Law Flashcards
To constitute and be proved as a federal crime, bankruptcy crimes must have
To constitute and be proved as a federal crime, bankruptcy crimes must have been committed during the pendency of a bankruptcy proceeding, with the defendant’s knowledge, and with a fraudulent intent to defeat the bankruptcy laws. The FBI investigates bankruptcy crimes and the U.S. Attorney’s Office prosecutes them.
During a bankruptcy investigation, the bankruptcy trustee can request documents from third parties (such as banks and customers), but cannot compel the third parties to produce the documents. T/F
False
To fulfill their fiduciary investigative responsibilities, trustees need to gather financial information. If the debtor’s books and records are missing, incomplete, or unreliable, they should be obtained from third parties, such as banks, customers, related parties, etc. A trustee steps into the debtor’s shoes, which allows him the opportunity to bypass restrictions on information, such as the attorney-client and accountant-client privileges. Attorneys might attempt to raise the attorney-client privilege as a defense to providing information, but they are usually unsuccessful in this regard.
If a third party resists the trustee’s request, the trustee can subpoena records or testimony under Bankruptcy Rule 2004.
Chapter 7 bankruptcy filing
In contrast, a debtor’s objective in a Chapter 7 case is to be relieved of all dischargeable debts and to obtain a fresh start. This is accomplished by the court liquidating the debtor’s assets and granting the debtor a discharge of allowable debts.
Chapter 11 bankruptcy filing
The Bankruptcy Code provides multiple methods for individuals and organizations to file bankruptcy. The purpose of the Chapter 11 filing is to allow the debtor breathing room from creditors so that the debtor can reorganize its financial affairs and continue as a going concern.
Examiners
In the context of bankruptcy proceedings, an examiner is a neutral party that the court may appoint to investigate and report on relevant matters to Chapter 11 bankruptcy cases. An examiner is normally appointed in a bankruptcy proceeding to investigate certain allegations of fraud and misconduct on the part of the debtor (or principals of the debtor). In a typical motion for the appointment of a trustee or examiner, allegations of fraud or misconduct are raised by creditors, the Office of the UST, or other interested parties. A bankruptcy judge hears evidence submitted by all parties (creditors, et al.), as well as the debtor’s response to the allegations. After hearing the evidence, the judge has the option to either appoint a trustee or an examiner, or leave the debtor in possession of the business—a decision that hinges on what is best for the interested parties. If an examiner is appointed, the sole responsibility is to “investigate and report” the results of the investigation to the court and other parties in interest as quickly as possible.
Examiners have the power to subpoena records and depose witnesses. They do not have the power to run businesses, make business decisions, or propose plans of reorganizations (generally speaking). Courts may expand the examiner’s powers to perform certain duties of trustees or debtors-in-possession.
Adjusters, or operations agents
Adjusters, or operations agents, are the “right hand” to trustees and debtors. An adjuster is an individual who handles the peripheral duties of a trustee. Such duties include securing the business location, changing locks, locating assets of the estate, locating business records, opening new bank accounts, investigating thefts of assets in conjunction with the trustee, storing assets of the estate, and arranging sales of assets. Adjusters also can assist debtors and trustees in operating the debtor’s business and in helping to prepare bankruptcy schedules, interim statements, and operating reports.
Can defendants use creditors actual knowledge of concealed assets as a bankruptcy crime defense? T/F
False
Defendants cannot use the fact that creditors have actual knowledge of concealed assets or that the concealment was not from all creditors as a defense to charges. They also cannot use as a defense the fact that they returned the estate’s assets, though this might mitigate damages.
Michael, a salesman for the Pearl Company, conspired with the company president to defraud the U.S. government, and Michael fraudulently billed the Department of Defense for defective work in furtherance of the agreement. Can both be liable for defraud and conspiracy?
No
While Michael and the Pearl Company may be held liable for making false statements to the government, they would not be liable for a conspiracy charge. A corporation cannot conspire with one of its own employees to commit an offense because the employee and employer are viewed legally as one. A corporation may, however, conspire with other business entities or third parties in violation of the statute.
Foreign Corrupt Practices Act’s (FCPA)
FCPA prohibits any transfers of value to a foreign official in a corrupt effort to obtain an improper advantage. Promises to pay are considered something of value. Furthermore, foreign companies are within the reach of the FCPA if they have registered securities or are otherwise required to file under the Securities and Exchange Act of 1934. Here, the German company would be subject to the FCPA because it is publicly traded on the NYSE, which requires registration with the SEC.
The anti-bribery provisions of the FCPA make it unlawful to bribe a foreign official for business purposes. Only regulated persons are subject to FCPA jurisdiction, and such persons include all of the following:
A domestic concern, which is any citizen, national, or resident of the United States, or any business entity that has its principal place of business in the United States or that is organized under the laws of a state, territory, possession, or commonwealth of the United States
An issuer, which is a corporation that has issued securities that have been registered in the United States or an entity that is otherwise required to file periodic reports with the SEC
The agents, subsidiaries, or other representatives of domestic concerns and issuers
A foreign national or business that takes any act in furtherance of a corrupt payment within U.S. territory
Also, the FCPA’s anti-bribery provisions extend only to corrupt payments made to foreign officials.
Moreover, the FCPA does not prohibit all payments to foreign officials; it contains an explicit exception for certain types of payments, known as facilitating payments or “grease payments,” made to expedite or secure performance of a routine governmental action by a foreign official, political party, or party official that relates to the performance of that party’s ordinary and routine functions.
