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The Law Against Fraud

The Fraud Trial 7

II. THE LAW AGAINST FRAUD

Fraud is distinguished from larceny or theft. The elements of criminal and civil fraud hinge on willful acts

of misrepresentation. Selected criminal and civil laws are defined.

Background and Definitions of Fraud

Early references to fraud in English common law—the legal system on which the U.S. system is based—

define it as cheating or deceit. A common-law cheat was someone who, by false pretenses, false tokens, or

intentionally false representations, induced someone else to part with their property or personal rights.

Common-law cheating or fraud was considered both a crime (a misdemeanor, as opposed to larceny,

which was a felony) and grounds for civil action. Fraud, then, has a historical foothold in English civil

law as well as in criminal law. This dual status is retained in modern U.S. courts. For many frauds,

criminal and civil actions are both pursued in relation to the same act: Prosecutors may file a criminal

complaint and the damaged party can file a civil action for recovery of damages or property. Similarly,

tax evasion can be treated as a criminal and civil fraud.

In many states, fraud is now considered larceny by trick or false pretenses. Larceny refers to what is more

widely called theft, and it is defined as the wrongful taking of money or property of another with the

intent to convert the money or property or to deprive the owner of its possession and use. Both fraud

and larceny are forms of theft. If the taking is by stealth or force, it is larceny. If the taking is by guile or

deception, false representation, or concealment of crucial information, the act is fraud, false pretenses,

or larceny by trick. For example, an employee in the accounting department who steals $40,000 worth of

merchandise from the organization’s warehouse in the middle of the night has committed larceny; the

employee did not commit fraud because their actions involved stealth, not guile or deception, false

representation, or concealment of crucial information. The deception element for a fraud action can be

designed to cause others to act or be part of concealing one’s own actions.

Although larceny by trick and false pretenses both involve deception, there is one small difference

between the two. With false pretenses, the defendant obtains title, whereas larceny by trick typically

results in the defendant obtaining possession. For example, a “buyer” obtaining title to a vehicle by

misrepresenting to the owner that they deposited money into an account constitutes larceny by false

pretenses; someone posing as an owner of a vehicle to trick a valet driver into transferring possession

constitutes larceny by trick. In the larceny by trick example, no title of possession was transferred.

Embezzlement is a particular kind of fraud that is distinguished from larceny; it is committed not by

deception, but by a breaching of one’s fiduciary responsibility. The difference centers on the legal

custody of the article stolen. Larcenists take something from its rightful owner without ever having had


8 The Fraud Trial

legal custody of it themselves; embezzlers, conversely, take something in which they have legal custody.

Embezzlement exceeds the originally authorized custody agreement.

In practice, fraud embraces all the miscellaneous means that individuals employ to gain an advantage

over another by false suggestion or suppression of the truth. According to Black’s Law Dictionary, the act

of fraud includes surprise, trick, cunning, and a range of unfair ways by which people are cheated.

Elements of Criminal and Civil Fraud

Fraud as a human activity can be difficult to understand, but the legal elements—the components of a legal

offense that specify what must be shown to prove the claim—of a fraud are more readily defined.

Generally stated, the legal elements of fraud, also known as misrepresentation fraud or fraudulent

misrepresentation, include:

• There is a misrepresentation of a material fact.

• The misrepresentation was made with knowledge of its falsity.

• The misrepresentation was made with intent to induce the victim to rely on the misrepresentation.

• The victim relied upon the misrepresentation.

• The victim suffered damages as a result of the reliance.

The key distinction between fraud and larceny or any other type of theft hinges on the first element: the

perpetrator acts by misrepresentation. Fraud may be prosecuted criminally, civilly, or both, in sequence or

simultaneously.

Civil Fraud Actions

The specific elements of civil fraud vary somewhat according to the jurisdiction, but the elements

normally include:

• The defendant has made a representation in regard to a material fact.

• The representation was false.

• The defendant knew the representation was false.

• The representation was intended to provoke an action by the plaintiff.

• The plaintiff suffered damage as a result.

• In acting, the plaintiff reasonably assumed the representation was true.

Fraud claims can arise under state or federal law, and they can be brought in state or federal court. In

federal civil actions, the rules of the legal system are governed by the Federal Rules of Civil Procedure.

Each state (and some counties) publishes its rules of civil procedure. Although the rules of civil

procedure in most states follow the general outline of the federal rules, procedural rules can be vastly

different.


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Under the Federal Rules of Civil Procedure, fraud claims have to meet tougher requirements than most

other civil actions. To bring a claim for most civil actions, plaintiffs can state their claims in general

terms without alleging detailed facts to support each claim. For example, a plaintiff alleging negligence

can file a claim by simply making the accusation (e.g., the defendant’s inattentive driving caused an

accident) without including any details or supporting evidence. But the Federal Rules of Civil Procedure

Rule 9(b) states that to bring a claim for fraud, parties must plead the facts of the alleged fraud with

particularity. In other words, a fraud plaintiff must make the plea in detail, specifying what

misrepresentations were made, to whom, how they were false, why the plaintiff relied on them, etc.

The 9(b) requirement sets up a catch for fraud plaintiffs. For example, suppose that the officers of Lapis

Bank are convinced that a member of the bank’s loan committee, Mr. Bartleby, has been arranging loans

as part of a kickback fraud, but they do not have the documentation necessary to make a claim with

particularity because the documents are in Bartleby’s control. To obtain the necessary documents, they

need access to the various legal mechanisms that are available only when a civil action has been

commenced. Judges often grant leeway in civil procedure, allowing a complaint to be brought pending

the results of discovery. There may have to be a hearing after the original filing and some agreement to

amend the complaint after discovery has produced the information necessary to state the claim with the

required particularity. The 9(b) requirement shows why the initial investigation by a fraud examiner is

important if the case proceeds to trial. If the fraud examiner has done their job properly, the attorney

should have all the information he needs to file a proper complaint.

Again, civil actions can be filed by plaintiffs in state or federal courts, but most fraud suits, usually styled

as misrepresentation claims, are filed in state courts. Suits involving parties from different states and

involving more than $75,000 in controversy (known as diversity cases), or actions brought on the basis of

federal statutes, can be brought in federal court. Federal court is generally preferred by plaintiffs in larger

cases because it provides better access to witnesses and documents located in different states.

Criminal Fraud Charges

Although fraud may be challenged in a criminal or civil action, there are differences between criminal

and civil actions for fraud. Normally, a major distinction is the question of criminal intent. Most crimes

require proof that the defendant acted with a culpable mental state. That is, prosecutors generally must

offer proof about what a defendant was thinking and intended when the crime was committed.

Generally, to establish criminal liability, prosecutors must show that a criminal defendant knowingly and

willfully intended to commit the act in question.

