III. Significant Cases
RESERVE FOUNDATION TRUST (DENVER): On May 29, 2007, Norman Schmidt and Charles Lewis were found guilty of conspiracy to commit mail fraud, wire fraud, securities fraud, and money laundering. From April 1999 through April 2003, Schmidt and Lewis developed a scheme to defraud investors using a “high-yield investment program.” Schmidt and Lewis, with assistance from others, falsely stated that they would invest the victims’ money, promising rates of return from two percent to 400 percent per month. To perpetuate the scheme, the defendants sent investors fraudulent monthly statements, which falsely reflected the growth of and earnings on their invested funds. To lure and reassure investors, the defendants made false representations that the investments were safe because invested funds could not be moved and that the investments were insured from loss by various high profile insurance companies. Entities involved in the scheme include the Reserve Foundation Trust, Smitty’s Investments, Capital Holdings, Monarch Capital Holdings, and Fast Track. The scheme unraveled as the FBI and IRS conducted a detailed financial analysis of subpoenaed bank and investment documents. This analysis revealed that the defendants used investor funds for loan payments, personal expenses, acquisition of unrelated businesses, and lavish personal items. Many of these items were seized and forfeited, including the Redstone Castle, valued at $6.3 million, seven NASCAR race cars, two semi-trucks, two trailers, and $17 million from 66 bank accounts. A $24 million money judgement was also ordered by the court. The proceeds will be distributed to up to 1,200 victims.
CASHTARICA (NEW YORK): On July 18, 2007, a felony Information was filed in the Southern District of New York against NETeller PLC, an Internet-payment business based in the Isle of Man. NETeller has admitted to criminal wrongdoing and has agreed to forfeit $136 million in illegal proceeds through a civil forfeiture action as part of an agreement to defer prosecution of NETeller for its participation in a conspiracy to promote Internet gambling businesses and to operate an unlicensed money transmitting business. The information also contained a criminal forfeiture allegation against all property involved in or derived from the criminal wrongdoing in the amount of at least $1 billion. The investigation into this criminal enterprise, conducted by the New York Division of the FBI, revealed that Stephen Eric Lawrence and John David Lefebvre developed an Internet-payment system that was used by NETeller and its predecessors to provide online payment services to Internet gambling companies. Lawrence and Lefebvre have pleaded guilty to charges that they conspired with others to operate an unlicensed money transmitting business and to promote illegal gambling by providing payment services to enable offshore Internet gambling businesses to access customers in the United States. Lawrence and Lefebvre also admitted to forfeiture allegations requiring them to personally forfeit an additional $100 million, which they are expected to pay in full prior to sentencing.
BCBSA Blue Cross and Blue Shield Association
BICE Bureau of Immigration and Customs Enforcement
CAIF Coalition Against Insurance Fraud
CEO Chief Executive Officer
CFTC Commodities Futures Trading Commission
CI Criminal Investigative
CMS Centers for Medicare and Medicaid Services
DEA Drug Enforcement Agency
DOJ Department of Justice
EBRI Electronic Bank Records Initiative
FDA Food and Drug Administration
FIFU Financial Institution Fraud Unit
FinCEN Financial Crimes Enforcement Network
FTC Federal Trade Commission
FSP Forfeiture Support Project
GDP Gross Domestic Product
HF Hedge Fund
HHS Health and Human Services
HIPAA Health Insurance Portability and Accountability Act
HUD Housing and Urban Development
ICE Immigration and Customs Enforcement
IFTF Insurance Fraud Task Force
IRS Internal Revenue Service
MARI Mortgage Asset Research Institute
MBA Mortgage Bankers Association
MEDIC Medicare Drug Integrity Contractor
MICA Mortgage Insurance Companies of America
NAIC National Association of Insurance Commissioners
NAMB National Association of Mortgage Brokers
NHCAA National Health Care Anti Fraud Association
NICB National Insurance Crime Bureau
OIG Office of Inspector General
PEO Professional Employer Organization
RCMP Royal Canadian Mounted Police
SAR Suspicious Activity Reports
SEC Securities and Exchange Commission
UCO Undercover Operation
USAO U.S. Attorney’s Office
USPIS U.S. Postal Inspection Service
WCCP White Collar Crime Program
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Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $25,000 and/or sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of “racketeering activity.” RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.