Fraud/ Fraud Mispresentation
Fraudulent misrepresentation of material facts is most often thought of when the term fraud is used. The specific elements composing proof of misrepresentation vary somewhat according to the jurisdiction and whether the case is prosecuted as a criminal or civil action. The elements normally include:
The defendant made a misrepresentation of a material fact.
The defendant knew the representation was false.
The victim relied on the misrepresentation.
The victim suffered damages as a result of the misrepresentation.
Bribery Offense
The elements of an official bribery offense under Section 201(b) of Title 18, U.S. Code, are as follows: Giving or receiving Anything of value With intent to corruptly influence An official act
Commercial Bribery
Commercial bribery refers to the corruption of a private individual to gain a commercial or business advantage. That is, in commercial bribery schemes, something of value is offered to influence a business decision rather than an official act. The elements of commercial bribery vary by jurisdiction, but typically include:
The defendant gave or received a thing of value.
The defendant acted with corrupt intent.
The defendant’s scheme was designed to influence the recipient’s action in a business decision.
The defendant acted without the victim’s knowledge or consent.
Title 18, U.S. Code, Section 1001 False vs Fraudulent Statement
Section 1001 prohibits a person from lying to or concealing material information from a federal official. A statement is false for the purposes of Section 1001 if it was known to be untrue when it was made, and it is fraudulent if it was known to be untrue and was made with the intent to deceive a government agency.
RICO enterprise criminal activity
The Racketeer Influenced and Corrupt Organizations (RICO) prohibits the investment of ill-gotten gains in another enterprise, using coercive or deceptive acts to acquire an interest in an enterprise, and conducting business through such acts. Section 1962(c) is the most commonly used RICO provision. It makes it an offense for any person associated with an "enterprise" that is engaged in interstate commerce to participate in the affairs of such an enterprise through a "pattern of racketeering activity." The elements of a Section 1962(c) offense are: The defendant was employed by or associated with an "enterprise," which includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact, although not a legal entity. The enterprise was engaged in or affected interstate or foreign commerce. The defendant conducted the affairs of the enterprise through a "pattern of racketeering activity," that is, two or more illegal acts enumerated in the statute, such as mail and wire fraud or ITSP violations. The defendant violates the final element if he has some involvement in the management or operation of the enterprise and in the commission of two or more “racketeering offenses” through the enterprise. The term racketeering activity includes a broad assortment of state and federal crimes, such as bribery, extortion, bankruptcy fraud, mail fraud, bank fraud, and securities fraud. These crimes are known as predicate offenses.
Mail Fraud
mail fraud is the use of the mail to perpetrate a scheme to defraud a victim of money or property. The gist of the offense is the use of the mail, which includes the use of the U.S. postal system or private interstate commercial carriers (e.g., FedEx, UPS, and DHL). Thus, where the mail is not used, no matter how large or serious the fraud, there is no federal jurisdiction under this statute. Yet, the mailing does not need to contain the false and fraudulent representations, as long as it is an integral part of the scheme. What is integral or incidental depends on the facts of each case; generally, a mailing that helps advance the scheme in any significant way will be considered sufficient.
What are the two fiduciary duties of people in position of trust or fiduciary relationship?
People in a position of trust or fiduciary relationship—such as officers, directors, high-level employees of a corporation or business, and agents and brokers—owe certain duties imposed by law to their principals or employers. The principal fiduciary duties are loyalty and care. The duty of loyalty requires that the employee/agent act solely in the best interest of the employer/principal, free of any self-dealing, conflicts of interest, or other abuse of the principal for personal advantage. Officers and directors of a corporation have a fiduciary duty to act solely in the best interest of the corporation. The duty of care means that people in a fiduciary relationship must act with such care as an ordinarily prudent person would employ in similar positions.
In general, officers and directors do not owe fiduciary duties to other constituencies, such as creditors, whose rights are purely contractual.
Truth in Negotiations Act (TINA)
Congress enacted the Truth in Negotiations Act (TINA) to protect the government from unscrupulous contractors that inflate costs by falsifying their cost proposals with inaccurate, incomplete, or noncurrent cost and pricing data. TINA is designed to provide for full and fair disclosure by contractors when negotiating with the government.
TINA applies to government purchases involving negotiations between the government and a contracting entity. Under TINA, government contractors must submit cost or pricing data before negotiations, and they must certify that the information is current, accurate, and complete as of the date the agreement on price occurred.
Bribery Act (UK)
Another way that the UK Bribery Act differs from the FCPA concerns facilitating payments. The FCPA does not prohibit all payments to foreign officials; it contains an explicit exception for facilitating payments made to expedite or secure performance of a routine governmental action. The Bribery Act, however, makes no such exception.
The Bribery Act exercises jurisdiction over all individuals and corporate entities for acts of corruption when any part of the offense occurs in the UK. Furthermore, liability exists for acts committed outside the UK by individuals and entities with a close connection to the UK, including:
British citizens
Individuals who normally reside in the UK
An entity incorporated under the law of any part of the UK
More specifically, foreign companies that have offices in the UK, employ UK citizens, or provide any services to a UK organization will be responsible for complying with the UK Bribery Act. A listing on the London Stock Exchange will not, in itself, subject a company to the Act.
Federal Wire Fraud
The federal wire fraud statute makes it a crime to use wire communications to perpetrate a scheme to defraud a victim of money or property.
To prove wire fraud, the government must establish the following elements:
The defendant undertook a scheme to defraud a victim of money or property.
The defendant knowingly participated in the fraud with the specific intent to defraud the victim.
The defendant used wire communications that traveled via interstate or international commerce in furtherance of the scheme.
