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EMBEZZLEMENT IN YOUR BUSINESS OR ASSETS: REMEDIES AND
PROCEDURES FOR CONVICTIONS AND RECOVERY
Introduction:
If you
own or run a business sooner or later someone will embezzle from you.
Most embezzlements are small, often only office supplies or expense
account abuse, but the number of significant embezzlements-theft of
thousands if not tens of thousands of dollars via abuse of books or
access to funds-is not only growing but is widely unreported for reasons
stated later in this article.
Our
office, which has been practicing in this locale for close to a hundred
years, recently computed that of the various business clients we
represent at least ten percent have suffered some employee theft in the
average year while we are asked to represent a victim of major
embezzlement on the average once a quarter, often more.
The
average business person, suspecting something may be wrong while studying
the profit-loss statement or hearing a rumor about an employee is usually
shocked to discover that the police, not to mention the district
attorney, are less than enthusiastic to investigate and disinclined to
prosecute the wrong doer absent a full confession.
The
reason is simple: with violent crime taking much of their time and funds,
and with prosecution of embezzlement both boring and difficult (being
based in most instances on financial records, financial statements,
calculations, etc.) the average criminal prosecutor seeks to avoid the
time consuming and frustrating prosecution as much as possible.
Does
that mean there is no effective relief? Absolutely not. If investigated
and prosecuted by the victim correctly, with the police and district
attorney used usually as an adjunct to efforts at relief, it is quite
possible to get adequate restitution and some modicum of justice.
This
article shall describe what our office has found to be effective means to
investigate, remedy and obtain damages for the typical embezzlement in a
company in California. A companion Retainer Page
article shall go into great depth in terms of tactics to adopt if one
suspects embezzlement in one’s life.
Embezzlement: What Is It?
Embezzlement
is theft of your property but a type of theft that requires some breach
of trust. “Embezzlement is the
fraudulent appropriation of property by a person to whom it has been
entrusted and the gist of the offense is the appropriation to one’s own
use of property delivered to him for devotion to a specified purposed
other than his own enjoyment of it.” People v Hodges, 315 P.2d 38 (1957).
“Essential elements of “embezzlement”
are fiduciary relationship arising where one entrusts property to another
and fraudulent appropriation of that property by the latter.” People
v Darling, 41 Cal. Rptr. 219 (1964).
While
larceny or theft is merely the taking of another person’s property,
embezzlement normally is larceny achieved via a breach of trust, a taking
from someone who trusted the embezzler with access to the funds. It can
be an employee taking from an employer, a fiduciary from a beneficiary, a
spouse from another spouse, a lawyer from a client, a trustee from a
trust, etc, etc. The reader should review the article on
Fiduciary Duty to
see how that concept ties into the typical embezzlement.
From
the criminal law point of view, embezzlement is
merely a variation of theft all of which is subsumed in the same Penal
Code statute relating to theft. Criminal punishment for embezzlement is
the same as for any other form of theft and is based on the amount
stolen, though additional penalties may lie if governmental embezzlement
is established. Penal Code Section 503 defines the crime as the
fraudulent appropriation of property by one to whom it has been entrusted
and Section 484 of the
California Penal Code provides the definition of theft in general which
states that anyone who, “…fraudulently appropriates property which has been
entrusted to him or her or who shall knowingly and designedly, by any
false or fraudulent representation or pretense, defraud any other person
of money, labor or real or personal property…is guilty of theft.”
Most
states create significantly greater penalties if the amount is not minor
(it requires a theft of four hundred dollars to be “grand larceny” in
California) with felony conviction possible if such theft is proven. Felony
conviction normally means incarceration for over one year is possible in
California.
From
the civil relief point of view, embezzlement creates many causes of
action of the victim against the perpetrator, from simple conversion (a
wrongful taking of property) to breach of fiduciary duty (breach of the
highest duty known to law.) Punitive damages often may be obtained. The
reader should review our article on Torts for a general description of the relief
available when one sues someone for committing an intentional tort.
The Unique Problems in Proving Embezzlement:
The
essence of embezzlement in most business contexts is that the perpetrator
had access to the monies and the company books and was able to achieve
the thefts over time by “cooking the books,” namely altering payees of
checks or vendor bills or some other type of accounting document so as to
allow monies to be paid directly to the embezzler. This, in turn, creates
a double problem of proof.
First,
access to the accounting documents and/or funds was often voluntarily
entrusted to the perpetrator by the employer thus the easy job of proving
theft by showing that the criminal achieved access to your property via
stealth does not work. As one client put it, “I put her in charge of my
check book, she didn’t steal access to it.” Of course, proof that the
money went to the embezzler is the vital element that must be
demonstrated; thus tracing sources of money, a prolonged and expensive
proposition, often comprises the bulk of the evidence in embezzlement
cases.