In contrast, establishing liability for most civil claims does not require proof of the defendant’s mental

state. In a pure fraud case, however, this distinction does not hold. That is, establishing civil liability for

fraud, like establishing criminal liability, requires proof of the defendant’s mental state. This is because


10 The Fraud Trial

one of the elements of civil fraud requires that the defendant knew that the statement was false and

intended the victim to rely upon it. The same is true for other asset misappropriation cases. For

instance, in the case in which Hunter Pascal is accused of embezzling the investment funds of a private

school, to establish that Pascal is guilty of embezzlement, the complaining party must show that Pascal

meant to siphon off the money from the school’s investment fund and that he did not merely misapply

or mismanage the funds. Under such circumstances, the complaining party might demonstrate Pascal’s

intent by showing the different ways he circumvented financial controls to take possession of the funds.

Intent can make establishing a defendant’s guilt difficult, but prosecutors in criminal cases do have some

leeway. They do not have to show that the fraud was successful or caused damages to another party,

only that it was designed and initiated to defraud someone. The government is not required to show that

anyone fell for the fraudulent representation, just that the defendant made a misrepresentation with

fraudulent intent. In a civil fraud, by contrast, the plaintiff has to show that, because a misrepresentation

was believed and acted upon, the plaintiff suffered damages, personal or financial.

Most criminal prosecutions take place on the local or state levels, using laws enacted within the

jurisdiction. To bring an action under the federal laws in the U.S. Code, which is a codification of all

general and permanent laws of the United States, there must be some basis for federal jurisdiction.

Jurisdiction is the power of a court to hear and decide a given case. Crimes committed during interstate

commerce or through the use of the mail are typical examples of situations that give rise to federal

jurisdiction. Federal law is often used to prosecute high-dollar or unusually serious crimes, primarily

because of the superior resources of federal law enforcement agencies and their nationwide jurisdiction.

Some of the more commonly invoked federal criminal statutes are listed below:

• Mail fraud (18 U.S.C. § 1341): Prohibits any “scheme or artifice to defraud” that uses or involves

any authorized depository for mail.

• Wire fraud (18 U.S.C. § 1343): Prohibits using wire, radio, or television communication during an

interstate commerce fraud.

• Racketeer Influenced and Corrupt Organizations, or RICO (18 U.S.C. § 1961 et seq.): Prohibits

the investment of ill-gotten gains in another enterprise, using coercive or deceptive acts to acquire an

interest in an enterprise, and conducting business through such acts.

• Federal securities laws (The 1933 and 1934 Acts): Prohibit false statements and malfeasances of

duty in securities transactions.

• Securities fraud (19 U.S.C. § 1348): Makes frauds involving registered securities a federal crime.

• Conspiracy (18 U.S.C. § 371): A combination or agreement to accomplish an unlawful purpose, or

to use illegal means in accomplishing a lawful purpose. The purpose need not be accomplished in

full. Conspirators can be individuals or corporate entities.


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• False statements (18 U.S.C. § 1001): Prohibits false or fraudulent statements made to the

government.

• False claims (18 U.S.C. § 1031): Prohibits schemes to defraud the federal government involving the

supplying of products or services.

• Identity theft (18 U.S.C. § 1028): Makes identity theft a federal crime including stiff penalties (up to

30 years in prison and fines of up to $250,000).

• Economic espionage (18 U.S.C. §§ 1831–1839): Criminalizes the theft of trade secrets and other

proprietary information.

• Tax evasion, false returns, and failure to file (26 U.S.C. §§ 7201, 7203, 7206(1) et seq.):

Addresses violations of the tax code.

• Bankruptcy fraud (18 U.S.C. § 151 et seq.): Covers misconduct in bankruptcy proceedings,

including intentional bankrupting or “bust-out” schemes.

• Federal corruption statutes (18 U.S.C. § 201 et seq.): Chapter 11 of this portion of the code

contains 19 separate provisions, describing a variety of conflicts of interest and corrupt conduct

involving public officials that includes bribery, illegal gratuities, and misuse of office.

• Embezzlement and misapplication of bank funds (18 U.S.C. § 656 et seq.): Covers the illegal

confiscation and misuse of funds in federally regulated institutions.

• Bank fraud (18 U.S.C. § 1344 et seq.): Prohibits any “scheme or artifice” used to defraud a federally

chartered or insured bank.

• Fraud and related activity in connection with computers (18 U.S.C. § 1030). In addition to

criminalizing the commission of fraud via the computer, this statute also prohibits obtaining

restricted data regarding national security, obtaining confidential financial information, unauthorized

use of a federal government computer, and damaging or destroying computer information. See also

the Electronic Transfer Funds Act (15 U.S.C. § 1693n).

Legal Elements of the Cause of Action

Both civil and criminal actions set forth a grievance or legal claim, which is divided into particular

elements of the claim, and a legal offense (referred to as a cause of action), which is established by

providing all of the elements of the underlying claim. If a party bringing a legal action fails to prove one

or more of the elements, then they have not established that offense.

The elements of a legal offense specify what must be shown to prove the claim. Thus, if during a fraud

investigation the examiner finds evidence that a fraud might have occurred, they must develop the

evidence necessary to establish the legal elements of the claim. In practical terms, this means that the

fraud examiner must be able to recognize which laws were potentially violated, and must be able to

match the facts and circumstances of a specific loss to one or more legal causes of action.


12 The Fraud Trial

For instance, in the Lapis Bank kickback scenario, suppose the members of Lapis Bank’s loan

committee are sued by shareholders who claim the committee was negligent in reviewing a series of bad

loans that were arranged as part of Bartleby’s kickback scheme. The shareholders’ claim for breach of

fiduciary duty consists of four elements:

• The committee members had a duty to the shareholders.

• The members breached that duty by a negligent action.

• The breach was the cause of harm.

• The shareholders suffered damages as a result of the breach.

Thus, to establish a claim for breach of fiduciary duty, the shareholders must offer facts to prove all four

elements. To prove the first element—that the committee members had a duty to the shareholders—the

shareholder’s attorneys present the terms of the board’s responsibilities, which show that the board held

a position of fiduciary responsibility. To prove the board breached its duty, the attorneys offer evidence

showing that the committee approved loans it should not have. The crux of this case, however, will

come in proving the third and fourth elements—that the breach caused harm to the shareholders. To

establish these elements, the shareholders’ attorneys provide evidence that the loans negligently

approved by the committee wrecked the bank’s financial status, and the shareholders’ investment in the

bank’s stock plummeted because of the bank’s weak net worth.

