Fraud and Larceny

White-collar crimes generally involve the use of deception to acquire money or property. This is the very definition of fraudThe use of deception to acquire money or property.. Many white-collar crimes are versions of fraud. Sometimes, white-collar crime involves outright larcenyThe trespassory taking of property with the intent to deprive the owner of it., 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 tradingA form of securities fraud., are forms of fraud. Specifically, these are securities fraudFraud committed in the context of investments regulated by the SEC.. 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 fraudFraud committed in the context of the health care field. 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 fraudThe use of deception to receive insurance funds. 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 arsonThe act of intentionally setting fire to property.. Arson is the act of intentionally setting fire to property.

Financial institution fraudFraud against banks and other similar institutions, such as credit unions. 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 launderingOccurs when funds gained from illegal activities are processed through a seemingly legitimate business to “clean” the funds from association with criminal activities.. 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 schemeA pyramid scheme, which is a particular type of fraud.. 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, embezzlementOccurs when someone takes property that was in his or her possession lawfully and then converts it to his or her own use. 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 forgeryA form of counterfeiting., which is counterfeiting someone else’s signature or other document. It can also involve wire fraudFraud committed over interstate wire, such as by telephone. if the embezzlement uses electronic communications.18 U.S.C. §1343. Refer again to Note 10.4 "Hyperlink: Thefts, Skimming, Fake Invoices, Oh My!" to learn about many different embezzlement schemes.

Corporate espionageThe use of deception to acquire the secrets of an economic competitor for financial gain. and misappropriationObtaining a trade secret by improper means. are crimes in which a competitor or would-be competitor has acted illegally to obtain trade secrets of another. The Economic Espionage ActA federal statute that criminalizes the theft of trade secrets, among other things. 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.

Organized Crime

While the term “organized crime” often summons images of the mafia, that is not the only type of organized criminal activity in this country. Consider the recent case against Pfizer, which settled with the U.S. Department of Justice in 2009. Pfizer’s subsidiaries, Pharmacia and Upjohn, had been selling pharmaceuticals “off-label” in doses and for uses not approved by the Food and Drug Administration (FDA), and it had been providing kickbacks to physicians to prescribe those drugs. The subsidiaries agreed to plead guilty to misbranding with the intent to defraud or mislead. They paid a criminal fine of more than one billion dollars and forfeited their profits from their illegal activities. Not only did they plead guilty to a criminal violation, but they also had to pay a hefty penalty for violating civil law, particularly related to paying kickbacks to physicians.FBI Press Release, “The Case Against Pfizer: A Record $2.3 Billion Settlement,” September 2, 2009, http://www.fbi.gov/page2/sept09/pfizer_settlement_090209.html (accessed September 27, 2010). KickbacksIncentive payments that are given to someone who makes decisions to encourage others to pay for something. are incentive payments that are given to someone who makes decisions to encourage others to pay for something. The repercussions of this conviction are certainly felt by those who were without knowledge of these acts, such as the shareholders and many employees, not to mention the patients who were subjected to off-label marketing in the contexts of what otherwise should have been trusting relationships with their physicians.

The Racketeer Influenced and Corrupt Organizations Act (RICO)A federal statute that penalizes racketeering activities. is a federal statute that, if violated, can add substantial prison time to a convicted criminal’s sentence. Even if someone is not per se involved with organized crime, RICO charges can be brought against a defendant who has violated the statute. This statute punishes those engaged in a pattern (at least two) of racketeering activities—which include a wide range of activities typically associated with organized crime—over a ten-year period,18 U.S.C. §1961(5). when funds from those activities were used to maintain, operate, or acquire a legitimate business. Racketeering activities include crimes such as loan-sharking, bookmaking, money laundering, counterfeiting, smuggling, blackmailing, human trafficking, and other similar crimes. Although RICO was written to target traditional organized crime, less than 10 percent of RICO cases filed have been against the mafia. RICO is now used against insurance companies, stock brokerages, tobacco companies, banks, and other large commercial enterprises. RICO also has a civil provision allowing a competitor to file RICO charges, which come with triple damages if the suit is successful.