Secondly,
the very accounting documents that would normally demonstrate in trial
that the theft occurred and who took the money are distorted quite often
by the embezzler and can hide his or her activities.
One
thus cannot prove guilt by access to property or by the normal records
kept in business. Instead, unless one can obtain a confession, one must
laboriously demonstrate the theft by a full and complete audit and
accounting (to show the money was misspent) and then compare that
accounting with the actual books kept or distorted by the embezzler.
Further, one must show that the false books or misuse of money was
intentional, not mere sloppiness. A recent case involving this office saw
the embezzler claim that she was simply incompetent and paid monies to a
third party by mistake, failing to enter previous payments correctly. The
“third party” was her accomplice of course, and it was only in showing
communications between that accomplice and the embezzler that we were
able to obtain a confession.
It is
by no means impossible to demonstrate intentional embezzlement and this
office has done so by such circumstantial evidence many times. The
problem is that it is time consuming, requires expert assistance by CPAs
who are capable of testifying in court…and is expensive. A recent audit
of a small business demonstrated theft of one hundred and ten thousand
dollars-but cost forty thousand dollars in accountant fees alone.
Further,
we have found many clients are embarrassed by the embezzlement and are
afraid that the reaction of customers and competitors to the discovery
may further hurt them in business. This is particularly true in
professional offices such as accounting offices, doctor officers, law
offices, etc. where the victim has the concern that a client or patient
may conclude that an accountant who can not keep his own books accurately
certainly should not be entrusted with others’ books.
The
desire to avoid publicity combined with the difficulty of success in court
leads many victims to conclude that discretion is the better part of
valor and to simply terminate the culprit and not to seek further
relief. This, in turn,
allows most embezzlers to continue in their efforts from company to
company and it is not uncommon to discover, when some employer finally
decides to prosecute, that the embezzler has conducted the same activity
in a dozen or more companies.
Thus,
with both the district attorney and the employer hesitating due to the
difficulty and cost of prosecuting the embezzler, it may seem that this
particular form of theft is one that allows the perpetrator to usually
succeed and that the business person or other victim of such theft has
little practical relief.
And embezzlers are often
charming and educated culprits, not easily made into villains before
judge and juries. See our story
Embezzlers are Nice
People.
Our
office has found, however, that such is not the case and that vigorous
and intelligent action can more often than not result in both justice
being achieved and significant restitution being made.
Relief From Embezzlement
As with
any project, the key to catching and obtaining a judgment against an
embezzler is careful planning and a realistic assessment of how to
achieve one’s goal. And, as with any plan, a primary factor in a
successful result-is defining precisely what one’s goals are. Do you want
restitution or do you want vengeance and can you have both?
That
is not an idle question. The sad fact is that most embezzlers are not
wealthy but combine their thefts with a life style that often results in
spending all they have-often more than what they have. Many embezzlers
begin their activities due to being in debt and begin to “borrow” money
from the boss to tide them over to the point where they can repay the
monies. At least that is what they say to themselves and quite often
really believe it. The problem, of course, is that the reason they are in
debt has nothing to do with cash flow but is predicated on the same type
of personality that seems inherent in most embezzlers.
Our
experience is that the average embezzler is intelligent, often quite
intelligent, and it is an ironic fact that if they had dedicated the same
energy to building a career that they do to stealing, they would probably
be successful. There often is a tendency to become arrogant and careless
as the years of embezzlement progress and, as one of our clients
mentioned, perhaps a desire to be caught for various psychological
reasons.
But
the overwhelming majority of embezzlers are discovered when they become
ill or take a vacation and the books are reviewed by the boss or a
temporary worker in the office and errors are found-then patterns of
errors…then it becomes apparent that the errors are not errors at all.
And
at that point of discovery is when key decisions have to be made. Our
companion article on the Retainer Page
will go into precise detail into the relief methods and tactical plans we
often suggest, but this article will outline the basics of what we have
discovered is an effective program for maximizing the recovery of
embezzled amounts.
- STEP ONE: THE GOALS
This
is a key question. If you want your money returned you have to carefully
determine if the embezzler has assets that are attachable. If money is
less important than vengeance, a very different approach is required as
discussed below. One client was more concerned with correcting the
accounting records than either vengeance or money, commenting that it
would cost hundreds of thousands to recreate ten years of falsified
records and, above all, he needed the expert embezzler to help recreate
the books, many of which were fiduciary records.
Thus
your first step is to itemize your priorities in seeking relief. It is
likely you will find that recovering money and reestablishing the books
is more vital to you than punishing the wrongdoer.
Why
is this important? The embezzler cannot help you if in prison; the
embezzler cannot pay your judgment if in prison. On the other hand, if
vengeance is your goal, prison is the only place you want the embezzler.
- STEP TWO: THE PLAN
Once
you know your goals, it is time to get expert advice. A good accountant,
investigator and attorney is the usual team since confronting an employee
is a dangerous event, both in terms of the effect on the case and the
danger of being sued for slander or libel.