When the U.S. Attorney decides to indict someone under RICO, he or she has the option of seeking a pre-trial restraining order or injunction to temporarily seize a defendant’s assets and prevent the transfer of potentially forfeitable property, as well as require the defendant to put up a performance bond. This provision was placed in the law because the owners of Mafia-related shell corporations often absconded with the assets. An injunction and/or performance bond ensures that there is something to seize in the event of a guilty verdict.
In many cases, the threat of a RICO indictment can force defendants to plead guilty to lesser charges, in part because the seizure of assets would make it difficult to pay a defense attorney. Despite its harsh provisions, a RICO-related charge is considered easy to prove in court, as it focuses on patterns of behavior as opposed to criminal acts.
There is also a provision for private parties to sue. A “person damaged in his business or property” can sue one or more “racketeers.” The plaintiff must prove the existence of a “criminal enterprise.” The defendant(s) are not the enterprise; in other words, the defendant(s) and the enterprise are not one and the same. There must be one of four specified relationships between the defendant(s) and the enterprise. A civil RICO action, like many lawsuits based on federal law, can be filed in state or federal court. 
Both the federal and civil components allow for the recovery of treble damages (damages in triple the amount of actual/compensatory damages).
Although its primary intent was to deal with organized crime, Blakey said that Congress never intended it to merely apply to the Mob. He once told Time, “We don’t want one set of rules for people whose collars are blue or whose names end in vowels, and another set for those whose collars are white and have Ivy League diplomas.”
Insurance-Related Corporate Fraud – Although corporate fraud is not unique to any particular industry, there has been a recent trend involving insurance companies caught in the web of these schemes. The temptations for fraud within the corporate industry can be greater
during periods of financial downturns. Insurance companies hold customer premiums which are forbidden from operational use by the company. However, when funding is needed, unscrupulous executives invade the premium accounts in order to pay corporate expenses. This leads to financial statement fraud because the company is required to “cover its tracks” to conceal the improper utilization of customer premium funds.
Premium Diversion/Unauthorized Entities – The most common type of fraud involves insurance agents and brokers diverting policyholder premiums for their own benefit. Additionally, there is a growing number of unauthorized and unregistered entities engaged in the sale of insurance-related products. As the insurance industry becomes open to foreign players, regulation becomes more difficult. Additionally, exponentially rising insurance costs in certain areas (i.e., terrorism insurance, directors’/officers’ insurance, and corporations), increases the possibility for this type of fraud.
Workers Compensation Fraud – The Professional Employer Organization (PEO) industry operates chiefly to provide workers compensation insurance coverage to small businesses by pooling businesses together to obtain reasonable rates. Workers compensation insurance accounts for as much as 46 percent of a small business owners’ general operating expenses. Due to this, small business owners have an incentive to shop workers compensation insurance on a regular basis. This has made it ripe for entities who purport to provide workers compensation insurance to enter the marketplace, offer reduced premium rates, and misappropriate funds without providing insurance. The focus of these investigations is on allegations that numerous entities within the PEO industry are selling unauthorized and non-admitted workers compensation coverage to businesses across the United States. This insurance fraud scheme has left injured and deceased victims without workers compensation coverage to pay their medical bills.
With the cooperation of the insurance industry, through referrals from industry liaison and other law enforcement agencies, the FBI continues to target the individuals and organizations committing insurance fraud. The FBI continues to initiate and conduct traditional investigations as well as utilize sophisticated techniques, to include undercover investigations, to apprehend the fraudsters.
Under the law, racketeering activity means:
- Any violation of state statutes against gambling, murder, kidnapping, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical (as defined in the Controlled Substances Act);
- Any act of bribery, counterfeiting, theft, embezzlement, fraud, dealing in obscene matter, obstruction of justice, slavery, racketeering, gambling, money laundering, commission of murder-for-hire, and several other offenses covered under the Federal criminal code (Title 18);
- Embezzlement of union funds;
- Bankruptcy or securities fraud;
- Drug trafficking;
- Money laundering and related offenses;
- Bringing in, aiding or assisting aliens in illegally entering the country (if the action was for financial gain);
- Acts of terrorism.
