CAUTION: Double Dip Ahead


Think you’re prepared to meet the challenge of increased fraud in a down economy? Guess again. Sure, you might be ready to handle most fraud coming from the other side of the glass. Fake checks and IDs. Forged endorsements and treasury duplicates. Even the extreme case of a deceased payee propped up in a chair outside your store. But stop deluding yourself. You can never really be ready for fraud coming from inside your own house.
Intuition tells me that embezzlement (often called occupational fraud and internal fraud) increases with the U.S. Misery Index, and right now that index is trending up.
The Index was created in the 1960s by an advisor to President Johnson named Arthur Okun. For July 2011 the U.S. Misery Index stood at 12.73. That figure — which is calculated by combining our current rates of unemployment (9.1 percent) and inflation (3.63 percent) — is the highest it has been since the early 1980s.
Whether it’s the Misery Index or another measure, my research showed I wasn’t alone in seeing a correlation between a bad economic climate and people behaving badly. So I thought it would be a good idea to become familiar with some statistics on internal fraud — because once you do, you’ll be much better at preventing, detecting, analyzing and dealing with it if and when it happens.
Numbers Don’t Lie
In doing my homework, I came upon two studies that were particularly helpful in understanding internal fraud. The first is The 2010 Marquet Report on Embezzlement. It analyzed the 485 largest embezzlements ($100,000+) in the United States, which just happen to be up 17 percent over the prior year.
Then there’s the ACFE 2010 Report to the Nations on Occupational Fraud and Abuse, which is based upon the results of online surveys taken of 22,927 Certified Fraud Examiners in October 2009.
While their sources may be vastly different, the studies find many common conclusions — and their differences are far fewer than one might imagine. From my perspective, both studies absolutley confirm that those in accounting and finance positions are most likely to commit internal fraud (more than two-thirds of the frauds originate with individuals working in accounting and financial departments). And the higher the position, the greater the dollars involved, with the average dollars for owner frauds outstripping employee frauds 10 to 1.
Worse for you, fraud is most prevalent in the financial services sector (which accounted for nearly 20 percent of losses in the Marquet study). In check cashing and payday lending, that’s virtually everyone in your employ.
Now for a real eye-opener: Women commit more than 60 percent of all embezzlements, although men do it on a bigger dollar scale. Moreover, the percentage of woman committing these crimes is on the rise.
While numbers for occupational fraud vary, it’s generally accepted that it accounts for nearly half a trillion dollars annually, and contributes to nearly half of all business failures. On average it is estimated to eat into revenue by 5 percent.
The average length of occupational frauds is measured in years — not days — and the average age of an embezzler is 40-something (the really big crooks are about 10 years older).
Warning Signs
The Marquet study confirms my Misery Index intuition. Even though Marquet statistics indicate most embezzlers are motivated by living a more lavish lifestyle (60 percent) rather than by financial woes, Marquet points out that “we believe that employee misconduct and internal corporate fraud will continue to be a problem as the U.S. economy struggles and unemployment hovers at levels nearing 10 percent.”
In addition to the warning sign of living a disproportionately lavish lifestyle, Marquet also found that gambling is a big driving force in internal fraud (25+ percent), followed by supporting a personal business (7 percent), personal financial issues, including family and medical (4 percent) and substance abuse (2 percent).
Interestingly, the warning sign statistics in the broader ACFE survey confirmed “lavish lifestyle/living beyond one’s means” as the No. 1 reason (43 percent of cases), but it elevated “experiencing financial difficulties” to No. 2 (36 percent of cases).
To my mind, that means the smaller the amount stolen, the greater the likelihood that some personal hardship was the rationalizing force behind the individual’s decision to commit the crime.
While the Marquet study noted that about 4+ percent of cases involved individuals with prior criminal histories, they believe the percentage is really somewhat higher (5 percent to 10 percent) because of underreporting. Despite broad differences in Marquet and ACFE survey groups, the percentages in this area are quite similar. In the ACFE study, 86 percent reported the perpetrator as never having been arrested or charged, while just 7 percent had a criminal record.
By the way, the average prison sentence for convicted major embezzlers was just under four years. In most states, embezzlement of any material magnitude is a felony.
How Big, How Long?
According to Marquet, California, Florida and New York account for nearly 40 percent of losses due to major embezzlements in the U.S.
The 10 states with the highest number of major embezzlement cases are: California, Michigan, Virginia, New York, Texas, Missouri, Pennsylvania, North Carolina, Florida and Ohio.
The 10 states with the highest losses from major embezzlement cases are: New York, Florida, Texas, California, North Carolina, Louisiana, New Jersey, Illinois, Virginia and Arizona.
