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Field of Schemes.

THE PRESIDENT/OWNER of a small company (we'll call him Mark) is on a business trip when he meets a reserved man from California and an exuberant western Canadian. As the three men talk, Mark learns that his two new friends are business partners who sell something they call subscription shares, which Mark learns represent parts of an investment account that will pay a high interest rate, with the opportunity to eventually roll over the investment into corporate stock. The pair explain how it works. To open up the subscription share account, Mark would have to make an initial investment of $25,000. He would then make monthly payments of $1,000 into the account for one year, at which time the account would mature and the investor would have the option of receiving back his principal plus interest or rolling over the money into stock. The account has an almost guaranteed rate of return, the two men say, adding that Mark's company could make a bundle of money if it invests in the account.

IMPRESSED WITH THEIR presentation, Mark keeps in touch with them and later agrees to go in on what seems like a sure deal. He receives documentation that records the amount of money he invested, the rate of return on the money, and the maturity date. Over the next year, Mark makes each monthly payment as specified in the contract. At six months, the president receives a statement showing a 15 percent growth in the fund on top of his investment. The fund is expected to grow another 10 percent before the maturity date.

But when the subscription share matures, there is no statement from the fund managers-and no check with the president's principal and interest. The telephone number on the Canadian's business card is out of order. The principal paid into the account, an estimated $37,000, is gone.

Instead of going into an investment account, the company's money collected in an offshore pooled account that was accessed by the Californian, the Canadian, and five other members of the scheme, all of whom were defrauding numerous unsuspecting investors. Money from the account was then used by the fraudsters for their own personal advantage. It was used to buy jewelry, real estate, cars, boats, and other commodities from around the world.

This example, a composite of several real-life schemes, illustrates how savvy fraudsters convince people to invest money in deals that, when examined closely, are highly suspicious. Security professionals usually start a fraud investigation by trying to identify those who committed the crime and then immediately taking them to criminal and civil court. However, this is not the best strategy if the company's overall goal is recovering the money it lost to the fraud.

There are several reasons to avoid this approach. First, if security does not know where the perpetrators keep all or most of their assets, the company may win a judgment in the wrong jurisdiction. For example, in the case mentioned, security and corporate legal counsel might have filed a civil lawsuit against the Californian in Los Angeles. Even if the defrauded company won the case, it would not recover its money if the fraudster had deposited all assets in London, which is not under the California court's jurisdiction.

A U.S. judgment is not easily recognized internationally. Foreign courts will question proper notice, service, and the extent and basis of the claim, even though those issues were ruled on by a U.S. court. Hence, multijurisdictional recovery efforts can be delayed and sometimes restricted by foreign courts.

Another disadvantage of seeking a court judgment immediately after the fraudsters' scheme has been identified is 'that court involvement may make it more difficult legally to carry out a broad investigation. For instance, in the example cited, the company president was duped into buying a bogus subscription share. To recover the company's losses, the investigator needs to determine where the money went, where the fraudsters' assets are located, and whether money from that account was used by the fraudsters to buy real estate or any other assets that can eventually be seized.

The company will need court orders that allow the security manager and legal counsel to retrieve documents and interview people to determine whether these individuals were involved knowingly or innocently in the scheme. Some of these court orders, which will be discussed later, are issued by a court without the knowledge of the fraudsters, thus allowing security to investigate the scheme and identify the suspects' assets without the suspects knowing that an investigation is underway. If the company first files a lawsuit, the fraudsters will be alerted that an investigation is underway and will likely take steps to more elaborately disguise the trail leading to the stolen assets. Moreover, if the company's first step is to file a lawsuit against the fraudsters, a court may limit all questioning to a narrow field of questions surrounding the "contract" between the victim and the fraudsters.

TRACING ASSETS. Rather than moving quickly to prosecute the case, security should first trace the stolen money and identify as many of the fraudsters involved in the scheme and. their assets as possible. This approach involves developing predicate act facts, those that highlight the fraud itself and how it was conducted, and recovery facts, those that can help the victim company retrieve its stolen money.

Predicate act facts. The first step is for security to learn how the fraud was committed and where the money might have gone. The victim of the fraud (in the case above, this would be the owner of the small business) should be interviewed to ascertain how the fraud scheme was sold to him.