Pattern of racketeering activity requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity. The U.S. Supreme Court has instructed federal courts to follow the continuity plus relationship test in order to determine whether the facts of a specific case give rise to an established pattern. Predicate acts are related if they “have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.” H.J. Inc. v. Northwestern Bell Telephone Co. Continuity is both a closed and open ended concept, referring to either a closed period of conduct, or to past conduct that by its nature projects into the future with a threat of repetition.
Mortgage Debt Elimination Schemes
• Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card, and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport.
• There is no easy method to relieve yourself of debts you have incurred.
• Borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.
Foreclosure Fraud Schemes
Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a Quit-Claim Deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner, without preventing the foreclosure. The victim suffers the loss of the property, as well as the up-front fees.
• Be aware of offers to “save” homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure.
• Seek a qualified credit counselor or attorney to assist.
Predatory Lending Schemes
• Before purchasing a home, research information about prices of homes in the neighborhood.
• Shop for a lender and compare costs. Beware of lenders who tell you that they are your only chance of getting a loan or owning your own home.
• Beware of “No Money Down” loans. This is a gimmick used to entice consumers to purchase property that they likely cannot afford or are not qualified to purchase. Be wary of mortgage professional who falsely alter information to qualify the consumer for the loan.
• Do not let anyone convince you to borrow more money than you can afford to repay.
• Do not let anyone persuade you into making a false statement, such as overstating your income, the source of your down payment, or the nature and length of your employment.
• Never sign a blank document or a document containing blanks.
• Read and carefully review all loan documents signed at closing or prior to closing for accuracy, completeness, and omissions.
• Be aware of cost or loan terms at closing that are not what you agreed to.
• Do not sign anything you do not understand.
• Be suspicious if the cost of a home improvement goes up if you accept the contractor’s financing.
• Never sign any loan documents that contain “blanks.” This leaves you vulnerable to fraud.
• Check out the tips on the MBA’s website at http://www.StopMortgageFraud.com for additional advice on avoiding Mortgage Fraud.
MORTGAGE FRAUD INDICATORS
• Exclusive use of one appraiser
Increased Commissions/Bonuses – Brokers and Appraisers
• Bonuses paid (outside or at settlement) for fee-based services
• Higher than customary fees
Falsifications on Loan Applications
• Buyers told/explained how to falsify the mortgage application
• Requested to sign blank application
Fake Supporting Loan Documentation
• Requested to sign blank employee or bank forms
• Requested to sign other types of blank forms
Purchase Loans Disguised as Refinance
• Purchase loans that are disguised as refinances
• Requires less documentation/lender scrutiny
Investors-Short Term Investments with Guaranteed Re-Purchase
• Investors used to flip property prices for fixed percentage
• Multiple “Holding Companies” utilized to increase property values
COMMON MORTGAGE FRAUD SCHEMES
Property Flipping – Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.
Silent Second – The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.
Nominee Loans/Straw Buyers – The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan.
Fictitious/Stolen Identity – A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant’s name, personal identifying information, and credit history are used without the true person’s knowledge.
Inflated Appraisals – An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.
Foreclosure Schemes – The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner. The three most used foreclosure schemes are identified as: phantom help; bust-out; and the bait and wwitch.
Equity Skimming – An investor may use a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.
Air Loans – This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.
FBI.gov is an official site of the U.S. Federal Government, U.S. Department of Justice.
Securities fraud, also known as stock fraud and investment fraud, is a practice in which investors make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws.
Generally speaking, securities fraud consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements.
Securities fraud includes outright theft from investors and misstatements on a public company’s financial reports. The term also encompasses a wide range of other actions, including insider trading and front-running and other illegal acts on the trading floor of a stock or commodity exchange.
According to the FBI, securities fraud includes false information on a company’s financial statement and Securities and Exchange Commission (SEC) filings; lying to corporate auditors; insider trading; stock manipulation schemes, and embezzlement by stockbrokers.