Conspiracy
Conspiracy refers to an agreement in which two or more people agree to commit an illegal act, and criminal conspiracy statutes punish such agreements. The essential elements that must be shown to prove a conspiracy are as follows:
The defendant entered an agreement with at least one other person to commit an illegal act.
The defendant knew the purpose of the agreement and intentionally joined in the agreement.
At least one of the conspirators knowingly committed at least one overt act in furtherance of the conspiracy.
Under the first element, the government must prove that the defendant reached an agreement or understanding to commit an illegal act with at least one other person. The conspirators must agree about the precise illegal act.
The government must also establish that the defendant knew of the conspiracy’s existence and its objective. The government, however, does not have to establish that the defendant knew all the details or objectives of the conspiracy, and it does not have to prove that the defendant knew the identity of all the participants in the conspiracy.
Finally, the purpose of the conspiracy need not be accomplished for a violation to occur, but at least one of the co-conspirators must have carried out at least one overt act in furtherance of the conspiracy. The overt act need not be criminal and could be as innocuous as making a phone call or writing a letter.
Forgery
A document is not a forgery just because it contains a false representation. To constitute a forgery, the writing as a whole must have apparent legal significance.
Larceny vs embezzlement
Larceny is defined as the unlawful taking of money or property of another with the intent to convert or to deprive the owner. Embezzlement is the wrongful appropriation of money or property by a person to whom it has been lawfully entrusted (or to whom lawful possession was given). Unlike in embezzlement, in larceny, the defendant never has lawful possession of the property, but may have mere custody of it. Thus, because Anderson was in possession, not just custody, of the funds before he misappropriated them, he committed embezzlement.
CAN-SPAM
The CAN-SPAM Act, or the Controlling the Assault of Non-Solicited Pornography and Marketing Act, attempts to reduce the amount of unsolicited commercial email, also known as spam, by establishing national standards for sending email solicitations. To reduce the amount of spam, the CAN-SPAM Act provides several provisions that apply to individuals or companies sending spam. More specifically, the Act prohibits several deceptive and/or fraudulent practices commonly used in spam, including the prohibition of using deceptive subject lines, using deceptive header information, and requiring sender identification.
Office of Foreign Assets Control (OFAC)
The Office of Foreign Assets Control (OFAC) is an office within the Department of the Treasury charged with administering and enforcing U.S. sanction policies against targeted foreign organizations and individuals that sponsor terrorism and international narcotics traffickers. OFAC maintains a list of individuals, governmental entities, companies, and merchant vessels around the world that are known or suspected to engage in illegal activities. Persons or entities on the list, known as Specially Designated Nationals and Blocked Persons (SDNs), include foreign agents, front organizations, terrorists and terrorist organizations, and drug traffickers.
Smurfing
Smurfing is the process by which a subject structures a deposit into several transactions, each less than $10,000, to avoid filing a currency transaction report as required under the Bank Secrecy Act. Smurfing is a very common technique for avoiding reporting requirements. To identify smurfing operations, fraud examiners should look for large numbers of cashier’s checks that are in even amounts and that are deposited on a regular basis.
Money Laundering Process/Sequence
“Placement” of funds is the initial step in the money laundering process. It is the step in which the funds are deposited into a financial institution or taken out of the country. If a money laundering scheme is detected, it is most often detected at this stage. “Layering” involves the creation of numerous transactions to prevent detection, such as moving funds between bank accounts, transferring funds from one form of currency to another, or transferring money between businesses. The final stage in the laundering process is the “integration” of the asset back into the economy in such a way as to make it appear as if it were derived from a legitimate business transaction.
A money laundering scheme cannot be successful until the _________ is eliminated or made so complex that individual steps cannot be easily traced.
papertrail
A money laundering scheme cannot be successful until the paper trail is eliminated or made so complex that individual steps cannot be easily traced. The number of steps used depends on how much distance the money launderer wishes to put between the illegally earned cash and the laundered asset into which it is converted. A greater number of steps increases the complexity of tracing the funds, but it also increases the length of the paper trail and the chance that the transaction will be reported.
Laundering (Income Statement; Balance Sheet)
Income Statement Laundering: Overstatement of Revenue or Expenses
Balance Sheet Laundering: Depositing Cash and Overwriting checks for revenues and expenses
Currency Transction requirements
Financial institutions have specific regulations requiring currency transaction reporting, but nonfinancial individuals and entities engaged in business also have currency reporting requirements. Title 31, Section 5331 of the U.S. Code (instituted as part of the USA PATRIOT Act) requires persons engaged in a trade or business and who in the course of such trade or business receive more than $10,000 in cash in one or more related transactions to file IRS Form 8300. Reported transactions include any sale made in a trade or business that is retail in nature, a sale of goods and services, a sale of real property, an exchange of cash for cash, a collectible, a consumer durable, repayment of a loan, and conversion of cash to negotiate instruments.
The information required to be reported under Section 5331 is very similar to the information that was already required by the IRS under Section 6050I of the Internal Revenue Code. Because of the similarity between the two statutes, the reports are to be made on the same Form 8300, which is filed jointly with the Financial Crimes Enforcement Network (FinCEN) and the IRS.
Money Services Business (MSB)
Money services businesses (MSBs) refer to non-depository financial service providers operating in one or more of the following capacities:
Currency exchangers
Check cashers
Issuers, sellers, or redeemers of traveler’s checks, money orders, or stored value
The United States Postal Service
Money transmitters
Prepaid access providers or sellers
MSBs offer an alternative to depository institutions for both financial services and money laundering. For this reason, an individual unable to transfer illegal funds into the U.S. banking system might turn to MSBs. In addition, MSBs generally operate under less strict regulations than traditional financial institutions. These overall less stringent requirements tend to raise the money laundering risk in certain transactions involving users of MSBs. For example, an MSB might not check a customer’s credit report before opening an account, or it might require less rigorous proof of a customer’s identity than a traditional bank. However, there is a trend to expand certain requirements to MSBs, such as requiring them to maintain anti-money laundering programs and meet certain provisions of the Bank Secrecy Act.
