Common Law Fraud in the Business Context

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  1. What is fraud?

    Fraud occurs when the accused makes false statements to manipulate the other party into a transaction or when the party charged with fraud withholds particular information from the other party to manipulate the other party into a transaction. In a shorter term, the accused will manipulate a situation to enter a transaction.

  2. How can you prove fraud?

    Fraud is typically difficult to prove because it is assumed by the courts that all parties involved understand and have the expertise of the validity of the statements in a transaction. Thus, a duty to disclose (or reveal) information has to exist for liability to arise. This means that the plaintiff must prove that the accused had acted with the intent to deceive and manipulate

  3. What does a claim for fraudulent misrepresentation have?

    A claim for fraudulent misrepresentation must require a misrepresentation (or lie) about a fact, the speaker’s knowledge that the fact is false, justifiable reliance on the misrepresentation for the translation, and damages of that reliance.

  4. What impacts a claim for fraud? What is the difference between opinions and facts in the business context? What challenge do sophisticated parties face when trying to prove the reasonableness of a misrepresentation? Can an at-will employee succeed on claims of fraud?

    Many factors can influence the ability to claim fraud. The first being that opinions are not misrepresentations of fact. In the business context, opinions about a product are referred to as trade talk. This simply expresses the speaker's personal belief. If an opinion is made about a type of investment, for example, and an investor acts on that. Fraud claims cannot be made because it is opinionated representation. Another influence is that sophisticated parties must overcome justifiable reliance. Justifiable reliance is the concept that an accused party relied on a misrepresentation to complete a transaction. Sophisticated parties are parties that have years of experience in a field related to the transaction. The last influential concept is that at-will employment generally negates justifiable reliance. At-will employees can be terminated at any time and are not concerned with future employees.

  5. What is fraudulent concealment?

    A fraudulent concealment claim arises when a party has to abide by the duty to disclose information relevant to a transaction and fails to fulfill that duty. There are five key elements of fraudulent concealment: a relationship between the parties that requires the duty to disclose, knowledge of parties of duties to disclose material facts, the party’s intention to not disclose, justifiable reliance, and damages.

  6. Is a fiduciary relationship required between parties?

    Yes, a fiduciary relationship is required. This is because it acts in favor of the beneficiary and towards a high standard of care to manage the beneficiary’s money or property. A fiduciary provides good faith, trust, confidence, and candor in a relationship. A fiduciary relationship does not exist in a transaction between sophisticated parties. Legal counsel and advisors are retained on both sides.

  7. How does the duty to disclose arise?

    A confidential relationship could result in the duty to disclose. Courts may find a fiduciary relationship based on a confidential relationship. However, a confidential relationship exists when a party is in the influential position over the other party.

  8. What does superior knowledge of special facts relate to disclosure?

    Superior knowledge of special facts is the concept where one party is in exclusive possession of material information that the other party does not know about. The duty to disclose arises when the other party acts under a false impression of facts to the transaction that would correct the disclosure of the special facts

  9. How can you make a successful aiding and abetting fraud claim?

    To make a successful aiding and abetting fraud claim, you need a proven case of fraud, the aider and abettor’s knowledge of fraud, the aider and abettor’s knowledge of substantial assistance of the fraud. A plaintiff has to show the connection between the fraud, the aider and abettor’s knowledge, the actions taken by the aider and abettor, and the damages. The allegations of aiding and abetting must be asserted as separate allegations than the initial allegation of fraud. The party in charge of aiding and abetting has to have actual knowledge of the fraud and provide substantial assistance in advancing the action of fraud.

  10. What is constructive fraud?

    Constructive fraud arises when the fraud has occurred but the elements of fraud cannot be proven. It is a claim available in cases where the liability is warranted although the intent of fraud may not be. The elements of constructive fraud consists of a relationship between the parties that creates a duty to disclose, the knowledge of material facts by the party, nondisclosure, justifiable reliance, and damages.

  11. Can the duty to disclose be replaced with the intent to deceive?

    Yes, in a case of constructive fraud, the party that must disclose information does not have to act with the intent to deceive if there is a duty to disclose.

  12. How can you establish a duty to disclose?

    To establish the duty to disclose, there must be a relationship between existing parties and that relationship’s duty to disclose. Officers and directors must provide their shareholders with duties of loyalty and candor, requiring complete disclosure.

  13. How can you establish justifiable reliance?

    It may be difficult to establish justifiable reliance for sophisticated parties. This is because it is assumed they have the experience to investigate the transaction and its circumstances. You can show justifiable reliance when one party in a transaction is in possession of material information, not discovered through another’s investigation.

  14. What is negligent misrepresentation?

    Negligent misrepresentation is a business tort which requires a party in a transaction owes a duty to the other to use reasonable care while supplying information regarding the transaction. Negligent misrepresentation claims depend on the defendant's failure to exercise reasonable care, the intention of the plaintiff’s reliance on the information, the plaintiff's reliance on the incorrect information, and the plaintiff’s suffered damages. Negligent misrepresentation does not require the party providing false information with the intention of deception, but that all the party needs to know was the knowledge that the information was false.

  15. What does negligent misrepresentation mean against auditors and accountants?

    Negligent misrepresentations claims are made towards auditors and accountants because they are involved in business transactions. A client will most likely hire an auditing or accounting firm to provide advice about a transaction and the client therefore relies on that advice and information

  16. What does negligent misrepresentation mean against officers and directors?

    Generally, officers and directors are not held liable for acts for their official roles. But when corporate officers and directors engage in tortious conduct, then they will be held liable. They can be held personally liable for their actions during business dealings. Claims for negligence can be brought up regardless of claims towards the corporation.

  17. What is the heightened pleading standard?

    A heightened pleading standard leads to the dismissal of fraud claims at the earliest stage of the case. This standard protects the reputation of the accused and provides notice of the alleged misconduct. The claim must be set in fraudulent conduct in specific detail. It is important to gather all evidence of a fraud case before filing a lawsuit, so that the counsel can file a claim to overcome heightened pleading standards.

  18. What are the exceptions to the heightened pleading standard?

    There are three exceptions to the heightened pleading standard: (1) pleading fraudulent concealment, (2) exclusive acknowledgement of fraudulent conduct, and (3) pleading intent to default. Pleading to fraudulent concealment occurs when one party reserves material information from another to complete a transaction. This makes it difficult to find out exactly when the fraud had occurred. The exclusive acknowledgement of fraudulent conduct is where the parties accused of fraud exclusively have knowledge concerning the fraud. The final exception is pleading scienter or intent to defraud, which the party’s intent to defraud another person, because a party cannot realistically know exactly what the accused is thinking of.

  19. How can you prove a fraud claim?

    To prove a fraud claim, the claim must be supported by evidence to prove the alleged facts. The burden of proof must be satisfied by the standards of the judge or a jury. Evidence must be presented as credible because claims of fraudulent activity can lead to criminal consequences.

  20. What type of damages come from a fraud case?

    There are three types of damages: (1) out of pocket damages, (2) benefit of the bargain damages, and (3) punitive damages that may arise in a fraud case. Out of pocket damages exert the injury suffered by the party claiming fraud. This can be the amount of money expended by the defrauded party and reduced by the transaction. Benefit of the bargain damages move the party claiming fraud to where they were before the fraud and transaction occurred. Finally, punitive damages are additional damages given with compensatory damages that a plaintiff has. Standards for punitive damages vary from state to state and depend on jurisdiction or case law and statute