** NOTE **
When it is me or you or anyone else we know – this is what judges tell us in the United States – (my note) –
Ignorantia juris non excusat or Ignorantia legis neminem excusat (Latin for “ignorance of the law does not excuse” or “ignorance of the law excuses no one”) is a public policy holding that a person who is unaware of a law may not escape liability for violating that law merely because he or she was unaware of its content; that is, persons have presumed knowledge of the law.
The rationale behind the doctrine is that if ignorance were an excuse, persons charged with criminal offenses or the subject of civil lawsuits would merely claim they were unaware of the law in question to avoid liability, even if they know what the law in question is. Thus, the law imputes knowledge of all laws to all persons within the jurisdiction no matter how transiently. Even though it would be impossible, even for someone with substantial legal training, to be aware of every law in operation in every aspect of a state’s activities, this is the price paid to ensure that willful blindness cannot become the basis of exculpation. Thus, it is well settled that persons engaged in any undertakings outside what is common for a normal person, such as running a nuclear power plant, will make themselves aware of the laws necessary to engage in that undertaking. If they do not, they cannot complain if they incur liability.
** NOTE ** –
When it is the social upper classes, securities fraud, political and business leaders – they use this law –
In Western jurisprudence, concurrence, (or contemporaneity or simultaneity), is the apparent need to prove the simultaneous occurrence of both actus reus (“guilty action”) and mens rea (“guilty mind”), to constitute a crime; except in crimes of strict liability. In theory, if the actus reus does not hold concurrence in point of time with the mens rea then no crime has been committed.
Suppose for example that, by accident while driving, the accused injures a pedestrian. Aware of the collision, the accused rushes from the car only to find that the victim is a hated enemy. At this point, the accused literally jumps up and down with joy proclaiming how pleased he or she is to have caused this injury. The conventional rule is that no crime has been committed
** NOTE **
which means that unless it is proven that the brokers, bankers, traders, ratings agencies, investment bankers, hedge fund managers and corporations both knew and intended to keep the truth about securities and financial derivatives hidden while expressing greater than true value – their crime isn’t a crime.
Now – if it was any other citizen in the US – it would be a crime – even jaywalking is a crime – and having an id that doesn’t match every other official document is a crime (whether we know it or intended fraud or not.) Many married women, not changing one document or another has spent time in jail and paid fines for simply not having documents that match (in the United States.)
But, in the case of these tremendously destructive white collar crimes in Wall Street and in banking and in the regulating industries concerning securities, trades, financial derivatives, credit derivatives and collusion, insider trading, unfair representation of values, etc. – then, intent must be proven among other things. What is wrong with that picture? (my note)
“Nevertheless, the idea of imposing liability on another despite a lack of culpability never really disappeared and courts have developed the principle that an employer can incur liability for the acts and omissions of an employee if committed by the employee in the course of employment and if the employer has the right to control the way in which the employee carries out his or her duties (respondeat superior).” Imposition of vicarious liability in these circumstances has been justified on the following grounds:
- Exercise of control: If penalties are serious enough, it is assumed that rational employers will take steps to ensure that employees avoid injuring third parties. On the other hand, rational employers may choose to rely on independent contractors for risky operations and processes.
- Risk spreading: Many consider it socially preferable to impose the cost of an action on a person connected to it, even if a degree removed, rather than on the person who suffered injury or loss. This principle is also sometimes known as the “deep pocket” justification.
- Internalizing the social costs of activities: The employer usually (though not always) passes on the cost of compensating injury or loss to the customers and clients. As a result, the private cost of the product or service will better reflect its social cost.
This is generally applied to crimes that do not require criminal intent, e.g., those that affect the public welfare but which do not require the imposition of a prison term. The principle is that in such cases, the public interest is more important than private interest, and so vicarious liability is imposed to deter or to create incentives for employers to impose stricter rules and supervise more closely.
