Category: Articles of Interest

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How to get the Opportunist Fraudster to Confess

By David Debenham

In our paper last month, we found that the difference between those who committed opportunistic fraudsters were more likely to be overconfident to pull off a fraud than those who might actually have the ability to do so, but who feared all of the “unknown-unknowns” that could catch them out.   These overconfident people falsely transfer their brilliance in one field into their abilities in fields they know nothing about such as fraud.  Their body language, vocal tone, and rates of participation suggest confidence because of this false transference. This means that these overconfident individuals speak more often, speak with a confident vocal tone, provided more information and answers, and acted calmly and relaxed as they work with their peers in the midst of perpetrating a fraud. In fact, overconfident individuals were more convincing in their displays of ability than individuals who were actually highly competent in their tasks, who, when questioned, become nervous when their conduct is called into question.  The over-confident do not say “I’m really good at this.” Because for them they are past that stage: Instead, they led their “ability” speak for itself as they explain in great detail what they do, and how they do it, in a calm and relaxed way.’  These status seekers who believe their competence at coding transfers into their ability to play poker, chess, or commit fraud, will want to demonstrate this by simply participating more and exhibiting more comfort with any task you put to them, and that is the key to catching them out.  [1]

The key is to enlist the fraudster’s advice in solving the various issues in your case, much as Columbo does in virtually every episode.   So long as you don’t appear to be as capable as the suspect (and how could you be considering their status and yours?) you can simply pose a serious of problems and let the fraudster solve them for you, all the while incriminating himself. Consider Columbo’s “Bye-bye Sky High IQ Murder case”. Genius accountant Oliver Brandt has been embezzling funds in order to keep his high-maintenance wife in fine frocks and tropical getaways. His business partner Bertie Hastings has just found out – and he must be killed.  Oliver shoots him and rigs an umbrella to take the murder weapon up a chimney. He puts a heavy dictionary on the arm of a chair, balancing precariously.  Oliver then starts a record player playing by pushing the start button, which eventually leads to the sound of two shots fired sometime later when Oliver is safely ensconced in a room full of witnesses who have just entered the adjoining room.  The sound of a body falling between the two shots alarms the witnesses.   The group runs into the room to see Bertie shot. In the confusion Bertie pockets the Dictaphone. Later Oliver recovers the umbrella and disposes of the murder weapon.  Columbo asks if the record had the shots. Of course not.  There were caps in the umbrella that were exploded as soon as the arm of the record player moved.  So too the dictionary was pushed off the arm of the chair by the movement of the arm of the record player, so in sequence it was cap explosion, dictionary fall (“the body”), and second cap explosion. At each stage Columbo suggests a hypothesis and the overconfident “high IQ” Oliver sets him straight, until at the end there is no more mystery to resolve.  Interview technique has outwitted the overconfident murder.   So too, for you.  Enlist the overconfident fraudster to incriminate himself.

[1] https://newsroom.haas.berkeley.edu/why-are-people-overconfident-so-often-it%E2%80%99s-all-about-social-status/

 

 

The Parable of the Boiling Frog

By David Debenham

The premise of this parable is that if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability or unwillingness of people to react to or be aware of sinister threats that arise gradually, step by step, over time rather than immediate obvious dangers. I see it differently. I see it as an example of the chasm of comfortable complacency.  One author calls it “The peculiar longevity of things ‘not so bad’.[1] The idea is that people stay in these zones of complacency, or “not so bad”, called “beta regions” because things are not so bad as to motivate them to leave, and also the alternative is not so good as to motivate them to leave.  They are stuck in a beta region of inertia or complacency.  Society pushes conformity, mediocrity and normality because it is both safe, and “not that bad”.  Over time grooves become ruts, and patterns become habits. One day we waking up with a bucket list of things we wished we had done, when at one point or another they were achievable with a little effort and imagination.

 Ironically, a nagging injury, a mild cold, or a less than ideal relationship – if they were slightly worse, we might get the injury checked out, take cold medicine, or break up with that person. Once it is severe enough, we take it seriously and are able to resolve it faster.

Why is this important to the field of fraud investigation?   Too often fraud victims are in the beta zone, where they are not so bad off that they have no “felt need for change”— no desire to go to the police or recover the monies wrongfully taken from them.  Those victims need to see (1) the discrepancy between where they are and where they could be by taking action, (2) assurance that the desired state is achievable, (3) that the desired state is more in keeping with their core values, (4) a path to getting to the desired state, and (5) a support team to accompany them to the desired state.  While you may not be the person to lead the transition team from where the victim is and where they could be, you may want to advise and support that leader.

[1] https://www.scn.ucla.edu/pdf/PeculiarLongevity.pdf

 

Limitation Periods and Fraud Victims

By David Debenham

“We do not see things as they are, we see things as we are.” [1]

Traditional doctrine treats fraud victims as simply those with weak internal controls, just as we treat victims of theft as those who fail to lock their doors and install burglar alarms.  In my view the truth is far more complex.

There are fraud victims who are simply told lies, and who, as soon as they uncover the lies, they are mentally equipped to start a lawsuit.  They invested in the fraud based on a rational calculation, and when they find out the information they relied on was false, they rationally determine who is at fault and sue for compensation, report the matter to the police, or complain to the relevant professional body.  That, however, does not encompass the entire universe of fraud victims. Many victims believe lie after lie and invest not only their entire life savings, but beg, borrow and steal from relatives, or invest family members’ money until vast fortunes are lost in what appears to an avalanche of throwing good money after bad.  It is this second group of fraud victims that concerns us here.

Most limitation statutes begin the period in which tort victim must sue. When that person knew, or ought to have known with the use of reasonable diligence, that a tort had caused them damage. The usual exception is when the tort victim is a vulnerable person, such as a child, or person with a mental infirmity, the limitation period only starts when they regain their senses or reach the age of majority. ` The fact is the matter many cases the victim of fraud does suffer from a form of mental infirmity or delusion.

Fraudsters often create a “reality distortion field” of “fake news” that lures in precisely those persons most susceptible to their deceptions. To understand this, we have to go back to the first principles of cognition.

First, there is an objective reality, and the reality we perceive.  When we perceive we literally are of two minds:

  • The logical mind, which, subject to errors due to logical fallacies, is what we use to form an analysis that leads to a logical conclusion. This takes effort, and time, and is susceptible to changed conclusion based on additional data.  This our scientific brain at work.
  • The emotional or intuitive mind often operates at the level of the unconscious and allows us to make a myriad of innocuous decisions without taking the time and trouble of going through a rational analysis. We bought A instead of B simply because we liked A more, often for reasons that are obscure even to us. At work are a series of unconscious lens or biases that assist in making “irrational” decisions quickly so we can move on with life without being slowed down by the sheer volume of decisions we have to make in life.

