No matter how long you've been running your business, when you hear that you or your business has been accused of "fraud," you are immediately worried. Business fraud is a term that evokes images of high-profile companies hitting the front page of news stories. Typically, this happens when a business or brand is accused of deceiving customers, investors, or stakeholders in a way that leads to harm. The nature of the claims may vary, but the accusation is often labeled as "fraud." However, in many situations, what is perceived as fraud might actually be a breach of contract or a business dispute rather than actual fraud.
This misunderstanding of fraud is important, especially for business owners who may find themselves facing accusations. While the word "fraud" tends to draw attention, particularly in the media, not every accusation of harm stems from fraudulent activity.
What Is Business Fraud?
In its simplest form, fraud is a deceptive practice where one party misrepresents or conceals information to deceive another party for personal gain. It's got a potential to cause significant harm, financially and reputationally, to individuals and businesses. Business fraud can take many forms, from financial fraud, securities fraud, and insurance fraud to other kinds of fraudulent behavior.
Fraud can manifest in situations where a business or individual intentionally misrepresents information, such as providing false financial statements or misrepresenting the safety or effectiveness of a product. Fraud can also occur when a company conceals important information that leads investors, customers, or partners to make decisions based on incomplete or misleading data.
Fraud Versus Breach of Contract: What's the Difference?
Many business disputes arise from contractual disagreements, yet the term "fraud" is often thrown into the mix. While both breach of contract and fraud involve harm, they are legally distinct. A breach of contract happens when one party fails to fulfill their end of a bargain, whether intentionally or unintentionally. Fraud, on the other hand, is deliberate deception.
For instance, if a company fails to deliver goods or services as promised, that's a breach of contract. However, if the company intentionally deceived the customer by promising something it never intended to provide, that's fraud. This distinction is critical in legal proceedings and can impact the type of lawsuit filed.
What to Do If You're Sued for Fraud
If you or your business has been sued for fraud, the first thing you should do is determine the nature of the claims against you. Fraud claims can fall into two broad categories: criminal fraud and civil fraud.
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Criminal Fraud: If the accusations involve criminal charges, meaning that a government entity is prosecuting the case, you should immediately consult a criminal defense attorney. Criminal fraud cases can lead to serious consequences, including imprisonment, fines, and a permanent criminal record.
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Civil Fraud: On the other hand, civil fraud cases are typically initiated by private individuals or businesses that claim to have been harmed by your actions. If this is the case, you will likely need a business litigation attorney who can help you defend against these claims or negotiate a settlement.
The first step is to thoroughly understand the specifics of the allegations. Fraud lawsuits typically require the plaintiff (the victim of the fraud) to prove several elements, which we’ll discuss in detail below.
Understanding the Cause of Action for Fraud
In civil fraud cases, the party suing must demonstrate that the other party engaged in fraudulent behavior. The purpose of such a claim is to seek compensation for the harm caused by that behavior, whether financial or emotional.
Victims can pursue damages in several forms, including:
- Financial losses: Recovering money lost due to fraud.
- Emotional distress: Compensation for emotional or psychological harm.
- Other damages: Any additional harm suffered as a direct result of the fraud.
Elements of Fraud: What Must Be Proven?
To successfully pursue a fraud claim, the victim generally must prove four key elements. Please Note: Each state has its own specific laws on what you need to prove and these are just common generalizations of what you often need to prove in a fraud case, so you should consult with a local attorney to confirm what you would need to prove in your state.
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Misrepresentation/Concealment of Material Fact: The accused party must have made a false statement or concealed important information (a material fact) that influenced the victim's decision. For example, if a business falsely claims its financial health to secure investment, this could be a misrepresentation.
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Intent to Deceive: The accused must have intended to deceive the victim. In legal terms, this is often called "scienter," which means the perpetrator acted with the knowledge that their statements or actions were false. ** Don't worry if you haven't heard of scienter before, it's one of those legal terms that sounds more imposing than it really is.
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Reliance: The victim must prove that they relied on the false information or concealment. This means they made decisions based on what the perpetrator told or did not tell them, and those decisions led to harm. For example, an investor who bought shares in a company based on falsified financial reports would need to prove reliance on those reports.
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Harm: Finally, the victim must demonstrate that they were harmed as a direct result of the fraud. This harm could be financial, such as losing money on an investment, or it could involve other damages, like emotional distress.
These elements are critical in fraud cases, and proving each one can be challenging. This is why it's essential to work with an experienced attorney who can help you navigate the legal complexities.
Remedies for Victims of Fraud
If you have been a victim of fraud, several remedies may be available to you through the court system (again, you need to check your local state laws to confirm what is available in your state). These include:
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Damages: The most common remedy, damages involve compensating the victim for their financial losses, emotional distress, and any other harm suffered.
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Rescission: In cases involving contracts, rescission may be available. This remedy cancels the contract and restores both parties to their pre-contractual positions. For example, if you were fraudulently induced to sign a contract, the court may allow you to void it.
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Punitive Damages: In some cases, the court may award punitive damages, which are designed to punish the perpetrator for particularly egregious fraudulent behavior. This is in addition to compensatory damages.
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Injunctive Relief: If ongoing fraud is occurring, the court may issue an injunction, which is a court order that requires the perpetrator to stop their fraudulent activities.
Fraud is a serious legal issue that can have far-reaching consequences, not just for the accused but for victims and businesses alike. If you find yourself on either side of a fraud case, it’s essential to understand the legal landscape and the specific elements that constitute fraud. If you believe you have been the victim of fraud, legal remedies are available to help you recover your losses and protect yourself from further harm.
Do I Need a Business Attorney?
If you are concerned about a fraud lawsuit, either against you and your business or one that you need to consider filing against someone, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.
