06 December 2005

About Fraud

Judge Easterbrook has some interesting observations about recent anti-corporate fraud legislation:

It is not clear to me that anything had to be done [about fraud]. Fraud was not invented in the 1990s. ... It is illegal in all 50 states, even Nevada.

He is, of course, tongue in cheek, but not entirely wrong either.

Colorado's criminal code, for example, has at least 59 different sections defining different kinds of fraud offenses against private parties, and 7 sections defining fraud offenses against public parties (and this count excludes definition and procedural sections and the related issues of bribery, although I do include embezzlement offenses). Many of these sections themselves define multiple kinds of fraud. And, Colorado is well known for having one of the most cleanly drafted criminal codes in the nation, although it also criminalizes a few fraud offenses not in the criminal code itself (such as felony tax fraud, Colorado Revised Statutes Section 39-21-118).

There are thousands of different federal fraud crimes, which are far less well organized, and fraud offenses make up a large share of the federal criminal docket.

This doesn't even begin to open up the regulatory and civil laws aimed at preventing fraud. And, yet, fraud persists and it is not always easy to enforce those laws. Given the incredibly diffuse array of ways this is currently dealt with, perhaps the real problem is a lack of a coherent overall strategy. Sometimes one big hammer is more effective than many little ones.

Thanks to How Appealling for the link.


wunelle said...

Do you suppose there is a need, not so much for new regulation, but for renewed recognition of, and vigilance against, an odious societal tendency, and regulation is our way of focusing on it?

Andrew Oh-Willeke said...

There is something to the notion that recurring campaigns against fraud have an effect and that new laws invigorate these campaigns.

But, the flip side of the equation is that people don't change much, and that doing the same thing over and over again and expecting different results is a good definition of insanity. The elderly, and other high risk groups are perpetually afflicted by fraud, and many approaches simply don't work, but are simply kept in place because no one wants to be weak on fraud.

Consider the question that used to be asked every time you checked in at an airport. Are you carrying explosives? Yeah, like a real terrorist is going to say yes to that question. But, many anti-fraud precautions currently in place, like the requirement that certain documents be notarized, or that certain statements be made under oath, are equally useless. In my experience, statements made under oath are more likely to be lies, not less likely to be lies.

On the other hand, the somewhat intrusive method of preventing check fraud of requiring a fingerprint on a check used as a payment is exceedingly effective.

As I noted in an earlier post, making information available when it is needed, giving people the right tools, and giving people an incentive to act properly is more effective than motivating people to do the right thing or educating people in a more global sense.

Colorado Luis said...

The other part of the equation that Judge Easterbrook isn't mentioning are the laws like Rule 9(b) of the Federal and Colorado Rules of Civil Procedure and the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995, which have the effect of actually privileging fraud defendants (on the theory that fraud is a serious charge that shouldn't be made lightly) and make it harder for plaintiffs to get their fraud cases off the ground. Seems to me these laws don't deter frivolous suits so much as they penalize plaintiffs whose lawyers aren't clever enough to draft a complaint that satisfies the pleading requirements the first time.

It's easier and more glamorous to pass a new anti-fraud statute than to look at ways of reforming the pleading rules to weed out the truly abusive fraud claims without dragging down all plaintiffs who plead fraud.

Of course, that is looking at it from the civil side, but the fact of the matter is that most fraud cases are so tough to prove that criminal prosecutors only touch the most egregious ones.