Let’s take the case further. Suppose one member of the committee has already been convicted of

criminal fraud for arranging loans as part of a kickback scheme, and because Lapis Bank has fraud

insurance, it has been compensated for its losses. The bank’s insurance company, Rock-Hard Insurance,

files a civil complaint of fraud against Bartleby for the damages incurred. To recover for the fraud,

Rock-Hard has to provide evidence to establish the following elements:

• A misrepresentation (false statement) occurred—the defendant who perpetrated the fraud, Mr.

Bartleby, misrepresented the facts of certain loan applications.

• The misrepresentation was willful (done with knowledge that it was false)—Bartleby intended to

sway the committee’s decision to approve certain loans.

• The misrepresentation was believed and followed—the committee relied on Bartleby’s deceptive

information in making its decisions.

• Damages were incurred—the bank suffered losses in excess of $500,000 as a result of Bartleby’s

fraud.

As the defendant in Rock-Hard Insurance’s complaint, Bartleby disputes that his act caused the losses

that the company paid off. In doing so, he will challenge one or more elements of the plaintiff’s claim.

He may argue about the third element, asserting that his influence was not the determining factor in the

committee’s decision, or that he can counter the fourth element by arguing that the loans failed for

reasons unconnected to his involvement in their approval.


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To prevail at trial, Rock-Hard must prove each element of its claim. If it fails to prove even one element,

Rock-Hard will lose its case.

Accordingly, when conducting a fraud examination, the examiner should always consider what conduct

can be proved and against whom it can be proved. These considerations are important for deciding

whether to proceed on a selected legal cause of action, and it is important for planning the course and

scope of any additional investigation activities. Additionally, these considerations will help identify the

individuals against whom a suit may be brought.

The elements of a legal cause of action generally are set out in the statute that creates or defines the

offense, but the elements of a claim might also be outlined in legal primers and guidebooks. In addition,

written decisions or opinions in which courts have interpreted and applied these statutes in real cases

might result in further delineation, explanation, or limitation of the statutory language by the courts.

Also, information about the legal elements of an offense might be gleaned from the jury instructions in a

similar case. Most jurisdictions publish pattern jury charges. These are sample charges that judges and

lawyers use to construct the questions that will be given to the jury. When researching the elements of

an offense, pattern jury charges can be helpful because they provide each of the elements of the claim

and who has the burden of proof for each element.

Laws arising from city or county ordinances are housed in different offices, depending on the type of

law and local governmental structures. Copies of these laws are usually available online or at an area

library.

Some cases involve administrative law, which is concerned with the rules and institutions of

administrative agencies of government. Administrative agencies have the authority to legislate,

adjudicate, and enforce laws within their specific areas of delegated power. If a case involves

administrative regulations issued by local, state, or federal agencies, the regulations should be available

through the particular agency, at area libraries, and via the Internet.

Common Civil and Criminal Actions for Fraud

The following discussion examines some of the more common civil and criminal actions for fraud. Most

are civil actions; however, there may be a corresponding criminal statute as well. Do not assume that the

attorney you are working with is familiar with every type of action. Although the attorney must make the

decision as to what cause of action they deem appropriate, most attorneys are open to suggestions.

Attorneys who are not familiar with fraud cases often overlook some causes of action, such as breach of

fiduciary duty or conflict of interest.


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Misrepresentation of Material Facts (Fraudulent Misrepresentation)

This is the offense most often thought of when the term fraud is used. Misrepresentation cases can be

prosecuted criminally or civilly under a variety of statutes, such as false statements, false claims, mail

fraud, or wire fraud, or they might be the basis for common-law claims. The gist of the offense is the

deliberate making of false statements to induce the intended victim to part with money or property.

The specific elements of misrepresentation vary somewhat according to the jurisdiction and whether the

case is prosecuted as a criminal or civil action. The elements normally include:

• The defendant made a misrepresentation of a material fact.

• The defendant knew the representation was false.

• The victim relied on the misrepresentation.

• The victim suffered damages as a result.

Although it might be necessary to prove that the victim relied upon the false statements and actually

suffered a loss in a civil case, these elements of proof might not be necessary in a criminal prosecution.

In most instances, only false representations of “presently existing facts” can establish liability. That is,

opinions or speculative statements about future events, even if made with the intent to mislead, may not

provide the basis for a misrepresentation claim. For example, a used car salesperson who assures a

customer that a 20-year-old car, which was towed into the lot, will give the customer “years of driving

pleasure” probably cannot be held liable for misrepresentation. The salesperson, however, could be

liable if they tell the customer that the car has been driven only 15,000 miles but knows that it has been

driven 150,000 miles.

The general rule precluding fraud actions based on opinions or speculative statements is subject to

certain exceptions, principally cases involving opinions provided by professional advisers such as

Certified Public Accountants. People who claim to have special expertise on which another party

reasonably relies may be liable for a false opinion that is within that area of special expertise.

Normally, only material false statements may serve as the basis for a misrepresentation of material facts

case. Materiality usually refers to statements that are sufficiently important or relevant to a reasonable

person in acting or making a decision. So, the plaintiff must show that the defendant’s statements were

not only false, but furthered along the act of fraud. To illustrate materiality, consider a case in which a

private school brought a civil action against a man named Hunter Pascal, alleging that Pascal, who

served as the school’s investment advisor, embezzled funds from the school’s investment fund. It may

not be material to the claim, for example, that, at one time, Hunter Pascal told auditors he had three kids

when he didn’t have any. But Pascal’s efforts to hide and destroy the school’s financial records played a

role in extending the life of the embezzlement, and evidence of such actions is material to the trial.


The Fraud Trial 15

Similarly, a claim that a company enjoyed a 50 percent growth in profits would probably be material to a

prospective investor, whereas a statement that the company was considering moving its headquarters

from New York City to Chicago might not be.

The materiality of allegedly false statements is often a central issue in securities fraud cases. For some

offenses, however, materiality is assumed and need not be proved.

Additionally, in all fraud cases, the prosecution or plaintiff must prove that a false statement was

intentional and part of a deliberate scheme to defraud. A person intentionally makes a false statement if

it is their desire to cause the social harm, or if they act with knowledge that the harm will almost

certainly result from their actions. In some instances, particularly those involving civil actions for fraud

and securities cases, the intent requirement is met if the prosecution or plaintiff can show that the false

statements were made recklessly; that is, with complete disregard for truth or falsity.

Moreover, there is no such thing as an accidental or negligent fraud. For example, mistakenly entering

incorrect numbers on a financial statement is not fraud; however, knowingly entering incorrect numbers

with the intent that someone will rely on them is fraud if the other elements are present.

Additionally, to bring a successful claim for fraud, civil plaintiffs must also show they actually suffered

damages (i.e., harm) as a result of a fraudulent act, while criminal prosecutions have no such burden.