Mr. Spock of Star Trek fame is the shining example of the rational “Vulcan” who represses his “emotional” side to be the optimal “science” officer.  Counter-balancing him is Dr. McCoy, the simple country doctor who sees the “human” (emotional) side of every dilemma.  Captain Kirk then makes the final decision based on the submissions of Spock and McCoy.  So, we would want to believe that we all balance our logical and emotional decision-making minds in perfect harmony.  We know better.

Big decisions are often made quickly, and on irrational grounds.  “Love at first sight”.  I just “love” the white Toyota Corolla but I wouldn’t be caught dead in the red Toyota Corolla even though the white one costs $5000 more and it would only take $250 to paint the red one white.  We often make important decisions without rational analysis.  “Go with your gut”, “it just feels right”, or “let your instincts guide you” rather than be trapped in “analysis paralysis” caused by reasoning to a solution.  If the rational analysis later “kicks in” we say “buyer’s remorse” or “acted in haste, now repent at leisure”.    Fraudsters often prey on this by playing on our unconscious biases, including irrational trust cues (“you can trust me, we are both lifelong Blue Jays fans”), and then put on time limits to commit the fraud victim to a rush to judgment that excludes rational reflection.  Once committed, the fraud victim can only reverse their decision by doing the hardest act known to our species—-admit they made a mistake.

Instead, what happens is the fraudster avoids reflection and buyer’s remorse by repeating and emphasizing misinformation that play on unconscious biases. “Go with your gut”.  “Ley your intuition be your guide”.  “Come on, you know it feels right”.  “Don’t listen to your sister, she’s just jealous because you got the jump on her for a change”.  Rather than engage in a painful analysis that would lead to the conclusion you made a mistake; your emotional self irrationally emphasizes positive data and rejects negative data in order to remain comfortable with the original decision.  Remember the old car commercials that had the beautiful woman lying on the hood—they were as much about making male purchasers of the car irrationally feel good about their purchase than they were about buying the car in the first place— either way, they were never about a rational analysis to buy one car over another.

Let us begin with machine learning as a model for our brain. For sake of arguments, we start with a blank slate at birth then we are bombarded with a host of stimuli that the brain has to sort into 1) relevant and irrelevant, and 2) prioritize relevant stimuli in order of importance so that we can “judge” the situation and “act” appropriately. With babies this is a continued process of trial and error where we learn to “trust” our caregiver’s guidance in determining the relevance and importance of the sensory data inundating our senses. Objective reality is flooding our brains with data and our parents and siblings are providing us with the guidance as trusted advisors how to organize these data into useful organization or paradigm. Data overload in the form of unfamiliar reems of unfamiliar data causes stress leading to crying followed by parental reassurance and guidance.

“Experiences” is thus a combination of our own primary perception of the word (data) and our secondary perception of how to filter this data of useful information based only on our own experiences but those secondary experiences from those we learn to trust from guidance.

As we grow up, we learn to trust friends, teachers, and relatives’ judgments and how to filter data, resulting in tension between our own existing filters and new filters which we have to reconcile with our personal judgments. On an empirical level, our filters are used to predict results and by striving to minimize the “predictions and errors” we improve our filters through which we “see” reality. Teenage angst is caused by attempting to reconcile old filters we have traditionally accepted from our parents and our new filters we accept from our peers and the need to reconcile the tension between the two. Eventually “freeze” our filters when they achieve “unacceptable level of success” with only minor changes when new data is not explained or understood by the existing paradigm, we are using to explain the world around us and to act and guide our actions accordingly. Think of a magic trick. The magicians slight of hand makes it appear that a rabbit was pulled out of the hat. That, however, contradicts our experience we look for an alternate framework to explain this “prediction error” regarding the origin of the rabbit. The more the search in vain for that better explanation, the better the trick. But why do we enjoy the trick— because it proves there is more to life that reason and logic— no one wants to be a Vulcan.

“You see, gentlemen, reason is an excellent thing, there’s no disputing that, but reason is nothing but reason and satisfies only the rational side of man’s nature, while will is a manifestation of the whole life, that is, of the whole human life including reason and all the impulses”

Doestoevsky

So where do things go wrong?  The “twitch reflex”, or master controller of our brain that makes the initial decision to go with our reflexes or analytical processes, is an emotional one that uses our biases to make immediate decisions when we feel pressed to act.  The fraudster therefore creates an “emergency” for the fraud victim to act reflexively rather than reflectively.

Having passed this gate, the fraudster then plays upon our “trust” reactors. Everyone intuitively trust different people for different reasons. Trust, Trust — whether in a person or a product — is a compilation of data biased by “positive” or “negative” emotive experiences. It is that data squeezed through some individual emotional filter, active in every encounter.  Are affinity frauds the result of happy group experiences throughout your childhood?  Do you fall for charmers because they remind you of your father and how he made you feel? When that filter blinds you to danger — when it nudges you again and again to put your faith in a fraudster despite a dearth of data, your individual trust filter betrays you.  To another, the same stimuli may make a person “hate” the fraudster precising because his charm reminds the potential mark of a charming father who ran off and abandon his family.

So, what went wrong? A problem at the perception level is often associated with mental illness. A problem at the “filter” level is associated with the “trust imbalance”. Presume we are not all together in life or there’s another motivation we are likely to trust someone we ought not to of. If there is a perceived imbalance between our perceived self worth and our actual lot in life that suggests we deserve more, we may decide that our personal paradigm is the problem. In order to get the life we deserve, we then fasten-on cult ideology or scheme that promises us our just desserts. All we have to do is shrug off the shackles of our existing belief systems (filters) and see the world in a new way be advocated by someone we are being asked to trust to come and act accordingly. Like Morpheus giving Neo the red pill in the movie the Matrix, we are shown that the world we believed was real is illusory and that once we see the real world as exposed by the red pill, our path to happiness becomes real. The fraudster performs two tasks simultaneously, he or she encourages trust by playing on our unconscious biases while simultaneously discouraging our reliance on our reflective, logical thought processes.  Those who revert to logical reflection see the fraudster’s trick for what it is and reject it out of hand.  Those whose unconscious biases are triggered are blind to the trick and “fall” for it. What follows is a trust in someone that overwhelms our previous trust sources and now becomes a new depository of our trust and with that creation of a new filter that rejects what we previously believed to be true and real as either false or incomplete.

In the case of fraud, the fraudster’s “red pill” or “black box” promises a world of happiness and contentment so long one keeps faith with the new paradigm being advocated by the fraudster. Examining the paradigm carefully would reflect a disappointing lack of trust in the fraudster which would result in being cast out of the group of new believers and forfeiting the benefits being promised as part of the fraudulent scheme.