Suspicious Activity Report
In 2002, FinCEN announced a new rule requiring brokers and dealers in securities to report suspicious activity via the Suspicious Activity Report by Securities and Futures Industries (SAR-SF; FinCEN Form 101). These firms are obligated to report suspicious transactions that are conducted or attempted by, at, or through a broker-dealer and involve or aggregate at least $5,000 in funds or other assets. Brokers and dealers in securities are required to report to FinCEN transactions that fall into one of the four categories below:
Transactions involving funds derived from illegal activity, or intended or conducted in order to hide or disguise funds derived from illegal activity
Transactions designed, whether through structuring or other means, to evade the requirements of the Bank Secrecy Act
Transactions that appear to serve no business or apparent lawful purpose or are not the sort of transactions in which the particular customer would be expected to engage, and for which the broker-dealer knows of no reasonable explanation after examining the available facts
Transactions that involve the use of the broker-dealer to facilitate criminal activity
Bank Secrecy Act (BSA)
the Bank Secrecy Act (BSA), which went into effect in 1970, was the first major piece of legislation aimed at detecting and preventing money laundering. The purpose of the law as stated in Section 5311 is “to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” The BSA sets forth a system of reporting and recordkeeping requirements designed to help track large or unusual financial transactions.
Owen receives a gift from a good friend for $15,000 in cash. Owen must file a Form 8300 (currency report) with the Financial Crime Enforcement Network (FinCEN) and the Internal Revenue Service. T/F
False
Owen does not have to file a Form 8300 because, while he received over $10,000 in currency, he did not receive it in the course of his trade or business; he received it as a gift.
The Treasury Department prohibits financial institutions from sharing customer information with one another.
False
Pursuant to Section 314(b) of the USA PATRIOT Act, the Treasury Department issued a rule allowing financial institutions to share customer information with one another. The term “financial institution” includes any entity that is required to have an anti-money laundering program under the Bank Secrecy Act. In order to share information with another financial institution, the sharing institution must file a prescribed notice form with FinCEN stating that it intends to share customer information.
Foreign Bank and Financial Accounts (FBAR)
Treasury Department regulations require citizens of the United States and resident aliens to file a Report of Foreign Bank and Financial Accounts (FBAR) (Treasury Form 90-22.1) when they maintain a financial interest or signature authority over a foreign bank account with a balance of more than $10,000 during the calendar year. Accounts in different foreign countries have to be aggregated.
Alternative remittance systems (also called parallel banking systems)
Alternative remittance systems (also called parallel banking systems) are methods of transferring funds from a party at one location to another party (whether domestic or foreign) without the use of formal banking institutions. These systems are characterized by the lack of direct physical or digital transfer of currency from the sender to the receiver. Instead, in the typical alternative remittance system, the payer will transfer funds to a local broker who has a connection in the region where the payee is located. The latter broker will then distribute the funds to the payee.
Transferring funds in this manner is not necessarily illegal (although some jurisdictions require brokers to register with the government). If available, using such systems can be beneficial because the commission that the networked brokers take might be lower than a banking fee for international transactions. Additionally, the payers and payees do not need to have bank accounts to perform the transactions.
Financial Action Task Force (FATF)
The Financial Action Task Force (FATF) is an intergovernmental body that was established at the G-7 Economics Summit in 1989. Its purpose is to develop and promote standards and policies to combat money laundering and terrorist financing at both the national and international levels.
The FATF’s Recommendations, revised in 2012, created the most comprehensive standard with which to measure a country’s anti-money laundering, counterterrorism, and nuclear proliferation laws and policies. They serve as a basic framework of laws that its members should have. While the recommendations are not required by members and the FATF acknowledges that following each rule might not be possible, members of the FATF often adopt them.
Some of the key measures in the recommendations provide that countries should:
Use a risk-based approach when setting anti-money laundering policies.
Create policies that increase cooperation and coordination with other countries.
Specifically criminalize money laundering and terrorist financing.
Enable authorities to trace, freeze, and confiscate assets suspected in laundering and terrorist financing.
Require financial institutions to keep certain records and establish anti-money laundering policies.
Front business
One of the most common methods of laundering funds is to filter the money through a seemingly legitimate business, otherwise known as a “front” business. A front business can be a very effective way to launder money because it provides a safe place for organizing and managing criminal activity, where the comings and goings of large numbers of people will not arouse undue suspicion. In addition, a front that does legitimate business provides cover for delivery and transportation related to illegal activity. The expenses from illegal activity can be attributed to the legitimate enterprise, and illegal revenues can be easily placed into the enterprise. One disadvantage to this, however, is that launderers end up having to pay taxes on their illegal income.
Customer Identification Programs (CIPs)
Section 326 of the USA PATRIOT Act expands the Bank Secrecy Act by requiring financial institutions to implement Customer Identification Programs (CIPs). These CIPs are to be incorporated into financial institutions’ money laundering programs, and at a minimum, they must include reasonable procedures for:
Verifying the identity of any person seeking to open an account to the extent reasonable and practicable
Maintaining records of the information used to verify a person’s identity, including name, address, and other identifying information
Consulting lists of known or suspected terrorists or terrorist organizations to determine if the person seeking to open the account appears on any such list
In the United States, there are two main categories of law
Substantive law is comprised of the basic laws of rights and duties (contract law, tort law, criminal law, etc.) as opposed to procedural law, which involves rules governing pleadings, evidence, jurisdiction, and so on. If someone says an act is “against the law,” he means substantive law, which includes statutes and ordinances at every level; common law, or case law, from all the various courts; and state and federal constitutions. The mail fraud statute is a criminal statute; therefore, it is most properly characterized as substantive law.
