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Auditor Using Magnifying Glass to Investigate Fraud

Important Elements of Proving Business Fraud

Martinez Law Office, Inc June 13, 2023

Most of us probably have our own definition of fraud, which often involves deceit and wrong dealing, but what does the law in California say about fraud? There is a Statute of Fraud, which may sound like it will define everything about fraud for us, but it deals with written contracts, not necessarily the definition of fraud itself. Instead, there are several laws dealing with fraud in specific circumstances, but no overall legal definition. Corporate fraud is usually the concept that applies to businesses.  

The concept of corporate fraud is when a business engages in activities that are dishonest or illegal. The perpetrator does not have to be a corporation but can be any business or any individual. The Enron scandal in 2001 is one of the most famous cases of fraud in U.S. history, involving many accounting shenanigans. The company concealed debts on failed deals and ended up even destroying documents.  

Fraud, however, does not have to rise to the Enron Level to be considered illegal or actionable by those harmed by the act or acts involved. A clerk in a company’s supply department may make a deal with a supplier to split the proceeds from a “fake” transaction, and it would be fraud. 

If you own or operate a business in or around Santa Ana, California, and you suspect someone you deal with has committed fraud – or worse, someone is coming after you legally alleging fraud on your part – contact me at the Martinez Law Office, Inc., for reliable legal assistance. 

I have more than four decades of experience as a business law attorney, and I will work with you to exercise your rights whether you’re planning to sue someone else or being sued. My firm also proudly serves business clients throughout Southern California, including the counties of Los Angeles, Orange, and San Diego. 

What Constitutes Fraud?

According to the Statute of Frauds, which again mainly pertains to fraud related to contractual obligations, fraud has four major causes of action: intentional misrepresentation, negligent misrepresentation, concealment, and false promise. These causes clearly pertain to the parties in a contract or a consumer and merchant or manufacturer.  

When it comes to business or contract fraud, the action often hinges on access to confidential information or access to sensitive assets that can be leveraged for gain. It is a white-collar crime committed by the entity itself or by individuals within the entity.  

Some examples include a fraudulent transfer of assets for personal gain. If you have access to corporate documents or assets and transfer them to your name or the name of a third party, that certainly rises to the level of corporate fraud. Fraudulent purchases using the company’s procurement department can also rise to a fraud charge if the purchase is used for personal gain and not for company necessity.  

An executive or other might seek unlawful business loans for personal use. The company itself, or an officer within, may also falsify accounting records to evade taxes. Assets can also be exaggerated in value in financial accounting, again for reasons of attracting partners, business, access to credit, and more. An executive or officer in the company may also resort to inflating value through accounting tricks in order to obtain a bonus for oneself based on performance standards. 

Proving Fraud: What Are the Elements?

In the case of Enron, criminal charges were filed, and many of the top executives ended up with prison terms. When corporate fraud prevails on a large scale, the U.S. Department of Justice (DOJ) may step in.   

In its document, “Federal Prosecution of Corporations,” the DOJ notes that “corporations are likely to take immediate remedial steps when one is indicted for criminal conduct that is pervasive throughout a particular industry, and thus an indictment often provides a unique opportunity for deterrence on a massive scale.” In other words, prevent future fraud by punishing current fraud and sending an industrywide message.  

When one entity wants to sue another for alleged fraud, the principle of “particularity” is enforced. Particularity means that case must be stated with specific facts alleged to the complaint being filed. Particularity is aimed at providing the court with “prima facie” – on the face – facts to allow the case to go forward. This is aimed at preventing frivolous or vexatious lawsuits.  

Prima facie facts must include the old journalistic standard for news by detailing the “five w’s and one h” -- that is, who, what, when, where, why, and how. 

Restitution for Fraud Victims

Generally, a victim who suffers loss at the hands of someone who commits fraud can seek restitution for the monetary loss or other harm inflicted. A lot will depend on the specifics of the fraud and its consequences, and of course, on the plaintiff’s prevailing in court.  

California also provides limited restitution to “victims of corporate fraud who have otherwise been unable to collect on their judgment.” The Secretary of State (SOS) administers the Victims of Corporate Fraud Compensation Fund (VCFCF). 

Seek Trusted Legal Advice 

If you feel your business is the victim of fraud or is facing a fraud lawsuit, contact me at the Martinez Law Office, Inc., for dependable legal guidance. From my office in San Jose, I represent businesses in the Greater Bay Area in matters of litigation.   

With more than 40 years of experience in business dispute resolution and litigation, my firm will work with you to craft a path toward achieving the best result possible.