The broader ACFE survey estimated the typical organization loses 5 percent of annual revenue to fraud. Its median loss was $160,000, with about 25 percent of defrauded organizations experiencing losses of at least $1 million.
Here’s one survey conclusion to keep your eye on: Small organizations are disproportionately victimized by internal fraud. And if you think you’ve discovered the only incident that occurred, better check again. The frauds reported to ACFE lasted a median of 18 months before being detected (4.5 years on average for Marquet).
According to ACFE, keeping your ears open pays off: internal fraud is much more likely to be detected by tip than by any other means. But being proactive can really help.
ACFE concludes that anti-fraud controls help reduce the cost and duration of internal fraud, and apparently more vulnerable smaller organizations can really benefit from such programs.
In fact, ACFE looked at the effects of 15 common controls on the size of loss and duration of frauds. Businesses that had controls in place had significantly lower losses and much quicker time-to-detection.
First Offenders?
According to the ACFE study, in addition to criminal history, only 8 percent of the perpetrators were administratively punished by former employers, and 10 percent had been actually terminated from their prior positions due to some suspected fraud-related activity.
With these limited risks to the perpetrators, is it any wonder why the numbers and incidents are so large?
Despite the relatively low prior criminal history, Marquet still recommends conducting background investigations to eliminate known bad actors. And understanding how your employees have behaved in past positions is certainly a solid first step.
Ultimately, though, your greatest protection lies in developing a better understanding of how your people are behaving right now.
More often than not, internal fraud goes undetected because, on some level, we really don’t want to see it. The greatest obstacle to ferreting it out is our own willful ignorance. Uncovering the ugly truth demands you regularly (but discreetly) look for the worst in those you’ve always tried to see the best in.

Dishonored Check Leads to Battle Over Attorney’s Fees


Any check casher who has had to go to court to collect on a dishonored check knows that sometimes the cost of the court action can exceed the potential loss on the dishonored check.
So recently when a check casher sued over a dishonored check, the check casher also asked the court to award it attorney’s fee.
As part of an insurance agreement, an automobile insurance company, the check’s drawer, issued a check for $1,288.64 payable to a couple and a car dealer. The couple and the car dealer endorsed the check, and the couple cashed the check at a Texas check casher, at which point the check casher became the holder of the check.
The check casher endorsed the check and deposited it with its own bank. When its bank presented the check to the insurance company’s bank for acceptance, the bank dishonored the check by refusing payment, and the check was returned to the check casher marked “Refer to Maker.”
The insurance company’s bank appeared to have dishonored the check because the signature of the car dealer’s representative was partially covered by the check casher’s stamp.
The check casher notified the insurance company of its claim and requested payment, but the company denied liability and refused to pay.
Files Suit
The check casher brought suit in justice court, asserting breach of contract on the basis of the obligation owed by the drawer of a check under the Texas version of the Uniform Commercial Code section 3.414.
The check casher further requested attorney’s fees, contending that its claim was contractual under Texas Civil Practice and Remedies Code section 38.001(8). The justice court granted the check casher a summary judgment for the amount of the check, statutory returned check fees, and attorney’s fees.
The insurance company appealed to the county court, and the check casher again was granted a summary judgment. The county court awarded the check casher damages of $1,279.98, court costs of $97, attorney’s fees of $2,995, and set postjudgment interest at 5 percent.
The insurance company appealed the attorney’s fees issue to the Texas Court of Appeals, which reversed the county court ruling on that issue, but affirmed the court’s judgment in all other respects.
The Court of Appeals concluded that section 38.001(8) did not apply to an action on a dishonored check under section 3.414 because such a claim was “purely statutory” and was not a contractural claim.
Goes to State Supreme Court
The check casher appealed to the Texas Supreme Court for review of the attorney’s fees issue. The Supreme Court agreed to determine whether a claim by a check’s holder against the drawer under section 3.414 was a contractual claim to which section 38.001(8) applied.
The Texas Supreme Court pointed out that Article 3 of the UCC establishes a comprehensive scheme governing the procedures, liabilities, and remedies pertaining to negotiable instruments, including checks.
As part of that scheme, when a bank dishonors a check, the drawer of the check is obligated to pay the amount of the check to the check’s holder according to its terms at the time it was issued.
The Supreme Court noted that Texas adheres to the American Rule for the award of attorney’s fees, under which attorney’s fees are recoverable in a suit only if permitted by statute or by contract.
