Next Article: False Statement as a Criminal Charge
Back to: CRIMINAL LAW
What are some common types of business fraud?
Many examples of business fraud include a scheme or plan designed to take from a person the tangible right of honest services. Below are some common examples of fraud in the business context:
- Mail or Wire Fraud – It is illegal to use the US postal service or electronic means of interstate communication to carry out a scheme to defraud. This is a very broad statute, as it includes any fraudulent conduct employing mail or wire transmission. “To mail” means a communication is sent or received through use of the US Postal Service or any interstate carrier. “Wire transmission” includes the use of radio, television, telephone, Internet, or other wired form of communication.
- Securities Fraud – Federal laws defining securities fraud are the Securities Acts of 1933 and the Securities Exchange Act of 1934. Section 17 of the 1933 Act covers fraudulent activity in the issuance of securities. Section 10 and Rule 10(b)(5) of the 1934 Act cover fraud in the purchase or sale of a security.
- Insurance Fraud – This is a common state-law crime in which an insured makes a fraudulent claim for benefits under an insurance policy. For example, intentionally setting fire to the building of a failing business to collect the insurance proceeds is insurance fraud.
- Healthcare Fraud – Healthcare fraud generally involves making fraudulent claims for payment or reimbursement of healthcare expenses. The common offenders are healthcare providers who make fraudulent claims for reimbursement for services never performed or unnecessary. The prosecution usually falls under the False Claims Act.
- Tax Fraud – Tax fraud is the knowing concealment of transactions or property ownership in an attempt to illegally avoid paying federal, state, or local taxes.
Discussion: Do you think there should be varying degrees of fraud? When does in individual’s conscious decision to do a poor job or cut corners amount to a plan or scheme to defraud the individual paying for the services? Could an intentional misstatement amount quality of services or effectiveness of a product amount to fraud? Could it be fraud if an individual misrepresents (or lies about) a work process in order to get hired or win a contract?
- Some might say that fraud is a straight-forward charge. Any deception of another for the purposes of personal gain should be treated equally. Others might argue that the extent to which one person defrauds another should be considered. This is less of a straight-line test and more of a sliding scale. Most consumers would agree that a misstatement of quality of services or effectiveness of a product could constitute fraud. A marketer, on the other hand, may be fair less apt to accept this as fraudulent activity. A service provider may be less willing to say that lying about a service process is fraud, while the individual hiring the contractor may believe it to be fraud.
Practice Question: Javier opens a personal wealth investment business. He represents to clients that he can generate above-average returns on their investment with minimal risk. He claims to have insider information on many new business ventures that makes them a certain success. He makes up fake disclosure documents for business that do not exist or have no connection with Javier. In reality, Javier is running a Ponzi scheme in which he takes money from investors and uses the funds to pay returns to other investors. He also spends much of the remaining funds soliciting new investors through email and direct-mail advertisements. What crimes, if any, has Javier committed? Why?
- Stock and securities fraud typically involves the selling of stocks, commodities and other securities through deceptive practices. The fraud usually occurs when stockbrokers or investment banks convince people to make investments based on false or exaggerated information, or on “insider trading” information not available to the public. Examples of securities fraud include Ponzi or pyramid schemes, broker embezzlement, and foreign currency fraud. Mail fraud and wire fraud occurs through using regular mail, or any form or wired communications technology, including the telephones and the internet as part of any fraudulent scheme. In the example from the practice question, Javier committed stock and securities frauds as well as the mail and wire frauds. https://www.thoughtco.com/fraud-definition-and-examples-417537
Cohen, Jeffrey R. and Ding, Yuan and Lesage, Cédric and Stolowy, Hervé, Corporate Fraud and Managers’ Behavior: Evidence from the Press (December 29, 2010). Journal of Business Ethics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1160076
Immordino, Giovanni and Pagano, Marco, Corporate Fraud, Governance and Auditing (February 4, 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1337909or http://dx.doi.org/10.2139/ssrn.1337909
Chidambaran, N.K. and Kedia, Simi and Prabhala, Nagpurnanand, CEO Director Connections and Corporate Fraud (March 15, 2011). Fordham University Schools of Business Research Paper No. 1787500. Available at SSRN: https://ssrn.com/abstract=1787500 or http://dx.doi.org/10.2139/ssrn.1787500
Bhasin, Madan Lal, Corporate Accounting Fraud: A Case Study of Satyam Computers Limited (October 20, 2015). Open Journal of Accounting, 2013, 2, 26-38. Available at SSRN: https://ssrn.com/abstract=2676467
Wang, Tracy Yue and Yu, Xiaoyun and Winton, Andrew, Corporate Fraud and Business Conditions: Evidence from IPOs (December 23, 2009). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1024229
Dyck, I.J. Alexander and Morse, Adair and Zingales, Luigi, Who Blows the Whistle on Corporate Fraud? (October 1, 2008). AFA 2007 Chicago Meetings Paper; Chicago GSB Research Paper No. 08-22; CRSP Working Paper No. 618; 1st Annual Conference on Empirical Legal Studies, Forthcoming; ECGI – Finance Working Paper No. 156/2007. Available at SSRN: https://ssrn.com/abstract=891482 or http://dx.doi.org/10.2139/ssrn.891482
Chidambaran, N.K. and Kedia, Simi and Prabhala, Nagpurnanand, CEO-Director Connections and Corporate Fraud (September 23, 2010). Fordham University Schools of Business Research Paper No. 2010-009. Available at SSRN: https://ssrn.com/abstract=1681472 or http://dx.doi.org/10.2139/ssrn.1681472