Universal jurisdiction or universality principle is a controversial principle in international law whereby states claim criminal jurisdiction over persons whose alleged crimes were committed outside the boundaries of the prosecuting state, regardless of nationality, country of residence, or any other relation with the prosecuting country. The state backs its claim on the grounds that the crime committed is considered a crime against all, which any state is authorized to punish, as it is too serious to tolerate jurisdictional arbitrage . The concept of universal jurisdiction is therefore closely linked to the idea that certain international norms are erga omnes, or owed to the entire world community, as well as the concept of jus cogens – that certain international law obligations are binding on all states and cannot be modified by treaty.
The imposition of criminal liability is only one means of regulating corporations. There are also civil law remedies such as injunction and the award of damages which may include a penal element. Generally, criminal sanctions include imprisonment, fines and community service orders. A company has no physical existence, so it can only act vicariously through the agency of the human beings it employs. While it is relatively uncontroversial that human beings may commit crimes for which punishment is a just desert, the extent to which the corporation should incur liability is less clear. Obviously, a company cannot be sent to jail, and if a fine is to be paid, this diminishes both the money available to pay the wages and salaries of all the remaining employees, and the profits available to pay all the existing shareholders. Thus, the effect of the only available punishment is deflected from the wrongdoer personally and distributed among all the innocent parties who supply the labour and the capital that keep the corporation solvent.
Because, at a public policy level, the growth and prosperity of society depends on the business community, governments recognise limits on the extent to which each permitted form of business entity can be held liable (including general and limited partnerships which may also have separate legal personalities).
 Criminal or civil controls?
 Using the criminal law
- Represents formal public disapproval and condemnation because of the failure to abide by the generally accepted social norms, codified into the criminal law. Police powers to investigate can be more effective, but the availability of relevant expertise may be limited. If successful, prosecution reinforces social values and shows the state’s willingness to uphold those values in a trial likely to attract more publicity when previously respected business leaders are called to account. The judgment may also cause a loss of corporate reputation and, in turn, a loss of profitability.
- Justifies more severe penalties because it is necessary to overcome the higher burden of proof to establish criminal liability. But the high burden means that it is more difficult to secure a judgment than in the civil courts, and many corporations are cash-rich and so can pay apparently immense fines without difficulty. Further, if the corporation knows that the fine is going to be severe, it may seek bankruptcy protection before sentencing.
- The theoretical value of punishment is that the offender feels shame, guilt or remorse, emotional responses to a conviction that a fictitious person cannot feel.
- If a state turns too often to the criminal law, it discourages self-regulation and may cause friction between any regulatory agencies and businesses that they are to regulate.
 Using the civil law
- With the lower burden of proof and better case management tools, civil liability is easier to prove than criminal liability, and offers more flexible remedies which can be preventative as well as punitive.
- But there is little moral condemnation and no real deterrent effect so the general management response may be to see civil actions as a routine cost of business which is tax deductible.
 Criminal laws
Most states use criminal and civil systems in parallel, making the political judgment on how infrequently to use the criminal law to maximise the publicity of those cases that are prosecuted. Some states enact specific legislation covering health and safety, and product safety issues which lay down general protections for the public and for the employees. The difficulty of proving a mens rea is avoided in the less serious offences by imposing absolute, strict liability, or vicarious liability which does not require proof that the accused knew or could reasonably have known that its act was wrong, and which does not recognise any excuse of honest and reasonable mistake. But, most legislatures require some element of fault, either by way of an intention to commit the offence or recklessness resulting in the offence, or some knowledge of the relevant circumstances. Thus, companies are held liable when the acts and omissions, and the knowledge of the employees can be attributed to the corporation. This is usually filtered through an identification, directing mind or alter ego test which proves that the employee has sufficient status to be considered the company when acting.
In the criminal law, corporate liability determines the extent to which a corporation as a fictitious person can be liable for the acts and omissions of the natural persons it employs. It is sometimes regarded as an aspect of criminal vicarious liability, as distinct from the situation in which the wording of a statutory offence specifically attaches liability to the corporation as the principal or joint principal with a human agent.
