COMMERCIAL FRAUD ASSESSMENT TOOL

Fraud

By: Eric Marcy

Whether you are the victim of fraud or are the target of a fraud investigation, it is necessary to make a structured and disciplined analysis of facts and the Law Enforcement Agencies involved to determine how best to protect your interests. This is a starting point. The following is an assessment tool to focus on the issues and help you determine how best to proceed to protect your legal rights and decide the best course of action.

These are the kinds of questions you might ask yourself that might help you analyze the situation before taking action.  Where is the fraud? What agency is investigating? Are you the victim or the target? Are you implicated in the fraud? What action should you take? How do you respond to a subpoena? How do you respond when a law enforcement agency contacts you? Should you go to law enforcement? Should you file a criminal complaint?

  1. FIRST QUESTION – WHERE IS THE FRAUD?
    1. Are you personally the target of a fraud investigation?
    2. Is one of your partners or principals the target of the fraud investigation?
    3. Are you the victim of fraud by an employee?
    4. Are you a victim of fraud by a supplier or customer?
  2. SECOND QUESTION – WHAT AGENCY IS INVOLVED IN THE INVESTIGATION?
    1. The Federal Government
      1. The United States Attorney’s Office.
      2. The Federal Bureau of Investigation.
      3. The Internal Revenue Service.
      4. The Office of the Inspector General (government contracts).
    2. State Government
      1. The New Jersey Attorney General’s Office – Division of Criminal Justice.
      2. The New Jersey Insurance Fraud Prosecutor’s Office.
      3. Department of Banking and Insurance (DOBI) – Fraud Investigation.
      4. The State Commission of Investigation.
      5. A County Prosecutor’s Office.
    3. All of these agencies have different agendas, focuses, degrees of sophistication in investigating fraud, and loss thresholds for prosecuting fraud/white-collar crimes.
  3. YOUR ACTIONS WILL BE DIFFERENT DEPENDING UPON THE STRUCTURE OF THE BUSINESS ENTITY, WHERE THE FRAUD IS OCCURRING, THE AGENCY THAT IS INVESTIGATING, AND WHETHER YOU ARE THE VICTIM OR THE TARGET
    1. If I am the victim, why do I need to get an attorney, accountant, or fraud examiner to perform an investigation?
      1. If you believe you or your company is the victim of fraud, it is best to retain counsel to conduct the internal investigation. An attorney will know how best to gather evidence, documents, interview witnesses, and communicate with law enforcement.
      2. It is important to retain counsel to conduct the investigation in the event that the investigation determines other areas of liability for you or the company that you are unaware of or have not considered.
      3. White-collar crimes are generally complicated to prosecute due to the sophistication with which the crimes are committed and the sophistication with which the crimes are covered up.
      4. If you or your company are the victims, to the extent that you have conducted your investigation (preferably through counsel) and organized the documents and evidence, the greater the likelihood that an agency will consider and pursue a prosecution.
      5. Your initial contact will usually be with an investigator of a law enforcement agency who may or may not have a background in business, accounting, or the customs and practices of your industry.
      6. If you cannot clearly demonstrate the criminal intent of the party that has defrauded you and if you cannot clearly show the paper trail, which circumstantially or directly shows the criminal activity of which you are a victim, you are less likely to generate an interest in investigating the matter.
      7. Business is a competitive world; people lose money, default on obligations, and break contracts all the time. Unless you can demonstrate facts and circumstances that confirm the criminal intent of the person who defrauded you, investigators will likely conclude that this is simply a “civil matter,” which is best left for resolution in the civil courts.
      8. Your own investigation is also necessary to protect you and your company. In conducting a private investigation, you want to make sure that you or members of your company cannot be accused of complicity or conspiracy relating to the activity.
      9. To the extent that your investigation reveals the criminal activity of an outsider, which implicates criminal exposure of someone on the inside, it is better for you to know this prior to turning the matter over to a law enforcement agency.
    2. When the target is you or someone in your company – you must ask yourself, WHOM DO YOU WISH TO PROTECT? The Company versus the individual.
      1. The structure of the company will be important to how you wish to proceed.
      2. If you are the target, you will want to protect yourself regardless of the type of structure of the company.
      3. If the company is a sole proprietorship, the answer may be simple – you wish to protect yourself and the company, but the entity will come second.
      4. If the company is a public corporation, its viability and integrity are paramount. To protect the entity, it must proceed with a careful investigation, be ready to disclose this information to the authorities, be ready to take remedial action, and possibly cooperate regardless of what employees may be implicated.
      5. If the company consists of several principles and partners, their individual interests may conflict, some wishing to protect themselves and some wishing to protect the viability of the company within which they have an economic interest. If there are multiple principles involved, each may require the advice of their own counsel.
  4. WHEN YOU BELIEVE THAT FRAUD IS OCCURRING WITHIN THE COMPANY, WHAT DO YOU DO?
    1. It depends on the structure of the company, who in the company is committing the fraud, and whom you wish to protect.
    2. In sole proprietorships, where you are the target, get counsel and protect yourself.
    3. In public companies, you must have corporate or retained private counsel to conduct the investigation and interface with the law enforcement inquiry – loyalty to the corporate entity becomes paramount – even if it means implicating employees.
    4. If the decision is to protect the company and individuals within the company who are potential targets, it may be necessary for separate attorneys to be appointed to represent the company and the individual targets.
    5. If multiple attorneys are involved at an early stage, it may be appropriate to enter into a Joint Defense Agreement to share information and cooperate in a common defense. When entering into a Joint Defense Agreement, you must understand the limitations and risks of such agreements.
  5. SUBPOENAS RELATING TO BUSINESSE
    1. Subpoenas upon the corporation, the corporation as a defendant
      1. Get counsel to serve as the interface with the agency:
        1. To confirm the authority of the subpoena.
        2. To determine whether there is a need or viable basis to move to quash.
        3. To try to narrow the scope as such subpoenas are frequently extremely broad and burdensome to comply with.
        4. To get additional time to comply – usually, the demand for records is extensive, and the return date for production may be short, burdensome, and unrealistic.
        5. To comply with the subpoena and review the production for responsiveness.
        6. To determine whether any privileges apply that might require withholding documents that seem to fall within the scope of the production.
        7. To prepare a privilege log if there are documents within the scope of the subpoena but there is a basis to assert privilege.
        8. To determine whether there is any proprietary material that needs protection that may be available under the law.
        9. To set up the manner of production.
        10. To maintain accurate records of exactly what was produced.
      2. Responding to a subpoena yourself has some risks inherent in that course of action. Subpoena compliance should be done by an individual with experience and who understands the law.
        1. Do not turn yourself into a witness, at least in terms of subpoena compliance.
        2. Do not risk obstruction charges or contempt charges if you withhold materials that should have been produced.
        3. The review and production should be done by someone with the experience and knowledge to properly determine if some documents are subject to privilege. If privileged documents are disclosed, the privilege may be deemed to have been waived.
        4. There may be proprietary information that is entitled to some protections that you will not have asserted.
        5. If you proceed without counsel, you may fail to create a proper paper trail to protect yourself under the production, you may not keep accurate records regarding the production, and you may inadvertently disclose and waive privilege.
        6. If you are the target, do not make your own production. You have a right not to incriminate yourself. While you may be compelled to produce the records, the act of production by itself may be incriminating.
        7. Always have an experienced and qualified attorney to review and advise on how to properly respond to a subpoena to protect your company and your interests.
    2. Subpoenas upon third parties, the corporate accounts, and the corporation as a defendant.
      1. Consider a motion to quash, but most probably get copies of the same records the agency will get.
      2. If you get notice of a subpoena served upon a third party if they can or will cooperate with you, get a copy of exactly what is provided in response to the subpoena.
  6. Once You Determine You are a Victim or Target – consult with counsel.
    1. Time is on the government’s side once formal charges are filed. While Speedy Trial statutes are ostensibly written to preserve a defendant’s right to due process and a speedy trial, in complicated white-collar cases, the deadlines established may work to the benefit of the prosecuting agency.
    2. Prosecutors may have records for years and indict shortly before the statute of limitations – if you have not been paying attention and are not prepared for possible litigation, it may be difficult to play catch up.
    3. Speedy trial statutes may force you to prepare a defense without the same records that the Government has in a very short time. The time to prepare may be modified by the defendant’s entry of a waiver of the Speedy Trial Act, and even then, the defendant may not have the benefit of the time that the Government had in putting its case together.
    4. Government may have had records relating to the investigation for years, and you may have only a few months to conduct your investigation, locate records, and prepare a defense.
    5. State, County, and Municipal Prosecutors are required by court rule to provide investigation materials, reports, and statements, otherwise known as “discovery,” when served with a demand for production.
    6.  Obtaining complete discovery from Federal Agencies may be more difficult. Although the Federal Government’s discovery obligations have expanded over the years, obtaining a full production and the production timing may be difficult and may place substantial pressure on your ability to prepare the defense.

