Fraud, Asset Tracing & Recovery, Country Analysis, CDR Essential Intelligence

Published date19 April 2022
Subject MatterCriminal Law, White Collar Crime, Anti-Corruption & Fraud
Law FirmWinstead PC
AuthorMatthias Kleinsasser, Joe Wielebinski and Toby M. Galloway

I Executive summary

Fraud, asset tracing and recovery always present challenges. Fortunately, in the U.S., the process is less problematic because we have the benefit of:

  • established common law and statutory law designed to protect against fraud;
  • well-developed case law interpreting the law;
  • a well-trained and educated judiciary;
  • adherence to the Rule of Law;
  • effective criminal law enforcement authorities that assist with the pursuit of criminal wrongdoing; and
  • a legal system that protects the parties' rights while providing effective relief to victims of fraud and other illegalities.

The system is not perfect, and there are often limitations or restrictions that make the pursuit of fraud difficult, time-consuming and expensive. Nevertheless, the U.S. legal system is admired as one of the most effective for combatting fraud. The intent of this chapter is to give the reader a better understanding of the U.S. legal framework relating to fraud, asset tracing and recovery.

II Important legal framework and statutory underpinnings to fraud, asset tracing and recovery schemes

The U.S. has federal jurisdictions and 50 states, plus the District of Columbia, Puerto Rico, and other districts and territories. In addition to consulting federal law, one must analyse the laws of the various other jurisdictions that could apply. The state and local systems are beyond the scope of this chapter, but one should review applicable state laws for any helpful claims or remedies.

A) Fraud causes of action

1 Common law fraud

The most basic fraud claim is common law fraud. Common law, or judge-made law, is the body of law in the U.S. derived from judicial precedent, as opposed to legal codes and statutes. The U.S. traces its common law history to England. In general, common law fraud occurs when a party makes a false representation of fact to another party who relies on the representation and is injured as a result. (See, e.g., Vicki v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 773 (Del. Ch. 2014) (citing Delaware law); Cromer Fin. v. Berger, 137 F. Supp. 2d 452, 494 (S.D.N.Y. 2001) (citing New York law).) The representation must be material and the injured party must be unaware of its falsity. (See, e.g., Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197, 1210 n.3 (9th Cir. 2012) (citing Arizona law).)

Less commonly, a claim may exist based on fraud by non-disclosure, which occurs when a party fails to disclose material facts that the non-disclosing party has a legal duty to disclose. The injured party must rely on the non-disclosure and be injured as a result. (See, e.g., Bombardier Aero. Corp. v. SPEP Aircraft Holdings, LLC, 572 S.W.3d 213, 219-20 (Tex. 2019) (citing Texas law); Wallingford Shopping, L.L.C. v. Lowe's Home Ctrs., Inc., No. 98 Civ. 8462 (AGS), 2001 U.S. Dist. LEXIS 896, *43-44, 2001 WL 96373 (S.D.N.Y. Feb. 5, 2001) (citing Connecticut law).)

2 Statutory fraud

U.S. federal and state laws contain various types of statutory fraud. These statutes were enacted to address fraud committed in the course of a particular type of transaction (e.g., securities fraud or real estate fraud).

a) Securities fraud

The most significant securities fraud statutes are found in the Securities Act of 1933 (the "Securities Act") (15 U.S.C. ' 77a et seq.) and the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. ' 78a et seq.). The U.S. Securities and Exchange Commission ("SEC") has supplemented the anti-fraud provisions of the Securities Act and the Exchange Act with its own rules, which also provide causes of action. For example, SEC Rule 10b-5, codified at 17 C.F.R. ' 240.10b-5, supplements Section 10(b) of the Exchange Act by making it unlawful to make an untrue statement of material fact in connection with the purchase or sale of a security (17 C.F.R. ' 240.10b-5).

Some causes of action in securities laws provide a private right of action, meaning that a private party may bring suit based on the statute; SEC Rule 10b-5 is one example. Other causes of action are available only to the government; e.g., claims under Section 17 of the Securities Act. (See SEC v. Pocklington, No. EDCV 18-701 JGB, 2018 U.S. Dist. LEXIS 227362, *42, 2018 WL 6843663 (C.D. Cal. Sept. 10, 2018) (stating that no implied private right of action exists for Section 17(a) claims).)

