Business fraud costs everyone in a company. Policies and procedures for businesses help prevent and identify fraud. This American news report gives some insight into the problem.

The video includes a case of a former trusted book keeper of a restaurant who defrauded their employer of thousands of dollars.



Do you suspect Corporate Fraud? Ask for a free White Paper: Workplace Fraud Investigation. How to uncover it, prevent it, stop it

Preventing or dealing with workplace fraud or theft takes work. Preparation is a big part of this. Even just saying you will be doing background checks during an interview process may help weed out some people from ever being hired.

Business owners should consider the level of risk their business is exposed to. Always presume innocence of staff. However ensure you have policies in place. Breach of these policies may allow you to dismiss staff much easier than simply suspecting them of theft or fraud. The American video below includes some practical tips if you want to initiate an investigation. Be very careful before making accusations of staff who may have been involved in workplace fraud.

Comment from Mark Streeter Fraud Lawyer

While this video suggests a do it yourself approach to fraud investigation it is pretty easy to see how it could get complicated. Streeterlaw are experienced in investigating workplace fraud. Acting quickly is important before evidence can be tampered with. Unfortunately taking the untrained approach, or relying on HR staff as  promoted in the video can give the suspect too much time and power in the situation to cover tracks.

If you suspect workplace fraud or theft give Streeterlaw a call.



Do you suspect Corporate Fraud? Ask for a free White Paper: Workplace Fraud Investigation. How to uncover it, prevent it, stop it

The reason insider trading is illegal is that one person, or group of people have an unfair advantage over others. In the perfect world no one would know more than anyone else. Obviously the world is not perfect.

Naturally some people must know information before it is made public. Businesses are continually evaluating opportunities and discussing strategies behind closed doors. This is not illegal. The reason insider trading laws have been created is to help ensure that those who are part of these discussions cannot unfairly profit from that prior or 'inside' knowledge.

The dramatic increase in online trading and buying shares has meant insider trading is no longer restricted to an elite group of business owners and their close friends. While a criminal insider trading case may be difficult to prove the financial services industry in Australia has gone through many changes over recent years. The restrictions on giving financial advice are complex. The need for clear documentation and explanations around advice given has increased dramatically. Simply asking your friends "what's the best shares to buy" is no longer so simple.

In this video below it gives advice on what to do if you suspect insider trading. It also suggests you walk away rather than be tempted to make use of inside information you may have received.

Other Insider Trading blogposts

Insider trading suspected in major USA mergers
Insider trading stock tips at family reunion
What is insider trading?
Decriminalising insider trading proposal

Insider trading only became illegal in 1960's when it was felt some individuals had an unfair advantage over others with the buying and selling of stocks. In 2009 an article was published supporting a fairly radical idea for insider trading to be decriminalised again. It is a very controversial idea.

Since the 1960's insider trading regulations have continued to be expanded. The video includes a discussion that fraud and insider trading are often linked. The article's author believes is that allowing markets to drive stock prices to realistic values is fairer. The counter argument is that it still gives an unfair advantage to some.

For the author insider trading is not fraud but rather is more likely to expose corporate fraud. The video also highlights the relative lack of resources being used on examining and trying to prevent Insider Trading.

Other Insider Trading blogposts

Insider trading suspected in major USA mergers
Insider trading stock tips at family reunion
What is insider trading?
Legal and illegal insider trading

Fraud can happen in any business. However non-profit organisations sometimes have looser controls so may be more susceptible to fraud. This video dramatisation below may be a little corny but the message about corporate fraud is good. The statistics about fraud are also interesting. More men commit corporate fraud than women.

The fraud video helps show how easy it can be for employees to take advantage of lack of business controls. Simple things like no double signing of cheques, not checking bank statements - or simply having too much control by only a few staff members.

Comment from Mark Streeter - Sydney Fraud Lawyer

Fraud is not always premeditated. Rather fraud can be opportunistic. Yet if fraud is not caught early employers can continue to abuse the situation and cause more damage to the business. If you suspect fraud give us a call.



Do you suspect Corporate Fraud? Ask for a free White Paper: Workplace Fraud Investigation. How to uncover it, prevent it, stop it

An expensive lesson in breaching a Contract of Employment

When you hire someone to do a job it is natural to expect them to not only do the job but to not help a direct competitor. Failure to do this proved to be an expensive error.