Negligent Misrepresentation

Although a misrepresentation fraud case may not be based on negligent or accidental

misrepresentations, in some instances, civil liability may arise from negligent misrepresentation. This

civil tort action is appropriate if a plaintiff suffered a loss because of the carelessness or negligence of

another party upon which the plaintiff was entitled to rely. Thus, to recover on a claim for negligent

misrepresentation, the injured party must show that they were entitled to rely on the untrue claim.

Examples would be negligent false statements to a prospective purchaser regarding the value of a closely

held company’s stock or the accuracy of its financial statements.

Concealment of Material Facts

An action for fraud may be based on the concealment of material facts, but only if the defendant had a

duty to disclose in the circumstances. The essential elements of fraud based on failure to disclose

material facts are:

• The defendant had knowledge of a material fact.

• The defendant had a duty to disclose the material fact.

• The defendant failed to disclose the material fact.

• The defendant acted with intent to mislead or deceive the other party.


16 The Fraud Trial

The duty to disclose usually depends on the relationship between the parties. Those people who occupy

a special relationship of trust, such as the officers or directors of a corporation, an attorney, accountant,

trustee, stockbroker, or other agent, may be found to have a duty to fully disclose material facts to the

parties who rely upon them. Statutes might expand the duty to disclose to areas in which traditionally

there was no such duty, such as to the sellers of personal or real property, or the purchasers or sellers of

securities.

Proof that the concealed fact was material probably is the most important element in a concealment

case; there can be no liability if the withheld information would not have affected the other party’s

actions or decisions. In addition to fraudulent concealment, a defendant might also be liable for

negligent failure to discover and disclose material facts. An accountant, for example, might be liable for

failure to discover or report material facts in a financial statement or audit. Of course, as with negligent

misrepresentation, the penalties are less severe for negligent concealment than fraudulent concealment,

and there is no criminal liability for negligent concealment.

Bribery

Bribery is a form of corruption that can be defined as “the offering, giving, receiving, or soliciting of

anything of value to influence an act or a decision.”

Types of Bribery Schemes

Bribery can be either official or commercial.

OFFICIAL BRIBERY

Official bribery refers to corruption of a public official to influence an official act of government. Illegal

payments to public officials can be prosecuted as official bribery, and they can give rise to stiff criminal

penalties. The elements of official bribery vary by jurisdiction, but generally are:

• The defendant gave or received (offered or solicited) a thing of value.

• The recipient was (or was selected to be) a public official.

• The defendant acted with corrupt intent.

• The defendant’s scheme was designed to influence an official act or duty of the recipient.

COMMERCIAL BRIBERY

Conversely, commercial bribery refers to the corruption of a private individual to gain a commercial or

business advantage. Commercial bribery may be prosecuted as a criminal act or redressed by civil action,

and commercial bribery is prohibited by statute in most states. If, however, a state does not have a

commercial bribery statute, a commercial bribery scheme may be actionable as common-law fraud or a

breach of fiduciary duty. So, civil actions for this type of misconduct may be brought even if commercial

bribery is not a crime in the relevant jurisdiction.


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There is no federal statute prohibiting commercial bribery, but such offenses may be prosecuted at the

federal level as mail or wire fraud, as a RICO violation, or as a violation of some other law. The

elements of commercial bribery vary by jurisdiction, but typically include:

• The defendant gave or received a thing of value.

• The defendant acted with corrupt intent.

• The defendant’s scheme was designed to influence the recipient’s action in a business decision.

• The defendant acted without the victim’s knowledge or consent.

Commercial bribery requires a lack of knowledge or consent on the principal’s part, and the “without

the knowledge or consent of the principal” element is included on the theory that a private business

owner is not defrauded if they know of or allows employees to accept gifts, favors, or other payments

from vendors or other business contacts.

Businesses injured by commercial bribery schemes may sue for treble damages and attorney’s fees under

the Civil RICO statute3 and the Clayton Antitrust Act,4 and for compensatory and punitive damages for

common-law fraud, conflict of interest, and breach of fiduciary duty.

Methods of Making Corrupt Payments

To establish a bribery claim, the party bringing the action must prove that the defendant offered a thing

of value; generally, the valuable item is not limited to cash or money. Any tangible benefit given or

received with the intent to corruptly influence the recipient may constitute an illegal payment. Courts

have held that such things as lavish gifts and entertainment, vacation travel and lodging expenses,

payment of credit card bills, loans, promises of future employment, and interests in businesses can be

bribes if they were given or received with the intent to influence or be influenced. Some state statutes

might distinguish between felonies and misdemeanors according to the amount of illegal payment.

Corrupt Influence

To establish a bribery claim, the party bringing the action must prove that the defendant acted with

corrupt influence. Proof often involves demonstrating that the person receiving the bribe favored the

bribe-payer in some improper or unusual way. For example, corrupt influence often is established by

showing that the person receiving the bribe:

• Provided preferential treatment to the bribe-payer

• Bent or broke the rules

• Took extraordinary steps to assist the bribe-payer

• Allowed the bribe-payer to defraud the agency or company

3. 18 U.S.C. § 1964. 4. 15 U.S.C. § 13(c).


18 The Fraud Trial

To prove corrupt influence, it is not necessary that the prosecution or plaintiff demonstrate that the

bribe-taker acted improperly; a bribe might be paid to induce an official to perform an act that otherwise

would be legal, or an act that the official might have performed without a bribe. Bribery schemes

involving these circumstances, however, are difficult to prove and are not favored by prosecutors.

Illegal Gratuity

Illegal gratuities are items of value given to reward a decision, often after the recipient has made the

decision. Under the federal legislation governing the offenses of bribery and illegal gratuity, an illegal

gratuity is a lesser-included offense of official bribery.5

The major difference between a bribe and an illegal gratuity is that an illegal gratuity charge does not

require proof that the gratuity was given for the purpose of influencing an official act. That is, an illegal

gratuity charge only requires that the gratuity be given for, or because of, an official act.

The elements of an illegal gratuity are:

• A thing of value

• Was given, offered, or promised to (or demanded, sought, received, or accepted by)

• A (present, former, or future) public official

• For or because of any official act performed or to be performed by such public official

In a typical scenario, a decision is made that happens to benefit a certain person or company. The party

benefitting from the decision gives a gift to the person who made the decision. The gift is merely

offered as a thank you for something that has been done.

Section 201 of Title 18 of the U.S. Code, which is the federal statute governing the illegal gratuity

offense, prohibits giving a government employee something of value because of their official position.

In practice, the statute is applied when relatively small payments, such as gifts or entertainment, are used

to attempt to influence a public official.

Extortion

An extortion case is often the flip side of a bribery case. Extortion is defined as the obtaining of property

from another, with the other party’s consent induced by wrongful use of actual or threatened force or

fear. Economic extortion is present when an employee or official, through the wrongful use of actual or

threatened force or fear, demands money or other consideration to make a business decision. Fear might

include the apprehension of possible economic damage or loss. A demand for a bribe or kickback,

coupled with a threat of adverse action if the payment is not paid, might also constitute extortion.