Federal Court system model
The federal court system uses a three-tier model.
• U.S. District Courts conduct trials on criminal charges and civil complaints under federal law.
• Courts of Appeals, including the Court of Military Appeals, review trial court decisions.
• The U.S. Supreme Court reviews lower court decisions. It is sometimes called the court of last resort.
Each federal district has a chief prosecutor, a political appointee, known as the United States Attorney, and a staff of prosecutors, known as Assistant United States Attorneys. Almost all cases are prosecuted by assistants. Criminal cases at the local level are prosecuted by the district attorney’s office or the attorney general’s office.
In most cases, appeals from decisions of the U.S. District Courts are heard in the U.S. Court of Appeals for the “Circuit,” which covers a particular geographic area. The United States has 13 Courts of Appeals. There are 11 numbered judicial circuits, plus the District of Columbia, all of which are defined by a geographic area. There is also the U.S. Court of Appeals for the Federal Circuit, which has nationwide jurisdiction over appeals involving certain subject matters. The U.S. Supreme Court is the highest appellate court in the federal system and may hear certain appeals from state courts, particularly on constitutional grounds.
Who can make appeals after a verdict is rendered?
Because of the Fifth Amendment’s double jeopardy provisions, only a convicted defendant in a criminal case can appeal a verdict. The government cannot appeal an acquittal on the merits of the case. The prosecution may, however, appeal adverse pretrial rulings on the admissibility of evidence and certain other matters that may temporarily terminate a prosecution (but do not result in a decision on the merits in favor of the defendant).
Either party in a civil case may appeal a judgment.
Every country’s law can be classified as _____
Almost every country can be classified as having either a common law or a civil law judicial system, and knowing the differences between the two is essential to understanding how legal and judicial processes work in foreign jurisdictions.
Civil law systems apply laws from an accepted set of codified principles or compiled statutes. Individual cases are then decided in accordance with these basic tenets. Under a civil law system, judges or judicial administrators are bound only by the civil code and not by the previous decisions of other courts. In deciding legal issues, a civil law judge applies the various codified principles to each case.
State Court system
Most U.S. states use a three- or four-tier court system.
• Lower-level trial courts try misdemeanors and hold preliminary hearings for felony cases, as well as civil disputes below a certain dollar amount (e.g., $10,000 or less).
• Higher-level trial courts (sometimes called superior courts) try felony cases, as well as civil disputes above a certain amount (e.g., $10,000 or more).
• Appellate courts review trial court decisions.
• Superior appellate courts, or supreme courts, review lower appellate court decisions.
A higher-level trial court would be responsible for trying civil disputes above a certain amount. Superior appellate courts generally do not hold trials; instead, they review lower appellate court decisions.
Common Law
In common law systems, there are laws established by court decisions (called the common law). As opposed to legislative statutes, the common law is developed on a case–by-case basis. That is, the common law is a system of legal principles developed by judges through decisions made in courts. It consists of the usages and customs of a society as interpreted by the judiciary, and it is often referred to as “judge-made” law. Common law originated as a legal system in England, and some of the principles established hundreds of years ago in court decisions remain influential to contemporary legal issues. Today, common law systems exist in the United Kingdom, the United States, India, Australia, and many other countries that were once part of the British Empire or were influenced by such legal systems.
In common law countries, there are two sources of substantive law: statutory law and common law. Statutory law includes statutes passed by the federal or state legislatures (and regulations passed by administrative bodies). Criminal law is statutory, while civil actions can be based on either statutory or common law.
Which of the following is the MOST ACCURATE statement about the U.S. legal system?
A. Statutory law consists of the usages and customs of a society as interpreted by the judiciary.
B. The criminal law is based on statutes passed by the legislatures.
C. Procedural law is comprised of the basic laws of rights and duties.
D. Substantive law sets out the rules of the legal system.
B
(Why other answers are wrong)
There are two sources of substantive law: statutory law and common law. Statutory law includes statutes passed by the federal or state legislatures (and regulations passed by administrative bodies). The common law consists of the usages and customs of a society as interpreted by the judiciary; it often is referred to as “judge-made” law. Criminal law is statutory, while civil actions can be based on either statutory or common law.
Which of the following statements about questions of laws and facts in legal proceedings is MOST ACCURATE?
A. In a bench trial, the judge only decides questions of law.
B. A defendant cannot waive the right to a jury trial.
C. In most criminal trials, judges decide questions of fact.
D. In most civil trials, juries decide questions of fact.
D
In general, the judge and jury serve important roles during a trial. In the trial setting, the jury finds the facts and the judge applies the law and rules on evidence. The judge also generally moderates the proceeding to ensure a fair trial. If, however, a jury is waived by the defendant and government, the judge decides both the facts and the law in what is called a bench trial.
Appeals involve questions of law or questions involving both law and fact. Most questions of law are decided by precedent; that is, prior court decisions of equal or higher authority that have considered similar cases.
Judge/Jury Roles
In general, the judge and jury serve important roles during a trial. In the trial setting, the jury finds the facts and the judge applies the law and rules on evidence. The judge also generally moderates the proceeding to ensure a fair trial. If, however, a jury is waived by the defendant and government, the judge decides both the facts and the law in what is called a bench trial.