As the new filter results in evidence to the contrary being rejected as irrelevant or misleading those who propose these other filters are rejected as untrustworthy sources of data. The believers reinforce their common belief to the new paradigm “filter” out data uncomfortable data. The true believers “will power” is tested and the new paradigm defended against those “naysayers” trying to test the fraud victim’s resolve with “false news”.  The so- called echo chamber of social media groups do more than repeat beliefs, they actually reinforce them as like minded “true believers” reproduced the emphasized trustworthiness of the original source by amplifying and enhancing and refining the new paradigm. In such a way, a “community” becomes splintered into a group of competing and rival communities based on competing paradigms. It is only when the trustworthiness of the new paradigm is irrefutably demonstrated (usually by the victims having run out of money without any happy result) that the scales fall from the fraud victims’ eyes the paradigm failed for them and they are ready to trust other sources of information as trustworthy by engaging in conscious reflection on irrefutable data. Usually, the victims ask themselves how they could have been so stupid or greedy, when they should ask themselves what unconscious biases made them so susceptible to the “snake oil” being sold to them. It is only when the fraud victim “comes to” and engages their logical brain and they come to the realization of having been duped that the limitation period for them to sue should begin to run.  Before that the unconscious mind has control of the “true believer” in a form of stupor akin to a hypnotic trance that prevents the victim from acting rationally.

 

Exemplar: Professional Bias

“The study of law is something unfamiliar to you… unlike any other schooling you’ve had before… I trained your minds. You come in here with a skull of a mush; you leave thinking like a lawyer.” [2]

Athletes develop their “twitch” muscles to improve their quickness or reflexes.  We do the same mentally with various educational systems, training and experiences that allow us to “intuitively” know the right answer without going through the long, laborious rational analysis that a novice would require.  This requires us to build a mental framework or “paradigm” that provides shortcuts to the right answer.   The first stage in this process is to add someone we trust for the right answer— the instructor. The instructor provides you with a new way of looking at problems, you either trust the instructor and adopt his or her worldview, or you fail the course. Paradigm change or a change in one’s world view results in the change in the person or people you trust, at first to expand that group and eventually substitute the new group for the past one.

In the movie the “Paper Chase”, one student, Brooks, had a photographic memory so he could remember all of the “facts” of a particular case, but this was useless to him as a prospective lawyer because of his inability to adapt the filter of the law proposed by this law professor that says which “facts” are a) legally admissible, b) legally relevant and material, and c) legally dispositive. Without the ability to absorb these new filters, whether consciously or through osmosis, Brooks failed out of law school. The main character, Hart, on the other hand works hard to learn these legal filters only to reject them at the end of the movie because of the delayed realization of the distasteful person it caused him to become.  The point is that adoption of a professional worldview is critical to professional success, and that worldview comes with conscious codes of conducts and unconscious biases.  So, for example, lawyers are trained to blind themselves to the flaws of their clients in order to represent them, which often results in lawyers becoming the dupes for their clients’ illegal enterprises.  Police officers’ unconscious biases can oft en cause them to blindly “rush to judgment” about the guilt of a particular suspect.  It is therefore important to understand that fraud victims who have changed their paradigm because they accepted a fraudster as their instructor, who taught them a false paradigm that  that led them become victims are no different from the rest of us.  Secondly, until they regain a more sensible footing on whom they trust to form their world view, they are helpless to see the fraud for what it is.

Thomas Kuhn’s, The Structure of Scientific Resolutions, illustrates the “stickiness” and resilience of paradigms in the contest of the world of science. Scientists historically rejected new paradigms that suggested the sun as the centre of the solar system rather than replacing the paradigm that the earth was the centre of the solar system by discounting evidence to the contrary as unreliable or misleading. Until the existing paradigm, 1) is faced with overwhelming contrary evidence and 2) there’s a new paradigm that “fits the existing and new evidence better than the old one”, old filters will persist. Without a new paradigm, the brain is left with no choice to use the old filters. Only methodologies are used in the in the absence of new methods.

Consider all the biases we know of —are they not conservative of the present way of thinking? Confirmation bias filters out evidence that does not support what we already believe. Implicit bias, or stereotyping, sees new evidence through the existing patterns of behaviour that we are familiar with. Expert bias, or the Einstein effect, means that experts will use old tools to solve new problems no matter how unsatisfactory instead of simply developing new tools because of the power of the use existing paradigm.

Consider the following hypothetical: I have three water jugs, 3, 21, and 127 litres of water in size. I can fill and empty the water jugs as many times as I want but I must get exactly 100 litres. Solution: fill the one 127 litre jug, pour 21 litres into the second jug, and then pour the remaining water into the 3-litre jug twice. Result: 100 litres (127-100-3-3).

Now make it the hypothetical of 3, 23, and 49 litre jugs – how do we get exactly 20 litres? Those who are familiar with the first solution normally would do 49 – 23 – 3 – 3 to get 20 litres. Those unfamiliar with it simply fill the 23-litre jug and pour 3 litres out of the second jug for the more elegant solution 23 -3 = 20. Paradigms can block the blindingly obvious. And so, to what fraudsters their paradigms (stories) they create. As a result, those who have bought into those fraudsters paradigms will do the same mental gymnastics as those calculating the second jug problem rather than get to the blindingly obvious solution.

As one author noted:

“We may believe that we are thinking in an open-minded way completely unaware that are brain is selectively drawing attention away from aspects of our environment that could not inspire new thoughts. Any data that does not fit the solution, we are already clinging to is ignored or discarded.” [3]

So, what causes radical paradigm shifts? It is often a mental reflex of one’s unconscious that says “I really love this guy” or “I really love this idea” that causes fraud victims to fall down the rabbit hole of a “reality distortion field” created or adopted by the fraudster for nefarious purposes. That translates into dropping existing or traditional way of thinking about the world in the face of a revolutionary new one that promises great hope of alleviating present discontent.   Once down the rabbit hole all of our conservative biases confirm the “new reality” in the face of contradictory evidence.  The hardest thing for any person to do is admit they were wrong.  Instead, the logical, analytical mind remains in suspended animation until the fraud victim is jarred out of their delusional state by some dramatic event.

 In the face of this it is the job of the fraud fighter to show the fraud victims that (a) they are a trustworthy source, and (b) they have fallen victim of an trustworthy source so the victim can be deprogrammed by an intervention that shows the victim a way out of their present predicament beyond simply investing more money in a fraudulent scheme. Without that the fraud victim will simply say that this may be the world that you live in, but they choose not to live in it. Until their rational self takes over, they remain  under a spell that makes the idea of suing the fraudster unthinkable.

 

 

 

[1] Nin, Anais. “Seduction of the Minotaur” (1961)

[2] Professor Kingsfield. “The Paper Chase”.

[3] Bilakc, “Why good thoughts block better ones.” Scientific American, Pg 13 (Fall 2020).