5. 18 U.S.C. § 201.


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In most states and under federal law, extortion is not a defense to bribery. That is, a person who pays a

bribe upon demand of the recipient still is culpable for bribery. In New York, however, extortion may

be a defense in certain circumstances.

Conflict of Interest

A conflict of interest occurs when an employee or agent—someone who is authorized to act on behalf of a

principal—has an undisclosed personal or economic interest in a matter that could influence their

professional role. These schemes involve self-dealing by an employee or agent and can occur in various

ways. For example, a conflict may occur when an employee accepts inappropriate gifts, favors, or

kickbacks from vendors, or when an employee engages in unapproved employment discussions with

current or prospective contractors or suppliers.

Statutes in every state and the federal system (as well as common-law decisions in all jurisdictions)

prohibit people from engaging in conduct that involves a conflict of interest. A conflict of interest may

be prosecuted civilly or criminally. The criminal conflict of interest statutes vary widely. They generally

prohibit public officers from accepting employment with government contractors or lobbying

government agencies during specified times.

Elements of a typical civil claim for conflict of interest include:

• The defendant is an agent of a principal or employer.

• The agent takes an interest in a transaction.

• The agent’s interest is actually or potentially adverse to the principal (i.e., the interest could cause the

agent or employee to place their personal interests ahead of the principal or employer).

• The agent did not disclose the interest and obtain approval by the principal.

Conflicts of interest do not necessarily constitute legal violations, as long as they are properly disclosed.

Thus, to be actionable, a conflict must be undisclosed.

An agent includes any person who, under the law, owes a duty of loyalty to another, including officers,

directors, and employees of a corporation; public officials; trustees; brokers; independent contractors;

attorneys; and accountants. People who do not occupy positions of trust with another party, such as

arm’s-length commercial parties, do not owe a duty of loyalty to each other and, therefore, are not

subject to conflict-of-interest restrictions.

If the defendant in a civil conflict of interest case is found liable, they must repay any losses that the

conflict caused and disgorge any profits they earned because of the conflict, even if there was no actual

loss to the principal. The disloyal party also might be required to forfeit all compensation received


20 The Fraud Trial

during the period of conflict. The victim of a conflict of interest may void any contracts entered into on

its behalf that were the result of or influenced by the conflict.

Forgery

Forgery includes two distinct common law offenses: forgery and uttering a forged instrument. Both

crimes are specific-intent offenses (i.e., they both require proof of specific intent to defraud).

Forgery is defined as:

• The fraudulent making or altering

• Of a false writing or instrument that has apparent legal significance

• With the intent to defraud

Uttering a forged instrument expands the forgery offense by including the offering or passing of a forged

document as genuine. The elements of uttering a forged instrument are:

• Offering as genuine

• A forged instrument

• With the intent to defraud

A forgery occurs when a document is not what it purports to be. A document is not a forgery just

because it contains a false representation. To constitute a forgery, the writing as a whole must have

apparent legal significance. Forgery occurs not just when an entire writing or instrument is created, but

also when there is any material alteration that affects the legal significance of the document or when a

signature is fraudulently procured from a person who does not know what they are signing.

Furthermore, forgery is committed even if no one is actually defrauded.

Although forgery is a crime, not a civil wrong, it can occur in connection with a fraud or a conversion of

property or property interests, for which the victim can seek civil remedies.

Theft of Money and Property

Theft is a term often used to describe a variety of fraudulent conduct. Many state statutes, for example,

describe misrepresentation fraud as theft by deception or larceny by trick. As used here, the term theft is

limited to embezzlement, larceny, and misappropriation of trade secrets and proprietary information.

Embezzlement

Embezzlement is the wrongful appropriation of money or property by a person to whom it has been

lawfully entrusted (or to whom lawful possession was given). Embezzlement implicitly involves a breach

of trust, although it is not necessary to show a fiduciary relationship between the parties. The elements

of embezzlement vary somewhat by jurisdiction, but generally are:


The Fraud Trial 21

• The defendant took or converted

• Without the knowledge or consent of the owner

• Money or property of another

• That was properly entrusted to the defendant (defendant had lawful possession of the property)

Larceny

Larceny is the wrongful taking of money or property of another with the intent to convert or to deprive

the owner of its possession and use. In larceny, unlike in embezzlement, the defendant never has lawful

possession of the property. The elements of larceny typically include:

• Unlawfully taking or carrying away

• Money or property of another

• Without the consent of the owner

• With the intent to permanently deprive the owner of its use or possession

The key distinction between embezzlement and larceny is that embezzlement involves the wrongful

appropriation of legally entrusted money or property, whereas larceny does not.

Misappropriation of Trade Secrets

Misappropriation is the intentional, illegal use of the property, funds, or ideas of another person for an

unauthorized purpose. In the fraud context, misappropriation claims generally involve trade secrets or

other proprietary information.

Trade secrets include not only secret formulas and processes, but also more mundane proprietary

information, such as customer and price lists, sales figures, business plans, or any other confidential

information that has a value to the business and would be potentially harmful if disclosed.

Theft or misappropriation of trade secrets may be prosecuted under a variety of federal and state

statutes and the common law. What constitutes a trade secret depends on the organization, industry, and

jurisdiction, but the following three characteristics are common to most definitions:

• The information is not generally known to the relevant portion of the public.

• It confers some sort of economic benefit on its holder (where this benefit must derive specifically

from its not being generally known, not just from the value of the information itself).

• It is the subject of reasonable efforts to maintain its secrecy.

The elements of a typical theft of trade secrets claim are:

• A party possessed information of value to the complaining party.

• The information was treated confidentially.


22 The Fraud Trial

• The defendant took or used the information by breach of an agreement, confidential relationship, or

other improper means.

An organization can only maintain legal protection over its trade secrets if it takes reasonable steps to

keep that information secret. Thus, to have an actionable claim for misappropriation of trade secrets, the

complaining party must have treated the information as confidential, although absolute secrecy is not

required; it is sufficient if the information was substantially undisclosed. Limited disclosure to people

with a need to know or pursuant to confidentiality agreements does not void the secret. There are

various methods an entity can use to demonstrate that its trade secrets were kept confidential. Such

methods include having a written policy describing the information as proprietary or secret, imposing

strict limitations on distribution of the information, and employing physical measures to secure the

information to prevent unauthorized access and use.

The owners of the information also should enforce restrictive agreements and act promptly to remedy

any inadvertent disclosures. Failure to do so might be construed as a waiver of confidentiality and make

it impossible to prevent future use or disclosures.