In criminal law, strict liability is liability for which mens rea (Latin for “guilty mind”) does not have to be proven in relation to one or more elements comprising the actus reus (Latin for “guilty act”) although intention, recklessness or knowledge may be required in relation to other elements of the offence. The liability is said to be strict because defendants will be convicted even though they were genuinely ignorant of one or more factors that made their acts or omissions criminal. The defendants may therefore not be culpable in any real way, i.e. there is not even criminal negligence, the least blameworthy level of mens rea.
It is used either in regulatory offences enforcing social behaviour where minimal stigma attaches to a person upon conviction, or where society is concerned with the prevention of harm, and wishes to maximise the deterrent value of the offence. The imposition of strict liability may operate very unfairly in individual cases. For example, in Pharmaceutical Society of Great Britain v Storkwain (1986) 2 ALL ER 635, a pharmacist supplied drugs to a patient who presented a forged doctor’s prescription, but was convicted even though the House of Lords accepted that the pharmacist was blameless. The justification is that the misuse of drugs is a grave social evil and pharmacists should be encouraged to take even unreasonable care to verify prescriptions before supplying drugs. Similarly, where liability is imputed or attributed to another through vicarious liability or corporate liability, the effect of that imputation may be strict liability albeit that, in some cases, the accused will have a mens rea imputed and so, in theory, will be as culpable as the actual wrongdoer.
As a jurisdiction with due process, the United States makes only the most minor crimes or infractions subject to strict liability. One example would be parking violations, where the state only needs to show that the defendant’s vehicle was parked inappropriately at a certain curb. But serious crimes like rape and murder require some showing of culpability or mens rea. Otherwise, every accidental death, even during medical treatment in good faith, could become grounds for a murder prosecution and a prison sentence.
Aggregation test in United States
By “aggregating” the acts and omissions of two or more natural persons acting as the corporation, the actus reus and mens rea can be constructed out of the conduct and knowledge of several individuals. This is termed the Doctrine of Collective Knowledge. In United States v Bank of New England (1987) 821 F2d 844 the charge of wilfully failing to file reports relating to currency transactions was proved because the bank’s knowledge was the totality of what all of the employees knew within the scope of their authority. The Court of Appeals’ confirmed a collective knowledge is appropriate because corporations would compartmentalise knowledge and subdivide duties and avoid liability.
A blameworthiness test
Gobert argues that if a corporation fails to take precautions or to show due diligence to avoid committing a criminal offence, this will arise from its culture where attitudes and beliefs are demonstrated through its structures, policies, practices, and procedures. This rejects the notion that corporations should be treated in the same way as natural persons (i.e. looking for a “guilty” mind), and advocates that different legal concepts should underpin the liability of fictitious persons. This reflects the structures of modern corporations which are more often decentralised and where crime is less to do with the misconduct by or incompetence of individuals, and more to do with systems that fail to address problems of monitoring and controlling risk.
In some instances of fraud, the court may pierce the veil of incorporation. Most fraud is also a breach of the criminal law and any evidence obtained for the purposes of a criminal trial is usually admissible in civil proceedings. But criminal prosecutions take priority, so if civil proceedings uncover evidence of criminality, the civil action may be stayed pending the outcome of any criminal investigation.
Under the merger doctrine as this term is used in criminal law, lesser included offenses generally merge into the greater offense. Therefore, a person who commits a robbery can not be convicted of both the robbery and the larceny that was part of it. The major exception to this rule is conspiracy, which does not merge into the crime that the conspirators intended to commit.
Solicitation to commit a crime and attempt to commit a crime, although not strictly speaking lesser included offenses, merge into the completed crime. As an important exception, however, the crime of conspiracy does not merge into the completed crime. Some states have eliminated the doctrine, permitting defendants to be convicted of both the lesser included and the greater charge.
In the criminal law, a conspiracy is an agreement between natural persons to break the law at some time in the future, and, in some cases, with at least one overt act in furtherance of that agreement. There is no limit on the number participating in the conspiracy and, in most countries, no requirement that any steps have been taken to put the plan into effect (compare attempts which require proximity to the full offence). For the purposes of concurrence, the actus reus is a continuing one and parties may join “the plot” later and incur joint liability and conspiracy can be charged where the co-conspirators have been acquitted and/or cannot be traced.