The Facts of Dinte v. Hales & Anor [2009] QSC 63 (25 March 2009)

Dinte, the Plaintiff in this action, hired Hales and Campbell to provide services to his business trading as Skycomm.  Hales held the position of “Service Manager” which included responsibilities for selling and servicing mobile communications equipment as a “premier dealer” for Motorola.

In the course of, and after his engagement with Skycomm, the Defendants entered into a partnership trading under the name of Dapcomm. Dapcomm operated in common areas of business as Skycomm; The two business were competing.

The claim was brought by Hales alleging that Hales had breached his implied term of Contract of Employment and his equitable duties owed to the Plaintiff as his employer.  Furthermore it was alleged that upon termination of employment, Hales retained copies of confidential information including lists of clients and customers together with commercially sensitive information which was used for the purposes of Dapcomm. It was alleged that Cambpell knew and approved of and assisted Hales in the impugned conduct and benefited from it.

Recovery of Damages more than loss of sales

The Plaintiff sued for damages. The Judge found that Hales was in breach of his obligations to Dinte and dishonestly diverted custom to the Dapcomm partnership through opportunities that were made available to him by virtue of his employment with Dinte.

This case is interesting because not only did the Court, having found liability, make an award of damages in the sum of $67,533.19 for loss of the diverted business but the Court also considered, as a consequence of the business diverted away from the Plaintiff’s business, that he should be compensated for loss of value of the business.  The loss of value of the business was calculated by using the amount of diverted business in the last financial year ($38,000) and taking the multiplier of 3.8 x EBIT which equated to $144,400.

Comment from Mark Streeter Sydney Lawyer

There are some important lessons to be learned from this case. This is an important decision in assessing and quantifying damages for recovery of Fraud in businesses.  Employees may divert business opportunities to themselves or other parties or merely destroy business opportunities. This may result in damages in excess of just the lost revenue for that financial year.

In this case the business was sold within a year after the Defendants had diverted the business but before the case went to hearing.  Accordingly the “loss” of goodwill was realised by the lower sale price obtained as a consequence of the reduced earnings because of the diverted business.

This case is consistent with the principles set down in To Robinson v Harman (1848) where Baron Parker said:
Where a party sustains loss by breach of a contract, he is, as far as money can do it to be placed in the same position, with respect to damages, as if the contract had been performed.

In this case the Plaintiff had lost the business but had also lost value in his business by way of goodwill (calculated as a multiple of EBIT) and suffered a reduced price in the sale of the business as a consequence.
 

Quick Action and Freezing Order in $300K Fraud Case

The Facts of Norco Co-Operative Limited v Kelly [2010] NSWSC 719

HK worked for Norco from 26 March 2001 to 10 February 2009.  In the course of her employment she fraudulently and dishonourably misappropriate amounts totaling at least $316,657.98!

These funds were used to pay off mortgages on properties she owned and also mortgages on properties she jointly owned with her life partner.

Upon discovery of the misappropriation, Norco made an urgent application for a “freezing order” which was granted on 19 March 2009.  This order prevented HK from removing from Australia or in any way disposing of or dealing with or diminishing the value of any of her assets in Australia up to the unencumbered value of $375,000.00.

Shortly before the “discovery”, HK transferred to her life partner title in one of the properties for nil consideration. His Honour Justice Lindgren found that Norco had an “equitable charge” over these properties but found the amount of the charge was limited to the amount of the misappropriated funds that had paid off the mortgage over the particular property.  It did not amount to a charge over each property for the full amount of the misappropriated funds.

Comment from Mark Streeter, Sydney Lawyer

This case uses the principle of constructive trust to “trace” the proceeds of the fraud.  As her life partner had not taken the property as a “bona fide” purchaser without knowledge and for fair value, the life partner did not have a basis for resisting a claim by Norco.

This case teaches an important lesson. Act quickly to firstly freeze and then recovery misappropriated monies or property or assets.  It may be possible to “trace” monies and obtain a secured position under an equitable charge (as illustrated by the Norco decision).




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Macquarie Bank's recorded phone calls used as evidence against them

What would you do if faced with a call on a margin loan of $160,000 from Macquarie Bank and given three working days to pay it? Over the past 12 months this has became a common situation in Australia, and around the world.

Last year one investor’s offer to meet the Bank’s call didn’t go exactly as planned and the Bank sold his shares at a substantial loss. However the Federal Court agreed that the investor’s efforts were sufficient to meet the Bank’s call. They ordered the Bank to compensate the investor. The Bank’s own recorded phone calls actually helped the case against them.