Further
the confrontation, if artfully done, can often cut short the entire
procedure by eliciting a confession from the culprit. Note that a
confession, if reduced to writing, maximizes your freedom of action in
that you no longer have to worry about convincing the District Attorney
of the strength of your case or if you can win before a jury.
Do
confessions happen? Remarkably often. This writer has noted that in the
majority of cases, if done with advanced planning and the team in place,
confessions are obtained. The key issue is whether one can prepare the
“confrontation” without the embezzler knowing and whether one can get
powerful evidence with which to confront the embezzler to “break them”
immediately.
A
typical method used by this writer is NOT to accuse the embezzler but to
show them the evidence in silence and then begin with words to the
effect, “We are not going to discuss whether you did this. We know you
did. We are going to discuss how you will repay it. If you refuse to
repay it, then we know what we have to do. Do you have any assets you can
pledge?”
In a
remarkable number of cases, the embezzler, after some hesitation,
immediately begins discussing how to pay it back. Note that neither side
has discussed guilt…only restitution. But the moment restitution is
discussed, guilt is admitted tacitly and later in the meeting, in
discussing the stipulated judgment, the guilt is explicitly stated.
One
must be very careful. In California, one cannot threaten to go to the
police unless someone pays you money. That is a crime called extortion.
Be sure to seek legal advice before seeking to use this method. Indeed,
without witnesses in the room, usually professionals, the meeting is
likely not to work since the embezzler, with time later to consider the
ramifications, may deny the admissions were made.
The
goal is to get a written confession as part of a repayment program. If
the repayment program is not adhered to, the confession can be used in
court. One cannot promise not to go to the police if paid. But one can
make clear that one does not have intentions of going to the police at
this time.
Assuming
the confession gambit does not work, then one must accumulate as much
evidence as possible and one can go to the authorities with the case
nearly complete (thus you have done most of the work for the District
Attorney who may thus be more inclined to prosecute) or one can file
civil suit or both. Again, the method of termination of employment must
be careful scripted since one can expect countersuits from the embattled
embezzler as a typical tactic to avoid liability.
Ideally,
the criminal case, which normally goes much faster, will conclude long
before the civil case and the conviction in the criminal case can be used
as evidence in the civil case. Remember, however, that an acquittal in
the criminal case will not necessarily stop your civil case since the
burden of proof is so much higher in the criminal matter that one can win
civilly even if one loses the criminal action. (Recall O.J. Simpson lost
the civil case after winning the criminal case.) See our article on
Criminal Law and Procedure.
Often
the plan does not include prosecution precisely to allow restitution. As
one client commented, “If she does not work for someone else, she can’t
afford to pay my judgment.”
The
moral dilemma facing some clients is the issue of the culprit actually
stealing from the next employer to pay off your own judgment. This
concerned one client so greatly that she felt she had to warn the next
employer, which resulted in the embezzler leaving the country and
disappearing.
We
have found that absent a real desire for vengeance, the plan comprises
two stages: first, the carefully orchestrated effort to obtain a
confession and recovery; and if that does NOT succeed, the careful cost
benefit analysis of whether to push for criminal followed by civil
prosecution.
- STEP THREE: THE RECOVERY
OF RECORDS
This
is more complicated than one thinks. First, the thefts often go over
several years and quite often the embezzler throws away critical document
or alters them. Secondly, for tax reasons, one must have accurate records
and the cost of the audit, even if possible, can be remarkable. One
auditor forced a client not to prosecute simply because the auditor
needed the embezzler’s help in recreating proper tax records! Thirdly, tax planning may be
essential, both because income and expenses may have been misreported,
but also because sales tax and the income tax of the embezzler may become
vital issues to confront.
Remember
that the embezzler owes income tax even on stolen gains. And recall that
tax payments, just as your judgment for theft, cannot be discharged via
bankruptcy. As one client commented, the tax authorities were competitors
for the same scarce dollars he was trying to retrieve from the embezzler.
Part
of any judgment one must seek from an embezzler is the cost of recreating
the books and paying any resulting taxes and penalties that may be due.
There is one bright spot: the cost of chasing and convicting the
embezzler is a deductible business expense.
Conclusion:
The
detailed plan we recommend is outlined in our Retainer Page series of in depth
articles but the point we make here is that relief is certainly available
for victims of embezzlement but must be sought with a carefully
implemented plan. Becoming enraged, feeling foolish, lashing out, or
ignoring the event are all equally useless and self-destructive.
Embezzlement will hit every business sooner or later and mastering the
skill of seeking relief and appropriate punishment is, regrettably, a
skill that every businessperson must eventually achieve.
Or,
as Euripides wrote twenty five hundred years ago:
A man’s most valuable trait is
a judicious sense of what not to believe.
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