BriberyOccurs when someone pays a government official to influence his or her decision or actions in his or her official capacity for the benefit of the person paying the bribe. occurs when someone pays a government official to influence the official’s decision or actions in his or her official capacity for the benefit of the person paying the bribe. The Foreign Corrupt Practices Act (FCPA)A federal statute that, among other things, outlaws the payment of bribes. outlaws bribery by U.S. companies doing business in foreign lands, though grease payments are permitted. Grease paymentsPayments given to speed up a process that will occur, rather than to influence a decision. are payments given to speed up a process that will occur, rather than to influence a decision. However, companies should be very careful in relying on the grease payment exception, since such payments are legal under the FCPA only if they are also legal under the laws of the country where the grease payments take place, and there are very few jurisdictions (if any) where they are indeed legal. States also have statutes against bribery.

Money laundering occurs when funds gained from illegal activities are processed through a seemingly legitimate business to “clean” the source of those funds. For example, someone who received $10,000 for criminal activities will need to “clean” the money to be able to use it legitimately. One way this can be done is by setting up a business that handles a lot of cash, which appears to be a legitimate business. This business can overstate its earnings by $10,000 over time by running the money through its books, thereby “cleaning” the funds. For example, if the business was a tavern, and the tavern grossed $12,000 per month, the ill-gotten $10,000 could be spread out over ten months by having the business claim that it grossed $13,000 each month. In that way, the ten thousand would eventually be “laundered” or “cleaned,” because it will appear to be money received by the legitimate business itself.

In that example, if someone found out about this money laundering operation and threatened to go to the authorities unless a payment was given to him to keep quiet, then that would be a form of extortion known as blackmail. BlackmailA form of extortion that occurs when someone threatens to reveal a harmful truth, such as involvement in criminal activity, but agrees to remain silent if he is paid. occurs when someone threatens to reveal a harmful truth, such as involvement in criminal activity, but agrees to remain silent if paid. ExtortionWhen someone obtains property through coercion by threat of some future action. is when someone obtains property through coercion. Another example of extortion is when a neighborhood gang extracts “protection payments” from local businesses. Essentially, the gang requires payment from local businesses periodically, and if the business refuses to pay, then the gang injures the business or its owner in some way, such as through vandalism or battery.

In organized crime cases, there can be strong incentives for people not to do the right thing. Maybe they are afraid of punishment by the government. But they may also fear punishment from their organized crime communities. In such cases, sometimes people do not tell the truth when they should. Someone who lies under oath, even if he or she thinks there’s a good reason to do so, has committed the crime of perjuryLying under oath.. Additionally, such a person might be charged with obstruction of justiceActing in a manner that creates obstacles to the administration of justice., which is acting in a manner that creates obstacles to the administration of justice.

Antitrust lawsLaws that seek to prevent activities that reduce or eliminate economic competition. seek to prevent activities that reduce or eliminate economic competition. Agreements “in restraint of trade” are prohibited.Sherman Act, 15 U.S.C. §1. These crimes involve things like collusion, allocating markets, price-fixing, and bid-rigging. Criminal convictions have been obtained for bid-rigging contracts for milk for school children, price-fixing for residential doors, and price-fixing for steel wool scouring pads.Anne K. Bingeman and Gary R. Spratling, “Criminal Antitrust Enforcement” (joint address, Criminal Antitrust Law and Procedure Workshop, American Bar Association Section of Antitrust Law, Dallas, TX, February 23, 1995), http://www.justice.gov/atr/public/speeches/0103.htm (accessed September 27, 2010). Check out Note 10.76 "Video Clip: Who Said Antitrust Is Boring? Not Hollywood!" for the movie trailer of The Informant!, which is based on an actual antitrust case involving illegal price-fixing.

Congress has addressed antitrust activities through the passage of several major pieces of legislation, though not all carry criminal penalties. Specifically, the Sherman Anti-Trust ActA federal statute prohibiting antitrust activities. carries criminal penalties for antitrust violations, but other antitrust laws do not.

