Fraud – Explained

Cite this article as: Jason Mance Gordon, "Fraud – Explained," in The Business Professor, updated January 9, 2015, last accessed April 8, 2020, https://thebusinessprofessor.com/knowledge-base/fraud/.
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Tort of Fraud
This video explains what is the tort of fraud.

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What is “Fraud”?

Fraud is the intentional misrepresentation of a material fact that is justifiably relied upon by someone to his or her injury. The false statement inducing the other party’s misunderstanding must regard a material fact about the prospective transaction. Fraud often involves intentional misrepresentations regarding ownership of property or one’s financial status.

  • Note: Fraud may be an intentional failure to disclose a material fact that induces another into action which results in her harm. This may be the case when a legal duty to disclose the material fact exists.
  • Example: Lying about assets or liabilities in order to get credit or a loan is a common form of fraud.

Discussion: How do feel about the requirement that fraud be intentional? Should a misrepresentation that is reckless and unverified be considered fraudulent, even if it is not intentional? Why or why not?

Practice Question: Daryl is selling a poster bearing the signature of a known celebrity athlete. Daryl advertises that the poster is 15-years old and was signed when the athlete was a rookie. In reality, the poster was signed recently, following the athlete’s retirement. If someone buys the poster based upon Daryl’s representations, is there a tortious act? Why or why not?

Proposed Answer

  • Fraud refers to the use any intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. The courts will typically find that a defendant has committed fraudulent misrepresentation when the following six factors have been met:
    • A statement or representation was made.
    • The statement or representation was false.
    • That when made, the defendant knew that the statement or representation was false or that the defendant made the statement recklessly without knowledge of its truth.
    • That the fraudulent misrepresentations was made with the intention that the plaintiff would rely or act on it.
    • That the plaintiff suffered harm as a result of the fraudulent misrepresentation.

Academic Research

Buell, Samuel W., What is Securities Fraud? (June 27, 2011). Duke Law Journal, Vol. 61, No. 3, p. 511, 2011. Available at SSRN: https://ssrn.com/abstract=1872932

Lederman, Leandra, The Fraud Triangle and Tax Evasion (February 22, 2019). Indiana Legal Studies Research Paper No. 398. Available at SSRN: https://ssrn.com/abstract=3339558 or http://dx.doi.org/10.2139/ssrn.3339558

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