8.4: Common Business Crimes

Each jurisdiction has the power to define what a crime is. Therefore, criminal laws can vary between states and federal governments. However, there are some common crimes that affect businesses across jurisdictions.

Fraud is the use of deception to acquire money or property. Securities fraud is when someone uses deception to circumvent the regulations or statutes interpreted by the US Securities and Exchange Commission (SEC) to acquire money or property. Goldman Sachs was charged with securities fraud when it misrepresented material facts to investors to gain financially.

Financial institution fraud 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 commit money laundering and those who falsify tax documents, or profit and loss statements, to gain funding from banks.

A Ponzi scheme is a fraudulent pyramid scheme, where innocent people pay in to participate. Those at the top of the pyramid may receive something that appears to be a return on their investment (ROI), but those at the bottom do not. Those who operate Ponzi schemes generally solicit investors, and those who invest in such schemes are expecting a legitimate ROI. However, the head of the Ponzi scheme 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 head for his own purposes, including paying investors with fake ROI payments as necessary. Pyramids will eventually collapse under their own unsustainable structure. Bernie Madoff was convicted of running the largest known Ponzi scheme that defrauded investors of approximately $65 billion.

Embezzlement occurs when someone takes property that was in his or her possession lawfully and then converts it to his or her own use. Embezzlement often happens by people who are in a position of trust over the assets of another person. This includes financial advisors, brokers, accountants, lawyers, and guardians. Embezzlement strategies can involve forgery, which is counterfeiting a document or someone else’s signature.

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. For example, larceny includes shoplifting and basic theft of personal property.

It is illegal to make false statements or engage in a cover up during dealings with the federal government. Making False Statements is a crime that is often easier to prove against a defendant than a more complex crime that is being investigated. For example, Martha Stewart was investigated for insider trading. Although the insider trading charges were dismissed, Martha Stewart was convicted by a jury of making false statements because she lied to officers during the investigation. As a result, she served five months in prison.

RICO

The Racketeer Influenced and Corrupt Organizations Act (RICO) is a federal statute that was passed to prevent gangsters from taking money earned illegally and investing it in legitimate businesses. Although RICO was written to target traditional organized crime, less than 10 percent of RICO cases filed have been against the mafia. Instead, 75 percent of RICO cases involve business fraud.

A racket is a dishonest or fraudulent scheme, which usually is an organized criminal activity. The two most common rackets are protection rackets and fencing rackets. In a protection racket, a criminal offers to protect the victim from violence or destruction of property. If the victim refuses to pay for protection, then the criminal will engage in violence against the victim or destroy his or her property. In a fencing racket, a criminal will steal property from a victim then offer to resell it to them. The victim must pay for the return of his or her own property.

RICO punishes those engaged in three or more racketeering activities over a ten-year period when funds from those activities were used to maintain, operate, or acquire a legitimate business. Racketeering activities include embezzlement, mail fraud, wire fraud, loan-sharking, bookmaking, money laundering, counterfeiting, smuggling, blackmailing, arson, and other similar crimes. RICO is now used against insurance companies, stock brokerages, tobacco companies, banks, and other large commercial enterprises. If convicted, a defendant can be punished with large fines and a prison sentence of up to twenty years.

RICO also has a civil provision allowing a competitor to file RICO charges, which come with triple damages if the suit is successful. In other words, a civil plaintiff can recover a judgment for three times the harm actually suffered, as well as attorneys’ fees.

Art Cohen vs. Donald J. Trump was a civil RICO class action lawsuit filed in 2013, accusing Donald Trump of fraudulently misrepresenting the nature of Trump University. Within weeks of winning the presidential election in 2016, Trump settled this case and two others for $25 million in damages to the plaintiffs.

Many states also have organized crime statutes. State penalties often are much more severe under the organized crime statutes than they would be if the accused worked alone. For this reason, businesses and individuals need to be careful to protect themselves from another’s wrongful conduct.