Cybercrime

CybercrimesCrimes that are committed virtually. are crimes that are committed virtually from a computer or over the Internet. These crimes are on the rise, and they include activities like hacking and identity theft. Cybercrime is a broad term that includes many white-collar crimes. Cybercrime is ubiquitous these days, because virtually every desk has a computer on it. These crimes can range from non-white-collar crimes (like possession of child pornography) to traditional white-collar crime, involving the use of deception to acquire money.

The Computer Fraud and Abuse ActA federal statute that carries punishments for compromising computers used in interstate commerce or communication. is a federal statute that carries punishments for compromising computers used in interstate commerce or communication. It punishes those who access a computer to commit fraud, among other things. See Table 10.1 "Summary of Computer Fraud and Abuse Act Compromising Confidentiality Provisions"Computer Crime and Intellectual Property Section, United States Department of Justice, “Computer Fraud and Abuse Act,” http://www.justice.gov/criminal/cybercrime/ccmanual/01ccma.html (accessed September 27, 2010). for a summary of the provisions that carry criminal punishments, as well as the statutory sentences.

The Unauthorized Access to Stored Communications ActA federal statute to protect the confidentiality of e-mail and voicemail. is a federal statute to protect the confidentiality of e-mail and voicemail. However, this act does not have as broad of a sweep as it might appear from its name. Courts have held that home computers, business computers, and Internet service providers (ISPs) are not “electronic communications devices” that are covered by this act. So hacking into an e-mail account providerFTC v. Netscape Communications Corp., 196 F.R.D. 559, 560 (N.D. Cal. 2000). would be prohibited by this act, but not hacking into a home computerUnited States v. Steiger, 318 F.3d 1039, 1049 (11th Cir. 2003). or a business computer.United States v. Steiger, 318 F.3d 1039, 1049 (11th Cir. 2003). Due to the narrow reading of the statute by the courts, few prosecutions have occurred under this Act since its enactment.Computer Crime and Intellectual Property Section, United States Department of Justice, “Other Network Crime Statutes, Unlawful Access to Stored Communications, 18 U.S.C. §2701, 8. Historical Notes,” http://www.justice.gov/criminal/cybercrime/ccmanual/03ccma.html (accessed September 27, 2010).

Identity theftThe unauthorized use of someone else’s identity, typically for financial gain. is also now codified into federal statute as a federal criminal violation.18 U.S.C. §1028(a)(7) and 18 U.S.C. §1028A. This crime is rampant. Identity thieves obtain credit in an otherwise creditworthy person’s name. The victim of these crimes can spend hundreds of hours repairing the damage. This is one of the primary reasons why it is very important not to reveal personal information on the Internet.

Finally, spamming is now subject to federal regulations, the violations of which are now a federal crime by virtue of the CAN-SPAM ActA federal statute carrying civil and criminal penalties for spamming.. This law serves as the vehicle to prosecute senders of large quantities of unsolicited e-mails if those e-mails do not meet the federal requirements.18 U.S.C. §1037. Marketers, beware!

Environmental Crimes

Environmental crimesActions that violate federal or state statutes relating to the environment, which carry criminal sanctions. are actions that violate federal or state statutes relating to the environment, which carry criminal sanctions. The Environmental Protection Agency enforces federal environmental statutes, including those that carry a criminal penalty. Many corporations have been convicted of environmental crimes. For instance, corporations that illegally dump toxic substances into waterways, illegally harm endangered species or those species’ habitats, or trade in illegal substances that have been banned due to their propensity to cause great harm to the environment are all engaged in environmental crimes. U.S. federal environmental statutes that carry criminal penalties include the Clean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; the Comprehensive Environmental Response, Compensation, and Liability Act; and the Endangered Species Act. Additionally, state environmental law statutes frequently carry criminal penalties as well.

Recent examples of corporate convictions for environmental crimes can be found in Note 10.84 "Hyperlink: Federal Environmental Criminal Convictions".