COMMON DEFENSE IN TRADE SECRET CASES

The most typical defense in trade secret cases is that the defendant developed the information

independently. If the aggrieved party demonstrates that the information came to the defendant as the

result of or during a confidential relationship, the burden of proof shifts to the defendant to

demonstrate independent discovery. The defendant also might defend a misappropriation claim by

showing that the information was not in fact a secret, that the third party’s use was authorized, or that

the trade secret or proprietary information was abandoned by the owner.

CIVIL ACTION FOR TRADE SECRET THEFT

A victim of trade secret theft may file a civil action for damages or request an injunction. Civil damages

for trade secret theft include reimbursement for actual losses caused by the defendant, such as lost

profits, reimbursement of development expenses and overhead costs, and the cost of efforts to protect

the secret or recover damages, as well as for reduction in the value of the business. Damages also can be

measured by the defendant’s profits, which may be ordered to be paid to the plaintiff. Punitive damages

and attorney’s fees also may be awarded.

In addition to or in lieu of monetary damages, the plaintiff in a civil action may also obtain an

injunction—a court order by which a party is required to perform, or is restrained from performing, a

specific act—under a variety of federal and state statutes. Because injunctions are issued under the equity

powers of a court, they are discretionary and are only issued where necessary to the interests of justice and

where there is an inadequate remedy at law. Thus, injunctions are difficult to obtain.


The Fraud Trial 23

To obtain an injunction, the plaintiff must demonstrate that:

• It is the proper owner of the trade secret.

• An unauthorized person has taken or used the trade secret.

• There is a high probability of improper disclosure.

• The plaintiff will suffer irreparable injury (meaning that the plaintiff could not be adequately

compensated by monetary damages).

• The plaintiff probably will win the case.

Injunctions are often issued in trade secret cases to prevent the use of stolen information, to prohibit an

employee in possession of a trade secret from accepting employment with a competitor, or to order the

wrongdoer to return the misappropriated information. The injunction usually prohibits use of the trade

secret only for the amount of time that would have been required to legitimately develop the

information.

Breach of Contract

If the fraudster has any kind of a contractual relationship with the victim, there may be a breach of

contract claim. A breach of contract occurs when one party to a contract fails to perform, or announces that

it does not intend to perform, their contractual obligations without just cause.

A breach of contract claim can arise under an oral or written contract. Many states have recognized

certain implied or unwritten duties as a part of almost every contract. For instance, some courts have

held that it is an implicit part of a contract that each party will use its best efforts to fulfill its duties

under the contract. A similar duty that has been recognized by some states is the duty to deal with each

other in good faith. If a party to a contract, including employment contracts, steals from the other party

or acts in bad faith, there may be a civil claim for breach of contract.

Gross Negligence

Gross negligence is a civil cause of action, and it can be generally defined as the intentional failure to

perform a duty in reckless disregard of the consequences to the victim. Although the exact definition

varies by state, the basic element of this civil cause of action is that the defendant committed an

intentional act, knowing that it was at least substantially likely to cause harm to the victim.

In the employment context, employees have a duty to act in the best interests of their employers. So, if

an employee consciously steals from their employer, the employee has breached their duty to act in the

best interest of the employer and caused harm to the employer. Further, if the employee knew that the

harm resulting from their wrongful act was likely to occur when they committed the act, their actions

may rise to the level of gross negligence.


24 The Fraud Trial

One further note about gross negligence—generally, punitive or exemplary damages are available if the

defendant is found liable for gross negligence.

Breach of Fiduciary Duty

People in a position of trust or fiduciary relationship—such as officers, directors, high-level employees of a

corporation or business, and agents and brokers—owe certain duties imposed by law to their principals

or employers, and any action that runs afoul of such fiduciary duties constitutes a breach.

Establishing a breach of fiduciary duty claim is easier than establishing a claim for fraud because a

breach of fiduciary duty claim does not require proof of wrongful intent. In fact, to state a claim for

breach of fiduciary duty, the plaintiff must show only that the defendant:

• Occupied a position of trust or fiduciary responsibility with respect to the plaintiff (e.g., was an

employee or agent)

• Breached that duty to advance a personal interest

The principal fiduciary duties are loyalty and care.

Duty of Loyalty

The duty of loyalty requires that the employee or agent act solely in the best interest of the employer or

principal, free of any self-dealing, conflicts of interest, or other abuse of the principal for personal

advantage. Employees or agents who owe a duty of loyalty must act solely in the best interest of their

principal and not seek to advance their personal interests to the detriment of their principal.

Accordingly, corporate directors, officers, and employees are barred from using corporate property or

assets for their personal pursuits or taking corporate opportunities for themselves.

Additionally, if an employee or agent commits a more traditional form of fraudulent conduct, such as

embezzlement, theft, acceptance of a kickback, or conflict of interest, the conduct also violates the duty

of loyalty and may be redressed as such in addition to or instead of the underlying offense.

Duty of Care

The duty of care means that people in a fiduciary relationship must act with such care as an ordinarily

prudent person would employ in similar positions. Corporate officers, directors, or high-level

employees, as well as other people in a fiduciary relationship, must conduct their business affairs

prudently with the skill and attention normally exercised by people in similar positions. Fiduciaries who

act carelessly or recklessly are responsible for any resulting loss to the corporate shareholders or other

principals. Damages may be recovered in a civil action for negligence, mismanagement, or waste of

corporate assets.


The Fraud Trial 25

People in a fiduciary relationship, however, are not guarantors against all business downturns or errors

in judgment. The business judgment rule protects corporate officers and directors from liability for

judgments that were made in good faith (e.g., free of self-dealings or conflicts) and that appeared to be

prudent based on then-known circumstances. Corporate defendants in such cases might raise the

business judgment rule in defense by showing that they had no reasonable grounds to suspect such

conduct or that the cost of prevention or recovery was too high compared to the anticipated returns.

Corporate officers breach their duty of loyalty if they accept kickbacks, engage in a conflict of interest,

or are otherwise disloyal, but corporate officers who carelessly fail to prevent such conduct, enforce

controls, or pursue recovery of losses might breach their duty of care.

Breach of Fiduciary Duty Claims

A breach of fiduciary duty claim is a civil action. A plaintiff who brings a successful breach of fiduciary

duty claim may receive damages for lost profits and recover profits that the disloyal employee or agent

earned—in some instances even the salary paid to the employee or agent during the period of disloyalty.

The plaintiff may recover profits earned by the disloyal agent even if the principal did not suffer an

actual loss. The plaintiff also may void contracts entered into on its behalf that were the result of or

were influenced by the employee or agent’s disloyalty.

The Location of the Law

Although fraud examiners should not be called upon to interpret the law, they should be aware of how

the law is made and where it can be found. Often nonlawyers are frustrated when they ask a seemingly

straightforward question of a lawyer, but get less than a straightforward answer. Do not get frustrated.