The TCPRC section 38.001 is one of several statutes modifying the American Rule. That section provides, in part, that:
A person may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for: … (8) an oral or written contract.
The Texas Legislature instructs the courts to construe section 38.001 “liberally … to promote its underlying purposes.”
Two Reasons
Although Chapter 38 does not explain its “underlying purposes,” there are at least two reasons, said the court, for allowing a claimant to recover attorney’s fees on a contract suit.
First, wronged claimants may recover the full amount of their damages — including costs in having to litigate the suit — from the wrongdoer, so that they are made whole.
Second, a party with a small but valid contract claim is more likely to risk bringing suit because the claimant may recover attorney’s fees if successful, even if the potential amount of attorney’s fees are greater than the amount of the contract.
Section 38.001’s establishment of a one-way fee shift means that a claimant does not risk having to pay the company’s attorney’s fees if the suit is unsuccessful.
To recover attorney’s fees under section 38.001, a claimant must meet several prerequisites. The claimant must: (1) plead and prevail on a claim for which attorney’s fees are permitted under section 38.001, (2) be represented by an attorney, (3) present the claim to the opposing party, and (4) demonstrate that the opposing party did not tender payment within 30 days after the claim was presented.
Some Exclusions
In addition, Chapter 38 excludes various types of contracts from its reach — specifically, certain contracts issued by insurers. Here, the check casher was represented by an attorney, presented its claim to the insurance company, and established that the company did not tender payment within 30 days.
Further, noted the court, the check casher was not suing on an excluded insurance contract. Thus, the court said its sole inquiry in determining if the check casher could collect attorney’s fees was whether its suit was a claim on a contract to which section 38.001(8) applied.
As a threshold matter, said the court, it must decide whether a check is a contract. The court noted that it was settled law that a check — as a type of negotiable instrument — is a formal contract, a rule established not only in treatises but also in the common law of Texas and other states.
Obligation to Pay
A negotiable instrument is “an unconditional promise or order to pay a fixed amount of money,” a definition that fits squarely within the meaning of a contract as “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.”
The drawer of a check has a clear obligation to pay the holder of a dishonored check under section UCC 3.414.
The court noted that the parties disputed whether a claim by an endorsee holder of a check against a drawer under section 3.414 was a contractual claim. The insurance company contended that although a suit by a payee against a check’s drawer was undoubtably contractual in nature, a suit by a holder like the check casher was merely a statutory claim inasmuch as the holder and drawer never entered into a contract with each other.
The premise for the insurance company’s distinction was that a drawer (as the person writing the check) and a payee (as the person named as the recipient of the check) were both parties to the contract, whereas a holder is not identified anywhere within the four corners of the check and must instead seek relief under section 3.414 rather than the common law of contracts.
Different Decisions
Whether a suit on a check is contractual, thus allowing for the recovery of attorney’s fees under section 38.001(8), has recently divided the Texas courts of appeals.
The courts of appeals that had examined the issue held that such a suit was contractual in nature. But in 2005, the Dallas Court of Appeals held that a claim under section 3.414 was statutory rather than contractual, and thus the holder was not entitled to attorney’s fees under section 38.001(8).
In reaching this ruling, the Dallas Appeals Court concluded that a check did not meet the requirements for the formation of a contract under the common law.
The court further distinguished previous court of appeals’ opinions that had approved section 38.001(8) attorney’s fees for claims on checks, observing that the case before it involved an ordinary, rather than a cashier’s check, and the claimant had sued the drawer rather than the payee.
The insurance company implicitly conceded that some of the reasoning in the 2005 case was flawed, specifically (1) the court’s rationale that a formal contract must meet the same formation requirements as a simple contract in order to be considered a contract, and (2) the court’s attempt to distinguish a cashier’s check from an ordinary check.
However, the insurance company continued to argue that a suit by a holder against a drawer under section 3.414 lacks a contractual basis, although on grounds that the holder is not explicitly identified within the four corners of the check.
Supreme Court Disagrees
The Supreme Court said it disagreed and concluded that a suit on a check under section 3.414 was a suit on a contract, whether it was brought by a holder or a payee.
Contrary to the insurance company’s assertion, said the court, the drawer of a check enters into a contract in which the drawer unconditionally promises to pay not only the payee, but also a subsequent holder of the instrument.
Because the check itself is the contract, it embodies the full agreement between the parties, as manifested by the drawer’s signature on the check; in signing the check, the drawer contractually obligates itself to pay the amount of the instrument to the instrument’s holder.
When a check is appropriately transferred to another person by endorsement, the transfer vests in the transferee any right of the transferor to enforce the check.