Conspiracy in the United States
Conspiracy has been defined in the US as an agreement of two or more people to commit a crime, or to accomplish a legal end through illegal actions. For example, planning to rob a bank (an illegal act) in order to raise money for charity (a legal end) remains a criminal conspiracy because the parties agreed to use illegal means to accomplish the end goal. A conspiracy does not need to have been planned in secret in order to meet the definition of the crime. One legal dictionary, law.com, provides this useful example on the application of conspiracy law to an everyday sales transaction tainted by corruption. It shows how the law can handle both the criminal and the civil need for justice.
[A] scheme by a group of salesmen to sell used automobiles as new, could be prosecuted as a crime of fraud and conspiracy, and also allow a purchaser of an auto to sue for damages [in civil court] for the fraud and conspiracy.
Conspiracy law usually does not require proof of the specific intent by the defendants to injure any specific person in order to establish an illegal agreement. Instead, usually the law only requires the conspirators have agreed to engage in a certain illegal act. This is sometimes described as a “general intent” to violate the law.
Conspiracy against rights
One important feature of a conspiracy charge is that it relieves prosecutors of the need to prove the particular roles of conspirators. If two persons plot to kill another (and this can be proven), and the victim is indeed killed as a result of the actions of either conspirator, it is not necessary to prove with specificity which of the conspirators actually pulled the trigger. (Otherwise, both conspirators could conceivably handle the gun—leaving two sets of fingerprints—and then demand acquittals for both, based on the fact that the prosecutor would be unable to prove beyond a reasonable doubt, which of the two conspirators was the triggerman). In order to achieve a conviction on charges of conspiracy, is sufficient to prove that a) the conspirators did indeed conspire to commit the crime, and b) the crime was committed by an individual involved in the conspiracy. Proof of which individual it was is usually not necessary.
It is also an option for prosecutors, when bringing conspiracy charges, to decline to indict all members of the conspiracy (though their existence may be mentioned in an indictment). Such unindicted co-conspirators are commonly found when the identities or whereabouts of members of a conspiracy are unknown; or when the prosecution is only concerned with a particular individual among the conspirators. This is common when the target of the indictment is an elected official or an organized crime leader; and the co-conspirators are persons of little or no public importance. More famously, President Richard Nixon was named as an unindicted co-conspirator by the Watergate special prosecutor, in an event leading up to his eventual resignation.
And, from English Law –
Conspiracy to defraud
Although most frauds are crimes, it is irrelevant for these purposes whether the agreement would amount to a crime if carried out. This gives the prosecution a choice whether to charge statutory or common law conspiracy where the agreement would amount to the commission of an offence if carried out. If the victim has suffered of any financial or other prejudice there of, there is no need to establish that the defendant deceived him or her. But, following Scott v Metropolitan Police Commissioner (1974) 3 All ER 1032, it is necessary to prove that the victim was dishonestly deceived by one or more of the parties to the agreement into running an economic risk that he or she would not otherwise have run, if the victim has not suffered any loss. For the mens rea, it is necessary to prove that “the purpose of the conspirators (was) to cause the victim economic loss” (per Lord Diplock in Scott). For the test of dishonesty, see R v Ghosh (1982) 2 All ER 689.
Fraud by high level corporate officials became a subject of wide national attention during the early 2000s, as exemplified by corporate officer misconduct at Enron. It beame a problem of such scope that the Bush Administration announced what it described as an “aggressive agenda” against corporate fraud. Less widely publicized manifestations continue, such as the securities fraud conviction of Charles E. Johnson Jr., founder of PurchasePro in May of 2008. FBI director Robert Muller predicted in April of 2008 that corporate fraud cases will increase because of the subprime mortgage crisis.
Insider trading is the trading of a corporation’s stock or other security by corporate insiders such as officers, key employees, directors, or holders of more than ten percent of the firm’s shares.
Some insider trading is illegal. In illegal insider trading, an insider or a related party trades based on material non-public information obtained during the performance of the insider’s duties at the corporation, or otherwise misappropriated.