What’s a Body to Do?

by David Debenham

In many cases those facing litigation or disciplinary proceedings are required to make some form of disclosure.  What if they choose not to do so, even if it means facing a fine or jail time?   One answer is to appoint an investigative receiver.  In Boutin v. Boutin, the husband refused to make the appropriate financial disclosure to his wife during the course of family law proceedings.   He was held in contempt and an investigative receiver was appointed to investigate his financial affairs. 

The court appointed receiver is an officer of the court. The Receiver does not, and cannot act, as the agent of either party. The Receiver is in a fiduciary capacity to all interested parties. As such, the Receiver and the terms of the Receiver’s appointment must maintain the court’s neutral and impartial position in the litigation as well as that of the Receiver. [58]  While Receivers commonly take control of a party’s specified property, Receivers can also be appointed to investigate personal or business affairs or to investigate certain transactions to protect a party’s interest pending trial.  The idea of appointing a receiver or monitor with investigative powers — and sometimes, with only those powers — has emerged in recent years. The appointment of a Receiver is an extraordinary and intrusive remedy.  A Receiver should be appointed only after a careful balancing of the need for such an order and the effect of such an order on all parties and others who may be affected by the order.  

The court has broad powers to impose terms as a penalty where a person is found in contempt. In addition, the court has jurisdiction to make an appropriate order under its inherent jurisdiction to control its own process and maintain the integrity of its own process.  In this case the foundation for the finding of  contempt was anchored in Mr. Boutin’s failure to make complete and accurate financial disclosure.  A penalty of appointing a non-possessory Investigative Receiver with all the powers and rights that Mr. Boutin has, including his rights as owner, shareholder, director, officer, tax payer, debtor, and creditor, to seek, request, and obtain possession of all relevant financial documentation and information relating to the financial issues in this case for the purpose of preparing a report to this court regarding Mr. Boutin’s assets, properties, financial transactions, was appropriate and necessary in the circumstances of this case (the “Investigative Receiver”).  This will, in essence, permit the Investigative Receiver to put before the court what Mr. Boutin could have done, should have done, but failed to do.  This was one of those situations where the appointment of a receiver to investigate the affairs of a debtor or to review certain transactions — including even, in proper circumstances, the affairs of and transactions concerning related non-parties – was a  a proper exercise of the court’s “just and convenient” authority under s. 101 of the Courts of Justice Act.  It was also a fair penalty as a term of sentencing for contempt.

Most administrative tribunals have no contempt powers.  These are reserved for the courts.  In Ontario, s. 13(2) of the Statutory Powers Procedure Act contemplates proceedings for contempt of a tribunal order be brought in the Divisional Court.  If the Tribunal in question does not have authority to appoint an investigative receiver in order to enforce a duty to cooperate, it can go to the Divisional Court and ask for that remedy if it can satisfy that court that the member is contempt of a tribunal order to cooperate with a regulator investigating allegations of professional misconduct. 

Trusts and Tracing

by David Debenham

A “trust” is a formal arrangement in which the donor or “settlor” of the trust places certain assets or rights he owns into a “trust” that is to be managed by the “trustee” for the benefit of trust beneficiaries, also called cestui qui trust.   Once transferred into trust by a trust deed, the settlor of the trust no longer has an interest in the trust assets he transferred, and the “legal” title in the asset is owned by the trustee and the “equitable title” is owned by the trust beneficiaries.  As far as outsiders to the trust are concerned, the trustee has the full right to deal with the trust assets as if the trustee owned the entire interest in them.  However, as between the trustee and the trust beneficiaries, the trustee must strictly observe the terms of the trust deed, and the trust beneficiaries have the right to sue the trustee for breaching his trust obligations to them. 

Where a fraudster has misappropriated funds, the courts often impose a “constructive” trust to protect the victims’ rights, such that they have all the rights of a trust beneficiary.

That the trust beneficiaries have a personal claim against their trustee for breach of trust is plain enough. What about if the trustee is insolvent such that a personal claim would be futile?  What about if the trustee conveyed the trust property to third parties in breach of trust, and the beneficiaries want the trust property put back into trust?  The case law speaks in terms of “proprietary” , or “in rem”, rights to recover the trust assets, and “personal rights” to sue individuals for participating in a breach of trust.

The proprietary claim is limited to those persons who have title to, or in possession of, the trust property. The trust beneficiary can recover the trust property, or property purchased with trust property, into whomever owns it, so long as tracing can make the connection to the present holder of the property. The fact that the holder of the property may be insolvent is irrelevant.   If title in the trust property passed because of a valid transaction with the trustee (even if it was in breach of the trust deed, unbeknownst to the purchaser), then the tracing is an equitable one, meaning that a court will not allow the proprietary claim to succeed against a bona fide purchaser for value without notice of the wrongdoing.[1] A creditor is unknowingly paid with trust property, the creditor is considered a bona fide purchaser for value without notice.[2] Being a proprietary remedy, if the bona fide purchaser for value without notice then “gifts” the trust property or its substitute to someone (called a “volunteer” in legal parlance), then the trust beneficiary can claim the property back from the volunteer so long as the volunteer owns it[3].

If the proprietary remedy is not available, the trust beneficiaries can assert personal remedies against these who (1) knowingly assisted in the breach of trust, (2) were, at one time, in knowing receipt of trust property, or (3) volunteers.  A personal remedy entitles the holder of a personal, possessory or proprietary right to damages for interference with his rights.

Change of Position Defence and Ponzi Schemes

What happens if the fraudster gives the proceeds of his fraud to his wife, who is unaware of his fraud, and she spends it on a vacation she would never have taken but for the receipt of this windfall?  A court find it inequitable for the victim of fraud to recover the money she received, because she is being forced to pay for a vacation she would never have paid for out of her own money.  This is called the “change of position” defence.

Where a trust beneficiary is engaged in a proprietary tracing, English courts have held that the change of position defence cannot be used.[4]  In Canada it is not so clear. The authorities are clear that the defence of change of position requires more than the mere spending of the monies received:[5]  Thus spending on everyday expenses would not suffice as these are not liabilities incurred specifically as a result of the receipt of the monies in question.  The volunteer must provide a full account of any expenditure alleged to be attributed to the windfall, and there must be (1) an exceptional expenditure (2) caused by the payment in question, or incurred in reliance of its receipt, (3) and spent in good faith. The defendant is required to show that his position “has so changed that it would be inequitable in all the circumstances to require him to make restitution,”[6]   It is hard to imagine a situation in which the equities will favor a Net Positive investor keeping their windfall in the face of the claim of a trustee-in-bankruptcy, receiver or other person acting for Net Negative investors in the context of a claw back claim. [7]  It would appear that the operating maxim is “equality is equity” and the courts will require cogent evidence to suggest any change of position would result in an oppressive inequity to the Net Positive Investor.[8]

[1] Re Diplock [1948] ChD 465;[1948] 2 All ER 318; Yorkshire Trust Co v. Empire Acceptance Co. [1983] CanLii 357, at para 10

[2] Williams v. Leonard & Sons [1896] 26 S.C.R. 406, at 410

[3] Royal Bank v. Safeco Ins Co. [1988] CanLii 3453 at para 48 (Alta, Master)

[4] Taylor v. Blakelock (1886) 32 ChD 560, atr 568

[5] International Longshore & Warehouse Union Local 502 v. Ford, 2016 BCCA 226 at para 47-9

[6] “Lipkin Gorman (a firm) v. Karpnale Ltd., [1991] 2 AC. 548 (UKHL) at p. 534(e).