Thus, the drawer’s obligation extends not just to the payee, but also to any downstream holder of the instrument.
The crux of a claim under section 3.414 — whether brought by a payee or holder — is that the drawer possesses an obligation to pay the check according to its terms in the event the drawer’s bank dishonors the instrument.
And when a drawer does not honor that obligation, said the court, and the holder sues the drawer, the suit is on the instrument — and thus the contract — itself.
Article 3, noted the court, has identical remedies for payee and holder when the drawer for a dishonored instrument is sued, which further shows the flaws of the insurance company’s distinction.
Common Law Principle
A holder’s ability to sue on the instrument is equally a common law principle. As early as 1758, in the seminal English commercial paper case, Miller v. Race, a holder could sue and recover for the amount of a dishonored instrument.
The UCC explicitly provides that it is to be supplemented by principles of law, unless displaced by the UCC’s specific provisions. Thus, section 3.414 does not convert what is a common law contractual obligation into a purely statutory one.
As a tool of commerce, a check would be meaningless if, in the absence of a statute, a drawer was burdened with no contractual obligation to pay the amount of a dishonored check to the holder of the instrument.
Further, under the economic loss rule, this court had previously held that a claim is based in contract when the only injury is economic loss to the subject of the contract itself.
Here, the check casher’s damages were solely based on its economic loss due to the insurance company’s failure to pay the amount of the dishonored check — the fact that the check casher sued pursuant to a statutory provision did not negate the reality that its damages were based in contract.
Question of Application
The Supreme Court said that because it concluded that a holder’s suit against a drawer under section 3.414 was contractual, the remaining question was whether section 38.001(8) applied to such a suit. Section 38.001 applies to a claim for “an oral or written contract,” and a check is a formal contract.
Importantly, section 38.001(8) does not distinguish between formal contracts and other types of contracts. Section 38.001(8) does not narrow its scope to claims for breach of contract, nor differentiate between different types of contracts: it merely applies to claims on written or oral contracts. Chapter 38 provides an express exclusion for certain insurance contracts, but not for contracts involving financial instruments.
Finally, said the court, the legislature had instructed the courts to construe section 38.001 liberally, not strictly, to promote its underlying purposes.
Applying section 38.001 here would do just that — it would allow a plaintiff with a small but valid contract claim to recoup its full amount of damages, a principle in line with the UCC’s direction to “liberally” administer the remedies in the Code so that “the aggrieved party may be put in as good a position as if the other party had fully performed.”
Here, the check casher conclusively proved the insurance company’s contractual liability on the check as a matter of law, as well as its claim for attorney’s fees.
By its plain terms, the Supreme Court said that section 38.001(8) did apply to the check casher’s contract claim brought pursuant to section 3.414.
Article 3’s Statutory Scheme
The insurance company next argued that even if the plain language of section 38.001(8) applied to a holder’s claim under section 3.414, the court should decline to apply it here to avoid disrupting the statutory scheme of UCC article 3.
The company correctly contended that the resolution of this issue was governed by the intersection of the court’s opinions in three cases that concerned the propriety of importing external statutory provisions into the UCC.
The court said these three cases established the rule that it is legitimate to apply a non-UCC statutory provision to a claim brought under the UCC, so long as doing so does not “ignore the UCC itself and thwart its underlying purpose.”
The insurance company argued that applying section 38.001(8) would violate this rule, that it would disrupt article 3’s comprehensive and carefully considered allocation of responsibility among parties to banking relationships. The Supreme Court said it disagreed.
Additional Remedy
Attorney’s fees, said the court, do not dictate fault or liability; they are awarded as a remedy after a party has been determined liable on a contract claim.
Attorney’s fees under section 38.001(8) are, in essence, an additional remedy so that a prevailing plaintiff may recoup the cost of trying a case and do not generally interrupt the measure of damages for a particular claim; thus, said the court, to permit the recovery of attorney’s fees here, did not disrupt the relevant remedies provisions of the UCC.
Second, the cause of action in this case touched on provisions of the UCC that were silent about attorney’s fees.
Here, said the court, the relevant statutory provision was silent on the issue of attorney’s fees, and so to import section 38.001(8) would not disrupt any element of that provision.
Thus, to be clear, said the Supreme Court, it was not holding section 38.001(8) may always apply to a UCC contract claim.
If, for example, a provision allowed for the recovery of attorney’s fees, but in a manner more restrictive than section 38.001(8), a plaintiff could not circumvent that limitation by recovering attorney’s fees under section 38.001(8).
The question to be answered in each instance is whether allowing a plaintiff to recover attorney’s fees under section 38.001(8) would do violence to a particular UCC article’s statutory scheme.