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Insider trading is the trading of a corporation‘s stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider’s duties at the corporation, or otherwise in breach of a fiduciary duty or other relationship of trust and confidence or where the non-public information was misappropriated from the company.
In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten percent or more of the firm’s equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While “legal” insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares, etc.)
Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.
Definition of “insider”
In the United States, for mandatory reporting purposes, corporate insiders are defined as a company’s officers, directors and any beneficial owners of more than ten percent of a class of the company’s equity securities. Trades made by these types of insiders in the company’s own stock, based on material non-public information, are considered to be fraudulent since the insiders are violating the trust or the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has made a contract with the shareholders to put the shareholders’ interests before their own, in matters related to the corporation. When the insider buys or sells based upon company owned information, he is violating his contract with the shareholders.
For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise.
In the United States and many other jurisdictions, however, “insiders” are not just limited to corporate officials and major shareholders where illegal insider trading is concerned, but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where the a corporate insider “tips” a friend about non-public information likely to have an effect on the company’s share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if he or she trades on the basis of this information.
Liability for insider trading
Liability for insider trading violations cannot be avoided by passing on the information in an “I scratch your back, you scratch mine” or quid pro quo arrangement, as long as the person receiving the information knew or should have known that the information was company property.
For example, if Company A’s CEO did not trade on the undisclosed takeover news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred.
 Misappropriation theory
A newer view of insider trading, the “misappropriation theory” is now part of US law. It states that anyone who misappropriates (steals) information from their employer and trades on that information in any stock (not just the employer’s stock) is guilty of insider trading.
Proof of responsibility
Proving that someone has been responsible for a trade can be difficult, because traders may try to hide behind nominees, offshore companies, and other proxies. Nevertheless, the U.S. Securities and Exchange Commission prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several stock exchanges actively monitor trading, looking for suspicious activity.
 Trading on information in general
Not all trading on information is illegal inside trading, however. For example, while dining at a restaurant, you hear the CEO of Company A at the next table telling the CFO that the company will be taken over, and then you buy the stock, you might not be guilty of insider trading unless there was some closer connection between you, the company, or the company officers.
U.S. insider trading prohibitions are based on English and American common law prohibitions against fraud.
SEC Rule 10b-5 is one of the most important rules promulgated by the U.S. Securities and Exchange Commission, pursuant to its authority granted under the Securities Exchange Act of 1934. The rule prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security, including insider trading.
Language of the rule
The rule itself is relatively short, and to the point. The formal title is “Rule 10b-5: Employment of Manipulative and Deceptive Practices”, and the complete text reads:
- It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
- (a) To employ any device, scheme, or artifice to defraud,
- (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
- (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
- in connection with the purchase or sale of any security.
There are several methods used to value companies and their stocks. They attempt to give an estimate of their fair value, by using fundamental economic criteria. This theoretical valuation has to be perfected with market criteria, as the final purpose is to determine potential market prices.
Stock Valuation Methods Described
- iStockResearch: Free intrinsic value (or fair value) calculation tool for US, Canadian and Russian companies based on original stock valuation model.
- http://www.moneychimp.com/articles/valuation/dcf.htm: Discounted Cash Flows Calculator that assumes that a higher growth can be sustained for a limited number of years.
- http://intelligentinvesting.googlepages.com/DCF.xls: A DCF spreadsheet that allows different growth rates to be specified for years 1, 2 to 4, 5 to 7 and 8 to 10.
- Baseline evaluation: Automatically fetches baseline data for popular stocks. Allows valuation with different assumptions like variable excess return period.
- Public Company Valuations: Free discounted cash flow (DCF) valuation tool for major listed companies.
- Stock selection criteria
- Bond valuation
- Real estate valuation
- Active portfolio management
- List of valuation topics
- Capital asset pricing model
- Value at risk
- Mosaic theory
- Fundamental analysis
- Technical analysis
- Fed model Theory of Equity Valuation
- Undervalued stock
- John Burr Williams: Theory
- ^ Corporate Finance, Stephen Ross, Randolph Westerfield, and Jeffery Jaffe, Irwin, 1990, pp. 115-130.
- ^ Discounted Cash Flow Calculator for Stock Valuation