[7] Samji (Trustee of) v. Whitmore [2107] BCSC 1917 at para 124; Den Haag Capital, LLC v. Correia [2010] ONSC 5339, at para 70; MGN Ltdf [2009} All ER 99, at para 33

[8] Re Titan Investments Ltd [2005] ABQB 637 at para 47; Principal Group v. Anderson (1997) AR 169, at para 47; RE Principal Group Ltd [1997] 200 A.R. 169, at para 11,`14, 16 (C.A>)

A Case of Interest?

By David Debenham

In the normal case, the plaintiff’s damages are determined as of the date of breach of contract or breach of duty and pre-judgment interest is used to compensate the plaintiff for time value of money between the date of breach and the date of trial.  [1]

Now consider the case where a fraudster has underpaid for an item due to his deceit.  The victim is entitled to damages, plus interest on the money he should have been paid if the misrepresentations had not taken place less what was actually paid.  However, should there be pre-judgment interest credited to the fraudster for the money that was actually paid as well?  In Tuke v, Hood[2] the English Court of Appeal considered the suggestion that credit should be given for the time value of the money, measured as notional interest, to be fundamentally misconceived, contrary to principle, and bad policy.  “the upshot of requiring such credit to be given would be to reduce the recoverable damages the longer the fraud went undetected, and thus to allow a dishonest defendant to benefit from the concealment of his fraud or dishonest assistance in a breach of fiduciary duty.  It would also be contrary to the fundamental aim of fully compensating a victim of fraud for all the loss directly flowing from the fraudulent transaction, including consequential loss.  Far from being overcompensated, [the victim] would not be fully compensated if he were to be required to give any credit for the time value of the money he received.”

Let us see why this must be so.  Let us consider the case where I own 2 cars, one worth $5,000 and the other $10,000.  The fraudster persuades me to sell the second car for $2,000 for the second car by telling me that the car is not road worthy when he knows it is.  What is my loss?  Why, it is $8,000 of course.  If the first car appreciates by $5,000 it does not mitigate my loss related to the second.  So too the $2,000 I received is not a benefit that offsets the $8,000 I actually lost: It simply reduces the amount of my loss.  If the aim is to put the injured party in the position that he would have been in if the fraud had not occurred, that aim is generally achieved by ensuring he gets back the value, in money terms, of what he parted with.  So, for example, if he is fraudulently induced to sell an asset worth $10,000 for $2000, he is compensated by an award of $8,000 because, by keeping the $2,000, he has received $10,000 in total.  If he also had to give credit for interest notionally (or even actually) earned on the $2,000 he would be under-compensated, because he would receive less than the full $10,000 that the asset was worth at the time of sale.  The notional interest to be earned in future is not part of the value he receives for the asset from the purchaser, nor is it properly described as a benefit conferred on him by the sale transaction.

The longer the delay in the award of the $8,000, the greater the amount of that under-compensation would be.  The difference would not be eliminated by an award of interest on the $8,000 because that reflects the loss of use of that sum from the date on which it should have been paid to the injured party.  It is not difficult to envisage circumstances in which the supposed “benefit” might wipe out the loss altogether.  There is no difficulty in concluding, therefore, that a claim for credit for the “time value” of the money received as consideration for the sale should not be allowed as part of the basic award of damages.

Now suppose that the asset sold at an undervalue was bought as an investment, and by the time the balance of the $10,000 (i.e.  the $8,000) is awarded, the asset is worth $25,000 and the injured party proves that he would have kept it but for the misrepresentation that it was not road worthy.  The consequential loss is $15,000, which is the difference between the $25,000 (i.e.  what the asset would now be worth if he had not sold it to the fraudster) and the $10,000, which is what it was worth when he did sell it to the fraudster.  If the victim receives the $15,000 on top of the £6,000 basic damages, he is put in the position in which he would have been but for the fraud (i.e.  when the $2,000 paid to him for the asset is taken into account, he has received in total $25,000).  The fact the claimant gets the base value of the asset at the time of sale restored to him by a combination of the $2,000 he retained plus the $8,000 damages, has nothing to do with the further $15,000, which measures the lost capital appreciation of the asset between the date of the sale and the value at the time when it would otherwise have been sold (or value at trial).  There is no logical basis for suggesting that the claimant would be over-compensated if he receives that additional $15,000 without credit being given for the “time value” of the $2,000, because that $2,000 has already been subsumed in the valuation of $10,000 which forms the starting point for the claim for lost capital appreciation.  If there is no principled reason for requiring interest on the $2,000 to be offset against the $10,000 valuation when that is calculated, there is even less justification for requiring it to be offset against the $15,000.  Any such offsetting will result in the injured party receiving less than the $25,000 which puts him in the position he would have been in but for the fraud.

As a matter of principle, the question to be asked is whether the claimant is unjustly enriched by keeping a benefit rather that giving a credit to the wrongdoer.  Let us say that victim of the fraud goes to a casino with the $2,000 and doubles his money.  Instead of interest, should the fraudster be credited with $4,000 instead?  The answer must be “no”, just as if the first car was sold to a third party for twice what it was worth.  There simply is no unjust enrichment (deprivation of the fraudster) associated with the remaining $2,000.  So too if the claimant had lost the $2,000 at the Casino, he could not add that loss to his claim against the fraudster. 

The court confirmed that all that the innocent party is required to do, in order to reflect the position as it would have been if the deceit had not occurred, in a case where the measure of damages is reflected by comparing the value of what was sold with the value of what was received, is to give credit for the money (or money’s worth) he received under the transaction itself.  This does no injustice to the fraudster, who only pays interest on the difference between the market value of the item sold and what the innocent party received for it.  No further credit has to be given for a notional amount of interest on that money even if there is a claim for consequential losses in which the starting point for the assessment is the market value of the item at the date of the sale.  To do otherwise, encourages the fraudster to delay the proceedings in an effort to increase the value of the credit “earned” as a result of the time value of money. 