This court decision could impact every investor who uses margin lending arrangements.

Background to the case of Goodridge v Macquarie Bank Ltd and Leveraged Equities Ltd

Next time you hear the words “this call may be recorded for training purposes” it may just help you. Lawfully obtained ‘surveillance’, in this case recording of phone calls, were used in this court decision.  This type of surveillance evidence is often most useful in the detection and proof of frauds but this case was different.

In the Federal Court decision on 12 February 2010 of Goodridge v Macquarie Bank Ltd and Leveraged Equities Ltd recorded telephone conversations were used to prove an aspect of the case. The Plaintiff is a Barrister (as a litigant in person) and he decided to take on the might of Macquarie Bank and Adelaide Bank.

The main issue was whether or not the Borrower had satisfied a Bank’s “call” under a Margin Loan.

The Situation

On Thursday 5 February 2009 the Bank made a margin call upon the Borrower. This required a payment of nearly $160,000 be paid by the following Tuesday 10 February – or three business days.

The Borrower sought to negotiate an extension. The Borrower knew that 10 days after the deadline he would receive approximately $175,000 of dividends from these units. His offer was for the dividends to be paid directly to the Bank in satisfaction of the Call. The Bank verbally agreed to this offer in a phone conversation.

Recorded Phone Calls Used as Evidence

The Bank had a procedure for recording telephone calls of its customers and brokers.  Two of these recordings were used in evidence as between the Borrower and the account manager. 

As agreed the Borrower signed an authority and instruction directing the dividend from his investments be credited to the Bank. As part of a subsequent conversation the account manager told the Borrower that he had done his part and that it was “perfect”. 

For an unexplained reason this authority was not acted upon and the dividend payment was still made directly to the Borrower’s bank account. It was then transferred to the Bank by the Borrower.

His Honour Justice Rares found that this action by the investor completely satisfied the margin call based on the evidence. The Plaintiff had successfully proven this aspect of his case using the Defendant’s own phone records.

Comment by Mark Streeter Sydney Lawyer

This case is illustrative of the high value Courts give to records held in objective media. These may include film, tape of voice recording or other electronic media such as emails, Skype or SMS records.

In a Court of Law it is not enough to be right. You must be able to prove, on the balance of probabilities, that you are right.  In this situation the recorded phone calls were the proof that was needed.

However any surveillance evidence must be in admissible form. It must not be obtained illegally. Otherwise it cannot be used in a Court of Law.  In Australia there are very strict rules regulating the collection of information and data.

This case actually involved two more margin loan calls with very interesting results. See the next blogpost.

Bank told to compensate for selling shares in low market

Macquarie Bank's sale of loan book creates problems for clients

The facts behind the case

Mr Goodridge (the Borrower) entered into a margin lending loan arrangement with Macquarie Bank in May 2003.  On 8 January 2009 Macquarie Bank sold their “loan book” (which included Mr Goodridge’s margin lending account) to a subsidiary of Bendigo and Adelaide Banks – Leveraged Equities Ltd (the Second Defendant in these proceedings).  Notices were issued on 19 January 2009 purporting to notify all customers of the Bank of the transfer and the new “ownership” of the Banking arrangements.

The Bank (either Macquarie Bank or Leveraged Equities) made a “calls and demands” under the loan on 5 February 2009 and 23 February 2009.
The evidence was accepted (form the Bank’s recording of a telephone conversation) that there was a negotiated arrangement between the Bank and the Borrower and the 5 February 2009 margin call was fully satisfied by the Borrower.

The enquiry then focused on whether or not a “call” under the margin loan by the Bank on 23 February 2009 expired unsatisfied which justifying the Bank selling the securities to pay down the margin loan.

The Borrower had purchased units in a listed units in Macquarie Country Wide Trust (MCW Trust).  The market price of these units on 11 November 2008 was 31 cents.  The discounted cashflow valuation that Macquarie Equities Ltd had placed on these Units was $1.15.  The price of these Units came under a degree of stress and by 23 February 2009 the price had fallen to 14.5 cents per Unit and during the day had dropped to 13 cents.  On the afternoon of 23 February 2009 an email was despatched from Leveraged Equities to the Borrower requiring payment of the margin call of $190,000.  The Borrower was given 24 hours to pay this amount to maintain the Loan Valuation Ratio (LVR) at 70%.  The “margin call” was not met within this timeframe and the Bank sold the Units for prices that went down to 10.5 cents per Unit.  All 5.6 million units were sold and because of the depressed price (in part caused by the fact that the market could not absorb the sale of 5.6 million units in a 24 hour period!)  There was still an amount outstanding to the Bank.  It remained in debit of over $58,000.00.

