Fraud and Larceny

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White-collar crimes generally involve the use of deception to acquire money or property. This is the very definition of fraud. Many white-collar crimes are versions of fraud. Sometimes, white-collar crime involves outright larceny, which is the trespassory taking of property with the intent to deprive the owner of the property. In both types of white-collar crime, the criminal is trying to take property for his or her own financial gain.

Fraud is found in many contexts. For instance, many regulatory violations, like insider trading, are forms of fraud. Specifically, these are securities fraud. Securities fraud is when someone uses deception to circumvent the regulations or statutes interpreted by the U.S. Securities and Exchange Commission (SEC) to acquire money or property. Goldman Sachs was recently charged by the SEC for securities fraud, because it allegedly misrepresented material facts to investors to gain financially. Check out Note 10.49 "Hyperlink: SEC v. Goldman Sachs" to review the complaint.

Health care fraud is also a common type of white-collar crime. A physician who submits false claims to health insurance companies to receive money is a common example. Check out Note 10.51 "Hyperlink: Health Care Fraud’s Epidemic" to see the U.S. Department of Justice’s comments regarding health care fraud.

Insurance fraud is the use of deception to receive insurance funds. For instance, if someone falsely reports that her office was burglarized and her computer equipment was stolen, and asks her insurance company to cover the loss, then this constitutes insurance fraud. This is because the person is lying (using deception) to acquire an insurance payment (acquiring money). A common context for insurance fraud is arson. If someone intentionally burns down his office building because he wishes to collect under his fire insurance policy, then he has committed insurance fraud by arson. Arson is the act of intentionally setting fire to property.

Financial institution fraud is fraud against banks and other similar institutions, such as credit unions. The IRS investigates financial institution fraud. Cases of financial institution fraud can involve people who falsify tax documents, or profit and loss statements to gain funding from banks, as well as those who commit money laundering. Check out Note 10.56 "Hyperlink: Financial Institution Fraud" for several financial institution fraud cases, most of which are excellent examples of white-collar crime.

Consider another type of fraud, where the deception is perhaps better hidden. Bernie Madoff committed massive fraud in a scheme known as a Ponzi scheme. A Ponzi scheme is a pyramid scheme, where people pay in. Those at the top of the pyramid may receive something that appears to be a return on their investment, but those at the bottom do not. This is because the funds paid in by those at the bottom are used to pay the people at the top. Those who operate Ponzi schemes generally solicit investors, and those who invest in such schemes are expecting a legitimate return on investment (ROI). However, the master of the Ponzi scheme does not really invest the funds. He simply takes them, and keeps his early “investors” happy by bringing in new investors, whose money he gives to the old investors as their ROI. This allows the Ponzi scheme to continue, because it appears from the outside that investors are receiving a legitimate ROI. The problem is that the capital contributions eventually disappear, since they are never invested but are simply used by the criminal for his own purposes, including covering his tracks for as long as possible by paying investors with fake ROI payments as necessary. To continue, the pyramid must get bigger and bigger. That is because new investors must be attracted to keep the cash flow going. Eventually, of course, pyramids will eventually collapse under their own unsustainable structure. Check out Note 10.58 "Hyperlink: The Mechanics of a Pyramid Scheme" for an illustration of a pyramid scheme from the SEC.

Madoff was a wealth manager who defrauded investors out of billions of dollars. How does someone get away with this? Interestingly, Harry Markopolos, a financial analyst, flagged Madoff’s actions to the SEC as statistically impossible long before Madoff was caught. Check out Note 10.59 "Hyperlink: Too Good to Be True? Statistically Impossible Returns" to watch Mr. Markopolos explain this by using sports analogies. This raises interesting legal questions regarding whether the SEC is proactive enough. The SEC actions are often reactive, responding to a situation after it happened.

Investors aren’t the only potential victims of white-collar crime. Owners of businesses are also potential victims. For example, embezzlement is a common crime, and it occurs when someone takes property that was in his or her possession lawfully and then converts it to his or her own use. As you can see, Bernie Madoff was an embezzler because he lawfully had possession of his clients’ money, but then he wrongfully converted those funds to his own use, rather than exercising his fiduciary duty to his clients. Embezzlement differs from larceny, because larceny requires the trespassory taking of property with the intent to deprive the owner of the property. In other words, in a larceny, the thief is not supposed to have possession of the property to begin with. Someone who embezzles something, however, has the right to be in possession of the property to start with but then wrongfully converts it (steals it) for his or her own use. Embezzlement strategies can involve forgery, which is counterfeiting someone else’s signature or other document. It can also involve wire fraud if the embezzlement uses electronic communications. 1 Refer again to Note 10.4 "Hyperlink: Thefts, Skimming, Fake Invoices, Oh My!" to learn about many different embezzlement schemes.

Corporate espionage and misappropriation are crimes in which a competitor or would-be competitor has acted illegally to obtain trade secrets of another. The Economic Espionage Act is a federal statute that criminalizes the theft of trade secrets. In a recent case of corporate espionage, Starwood Hotels sued Hilton, claiming that Hilton, along with some of its executives, stole millions of dollars in confidential trade secrets that were used to compete with Starwood’s successful chain of hotels.