In addition, security should gather any documentation pertaining to the fraud, including letters, notes, telephone messages, e-mails, and memoranda be- tween the fraudster and the victim. Also of interest are any written or verbal comments made by any middlemen involved in the deal, such as lawyers or bank executives who might have helped explain the fund. While it's likely that the fraudsters themselves will have used phony names, some of the middlemen might have been unaware that the account they were handling was fraudulent. Getting their names could lead to other information that helps narrow down who the fraudsters are and where the money was eventually sent.

In the case cited, security would also get the account number and address where the company's monthly checks were sent. The person who endorsed the check, as well as the name of the bank where the check was deposited and any account numbers, would be on the back of each canceled check and should be noted by the investigator.

Recovery facts. The predicate act facts will often lead to recovery facts. For example, after gathering information as discussed, security would know which bank was used to cash the victim company s monthly payments to the fraudsters. If the money was sent to and cashed at a bank in California, security could, by authority of a California court order, interview the bank executive who handled that account. (It should be noted that because privacy laws prohibit bank executives from revealing information about clients, security and legal counsel would probably need court orders to compel testimony and the release of certain documents. More on this later.) Security should not "purchase" bank information from a bank employee or a third party, such as an investigator. Such an act is usually illegal and sanctionable.

Information provided by the bank executive will begin to narrow down the search. For example, documents may show that money from the California bank account was wired to a fund manager in Fiji. A search in Fiji may show that the account was used to get a mortgage for property in the Bahamas. Real estate records in the Bahamas will identify the property that was purchased as well as the name of the owner. With this information, the investigators learn that the company should seek restitution in the Bahamas, and they know who to file the suit against.

COURT TOOLS. To collect these recovery facts, the corporate legal counsel and security manager will need to use several tools available in various courts to force the release of otherwise confidential documents.

English law, Because many fraudsters transfer their ill-gotten assets to countries in the Caribbean and the South Pacific, where English law applies, the security manager and legal counsel should be familiar with some of the useful court orders that can be obtained from English courts.

To discover otherwise private or protected information, English law offers a remedy based on the case of Norwich Pharmacal Company v. Commissioner of Customs and Excise. Under Norwich Pharmacal, a witness, whether innocent or not, who is involved in a fraud, has a duty, and can be compelled, to produce information and documentation to the claimant to assist in that claimant's cause.

A Norwich Pharmacal order may be obtained against a bank or professional advisor, including attorneys and professional nominee directors. The Norwich Pharmacal remedy is now one of the single most important bases for obtaining recovery information and documentation in offshore jurisdictions that would otherwise be unavailable.

There is another important remedy available based on the case Mareva Commpania Naviera S.A. v. International Bulkcarriers S.A. (Mareva). Mareva allows for an injunction to freeze the dissipation of assets where there are issues of flight, asset secretion, and asset movement.

With most Mareva injunctions, there is also a supplementary discovery order. This supplementary order entitles the claimant to get discovery both from the party whose assets have been frozen and a third party to whom notification of the Mareva injunction has been given. In practical terms, this usually means a bank.

Finally, there is a third remedy based on the case of Anton Piller K.G. v. Manufacturing Processes. That decision allows for limited discovery. The party who is the beneficiary of an Anton Piller order has the right to seize and secure evidence on certain terms. The evidence is held so that the process of the court is not rendered useless.

To obtain any of these orders, the victim of the fraud must show evidence that there is a strong probability that the defendant is involved in fraudulent activity. For example, when seeking an Anton Piller order, the victim must show that he or she had a business relationship with the defendant and that the defendant is likely to be in possession of documents that can help prove the fraud, such as bank account statements, letters to and from the victim, and internal memos between members of the fraud scheme. The victim might present as evidence a letter that the fraudster wrote to him or her outlining the terms of the "investment," for instance. To get a Mareva order, the victim might show that the defendant's office has closed, that the defendant has failed to return phone calls, and that references provided by the defendant don't check out.

All of these factors point to possible fraud, but do not prove it outright. Nevertheless, at this early stage, the burden of proof is lower, allowing the victim to obtain the orders needed to later prove the fraud.

U.S. law. As noted earlier, the victim's lawyers should gather evidence before filing a lawsuit (which would alert the target of the probe), but that may not be possible if potential witnesses or documents sought by investigators are in the United States. That's because under U.S. law, victims gather evidence by using subpoenas and depositions, but before they can proceed, they must file a lawsuit.