Often lawyers cannot answer a question until they know all of the facts and have researched the

particular issue to find out how the courts have ruled on it.

Although most nonlawyers never have to conduct legal research, it is helpful to know how legal

information is organized. For example, to find a copy of the federal wire fraud statute, an examiner can

search online without having to contact a lawyer. Additionally, the Internet is loaded with case law,

statutes, and other resources at the federal, state, and local level.

The following summary details the major divisions used to categorize legal information. This will help in

understanding the broad features of the landscape, but any effort to conduct complex legal research

should be performed with the aid of a researcher, librarian, attorney, or paralegal.

The U.S. legal system is based on common law, which is made up of legal principles developed over time,

according to usage and the decisions of courts. Common law is supplemented and modified by statutory


26 The Fraud Trial

law, which refers to the laws passed by legislative bodies and is contained in statutes. That is, statutory

law includes statutes passed by the federal or state legislatures (and regulations passed by administrative

bodies). Criminal actions are based on statutory law, but civil actions can be based on either statutes or

common law. Also, under the U.S. legal system, the laws constantly evolve and any single case might

involve both common law and statutory law.

To understand the interaction between common law (judge-made law) and statutory law, consider the

following example:

EXAMPLE

Two men, Bryant and Dalton, were convicted of violating a statute. They paid the director of a

convention center $26,000 in exchange for obtaining favorable treatment for their convention-booking

business. As part of the dealings with the director, they sent two telegrams from Kansas City, Missouri,

to Bridgeton, Missouri. They did not know that the telegrams were routed through Middletown,

Virginia. Both Bryant and Dalton were convicted of federal wire fraud, which makes it a crime for

anyone to knowingly use wire communications in interstate or foreign commerce to perpetrate a scheme to

defraud a victim of money or property.

They appealed their conviction on the basis that they had no way of knowing that the telegram was going

to be sent interstate. On appeal, they asserted that they did not violate the wire fraud statute because they

did not satisfy one of the elements of the wire fraud offense—that the defendant knew or reasonably

foresaw that the telegrams were going to be routed out of the state.

The facts are not in dispute—Bryant and Dalton used wire communications in interstate or foreign

commerce to perpetrate a scheme to defraud a victim of money or property.

The question before the court was a legal question. The question the court had to answer was: “Under

the language of the statute, does the defendant have to know or foresee that the communication will be

transmitted between two states?”

In answering this question, the court sided with the government, concluding that the defendant does not

have to intentionally send the message across state lines. Part of the court’s opinion is set forth below:

Certainly the statute requires that defendant be a party to some kind of scheme to defraud. . . .

It also requires that the defendant intend that a communication by wire be sent in furtherance of

the scheme, or at least that the use of wire communication be reasonably foreseeable. But the

words themselves, read literally, require only that the wire communication be interstate, not that

the defendants know that it is to be interstate. The literal meaning of the statute should control,


The Fraud Trial 27

unless it is contrary to the manifest purpose of Congress or inconsistent with binding case law.

United States v. Bryant, 766 F.2d 370 (8th Cir.), cert. denied, 474 U.S. 1054 (1985).

The appellate court’s decision thus became precedent, binding lower courts to follow the decision in later

cases of similar nature, until or unless the rule of law established is overturned by a higher court or the

legislature. The body of precedent is called common law.

The purpose of this example is to illustrate that judges are called upon to interpret the meaning of a law

with respect to the facts at hand. In cases involving statutes, disputes often arise as to the meaning of

the words used in the statutes. Judges interpret what the words mean. In doing so, judges consider any

precedent—prior court decisions of equal or higher authority that have considered similar cases—

established by other judges. That is, when interpreting a statute, judges look at how it has been dealt

with in the common law. A court must follow the precedents of higher courts in its jurisdiction (e.g., a

federal district court must follow the interpretations of its respective court of appeals, and all federal

courts must follow the interpretations of the U.S. Supreme Court).

Procedural Versus Substantive Law

In the United States, there are two main categories of law: substantive law and procedural law. Substantive

law consists of legal rights and duties (e.g., contract law, tort law, and criminal law) as opposed to

procedural law, which sets out the rules of the legal system. If someone says an act is “against the law,”

they mean substantive law, which includes common law from all the various courts and state and federal

constitutions, statutes, and ordinances.

Again, procedural law sets out the rules of the legal system, including the rules governing pleadings,

evidence, jurisdiction, and court procedures. Procedural law includes deadlines, filing requirements,

steps to follow in bringing a claim, rules of evidence, and so on.

Substantive law sets the terms of any dispute; procedural law dictates how a legal dispute is handled.

Locating Substantive Law

In the United States, substantive law may come from statutory law, common law, and constitutional law.

STATE AND FEDERAL STATUTES

State and federal statutes are generally grouped under subject headings such as banking, labor, securities,

and so on. Most criminal statutes are grouped together as a separate category.

A single case may involve several subject headings of the law. For example, a loan fraud committed by

an employee of a federally chartered bank can involve (1) criminal charges for violation of banking


28 The Fraud Trial

regulations, (2) criminal charges of mail fraud or wire fraud, (3) a civil tort action for damages suffered

by the bank’s shareholders and investors, or (4) an income tax suit under state or federal guidelines for

income not reported by the defendant, and so forth.

To research a case or issue, one can consult the laws in statute books published by the state or federal

government. These are available in legal libraries, at most public libraries, through government agencies,

and on the Internet. Substantive federal law is contained in the U.S. Code. Each state publishes its own

laws.

Statutes are catalogued by a number-letter designation called a cite or citation (e.g., 44 U.S.C. § 1863(i–o)).

This citation directs the reader to Title 44 of the U.S. Code, and to Section 1863 of that title, specifically

subsections i through o.

There are also published guidebooks that cover specific areas of the law—books on tax law, law for

bankers, labor law, and so on. These guidebooks contain the text of pertinent laws and commentary

from the author(s). Legal dictionaries and encyclopedias are available, some covering the law in general

and others dealing with specific areas. Encyclopedias can also be arranged geographically, covering

national law. Two of the most comprehensive are American Jurisprudence (referred to as AmJur for short)

and Corpus Juris Secundum (known as CJS). Encyclopedias are also published for some of the larger states

such as California and Texas. Do not be afraid of legal encyclopedias. Often they are well-written, fairly

easy to understand, and can provide you with general information on legal topics.

Other places to find laws and legal discussion include legal journals (such as the American Lawyer or the

American Bar Journal), law reviews published by universities, guides written as primers for law students

(called hornbooks), and materials prepared for continuing legal education for practicing attorneys (which

also serve as useful overviews for the general reader).

