Question

Sam’s Electronics Universe has discovered and investigated a kickback fraud perpetrated by its purchasing agent. The fraud lasted eight months and cost the company $2 million in excess inventory purchases. The perpetrator personally benefited by receiving kickbacks of $780,000. Your boss wants to seek restitution of what the company has lost, but is worried about the ramifications of a trial and its effect on your company’s image in the market. She is trying to decide if she should pursue remedies through a civil trial, or turn the case over to the district attorney to prosecute the perpetrator criminally.

The defendants have retained Daren as an expert witness in a recent fraud case. He will be providing information concerning the defendant’s activities, explaining why the defendant’s activities are in accordance with generally accepted accounting principles (GAAP) and normal business practice. Throughout the litigation process, Daren has been completely honest with the attorneys in his deposition and any other correspondence. Daren believes that the activities of the defendant have been in accordance with GAAP. The case continues and is brought to trial. A few days before Daren is called to testify in the trial, he discovers some new documents and information, which could possibly represent fraudulent behavior by the defendant.

Questions:

1. What ethical issues does Daren face in the light of this new information he has received?
2. What concerns should Daren have?
3. What are some possible actions Daren could take?

Answer 1

Question 1:

a.   Position 1 (Civil Court Remedies)—A typical response may include

i.   When companies pursue remedies in civil court, usually the fraud cases are settled before the case goes to trial. The purpose of a civil lawsuit is to compensate for harm done to the organization. To be successful, the company only has to prove its case by the “preponderance of the evidence,” which means they only have to tilt the judge or jury toward their side in order to win. If the company wins, monetary restitution will be awarded. Civil complaints can be filed against both the employee and the payer of the kickbacks.

b.   Position 2 (Criminal Prosecution) – A typical response may include:

i.   The criminal prosecution system is the only way to put the fraud perpetrator in jail. The criminal justice system includes more protections for the rights of the defendant, including the protections that arise from the Fourth, Fifth, and Sixth Amendments. Officers of the court and local law enforcement must be involved in order to prosecute the perpetrator criminally. It is much more difficult to prove a fraud case criminally because the case must be proven “beyond a reasonable doubt.” Law enforcement and officers of the court must follow proper procedures as they gather evidence, or else the evidence may become inadmissible in court. Criminal prosecution, however, is the best way to deter future fraudulent activity by this perpetrator and by other employees who will be watching to see what happens to this dishonest employee.

Question 2:

Daren could decide that the information represents only possible fraudulent activity, and not consider it something worth testifying to the court about. He could also think that he has been brought to this case in order to protect the defendant; thus, he might think he is not responsible for bringing forth incriminating data. Daren could approach the defendant’s attorney and share the information he has discovered. The attorney will likely not call him as a witness in this case, but Daren faces the issue of reporting his findings to the prosecution. Daren also faces the issue of not reporting his discovery to the attorney and simply reporting his findings on the witness stand during examination. The main issue Daren faces is whether to reveal the new information. If Daren believes the information is serious enough, at a minimum he should resign from the case.