Appeals involve questions of law or questions involving both law and fact. Most questions of law are decided by precedent; that is, prior court decisions of equal or higher authority that have considered similar cases.
To determine if a misrepresentation in the offer or sale of any securities is ________, the fraud examiner should answer the following question: “Would a reasonable investor wish to know this information to make an informed decision?”
Material
Securities laws require that the investor receive full and fair disclosure of all material information, and they make it unlawful for anyone to obtain money or property by using a material misstatement or omission in the offer or sale of any securities.
As a general rule, to determine materiality, the fraud examiner needs to answer the following question: “Would a reasonable investor wish to know this information to make an informed decision?” If the answer is “yes,” then this information, or the lack thereof, has a high likelihood of being deemed material. (If an actual investor acted based on the misrepresentation, that clearly strengthens the case, but it is not essential that the false or misleading statement influenced an investor, merely that a reasonable investor could have been so influenced.)
Churning
Churning is the excessive trading of a customer account to generate commissions while disregarding the customer’s interests. Specifically, churning occurs when an investment professional excessively trades an account for the purpose of increasing his commissions instead of furthering the customer’s investment goals.
Security definition
The default definition of security is the term investment contract. In the case of SEC v. Howey Co., the Supreme Court established a four-step test for an investment contract. The test, which is known as the Howey test, states that a financial instrument is an investment contract if the following four elements are met:
• There is an investment of money or other asset.
• The investment is in a common enterprise.
• There are expectations of making a profit.
• The profits are to be derived solely from the efforts of someone other than the investor.
Retirement plans and fixed insurance policies are generally not recognized as securities.
Front Running
Front running is a type of insider trading. Front running involves the use of the privileged knowledge of a customer’s order to buy or sell a large amount of a commodity, option, or security that, because of its size, is likely to move the market
Uniform Securities Act of 2002
A model act from which many state securities laws are based, certain conditions must be in place before a security can be sold or offered for sale. A registration in place to cover the security, a registered securities professional, and full and fair disclosure of all material information
Securities broker-dealer requirements on investment recommends requires
Securities broker-dealers are prohibited from recommending investments or investment strategies that are unsuitable for their clients. Thus, making unsuitable recommendations (e.g., recommending high-risk options to a senior citizen with limited assets) is prohibited.
Essentially, there are two rules relating to suitability: the “know your customer” rule and the suitability rule. The “know your customer” rule provides that securities broker-dealers must know their customer financially to effectively service the customer’s account and to minimize the risk of recommending an inappropriate investment. Thus, this form of suitability violation occurs when a broker recommends an investment or investment strategy to a client without having conducted due diligence to ascertain relevant personal and financial information about the client.
In addition to the “know your customer” requirement, there are suitability requirements that broker-dealers must follow when making recommendations to a client. The suitability rule prohibits a broker-dealer from making a recommendation to a client if the broker does not have reasonable grounds for believing that the recommendation is suitable for the client. This form of suitability violation occurs when a broker recommends an investment, recommends an investment strategy, or makes an investment that is inconsistent with the client’s objectives, and the broker knows or should know the investment is inappropriate.
Securities Exchange Act of 1934
Like Securities Act of 1933, Congress enacted the Securities Exchange Act of 1934 due to concerns over the 1929 stock market crash and the manipulation of the securities markets, but unlike the 1933 Act, the Securities Exchange Act of 1934 mainly deals with post-issuance trading. Simply put, the 1933 Act regulates the issuance of the securities themselves, and the 1934 Act covers subsequent trading of securities through brokers and exchanges.
General Partnership vs Limited Partnership
Unlike general partnership interests, interests in limited partnerships are generally held to be securities because this type of structure conforms closely to the definition of an investment contract.
A limited partnership is similar to a general partnership, except that in addition to one or more general partners, limited partnerships also have one or more limited partners. In contrast to a general partner, who has unlimited personal liability, a limited partner is a passive investor whose liability is limited to the amount of his investment in the company. Thus, in a limited partnership, the general partners manage the enterprise’s activities, and the limited partners supply the funding. Limited partners do not manage the enterprise’s activities.
Rule 10b-5
Rule 10b-5—which the SEC promulgated pursuant to Section 10 of the Exchange Act—prohibits false statements and other fraudulent activity in connection with the purchase or sale of any security. Rule 10b-5 is often referred to as the Act’s anti-fraud provision. Specifically, Rule 10b-5 states that: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
• To employ any device, scheme, or artifice to defraud,
• To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
• To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
Tax violation against tax preparer
In some instances, tax violations extend beyond the taxpayer and can result in penalties for those who help prepare tax returns and information. A tax preparer can face penalties if he:
• Aids or assists in, procures, or advises with respect to the preparation of any portion of a false return, affidavit, claim, or other document
• Knows, or has reason to believe, that the information will be used in connection with any material matter arising under internal revenue laws
• Knows that the portion (if so used) would result in an understatement of tax liability for another person
Whether a corporation is charged with tax fraud along with its officers depends on:
Corporate fraud charges depend on the intent of the corporate officers, Auerbach Shoe Co. v. Commissioner, 21 TC 191; aff’d, 216 F.2d 693, 54-2 USTC P 9673 (1st Cir. 1953).
Taxpayer burden
The general rule is that the taxpayer bears the burden of proof at trial in civil proceedings (e.g., refund claims and civil deficiency claims). The Statutory Notice of Deficiency (90-day letter) generally enjoys the presumption of correctness. This presumption in favor of the IRS requires the taxpayer to come forward with prima facie evidence to prove that the IRS’s determination was erroneous. After successfully rebutting the presumption of correctness, taxpayers have the burden of proving their case by at least a preponderance of the evidence.