What's the Story?

The relationship between a Lender and the Borrower under a margin loan facility is one of substantial interdependence.  Unlike real estate which could take somewhere between three and six months for the Bank to take possession and sell, listed securities can be sold quite quickly.
The relevant clause of the margin lending loan required the Bank to give three business days notice for compliance with a margin call.  Other clauses in the agreement provided for the ability, at the discretion of the Bank, to modify the terms of the agreement.  However, His Honour Justice Rares found that this three days notice as an expressed term offered the Borrower a substantial contractual right and any alternative construction would lead to a very unreasonable and uncommercial result!

His Honour Justice Rares noted that the liability to meet a margin call remained contingent up until the time of the compliance and only matures into an actual liability if at the time of the application of the formula (to ascertain the LVR) the loan balance and the valuation of the securities is in breach of the required ratio.  His Honour Justice Rares delivered a lengthy 57 page judgement which dealt with many legal and factual complexities in a rational and well reasoned judgment.  The judgment will provide essential reading in construing any contracts relating to margin lending accounts.

His Honour found that the margin call was in breach of the terms of the margin loan agreement and accordingly invalid. There was no right on the part of the Bank (either of the two defendants) entitling them to sell.  Accordingly the sale of the units was unlawful and damages were payable.

If that was not enough, the judge also found that in the event that it was validly assigned that the “shortening” of the time for meeting the margin call from 3 to 1 days was a breach of section 12CB of the ASIC Act.  His Honour found that in all the factual circumstances, there had been a misuse of the power of sale and that the second defendant had required the Borrower to comply with conditions that were not reasonably necessary to protect his legitimate interest in breach of section 12CB(2)(b) ASIC Act in that it required him to pay money in accordance with a timetable and a series of demands that were not valid and secondly threatened, and then proceeded to, sell his property without a legitimate interest that it was entitled to protect. 

Accordingly this misuse of the power of sale was unconscionable.

The Borrower sought relief and an order that 5,603,562 in the MCW Trust be restored to him.

Since 23 February 2009 these units have increased in price substantially.  Additionally the units paid dividend (which also part of his damages claim) together with interest on the dividends.  As at 26 February 2010 they are 56.5 cents / Unit.  (That is his units would be worth over $3,000,000 plus dividend, plus interest on the lost dividend).

Another important issue - Invalid Assignment

Another significant legal issue to be determined was the question of whether or not a Bank can assign and “sell” a loan portfolio.  In the second paragraph of the judgement His Honour notes that:
“It was common ground that contractual obligations are generally incapable of assignment and that these can only be transferred by novation of the original contract.” 

His Honour found against the Banks on multiple counts. He found that they had not been a valid assignment of the entitlement under the loan to the second defendant which entitled them to make the call on the margin loan.

Comment from Mark Streeter - Sydney Lawyer

Inevitably this court decision will be appealed. Macquarie Bank sold a $1.5 billion loan portfolio to Leveraged Equities Ltd. They certainly would not want to see some sort of class action by other Borrowers seeking compensation for margin calls that were unlawfully made!

The saga will continue in the meantime - Happy investing!

The first margin loan in this particular case also involved the use of a phone recording as evidence. Read the full story on the blogsite

David beats Goliath using a recorded phone call

Solicitor resigns and fights against signed employment agreement

In recent years the pros and cons of employment contracts have been hotly debated. When a Solicitor in a country town resigned from his firm to work for another he was accused of being in breach of his employment contract. It was up to the Supreme Court of New South Wales to decide what “restraint of trade” in employment agreements could apply to the solicitor and what was unreasonable.

Explanation of Restraint of Trade

A common term of an employment contract, or contract of sale of business, is a “restraint of trade”. These clauses restrict or limit the competitive activities of the seller or the employee. This is to protect the goodwill and “value” of the purchaser. A 2010 decision in the Supreme Court of New South Wales shows the limitations of these clauses being binding.

