Fraud can rear its ugly head in any type of business transaction. One party may try to take advantage of their superior knowledge or access to information to misrepresent or fail to disclose key facts to the other party. However, while the party who loses money in a transaction will often claim they were defrauded, there is a high legal bar to meet to win this type of case. Fraud lawsuits are fact intensive and require a significant amount of evidence to prove the allegedly fraudulent activity to the degree required by law.
Common Types of Business Fraud
Here are examples of some of the most common types of fraud:
- Payroll fraud – Small businesses are particularly vulnerable to payroll fraud, which is the theft of funds from a business through its payroll processing system. There are numerous types of payroll fraud, including ghost employees and timesheet fraud.
- Real estate fraud – Any party to a real estate transaction can commit fraud. The buyer may defraud a bank through the mortgage process. The seller may defraud the buyer through a failure to disclose defects in the property or by making affirmative misstatements about the condition of it.
- Investment fraud – Some people may fraudulently sell shares in a pyramid scheme where they promise returns to investors, but they are merely using other investors’ funds to pay them. In the meantime, the sponsor of the fraud is misappropriating investors’ money for themselves.
- Financial statement fraud – Company representatives may sell shares in their company using falsified financial statements which represent the company as being in far better financial shape than it actually is in. Investors rely on these misrepresentations when giving a business their money.
- Healthcare fraud – Anyone involved in the healthcare process, including doctors, pharmacies, and other medical providers, may submit fraudulent invoices that are either inflated or are for services that were never provided.
- Fraud in a business transaction – One type of business transaction fraud occurs when a company tries to buy another, but the target company has not disclosed key facts about the transaction that would make the business worth less.
Fraud Is Not Always an Easy Thing to Prove
No matter what type of fraud is involved, there is a high bar you must meet in order to prove your case. Any type of fraud requires willful conduct with an intent to deceive. In other words, one cannot commit fraud accidentally. Nonetheless, it is possible to win damages when you have been defrauded if you are eligible to take legal action.
Here are the elements you would need to prove in any type of business fraud case:
- The defendant made a misrepresentation of a material fact
- The defendant either knew that the representation was false or did not know whether it was true or false
- The defendant intended for the plaintiff to rely on that representation
- The plaintiff actually did rely on what the defendant (mis)represented
- The plaintiff suffered a monetary loss
Intent does not necessarily mean that the party perpetrating the fraud had the intent to hurt the other party. Intent means that they knew the statement was false or didn’t know whether it was true or false, and they intended for the other person to rely on it. Most cases of fraud involve a plain, old-fashioned lie that someone told to get their hands on someone else’s money.
Fraud Can Also Be Not Saying Something
The failure to disclose information could also be fraud. When someone has a duty to disclose something, they can be liable if they fail to do so. For example, in a real estate transaction, the seller would be required to disclose certain material defects in the home about which they knew. Here are some relationships where a person or organization may also have a duty to disclose:
- When a party has said something that could potentially mislead the other party, they have a duty to say enough to clarify what has already been disclosed
- When a party has special knowledge of a fact to which the other party will not have been privy
- When a party has a fiduciary relationship with another party in a transaction
It may be comparatively easier to show that what the defendant told you was false, but the challenge in a fraud case is proving there was fraudulent intent. You would usually need to offer as evidence communications or documents that are inconsistent with what the defendant had told you, which would show that the defendant knew what they were saying was false. These would probably not be documents you would have access to on your own at the start of the litigation process. Instead, your business litigation attorney would need to request these documents in discovery
Common Defenses to Fraud Allegations
A person and/or entity accused of fraud could assert a number of defenses to the accusations against them, including:
- The defendant did not know at the time that the statement was false
- The plaintiff should have conducted their own investigation, and they did not reasonably rely on what the defendant said
- The defendant did not intend to commit fraud
The plaintiff will need to show that they actually relied on what the defendant said and that it was reasonable to do so. There are some cases in which the misstatement is so obvious that a court could question whether the plaintiff should have relied on it. In other words, extreme gullibility could be detrimental to a fraud case. For this reason, a plaintiff could expect that their behavior would be on trial too.
Damages in a Fraud Lawsuit
There are a number of remedies that one can seek in a fraud lawsuit, including:
- Compensatory damages for the financial and other losses the plaintiff has suffered (including actual losses and lost profits)
- Rescission of the transaction, where the court undoes it entirely
- Punitive damages that send a message to the defendant that their actions were wrong and beyond the pale—and which are also meant to discourage this defendant and others from engaging in similar behavior in the future
In most cases, the court would award damages. However, if damages are not enough to remedy the wrongdoing, the court could order the equitable relief of rescinding the transaction.
Negligent Misrepresentation as an Alternative
There is an alternative that could still help you win your case if you are unable to prove fraud. Negligent misrepresentation is another common legal ground for relief for instances where someone feels they were duped by another person. The elements that you must prove to win this kind of case are as follows:
- The defendant owed a duty of care to the plaintiff
- The defendant supplied the plaintiff with false information in a business transaction
- The defendant did not use reasonable care to ensure the information they supplied was correct
- The plaintiff suffered a loss as a result of the defendant’s misrepresentation
In a negligent misrepresentation case, you do not need to prove intent. Instead, all you need to prove is that the defendant failed to live up to the duty of care they owed you to supply the correct information. Fraud can be negligent misrepresentation, but not vice versa.
Fraud is a very serious offense, and it can also be grounds for a criminal case. There is nothing that would stop you from recovering money civilly, even if the defendant was criminally charged. Your first step should be to contact an experienced Houston business fraud attorney who could help you gather evidence that could prove the elements of your claim.
The lawyers at Feldman & Feldman are experienced in commercial litigation. You can contact us by reaching out to us online or calling us today.