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Corporate Fraud Litigation

We define corporate fraud as a loss to a corporation arising from the deceitful conduct, or the conduct by omission, of the officers and directors of the corporation, or arising from the conduct of third party individuals and entities. It is separate and apart from what we define as ‘employee fraud’ because of the nature of the fraud, and due to the way the law treats such incidents.

Internal Corporate Fraud

An example of an internal corporate fraud carried out by a former chief financial officer of a corporation, and handled by our firm, came to light when the CFO resigned from his company to take a similar position with an affiliated company. The new CFO, in his review of the company’s expense reports, discovered some unusual cheques made to a numbered company for marketing purposes.  An internal audit revealed further unexplained cheques made to the same numbered company, and to other unexplained entities for marketing purposes. In-house counsel retained our firm and an external auditor, and an investigation under litigation privilege was conducted. The investigation revealed that over a two year period approximately $350,000 in cheques had been issued to two numbered companies associated with the former CFO.

In most cases of fraud such as this, there is an addiction that motivates the fraudster to breach the trust of his or her position.  In this case, the wayward CFO was addicted to weekend racing of high performance cars, which is quite an expensive hobby. The CFO was sponsoring his own auto racing craving through corporate funds, without disclosing to the company his conflict of interest, and without disclosing the purposes and motivations behind the use of such funds. As an ancillary issue, the investigation also revealed that the former CFO, a married man with two children, was accessing gay escort sites on his company computer. When confronted with the evidence to support the inappropriate marketing expenditures on his weekend racing addiction, and his inappropriate corporate website and email use, the former CFO repaid the entire amount and our legal fees within two weeks.  While civil litigation was not necessary to obtain recovery in this case, the corporation insisted on making a criminal complaint, and our firm prepared a brief for the police that was sufficient for the Crown to approve the laying of criminal charges.

External Corporate Fraud

A recent example of an external corporate fraud perpetrated by an individual or entity external to a company, and handled by our firm, involved a corporation that was operating as a corporate partnership. Prior to the uncovering of the fraud, the company’s two primary directors and officers split their expertise between business operations and product operations. Shares were held on a 50-50 basis between their two families. The ‘production’ partner to the corporation died, and left his wife as the beneficiary of his shares. The wife then assumed the role as the director and officer of operations of the company.  After the ‘production’ partner’s death, the ‘business’ partner noticed unusually high inventory losses. He engaged our firm and private investigators in order to investigate the ‘production’ partner’s family and the inventory losses. The subsequent investigation was conducted under litigation privilege.

The motivation of the wayward ‘production’ partner in this case was undisclosed personal debt arising from years of living extravagantly, and beyond his family’s means. In order to fund their lifestyle, the ‘production’ partner had arranged for a third party shipping agent to move percentages of both raw and finished product inventories to shipping containers destined for an offshore company domiciled in the Dominican Republic.  The offshore company was operated by a relative of the wayward partner’s wife.  His wife then attempted to continue the same scam but to her chagrin did not have the same aptitude to conduct the scheme as had her deceased husband.

Through our investigation we learned that a company operating a similar business in the Dominican Republic had received the products, and thereafter made cash payments to the ‘production’ partner and his wife.  GPS tracking and shipping weigh bills were utilized to uncover the movement of the products.  An undercover agent was used to infiltrate the Dominican company to confirm receipt of the products. Thereafter, we brought an action against the Dominican company, together with an oppression application against the wife of the deceased ‘production’ partner.  We characterized this scheme as an external corporate fraud in the form of a conspiracy with third parties as the use of accessories external to the company was necessary for this fraud to take place, and the third parties benefited from the scheme.

As a result of our litigation, the family of the ‘production’ partner surrendered their shares, and the ‘business’ partner took over full control of the company.  Recovery against the Dominican firm was not a viable option from a litigation cost perspective, and the wife of the deceased ‘production’ partner was found to be financially insolvent.  The litigation stopped the bleeding of company resources, and the ‘business’ partner obtained full control of the company.  In other words, his objectives were achieved.

Corporate Fraud

There are endless variations of frauds perpetrated on corporations by their directors and officers, or by individuals and entities external to their operations. All of these frauds involve a breach of trust. The primary goal of many corporations victimized by fraud is to stop the bleeding of assets.  Recovery interests are often balanced against the costs of the investigation and litigation, and the recovery of those costs. Civil litigation and requests for criminal prosecutions often, but do not always, result in recovery.  Some companies seek civil and criminal prosecutions as public statements that wrongdoing against their company will not be tolerated, as well as seeking civil judgments and criminal restitution orders in their efforts to obtain recovery.  Other companies do not wish internal losses to be part of the public record.

At Investigation Counsel, we are sensitive to the approach taken to resolving corporate frauds, and we welcome you to contact us  to discuss an investigation and recovery plan.