[1] Tuke v Hood [2022] EWCA Civ 23

[2] Kinbauri Gold Corp.  v.  Iamgold International African Mining Gold Corp., 2004 CanLII 36051 (ON CA)

Expert Evidence and Testimony

By David Debenham

“If only you could see what I have seen with your eyes” (Blade Runner, 1982)

The role of the optometrist is to prescribe spectacles or contact lenses.  It is to assist the patient in seeing the world more clearly.  So too, expert witnesses should bring their skillset to bear to help a judge to better evaluate the evidence they are seeing.  Too often experts behave like the over-anxious, over-achieving student who shouts out the answer to the class rather than simply explains the steps to be taken by the class to get to the right answer. The expert’s role is to educate the judge by using technical expertise that the court is not privy to, not to supersede the judge or jury as decision maker. 

In Logix Data Products v. The Queen[1] the taxpayer claimed a Scientific Research and Experimental Development tax credit (a “SRED”) in relation to a solar panel it developed to replace shingles on a roof. CRA alleged that the panel did not advance the science by conducting scientific research, and therefore did not qualify for the credit.  The court disallowed the expert’s report on several grounds: (1) it purported to give an opinion on the ultimate issue before the court, being, whether the work done by the taxpayer constituted scientific research for the purposes of the Income Tax Act, rather than merely assisting the court in making that determination, (2) the expert report contains several opinions without setting out the facts and assumptions upon which those opinions are based, (3) the report does not set out the professional literature that supports the basis of his opinion, and was reviewed prior to giving his opinion(4) the report voices the opinion that the taxpayer’s claim meets the requirements of SRED was not an independent evaluation but was one sided advocacy, (5) giving an opinion of the proper interpretation of domestic law is inadmissible, as this is the purview of the judge.  The court noted:

“ An expert opinion may assist the court in evaluating technical evidence…. But, at the end of the day, the expert’s role is limited to providing the court with a set of prescription glasses through which the technical information may be viewed before being analyzed and weighed by the trial judge. Undoubtedly, each opposing expert witness will attempt to ensure that its focal specifications are adopted by the court. However, it is the prerogative of the trial judge to prefer one prescription over another.”[2] 

[1] [2021] TCC 36

[2] Citing RIS-Christie Ltd. v. The Queen 1998 CanLII 8876 (FCA), [1998] F.C.J. No 1890, [1999] 1 CTC 132 (FCA) [RIS-Christie], at para. 12.

Filters, Folklore, Fake News, and Faulty Investigations

By David Debenham

I am myopic and color blind.  My father was hard of hearing.  We all have our perceptional strengths and weaknesses.  Less obvious is our beliefs about people, and the world in which we operate, form a filter through which we perceive the world as we experience it.  Known pejoratively as a “reality distortion field” in which the objective world is filtered through our view of the way the world operates to form the world we experience. Typically, a person’s Weltanschauung would include a person’s philosophic, moral, and religious conclusions about the individual, society, and existence (however tentative) at a particular time in their life used to filtering their life experiences. It is the personal barometer that determines “real” and “fake” news at an individual level.  It determines what is “dependable” data, and how that data is organized into “information”. Another popular word is “paradigm”.  Aa paradigm is a set of assumptions governing how we interact and interpret the world. Every human has a personal paradigm which is influenced by outside forces acting on them and their own experiences and internal beliefs in support of the paradigm. Cognitive dissonance is when one’s experience conflicts with our belief system, causing us to either (i) reject the experience as false data, (ii) or amend our belief system to account for the phenomenon. Usually rejecting the experience as false data is the easier path, and thus the one most taken. However, when the experiences that are inconsistent with the paradigm pile up to the point that they can no longer be ignored, the individual is forced to undergo a “paradigm shift’ in which they are forced to amend their old worldview to account for these experiences. The individual often says that the “scales impeding their vision of reality fell from their eyes” and they could see the world truly for what it was for the first time.

As an investigator, we have to be wary of the witnesses’ worldviews and our own.  Witnesses who are deceived by fraudsters are often lured into a distorted worldview, but one in which they believe they see the world for what it truly is for the first time.  Eventually the fraudster’s worldview must give way when the number of intensity of experiences convinces the mark that it can no longer be true, and the mark realizes that they have “gone down the rabbit hole” to share a false reality with the fraudster.  Thus, a fraud victim often two paradigm changes, the first being the worldview of the fraudster and their “black box” of miracles in which they cannot lose, and the second when they have so uncontrovertibly lost, that they now see the fraud for what it was. Thus, a fraud victim’s account of what is happening, or what has happened, varies radically depending on which paradigm they believe in and the time of your interview. 

For investigators, the danger is in forming a worldview that leads us to conclude what type of person is most likely to have committed this offence, and then filtering the evidence based on this view.  As they say in “Casablanca”, we “round up the usual suspects”. For fraud cases this is extremely dangerous because the fraudster’s ability to be liked, trusted, respected is their stock and trade, as it makes them the least likely to be suspected by victim and investigator alike. Just as fraudsters prey upon people of their own sociological group because trust is presumptively the default (“affinity fraud”), so too fraudsters attempt to prey on our similar interests (sports, cars, etc) in an effort to win our trust. We have to ask ourselves, (1) am I focusing on a suspect because I dislike them and therefore don’t trust them? (2) am I minimizing the involvement of a potential suspect because they don’t seem the type? (3) if I gave all the evidence to another investigator with a background different from my own, would they weigh it in the same way as I have?

Let us take some examples from history.

I don’t believe the traditional account of the Battle of Gettyburg during the Civil War.  The traditional view is (1) Robert E. Lee was a brilliant battlefield tactician at the height of his powers during the Civil War, (2) during the third day of the Battle of Gettysburg he simply ordered the main line of his infantry to charge the cannons in what has been known as Pickett’s Charge, where they were mowed down, losing the battle and ultimately the war.  Now how do historians deal with this dissonance?  The traditional views are (1) hubris, Lee believed and his Army was invincible after a string of victories or (2) ill health, a heart attack earlier in the campaign had affected his judgment. These seem like poor attempts at reconciling the folklore of the battle, as a heart attack does not affect one’s faculties after one has recovered, and I doubt that a general on the most important day of his life abandoned his skills as a tactician.

What do I believe? At the Battle of Brandy Station shortly before Gettyburg Stuart’s cavalry engaged the Union cavalry in a fierce battle that resulted in a draw.  That battle revealed the increasing competence of the Union cavalry to the point that they were a match for Stuart’s Invincibles.   That, however, was unknown to Lee when Stuart rejoined Lee on the second day of the Battle of Gettyberg.   I believe Lee instructed Stuart to ride his cavalry around the union line and attack it from the rear, on the road between the Union troops and their retreat route to Washington. When they reached that point, Stuart would fire 4 cannon shots and charge the union position, with Pickett’s forces then charging the main line, and Longstreet from the other side of the Union line. The three pointed pincer attack would see the Union forces surrounded, leaving them no choice but to surrender. Unfortunately for Lee, Longstreet refused to attack and Stuart was repelled by Union General Custer after he had fired the 4 cannon shots, leaving only Pickett’s Charge proceeding as planned. 