Try at BB Gun Robbery Nets 35 to Life


Three strikes laws are designed to take career criminals off the streets. They apply even when a robber uses an unloaded BB gun in an attempt to hold up a check cashing store.
The manager of a California check cashing store arrived just before the store was scheduled to open. A man, whose first name was Charles, approached the manager outside the store and she told him the store opened in 25 minutes.
Charles pointed a gun at the manager, told her it was a robbery, and to open the door and deactivate the alarm.
When she deactivated the alarm, an alert was sent to the police. After the manager told Charles she had to wait 11 minutes for the safe to open, Charles began to get nervous and told her he would kill her if she called the police.
Police Arrive
When the police arrived, they asked the manager if everything was all right, and she said no.
Charles threw the gun under a desk and told the police that he was the manager’s friend. The manager then told the police about the gun. The police found a pair of leather gloves and what turned out to be an unloaded BB gun.
Charles was arrested, and a police officer interviewed him at the city jail. After being advised of his Miranda rights, Charles agreed to speak with the officer. Charles admitted that he tried to rob the check cashing store by using his BB gun to intimidate the manager.
A police detective taped an interview with Charles during which he claimed that he did not show the gun to the manager and that he only pulled it out when the police came.
Charles was charged with attempted second-degree robbery, with the allegation that he personally used a dangerous and deadly weapon within the meaning of the California Penal Code.
It was further alleged that Charles had three prior convictions. Those three convictions constituted three strikes within the meaning of the state’s “Three Strikes” law.
Before the trial, Charles moved to dismiss his prior strikes, arguing that the convictions were sustained long ago, and citing depression, childhood problems and attempts at rehabilitation. The court held a hearing and denied the motion.
Guilty of One Crime Only
The court granted Charles’s motion to split the allegations of prior convictions, and the robbery case went to a jury trial.
The jury found Charles guilty of attempted robbery but didn’t convict him of the allegation that he used a dangerous and deadly weapon.
After being found guilty on the attempted robbery charge, Charles waived his right to a court trial on the allegations of the three prior convictions and admitted to all three convictions.
Again Asks Dismissal
His defense counsel again asked the court to dismiss the prior strikes, arguing that the jury did not agree with the allegation that Charles had used a dangerous weapon and that the BB gun he used was not loaded.
He further argued that Charles did not touch or harm the manager in any way and that he did not attempt to escape when the police arrived, but instead cooperated and gave a detailed confession.
The defense counsel argued that Charles’s prior convictions did not involve any injury, and that even without the prior strikes, Charles would be subject to a lengthy sentence.
The court denied the motion, reasoning that the BB gun looked like a real gun, Charles’s prior convictions were serious or violent, and that he was the type of recidivist contemplated by the Three Strikes law. The court found the allegations of prior convictions were true.
The court then denied probation and imposed an indeterminate term of 25 years to life, plus 5 year consecutive terms for the two serious felony prior convictions, for a total of 35 years to life.
Charles then appealed to the California Court of Appeals. He claimed that the trial court abused its discretion in denying his motion to dismiss his prior strikes.
Charles argued that two of his three prior strikes stemmed from one incident 11 years ago, that the other strike was 15 years old, and that he would still receive a lengthy sentence if the court granted his motion.
He further pointed to his use of a BB gun to commit the current offense and his personal history to support his contention. Charles also argued that the trial court’s denial of his motion violated the due process clause of the Federal Constitution.
Abuse of Discretion
A trial court’s decision to not dismiss or strike a prior serious and/or violent felony conviction allegation under the Penal Code is reviewed for abuse of discretion by an Appeals Court.
A trial court does not abuse its discretion unless its decision is so irrational or arbitrary that no reasonable person could agree with it.
Because, said the Appeals Court, the circumstances must be “extraordinary” by which a career criminal can be deemed to fall outside the spirit of the very scheme within which he squarely falls once he commits a strike as part of a long and continuous criminal record, the continuation of which the law was meant to attack, the circumstances where no reasonable people could disagree that the criminal falls outside the spirit of the three strikes scheme must be even “more extraordinary.”
Charles, said the Appeals Court, had the burden to show that the sentencing decision was irrational or arbitrary
In determining whether to dismiss a prior felony conviction, the trial court must consider whether, in light of the nature and circumstances of his present felonies and prior serious and/or violent felony convictions, and the particulars of his background, character and prospects, the defendant may be deemed partly or entirely outside the scheme’s spirit and thus should be treated as though he had not previously been convicted of one or more serious or violent felonies.