The facts of the Employment Contract

M was employed as a solicitor by a firm in Taree and had signed a contract of employment.  The contract of employment contained three restraints which were to apply following the cessation of employment. These were to apply whether he resigned, was dismissed or they agreed on a mutual termination. The Restraints were:

1. Prohibition against soliciting Clients of the Firm. (A Client of the Firm was defined to mean someone who is at termination, or during the preceding one year had engaged the firm).

2. Prohibition against soliciting employees to leave the firm and related companies.

3. Prohibition on engaging in “Competitive Activity”. The definition of Competitive Activity is "any activity which involves carrying on either alone, as a director or in partnership with any person or persons or as an employee of any person or persons the business or profession of a lawyer within ten (10) kilometres of the post offices at Taree or Wingham".

On or about 27 November 2009 M resigned his employment from the firm.  He expected he could stay in the town where he lived and obtained employment with another local firm.  His previous employer commenced proceedings. They sought to restrain M by Court order from working for his new employer due to it being a contravention of the employment agreement.

Such a case could at times drag on. However as there was a need for the solicitor to have gainful employment and the requirement that the issues and construction of the restraint of trade clauses be construed quickly, the hearing was speeded up. Judgment by Justice McDougall J was handed down on the 28th of January 2010.

Case Facts

M ceased employment with the firm on 27 November 2009.

Clause 13 of his contract of employment imposed three restraints, each of them to be effective for 12 months.

His Honour Justice McDougall restated the rule that a restraint of trade could be justified insofar as it is no more than is necessary for the reasonable protection of the legitimate interests of the plaintiff.  In the circumstances and in the particular facts of this case, the plaintiff’s interests were identified as the goodwill of its legal practice.  The plaintiff identified a legitimate interest that was capable of being the subject of restraint and led evidence that the firm had introduced the employee to clients of the firm.

M offered undertakings to the Court to abide by the second restraint of not soliciting other employees to leave. The scope of the second and the third  restraints were what were being questioned.

In respect of the First Restraint, His Honour was asked to determine whether or not the restraint against solicitation should be limited to clients of the firm for whom the defendant had provided legal services. In it's original form it was worded to extend to all clients of the firm generally. That is any client of the firm whether or not the employee had any contact or association with the client.  His Honour determined (at paragraph nine) that the restraint should be limited to the solicitation of clients of the firm for whom the defendant had performed work (or legal services) in the preceding 12 months.

In deciding how long this restraint should take place His Honour considered this to be a question partly of principle and partly of fact.  His Honour found support in the view that the length of time should reflect the amount of time taken to end the connection between the client and the employee and how long it would take to train up someone else to fill the employee’s place.  His Honour found 12 months to be justified on the evidence.  Accordingly His Honour read down the restraint against solicitation of clients with whom the defendant had not worked with.

The Third Restraint was the most contentious. It provided a prohibition on competition on an absolute basis within a 10 kilometre radius of the designated places. This was not only a restriction on acting for clients of the firm but anyone (and everyone) else within this area. Taree and the surrounding countryside has a population of 48,000. Due to the size of the town the 10 km restraint covered the entire town.

His Honour was mindful that it was his role to assess what was reasonably necessary in all the particular circumstances of this case having regard to the application of principles established by previous cases.

His Honour found that the Third Restraint was a blanket covenant against competition. It protected not only the plaintiff’s legitimate interests in its own clients but also competition in respect of those who are not, nor had never been its clients. His Honour found that the Third Restraint went further than was reasonably necessary for the protection of the firm and did not consider this restraint reasonable.

His Honour also determined the question of costs.  Acknowledging that costs generally follow the event and each party had had a “measure of success”. Nevertheless, His Honour ordered that the Plaintiff pay 80% of the Defendant’s costs of the proceedings.

Comment from Mark Streeter Sydney Lawyer

The Restraint of Trade Act 1976 (NSW) is a very small piece of legislation.  The full Act is only four sections. The Restraint of Trade Act provides that ‘Restraints’ are valid to the extent to which it is not against public policy, whether they are in severable terms or not and empowers the Supreme Court to set aside a restraint of trade on the basis that it is offensive to public policy.

Sub section 4(3) provides that the Supreme Court may, on such terms as it thinks fit, order the restraint be invalid or accordingly valid only to the extent the court thinks fit.

How does a Court determine whether or not a restraint of trade infringes public policy? – That’s why it’s helpful to read this judgment as an exposition of principle. The Act is not limited to employment contracts but could also be applied to shareholder agreements or partnership contracts.