What is interesting is not whether I am right or wrong, but the ire and fury visited upon me by my university Professors for attacking the “settled” fork lore of the battle.  Rather than entertaining a new theory that would keep the “settled” view of Lee intact, and explaining why Pickett’s Charge proceeded as it did, the new theory challenged the deeply ensconced views of the Professors at the hands of an “amateur” like myself, and was not be entertained no matter how much “proof” I provided. 

So too, my explanation of the Battle of Stalingrad during World War 2.  I explained it as the tactical equivalent of General Grant’s siege of Vicksberg to cut off Mississippi River, with the Volga River being used by the Soviets in the same manner as the Confederates.   I explained the difference in result being solely to a Gernan intelligence failure that had allowed the Soviet Union to ship the bulk of its forces in Siberia to the Volga undetected at the same time as it was shipping the bulk of its manufacturing plants in the opposite direction.  The result was to double the Soviet forces opposite Stalingrad, and then encircle Stalingrad before the Germans could believe what was happening.   To go from the cusp of ultimate victory to Germany’s largest defeat in history was too much to fathom.   So too, for Professors to believe that Stalingrad was anything other than a military, rather than intelligence failure, and my explanation was once again rebuked.  While university purports to be the place to explore new ideas, my experience was the opposite.   So too may be the case when you are doing an investigation that is led by seasoned professionals with deeply ensconced beliefs. 

All of this may tempt you into believing that there is a great more individual or social psychology in play during the investigative process that you might have previously believed.  Please adjust your worldview accordingly.

Is There a Need for an Expert to Prove Damages?

By David Debenham

Documents do not speak for themselves. A document tendered by itself as here is hearsay, and hearsay is presumptively inadmissible. Unless there is a “hearsay” exception that admits them documents prove nothing in themselves[1].  They need a live witness to testify as to the truth of the documents’ contents to prove their contents. 

A primary source is a document written by someone who was a witness to the events described in the document.  By contrast, a secondary document is written by someone who was not a witness to the events described in the document.[2]  Thus a source document is proven by someone with first hand knowledge of its contents, while a secondary document is generally proven by someone who collated source documents already admitted into evidence. Otherwise it is ”double hearsay”, an unsworn document based on other unsworn documents.

In accounting we start with the bookkeeper recording (journalizing) transactions in a daily record, using double entry methodology.  From there entries are transferred (posted) into ledgers, which are secondary documents that provide a summary of similar transactions during the accounting period, such as the ledger of purchases account. From the ledger, the various items are posted as specific entries in the financial statements. It follows that to prove financial statements in court that you need to prove the ledger and the journal by one or more witnesses unless an exception to the hearsay rule applies.

What about an expert witness?  The role of the expert witness is to assist the court through the provision of an independent and unbiased opinion about matters coming within the expertise of the witness and beyond the ken of the ordinary person.  The expert gives an opinion based on what they are told or read before trial, which is hearsay. The expert disclosed this second-hand evidence (hearsay) to show the information on which their expert opinion is based, not as evidence going to the existence of the facts on which the opinion is based.  In other words, the hearsay upon which the expert bases his or her opinion must be proven by other witnesses for the expert’s opinion to have any weight at all. 

There is no rule governing the necessity of expert evidence to prove damages.  Where actuarial calculations are necessary, for example, there is no requirement that they be introduced into court by an expert.  There is no question that expert actuarial evidence is valuable in cases involving complex calculations, such as claims for future lost income or medical care which must be discounted for various contingencies.  Nonetheless, the jurisprudence suggests that there is no requirement per se that a plaintiff obtain an actuarial assessment in every such case.  Indeed, one could easily conceive of a situation in which the plaintiff did not have the resources to retain an expert, but had other persuasive documentary or testimonial evidence at their disposal.  

Although it is customary that expert evidence is called there is no legal requirement to do so.  I would adopt the position expressed by Ferguson J. in Buksa v. Brunskill, 

The usual instruction to the jury is to suggest that if it finds that there will be a future loss of income it should determine the average annual loss and then consider the present value and then consider the various contingencies.  These calculations are customarily explained by an expert witness but in my view the jury must make its own calculations whether or not there is expert evidence.[3]

One case has suggested to some that expert evidence is necessary to collate and present damages to a judge or jury. n Fermar Paving Limited v. 567723 Ontario Ltd. o/a Winter’s Pit[4] the Plaintiff 2010, Fermar entered into a construction contract with the Ontario Ministry of Transportation (“MTO”) to provide road construction on a portion of Highway 26 in Simcoe County (the “Project”). To complete the Project, Fermar required two types of aggregate: granular “A” and granular “B”. The aggregate was required to meet the Ministry’s specifications.  The Defendant operating as Winter’s Pit (“Winter’s Pit”), approached Fermar to discuss Fermar’s needs for aggregate. After some discussion, Fermar sent a document (“the Document”) to Winter’s Pit setting out the proposed terms of an agreement. Winter’s Pit requested a higher price for the granular A and granular B but asked for no other changes. The Document was signed by both parties on September 3, 2010.[5]  A few days later, through its solicitor, Winter’s Pit said that it could not provide as much aggregate as it was required to in accordance with the signed Document. There were discussions over several months, but no new signed agreement was reached. In November 2010, Fermar was told to leave the site or Winter’s Pit would commence proceedings for trespass. Fermar brought an action for breach of contract by repudiation of the agreement and sought damages to compensate Fermar for the cost of having to source the aggregate from elsewhere. a) The Document was an enforceable agreement; and (b) c) Winter’s Pit repudiated the terms of the agreement such that it was responsible to pay the respondent damages in the amount of $816,436.37. The Ontario Court of Appeal found that the trial judge erred in her determination of damages, and referred the issue of damages back to the trial division for re-trial. 

The Court of Appeal agreed that Fermar had a right to source its aggregate elsewhere and sued Winter’s Pit for breach of contract. The trial judge correctly held that as a result of Winter’s Pit’s repudiation of the agreement, Fermar was entitled to be restored to the position that it would have been in had Winter’s Pit met its obligation to supply all necessary aggregate. Fermar was required to find other sources of aggregate and incurred costs for equipment rental, cost of the aggregate, transportation, labour and other valid expenses.  The trial judge awarded Fermar damages in the amount of $816,436.37, which she found to be the difference between what Fermar would have paid to Winter’s Pit and the amount it did pay to the third-party suppliers for the aggregate.  In so doing, the trial judge relied on only two documents. The first was a document entitled, “Cost Summary for Alternate Sourcing of Granular “A” and Granular “B” by Supplier”, which purported to summarize approximately 1000 pages of invoices and other documents. The second was a document entitled, “Production Cost Analysis”, which compared the costs that Fermar says it would have paid to Winter’s Pit and the costs it paid to third parties for the aggregate. These documents were adduced at trial through E, Fermar’s project manager.

