Line between legal deception, criminal fraud can be murky
Q: Recent court cases suggest deception may not always be considered fraud. What’s the distinction?
A: When former hedge fund manager Martin Shkreli recently was convicted of securities and wire fraud, a pivotal issue in the high-profile case was the fact that the defrauded investors didn’t lose any money. Even though false representations were made, the investors eventually were made whole and the defense argued that fact precluded conviction. In another recent case, a contractor’s conviction for wire fraud was overturned because, although false representations were made, they ultimately didn’t impact the benefit of the bargain between the parties. While the line between what is criminal fraud and what’s acceptable deception is murky, courts tend to focus on whether a party got what they bargained for as part of the transaction. Thus, in a case like Shkreli’s, where investors were misled about the nature of the investments, conceptually exposing them to added risk they didn’t contemplate, a fraud conviction may stand even though there was no loss.
Q: What’s the practical impact of economic loss in fraud prosecutions?
A: For purposes of obtaining a conviction, actual economic loss usually isn’t a requirement. However, when a prosecutor decides what cases to prosecute given their limited resources, financial loss is an important factor, not only because it remedies an actual harm to victims, but also because it makes obtaining the conviction much easier. Often the best evidence of a defendant’s intent to defraud investors, for example, is the fact that the investors suffered actual harm. However, it’s important to note that for purposes of federal sentencing, the possible sentences for fraud are driven not only by the actual harm suffered, but also by the “intended loss” that the defendant could’ve caused as a result of the scheme. Thus, in a case like Shkreli’s, there will be another significant legal battle over the harm that Shkreli intended to cause, and the outcome of that battle will dramatically impact what sentence he may receive.
Q: What lessons can companies take from these recent decisions?
A: While the line between deception and criminal fraud sometimes can be unclear, the reality remains that companies can best avoid potential liability by giving a wide berth to the line. Like most problems of this type, it’s difficult, if not impossible, to identify exactly where the line runs. It’s far easier to identify the safe ground. Companies need to emphasize in their training and compliance programs a corporate culture of commitment to accuracy and honesty in all aspects of the company’s business. If an employee then engages in conduct that crosses the line into fraud, the company will have a more realistic chance at convincing prosecutors that the employee was truly a rogue employee, acting against the company’s interests, and thereby hopefully avoiding criminal charges for the company itself.