 

CONCLUSION

          If you believe yourself or your company to be a victim, before rushing to a law enforcement agency with allegations of fraud, it is important to consult with counsel, conduct a proper investigation, and marshal all relevant evidence that would convince a law enforcement agency that the conduct was criminal and is worth further investigation.

          If you believe you or your company is the target of a criminal investigation, engage a qualified defense attorney to consult with to provide you and/or your company with advice as an investigation progresses.

          If you wish to schedule a consultation with the author:

Eric Marcy, Esq. is Of Counsel at Lyons & Associates, P.C., with offices in Somerville, Morristown, and Freehold, New Jersey. His practice areas include criminal defense, professional licensing, appeals, administrative law, and parole planning/litigation.

Inquiries may be directed to him by telephone at 908-575-9777 or by email at [email protected].

Mr. Marcy has been a member of the New Jersey Association of Criminal Defense Lawyers since 1987. He served as a Trustee of the NJ-ACDL from 2001 to 2010.

Mr. Marcy served as an instructor for the Institute of Continuing Legal Education Criminal Practice “Skills and Methods” program for newly admitted attorneys from 2000 to 2009.

He is also an authorized attorney under the New Jersey State PBA Legal Protection Plan, representing law enforcement officers in administrative, civil, and criminal matters.

Mr. Marcy has been selected for inclusion in New Jersey Super Lawyers® lists from 2006-2009 and 2017 to the present. Super Lawyers is not approved by the New Jersey Supreme Court, and the selection process may be reviewed online.