its assets and purchases stock, may sometime be the subject of a fraudulent conveyance claim.

A common legal defense to a fraud statute involves the defendant's "good faith belief" that the asserted fraudulent representations were true. However, "scienter" (intent to deceive) is not always required to trigger liability. The statute of limitations (time in which to bring a case) for federal fraud statutes is frequently five years but may be ten years if a financial institution is involved. A "continuing offense" may expand this time period beyond the original commission of the unlawful conduct. Federal Courts of Appeal disagree as to whether the statute of limitations for mail and wire fraud begins on the date of the communication or the date of completion of the scheme.

This blog provides a brief and incomplete educational overview of a complex topic and is not intended to provide legal advice. Always consult experienced legal and financial professionals in specific situations.

Brad Reid is a Professor of Law and Ethics at Lipscomb University, Nashville, Tenn. Brad is a graduate of the University of Texas Law School. He worked for Exxon and was in the private practice of law before becoming an academic. He regularly produces both academic and popular audience articles concerning legal developments. Brad can be reached at brad.reid@lipscomb.edu.

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