In addition to the federal securities laws, states have adopted their own securities regulations known as "blue sky laws", many of which allow private rights of action for injured parties. (See, e.g., Tex. Civ. Stat., Title 19, Art. 581-1 et seq.)

b) Other types of statutory fraud

States have enacted numerous statutes addressing fraud in various contexts. For example, Section 27.01 of the Texas Business & Commerce Code provides a cause of action and exemplary damages for a person injured by fraud in a real estate or stock transaction. All states have laws prohibiting the use of deceptive trade practices, including fraud. (See, e.g., Cal. Bus. and Prof. Code ' 17500 et seq.; 2019 Minn. Stat., Chapter 352D, ' 325D.44 et seq.) Also, Title 18 of the U.S. Code, as well as the statutes of each state, make the commission of fraud a criminal offence in many contexts. (For example, using the mail to commit fraud is prohibited by 18 U.S.C. ' 1341.)

c) Fraudulent transfer law

The U.S. has a well-developed body of law permitting creditors to recover fraudulent transfers of money and other property. Most states have adopted the Uniform Fraudulent Transfer Act ("UFTA") or the more recent Uniform Voidable Transactions Act ("UVTA"), with minor differences existing between the statutes enacted by the states. (See, e.g., Tex. Bus. & Com. Code ' 24.001 et seq. (setting forth Texas's version of the UFTA).) The U.S. Bankruptcy Code also contains provisions allowing for recovery of fraudulently transferred property, which are generally similar to the UFTA and UVTA (11 U.S.C. ' 548).

The UFTA and UVTA allow for recovery of two types of fraudulent transfers. The first type - transfers made with actual intent to hinder, delay, or defraud a creditor - are commonly referred to as actual fraudulent transfers. (See, e.g., Tex. Bus. & Com. Code ' 24.005(a)(1).) Despite the name, fraudulent intent is not required so long as the transfer was at least intended to hinder or delay a creditor's collection efforts. Fraud is, by definition, secretive. The UFTA and UVTA provide a non-exclusive list of factors (so-called "badges of fraud") a court may consider in determining whether a transfer was made with fraudulent intent (e.g., that the transfer was concealed) (Tex. Bus. & Com. Code ' 24.005(b)).

The second type of recoverable transfer is commonly referred to as a constructively fraudulent transfer. Constructively fraudulent transfers need not involve actual fraud, but merely require that the transferor received less than reasonably equivalent value for the property transferred. In addition, constructive fraudulent transfer law has a solvency element: the transfer must have been made while the transferor was insolvent, undercapitalised, or unable to pay its debts as they became due. (See, e.g., Tex. Bus. & Com. Code ' 24.005(a)(2), 24.006(a).) Constructive fraudulent transfer law protects creditors by discouraging a party with limited assets from transferring those assets away for less than reasonably equivalent value.

A creditor with a fraudulent transfer claim may sue both the initial transferee of the transferred property and any subsequent transferee. But a subsequent transferee who took the property in good faith and in exchange for value is immune from a fraudulent transfer suit. (Tex. Bus. & Com. Code ' 24.009(b).) In this way, U.S. fraudulent transfer law balances protecting a creditor's right to recover property while protecting innocent third parties who took property without knowledge of the fraudulent transfer.

B) Tools for practitioners

1 Discovery

Practitioners seeking to trace and recover assets can use the extensive discovery process allowed in American litigation. Litigants may serve requests for production of documents, demand that adversaries answer sworn interrogatories, and depose witnesses. (See, e.g., Fed. R. Civ. P. 30-34.) Third parties may be compelled by subpoena to provide testimony or produce documents. (See, e.g., Fed. R. Civ. P. 45.) Some U.S. jurisdictions permit pre-suit discovery from third parties. However, the U.S. lacks a uniform streamlined process such as the Norwich Pharmacal orders allowed in the U.K., which permit the requesting party to obtain a court order requiring a third party to disclose information or preserve assets or documents.

The permissible scope of discovery is broad. Once a lawsuit has been filed and the defendant has appeared, the plaintiff can generally obtain discovery regarding any non-privileged matter that is relevant to a party's claims or defences and proportional to the needs of the case. Information need not be admissible in evidence to be discoverable. (See, e.g., Fed. R. Civ. P. 26(b)(1).) Courts in the U.S. also generally prefer disputes to be resolved after discovery has been conducted, meaning that a plaintiff need not obtain and plead most of its evidence when it files its initial complaint. Some U.S. jurisdictions do require that certain claims be pled with particularity, including fraud claims. (See, e.g., Fed. R. Civ. P. 9(b).)

For these reasons, the discovery process may be the most potent tool for practitioners to uncover concealed assets. In limited circumstances, a party may conduct discovery prior to filing a lawsuit, though the extent to which pre-suit discovery is allowed varies significantly between U.S. jurisdictions. For example, Texas Rule of Civil Procedure 202 permits pre-suit discovery to investigate a potential claim, while Illinois Supreme Court Rule 224 generally allows pre-suit discovery only to identify potential defendants.

2 Injunctive relief

A party concerned that someone may take steps to shelter or...

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