The rule established under the Reform Act transferred the burden of proof to the IRS in civil court proceedings on income, gift, estate, or generation-skipping tax liability with respect to factual issues that are relevant to determining the taxpayer’s tax liability, provided the taxpayer: (i) provides credible evidence on the factual issue; (ii) keeps records and backs up items as presently required under the Code and regulations; and (iii) cooperates with the IRS in regard to reasonable requests for meetings, interviews, witnesses, information, and documents.
However, there is no presumption of correctness when the government alleges civil or criminal tax fraud; the burden is on the government in tax fraud cases.
Evidence: 3 basic forms
There are three basic forms, as distinguished from types, of evidence: testimonial, real, and demonstrative.
Testimonial evidence refers to the oral statements made by witnesses under oath.
Real evidence refers to physical objects that played a part in the issues being litigated.
Demonstrative evidence is a tangible item that illustrates some material proposition (e.g., a map, a chart, or a summary). Demonstrative evidence differs from real evidence in that demonstrative evidence was not part of the underlying event; it was created specifically for the trial. Its purpose is to provide a visual aid for the jury. Nonetheless, demonstrative evidence is evidence and can be considered by the jury in reaching a verdict.
Best Evidence Rule
Sometimes testimony may be excluded because of the best-evidence rule, which prohibits a party from testifying about the contents of a document without producing the document itself. This rule, however, only applies when an original or copy is being used to prove the contents of a writing, and it does not demand that a party produce the very best evidence to prove a fact in dispute.
Also known as the original-writing rule, the best-evidence rule provides that when a witness testifies about the contents of a document, at least a fair copy of the original must be available for inspection. If there is no original, a copy of the proven authentic document will do, but the court must be assured that the copies are reliable and accurate. If the document is lost—no original, no copies—the judge will have to be convinced that there is good reason to forgo the exhibit and admit the testimony.
Impeachment
Impeachment is the practice of bringing out matters that attack a witness’s credibility. There are numerous ways an attorney might impeach a witness, but the most common ways include efforts to show that the witness: • Is influenced by bias or self-interest • Has an impaired ability to observe • Made prior inconsistent statements • Has been convicted of a felony • Has a reputation for untruthfulness
Evidence: 2 types of admissible Evidence
There are two basic types of admissible evidence: direct evidence and circumstantial evidence. Direct evidence is evidence that tends to prove or disprove a fact in issue directly, such as eyewitness testimony or a confession. Circumstantial evidence is evidence that tends to prove or disprove facts in issue indirectly, by inference.
Chain of custody
The primary reason for maintaining the chain of custody on an item of evidence is to establish that the evidence has not been altered or changed. If evidence is subject to change over time, or is susceptible to alteration, the offering party may need to establish that the evidence has not been altered or changed from the time it was collected through its production in court. This is done by establishing a chain of custody. The chain of custody is both a process and a document that memorializes 1) who has had possession of an object and 2) what they have done with it.
Work product protection
Work product protection applies only to documents and things prepared in anticipation of litigation or for trial. Documents and tangible things prepared in the course of an in-house or other pre-litigation investigation, even if at the direction of an attorney, may not be privileged if they were not prepared in anticipation of litigation. Just because there is a possibility of future litigation does not mean that the investigation is in anticipation thereof. Litigation must be actually planned and the work for which protection is sought must have been undertaken for the specific purpose of preparing for that litigation. However, if the work to be protected was done in anticipation of litigation, then it does not matter in most jurisdictions that no lawsuit has been filed yet.
Fourth Amendment to the U.S. Constitution
The Fourth Amendment covers illegal searches and seizures by the government, and because every person has a reasonable expectation of privacy in their residences,
The Fourth Amendment to the U.S. Constitution guarantees the right of all citizens to be free from unreasonable searches and seizures and permits reasonable searches. The general rule is that a reasonable search is one that is carried out pursuant to a valid search warrant (i.e., a court order that grants authorities the right to search a person or place for evidence of a crime). Thus, in some circumstances, the Fourth Amendment requires that the government obtain a warrant before it conducts a search.
Defamation, slander, libel
To recover for defamation, the plaintiff must prove the following elements:
• The defendant made an untrue statement of fact.
• The statement was communicated (published) to third parties.
• The statement was made on an unprivileged occasion.
• The statement damaged the subject’s reputation.
Defamation is made up of two torts: libel (written form) and slander (defamatory remarks that are only spoken)
Elements of libel and slander are the same.
Invasion of privacy laws
Invasion of privacy laws concern a person’s right to keep his life private and free from intrusion. There are two relevant torts of invasion of privacy: (1) intrusion upon seclusion and (2) public disclosure of private facts. Intrusion upon seclusion occurs when an individual intentionally intrudes into an area where another individual has a reasonable expectation of privacy and the intrusion would be highly offensive or objectionable to a reasonable person. The tort of public disclosure of private facts occurs when one party makes public statements about another party’s private life that are not of public concern.
Unlike defamation claims, the public disclosure of private facts cause of action can arise even if the statements at issue are true. The key to this cause of action is that the information must be private in nature and not a matter of public interest.
Spoliation of evidence
Spoliation of evidence is broadly defined as the act of destroying evidence or making it otherwise unavailable. The act of spoliation can surface in just about any type of case, criminal or civil, and by any party, plaintiff, or defendant. The theory behind spoliation of evidence presumes that the individual who makes evidence unavailable following the probable initiation of a lawsuit is aware of its detrimental effect upon a case.