The subpoenas or discovery motions themselves may be issued under seal, but the lawsuit cannot be kept secret. One possible way around this problem is to file the lawsuit against the corporation through which the individuals were conducting the fraud, hoping that the individuals won't be alerted. The lawyers can then, for example, ask the court to issue a sealed equitable bill of discovery entitling them to serve a summons on a party, such as a bank, that has information about who the wrongdoer is or what the wrongdoer has done with the assets. (To have a subpoena issued by a judge under seal, the victim must make the same type of arguments and provide the same type of evidence required under the English system.)

Generally, the victim should conduct as thorough an investigation of the fraud as possible, getting a fill picture of the fraud and the assets held by the fraudsters and taking action in countries operating under English law before seeking subpoenas and depositions in the United States.

If the fraudster is forced into a deposition in the United States too early--before the victim knows how many assets the fraudster has and where those assets are located--the deposition may end up being useless. In addition, courts will often force a defendant to answer questions in a deposition only once. The victim does not want to waste this one bite at the apple.

Different states also offer other remedies. For example, in a progressive jurisdiction such as Florida, expedited recovery and securing of evidence is available. Florida permits an allegedly injured party to get a court order that restricts what the party alleged to have caused the financial loss can do with specified documents or other evidence. Lawyers can also ask for an in camera (closed) hearing to prevent notice from being given too early to the parties who might destroy such evidence. New York, California, Michigan, Massachusetts, and North Carolina are some of the other states with similar laws.

The remedy of attachment is used in the United States to create a security interest in property held by third parties within the court's jurisdiction. One basis for an attachment is when the defendant has disposed of, concealed, or removed assets from the state with the intent to defraud creditors. In most states, courts can attach assets located within the court's jurisdiction.

Common attachment targets are real estate and bank accounts, including joint accounts when only one depositor's interests are at issue. Corporate stock may also be attached where permitted by statute.

To obtain an attachment order, concise proof is required and thus a need for specific documentary or testimonial evidence. Some states require a preattachment hearing before a court can attach a piece of property, but most will allow the writ of attachment to be issued by a court ex parte and then require a postattachment hearing. What this means is that the victim can receive the attachment order without allowing the alleged wrongdoer to know in advance. This is designed to prevent the fraudster from delaying a preattachment hearing while he or she tries to hide the asset. Once the property is attached, the property owner is notified by the court and can seek a postattachment hearing to dispute the order.

A few states allow for real estate and bank accounts located within a court's jurisdiction to be seized when authorized through a court order called sequestration. Property is seized subject to a later hearing that will assess the claims of both parties.

Sequestration is typically granted by the court based on a showing of specified grounds or good cause, such as proof of fraudulent procurement or proof of fraudulent concealment or dissipation of assets. As with an attachment, an affidavit clearly and concisely stating the proof is required to obtain a writ of sequestration.

A writ of sequestration is much broader than an attachment. With an attachment, for example, a specific piece of real estate is attached and the property owner cannot make any transactions with that property until the court case is resolved. With sequestration, the defendant's general holdings (whether real estate or bank accounts) are set aside by the court until the case is resolved.

There also may be ways to obtain evidence outside the United States if the target of your discovery has an office in the United States. Many foreign businesses, particularly banks, have offices in the United States and can be served with a subpoena for records. Sometimes, records of a corporate affiliate can be obtained through subpoena. However, this process will most likely be contested, and enforcement may be difficult since the records may be located outside the jurisdiction of the courts.

The primary goal of all these investigative and legal actions is the recovery of stolen goods to give the victim relief By focusing on where converted assets are now located and how they are held, rather than on quick prosecution, a company can increase its chances of recouping losses suffered from fraud.

Eric S. Rein is a principal in Schwartz, Cooper, Greenberger & Krauss, Chtd., in Chicago. His practice concentrates on domestic and international fraud, business litigation, and lender liability. Eugene S. Becker is the senior principal and one of the founding partners of Kenney, Becker LLP, New York City. He has been involved in fraud recovery, multinational litigation, and arbitration projects in North and South America, the Caribbean, Europe, and Asia.
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Title Annotation:conducting a fraud investigation
Author:BECKER, EUGENE S.; REIN, ERIC S.
Publication:Security Management
Date:Jul 1, 2000
Words:2840
Previous Article:Smart Moves Against Cargo Theft.
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