Until recently, most legal research required a law library or a paid legal research service such as

LexisNexis or Westlaw. Today, however, a simple Google search may be the best way to begin your

Reading the Cite Statute: 44 U.S.C. § 1863 (i–o) Title: 44 Statute book: United States Code Section: 1863 Subsection: i through o


The Fraud Trial 29

legal research. The Internet contains excellent resources for legal information, including websites such as

FindLaw and Nolo. For more online resources, a list of law-related Internet sites can be found at

ACFE.com/useful-websites.

Law libraries are also an excellent resource. The reference personnel at law libraries are generally

knowledgeable and helpful. General librarians can also be very helpful. There is no shortage of

information and commentary on the law, so it helps to have a guide.

COMMON LAW

Again, common law consists of the usages and customs of a society as interpreted by the judiciary; it is

sometimes called judge-made law because it comprises the decisions of judges in actual cases. Statutes are

supplemented and modified in common law systems according to how the laws are applied by judges.

The common law is based not on statutes passed by the legislatures, but upon “precedent” established

by previously decided cases stretching back hundreds of years in U.S. and English courts. That is,

decisions that establish particular legal principles are called precedent, and in a common law system, the

decision in an individual case binds judges in later cases of a similar nature, until or unless the rule of law

established is overturned by a higher court or the legislature. The body of judicial opinions is sometimes

referred to as case law.

Appellate courts enter their decisions into common law by writing their opinion of the case. An opinion

contains the judge’s legal reasoning in weighing the facts of the case and the ultimate holding (decision)

issued by the court on the subject.

Appellate decisions are published in books (and electronically) in volumes called reporters (also called

reports or case reports). Reporters are organized by the court issuing the decision and by geographical area.

The National Reporter System organizes federal and state case law into a cohesive body of law that can

be researched within and across jurisdictions. The Federal Reporter contains decisions issued by the U.S.

Courts of Appeals; federal Supreme Court decisions are contained in the Supreme Court Reporter. The

system divides the 50 states and the District of Columbia into seven regions: Atlantic, North Eastern,

North Western, Pacific, South Eastern, South Western, and Southern. State appellate court decisions are

issued in regional reporters such as the Pacific Reporter and the Atlantic Reporter.

Reporters are grouped overall by series and volume (there might be 50 volumes, for example, in a

series). If a case is especially recent, its holding may be available only through the court itself, an

electronic reporting service, or the Internet. A standard reporter entry contains the full text of the

court’s opinion in the case, plus relevant headnotes, which summarize the legal issues that surround the

http://www.acfe.com/useful-websites


30 The Fraud Trial

case. Judges do not write headnotes. Headnotes are written by the editors of the reporter and give a

quick summary of the issues discussed in the opinion.

When writing opinions, judges cite other court opinions for their precedential value or, to the extent the

opinion is not precedential, for their reasoning. When citing other opinions, judges use a system similar

to those used for statutes. For example, the cite 802 S.W.2d. 650 (1990) refers to the case in Volume 802

of the Southwestern Reporter, Second Series, beginning on page 650; the final parentheses indicates the case

was decided in 1990. After a certain number of volumes are collected, a new series of the reporter

begins. A cite might refer to Hale v. Sampson, 333 F.3d 615 (1997), indicating the case is contained in

Volume 333 of the Federal Reporter, Third Series, beginning on page 615 (the decision being handed

down in 1997). A citation of 384 F.2d 678 refers to a case in Volume 384 of the Federal Reporter, Second

Series, page 678.

A case citation can look pretty daunting if the case has been through several levels of appellate courts or

the Supreme Court. In some instances, after the citation there might be information about the

subsequent history of the case on appeal, such as whether it was affirmed or reversed. The reference cert.

denied is used to indicate that the case was appealed, but the Supreme Court refused to hear it.

There is more than one reporter that publishes U.S. Supreme Court opinions: the United States Reports

(U.S.), which are the official reports of the Supreme Court; the Supreme Court Reporter (S. Ct.); and United

States Supreme Court Reports, Lawyers’ Edition (L. Ed.). For example, an important case about discovery

issues quoted in a later section of this text is cited as: U.S. v. Proctor & Gamble Co., 356 U.S. 677; 78 S. Ct.

983; 2 L. Ed.2d 1077 (1958). This citation references three reporters that all contain the same Supreme

Court opinion. At least one of the three reporters should be available in any law library.

CONSTITUTIONAL LAW

An analysis of constitutional law is beyond the scope of this material on fraud trials; however, certain

cases do invoke constitutional principles, especially as they proceed through the appeals process. The

Constitution defines and limits the powers of the various branches of the government and guarantees

basic rights to all citizens—rights such as equal protection under the law, due process, and freedom

Reading the Cite Court Case: 333 F.3d 615 (1997) Volume: 333 Reporter: Federal Reporter, Third Series Page: 615 Decision date: 1997


The Fraud Trial 31

from unreasonable searches and seizures. Thus, in the United States, the federal Constitution supersedes

decisions by lesser bodies (state legislatures and supreme courts), and even acts of the U.S. Congress if

Congress exceeds its own constitutional powers. Copies of the U.S. Constitution and those of individual

states are available online. Appellate reporters often contain discussion of constitutional issues.

Locating Procedural Laws

Procedural law refers to the guidelines for how courts conduct business. In federal courts, procedures are

governed by the Federal Rules of Civil Procedure and the Federal Rules of Criminal Procedure. The Legal

Information Institute (LII), which provides free access to legal information for the public, publishes the

text of these rules online, and the United States Code Annotated includes the text of the rules, as well as

editorial notes and commentary by special committees.

In addition, local federal district courts might have their own local rules of procedure, which could vary

or expand some of the general federal rules. The Federal Procedure Rules Service (FPRS) collects the

complete text of all the rules applicable to federal courts of general jurisdiction. Individual jurisdictions,

or circuits, publish the rules particular to their authority, which are available in separate volumes through

the FPRS.

Moreover, there are special procedural laws governing appeals courts. Federal Rules of Appellate Procedure

are collected in the United States Code (following Title 28 of the U.S. Code); individual courts of appeal

might supplement the general rules with their own publications. These are listed under the name of the

court (e.g., Appeals to the Fifth Circuit Manual).

Also, there are special procedural laws governing evidence. The Federal Rules of Evidence cover what

counts as evidence, the conditions of its admissibility in court, and the methods authorities must use in

acquiring and processing evidence. These rules are collected in the United States Code (Appendix to Title

28) and the Federal Rules of Evidence Service.

Furthermore, each state (and some counties) publishes separate procedural rules. Most state procedural

rules follow the general outline of the federal rules, but state procedural rules can be vastly different. If

an examiner has a specific question about a procedural or evidentiary rule at the state or county level,

they should consult a copy of the rules for the particular jurisdiction or speak with an attorney.

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