Although few jurisdictions have a separate cause of action for spoliation of evidence, almost every jurisdiction allows for sanctions resulting from such acts. To impose sanctions for spoliation, some courts require the spoliation to be intentional, though others merely require negligence or reckless spoliation. Thus, spoliation sanctions can arise from intentional acts and negligent acts.
Miranda warnings
Designed to protect an individual’s Fifth Amendment right against self-incrimination and Sixth Amendment right to an attorney, Miranda warnings advise suspects that they have the right not to answer questions and the right to legal counsel during interrogations. Miranda warnings are required only if a person is being interrogated by public authorities in a custodial setting. Custodial setting refers to questioning initiated by government agents after a person has been taken into custody, or otherwise deprived of his freedom or action in any significant way. As a result, both private and public employers may interview employees in noncustodial settings without giving Miranda warnings.
In the context of employee interviews by public employers, the answer to whether Miranda warnings are legally required depends on the applicability of the Fifth Amendment to the employee interviews. When a public employee is being questioned by his employer, he is being questioned by the government; therefore, the Fifth Amendment applies to employee interviews that are related to potentially criminal conduct.
And because the Fifth Amendment’s protection against self-incrimination applies to internal investigations conducted by government employers, public employers must give Miranda warnings to employees being subjected to custodial interviews (i.e., employees in custody and subject to interrogation). That is, public employers must give Miranda warnings to employees being interviewed about a potentially criminal matter if the government (or its agent) has arrested the employee or deprived him of action in a significant way.
Exceptions to Fourth amendment requirement for search warrant:
There are a number of recognized exceptions to the warrant requirement, principally:
• Workplace searches by government employers
• Searches performed as an incident to arrest
• Searches of motor vehicles
• Searches in exigent or emergency circumstances, to prevent the destruction of evidence, or while in “hot pursuit” of a suspect
• Searches conducted pursuant to valid, voluntary consent
• Searches when the evidence is in “plain view”
• Border, customs, and prison searches
Consent to search waiver
Consent is a recognized exception to the warrant requirement. Individuals are always free to waive their Fourth Amendment rights. If a subject consents to a search or seizure by a government agent, this eliminates the need for a warrant. Thus, the government does not need a warrant to perform a search if a person with proper authority consents to a search.
But to constitute an effective waiver of Fourth Amendment rights, an individual’s consent to a search or seizure must be voluntary.
Consents to searches by government agents obtained by deceit, bribery, or misrepresentations are generally held to be involuntary and, therefore, do not waive the consenting parties’ Fourth Amendment rights.
Also, government agents do not have to warn subjects that they have a right to refuse to consent to searches.
Probable Cause
Probable cause has been defined as those facts and circumstances sufficient to cause a person of reasonable caution to believe that a crime has been committed and that the accused committed it. Probable cause requires more than mere suspicion or hunch, but less than virtual certainty. “Reasonable grounds to believe” is probably as good a definition as any.
False imprisonment
False imprisonment is the restraint by one person of the physical liberty of another without consent or legal justification.
To recover for a claim of false imprisonment, the plaintiff must prove all of the following elements:
• The defendant used words or actions intended to restrain the plaintiff.
• The defendant’s words or actions resulted in the restraint of the plaintiff without the plaintiff’s consent (i.e., against the plaintiff’s will) and without legal justification.
• The plaintiff was aware that he was being restrained.
A claim of false imprisonment might arise if an employee is detained in any way during a search or interview. Generally, an employer is entitled to question an employee at work about a violation of company policy without incurring liability as long as the employee submits to the questioning voluntarily; that is, not as a result of threats or force.
Exclusionary rule
Under the exclusionary rule, which is in effect in all federal and state courts, evidence seized in violation of the Fourth Amendment will be suppressed—that is, it becomes inadmissible—in any criminal prosecution against the suspect except under a few limited exceptions. In addition, all evidence that is obtained as a result of the illegally obtained evidence will also be excluded. An unlawful search and seizure does not mean the suspect cannot be prosecuted, and it does not invalidate a conviction based on other evidence. But it does prevent the wrongfully obtained evidence and all evidence derived from it from being presented at trial.
Daubert criteria
In Daubert v. Merrell Dow Pharmaceuticals, Inc., the Supreme Court set forth the following nonexclusive list of factors to assess reliability:
• Whether the expert’s theory or technique can be or has been tested
• Whether the expert’s theory or technique has been subjected to peer review and publication
• Whether the expert’s theory or technique enjoys general acceptance within the relevant scientific community
• Whether there are standards governing the method used by the expert
• Whether the expert’s technique has a high error rate
Two Kinds of testimony
There are two basic kinds of testimony. The first is lay testimony (sometimes called factual testimony), where witnesses testify about what they have experienced firsthand and their factual observations. The second kind is expert testimony, where a person who, by reason of education, training, skill, or experience, is qualified to render an expert opinion concerning certain issues at hand. A lay witness (or fact witness) is anyone who provides nonexpert testimony. Note, however, that an expert witness might also provide lay testimony.
Typically, a fraud examiner who worked on a case will be capable of providing lay testimony based on observations made during the investigation. When a trial involves issues that are complex or unfamiliar to most people, as is common in incidents of fraud, expert testimony is appropriate to help the judge and jury understand these issues.
Rules of Evidence: 702
Rule 702 of the Federal Rules of Evidence provides that the judge must make three determinations before allowing an expert to testify before the jury:
• Is the person qualified as an expert witness?
• Will the expertise of the witness assist the jury in understanding the evidence or determining a fact at issue? In other words, is the testimony relevant to the facts of the case?
• Is the testimony reliable?