The trial judge noted that E was responsible for planning all assigned projects, preparing contracts, progress certificates, payments and completion of the projects. He oversaw the completion of this project and obtained alternate sources of aggregate. E testified that Fermar obtained the requisite Granular A from Brock Pit and Granular B, as well as some additional Granular A, from Walker’s Pit.  E testified that he had to approve all invoices used in the analysis when they were originally received and did not review them again for purposes of preparing the summary. 

E prepared the cost analysis using the costs that were prepared, analysed and collated by the Accounting Department of Fermar. He stated that he did not do an independent analysis himself, as the information came from a reliable source, namely Fermar’s Accounting Department. 

It was the position of the defendant that these costs were not valid and should be rejected, given that they were not prepared by an accountant or an expert in the area, but rather by the Project Manager of Fermar, who was not an accountant. Further, it was the position of the defendant that the evidence given was opinion evidence and he had not been qualified as an expert. Finally, the defendant submits that the evidence was not “business record evidence” and no backup material was provided in support of the summaries. This was argued at the time of trial and it was the position of the plaintiff, and acknowledged by the defendant that approximately 1000 backup documents had been provided by the plaintiff as regards the cost summary but not produced at trial.

The trial judge found that the evidence adduced by the plaintiff pursuant to the testimony of E was not “opinion evidence”. He presented evidence in the form of a cost summary based on Fermar accounting information, including the invoices he had previously reviewed and approved for payment, on the basis of which approval, said invoices had been paid and that he had compiled with the assistance of the accounting department. “This was substantive evidence” according to the trial judge.  Further, the trial judge found that “while it would have been useful to have the supporting documentation, I am not satisfied that this was necessary in the circumstances of this case. I find Mr. E’s evidence to be credible. He testified in a straightforward clear, uncontradicted manner.”

The court of appeal found that it was not possible on this record to calculate the amount of the appellant’s damages because the source documents were not part of the trial record, nor was there agreement on the quantum of damages at trial. Because it is not possible for this court to make the factual findings necessary to determine these issues on the existing trial record, the Court of Appeal returned these issues to a judge of the Superior Court to quantify the damages.

So what does all of this mean?

  1. Expert opinions may be introduced at trial to give an opinion as to damages if the damages calculation is complex, and involves factors upon which the expert has expertise.  On the other hand, it is not necessarily the case that an expert opinion is required.
  2. An accountant or other professional may be collating information from source documents and introducing them in court.  That does not make the witness an “expert”, such that they must meet the qualifications of an expert as possessing expertise beyond the scope of the ordinary citizen.  Where the case involves the calculations that are relatively simple mathematics, no expert is required,[5] and the witness should not be qualified as an expert to testify regarding the calculations.
  3. Collated secondary/summary documents remain hearsay, such that the underlying source documents need to be produced, and proven at trial, before the secondary 

[1] Cambie Surgeries Corporation v British Columbia (Attorney General), 2017 BCSC 861 (CanLII), 

[2] Chippewas v Attorney General (Canada), 2016 ONSC 672 (CanLII),para 4

[3] [1999] O.J. No. 3401 (S.C.J.) at para. 5:

[4]  2020 ONCA 173 (CanLII), varying 2018 ONSC 5485.

[5] Graff v. Bennett, 1995 CanLII 4000 (SK CA)

Fraud Psychology 201

By David Debenham

When we discuss fraud psychology we start and end with the fraudster, and we usually focus of Cressey’s Triangle and its variants that include not only rationalization, pressure, and opportunity, but capability as well.  As an accountant and a lawyer, I can usually tell who the fraudster is by the means they use to perpetrate their fraud(s). Professionals are “comfortable” with abusing the types of techniques they use in everyday practice, such that a lawyer commits certain types of frauds, and accountants commit other types. When I was confronted with an exception to this rule recently, I said I bet the lawyer was aided and abetted by his firm’s bookkeeper, and it turned out he was.

This type of fraudster finds an opportunity in their everyday life, and is pressured by circumstance to step across (or erase) the ethical line for the greater good of the family or community that depends on them.  Once the pressure is removed, the fraudulent behavior continues because the ethical line is hard to retreat to.  

But frauds of opportunity are only part of the puzzle.  Many fraudsters have a long history of latent misconduct that only becomes apparent when their frauds are too large to hide or ignore.   They aren’t the “one-off opportunist” but are persons who made the wrong choice at a certain fork in the ethical road, and simply cannot find their way back without being caught and punished. 

Then we consider the “underachiever”.  There is a fraudster who has been told from childhood that they are gifted, and yet they go through school with grades that bely this assessment, so they cheat.  They lie and cheat at school, sports, games as a way of ensuring other assess them as they have self-assessed as superior.  The rules don’t allow them to show what they can really do, so avoiding the rules proves their ability.  They are often assessed as narcissists, psychopaths and the like because they obsess about their own image and ignore or the minimize the consequences to others.

There is also the grifter, who commits fraud in the same way that others steal or sell drugs for a living.  Fraud is simply a way to earn a living. 

But wait, this is only part of the picture.

What about the psychology of the “victim”?  Is there an employer that invites fraud by its employees by encouraging management fraud?  By treating those who join the business as family, without any vetting of the employee?   Affinity frauds are the marriage of fraudster with a certain sub-group of society?  Do fraudsters find their victims based on particular characters of the victims? If we identify a fraudster, can we identify which groups he or she might have victimized by the groups he has connected with in the past?

And what about facilitators?  Is there a certain psychology that identify certain persons as shills?  The fraudster rarely can perpetrate a fraud without help.  Some people won’t initiate a fraud, but will facilitate others in doing so, such as secretaries, personal assistants, junior colleagues.  Is it the charisma of the fraudster?  Is it that the fraudster financially rewards them? Is it that the fraudster promotes them above their abilities or otherwise charms with praise?  How do we identify the facilitators and distinguish them from “dupes”.

Dupes, or marks, are the ideal victim of fraud.  Not only are they susceptible to the fraudster’s message, but they are also likely to become “true believers” and lure others into the scheme (usually friends and family) based on their false believe in the fraudster.  Unlike the rank-and-file victim, they are the most likely to become evangelical in their belief in a fraudulent venture such that they lose everything and yet are the last to realize that they have been defrauded until, at last, the evidence becomes so overwhelming that the scales finally fall from their eyes and the fraud is revealed to them. 

Is there a type of person that makes an ideal dupe?  Do fraudsters intuitively identify them because of certain characteristics? Are there people uniquely vulnerable to fraud schemes?  Is there way to treat them to escape from such schemes and reveal the fraud before the scheme itself has run its course and victimized everyone?

As forensic investigators we need to understand everyone in the fraud food chain properly not only to allocate blame and compensation properly, but to move our practices from reactive investigations to proactive auditors.