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Business Law Refresher: Useful Legal Definitions Everyone Should Kno

Companies / Business Feb 14, 2009 - 09:55 AM GMT

By: David_Haas

Companies It's time taxpayers begin thinking less in terms of excuses, justifications, rationalizations, and scapegoating for the current financial mess and more in terms of investigations, indictments, arrests, detentions, prosecutions, penalties, restitutions, “clawbacks”, and punitive-damages. Here in the U.S., RICO LAW comes quickly to mind.

Defense Team Struggles With Mounting Evidence

Defense Team Struggles With Mounting Evidence

It's way past the time to end the ineffectual scolding, finger-wagging, and hand-slapping. There is no hiding the fact that many, many white-collar crimes may have been committed - with still more possibly being committed now - and the sloppy trails of evidence are still steaming-warm and easily followed.

Cynically, I have a strong suspicion that few of these trails are being explored or pursued vigorously simply because they may lead to some rather - shall I say - “uncomfortably high-profile” offices and result in awkward explanations of conspiracies or cronyism, not to mention some “interesting” trails of both money and favor.


What's been missing throughout the bubble-decades is both TRANSPARENCY AND ACCOUNTABILITY backed by a broad, public understanding of business law. This must all change.

In that spirit, I've included below the legal definitions of some very useful terms that we should all become quite adept with and begin “generously peppering” into any conversation we're engaged in about the financial situation and its causes. Nothing as egregious as what we're experiencing could ever have happened without a lot of material breaching, misapplication, and disregard of the multitude of laws written to protect us from just such a thing!

Inquiring minds need to know, why aren't illegal activities being identified, highlighted, and widely reported in ALL THE MEDIA? What's to hide? Why is this whole mess being so carefully - if not strategically - positioned as “merely market forces” that are relentlessly driving the trillions in losses and wealth destruction?

Is it implausible to the blinkered media-poodles that crime, unethical, and unlawful behavior are major contributors, if not the root-cause of the crisis? Or is it just beyond the reach of their editorial chains?

Markets are comprised of the actions of people. Let's start scrutinizing those actions now so we know who's to blame and so that we won't be doomed to repeat these society-damaging institutional and governmental failures ever again.

- David

Let's move on to the legal terms that I believe every educated adult should have a working knowledge of if he/she hopes to protect him/herself in the modern financial world. These terms describe the crimes that financial “sharks” commonly commit. People need to be alert to what these crimes are so they're less likely to be victimized by them.


MUCH MORE USEFUL AND VALUABLE INFORMATION ABOUT ALL ASPECTS OF THE LAW CAN BE FOUND THERE. SPECIAL THANKS GO OUT TO THEM - unless they complain, then I'll probably have to can this post! Also, sorry if their definitions happen to have any “typos” or inaccuracies, but I don't have time to hunt them down or correct them.

If you're reading this, recognize that you've done wrong, and feel a warm trickle - be proactive!
Pick up the phone and contact a lawyer, before one contacts you.

- David

CONFLICT OF INTERESTS : A conflict of interest arises when the considerations of one party is to the detriment of another. For example, a lawyer who represents both parties in a divorce may be required to find fault in one party in order to advance the interests of the other in property division or support matters. When an attorney has a personal financial interest which is adverse to the outcome sought by a client, the attorney has a duty not to represent the client under the Code of Professional Responsibility. Attorneys are required to withdraw from representation when an actual conflict exists. If there is a potential for a conflict of interests, the attorney may be able to maintain representation after making a disclosure about the potential conflict. Conflict of interests also arise in public offices, which occurs when a private gain to the individual officeholder is contrary to the interests of the public.

CONSPIRACY : Conspiracy is a separate offense, by which someone conspires or agrees with someone else to do something which, if actually carried out, would amount to another Federal crime or offense. It is an agreement or a kind of partnership for criminal purposes in which each member becomes the agent or partner of every other member. It is not necessary to prove that the criminal plan actually was accomplished or that the conspirator was involved in all stages of the planning or knew all of the details involved. The main elements that need to be proven are a voluntary agreement to participate and some overt act by one of the conspirators in furtherance of the criminal plan. If a person has an understanding of the unlawful nature of a plan and knowingly and willfully joins in that plan on one occasion, that is sufficient to convict him for conspiracy even though he had not participated before and even though he played only a minor part. A conspiracy may exist when the parties use legal means to accomplish an illegal result, or to use illegal means to achieve something that in itself is lawful.

CONVERSION : Conversion is when someone wrongfully uses property of another for their own purposes or alters or destroys it. In an action for conversion, the taking of the property may be lawful, but the retaining of the property is unlawful. To succeed in the action, the plaintiff must prove that he or she demanded the property returned and the defendant refused to do so.

CRIMINAL FACILITATION : Criminal facilitation generally refers to knowingly assisting another in the commission of a crime. Criminal facilitation is governed by state laws, which vary by state. Local laws should be consulted for specific requirements in your area.

CRIMINAL NEGLIGENCE : Criminal negligence is negligence which requires a greater degree of culpability than the civil standard of negligence. The civil standard of negligence is defined according to a failure to follow the standard of conduct of a reasonable person in the same situation as the defendant. To show criminal negligence, the state must prove beyond a reasonable doubt the mental state involved in criminal negligence. Proof of that mental state requires that the failure to perceive a substantial and unjustifiable risk that a result will occur must be a gross deviation from the standard of a reasonable person. Criminal negligence is conduct which is such a departure from what would be that of an ordinary prudent or careful person in the same circumstance as to be incompatible with a proper regard for human life or an indifference to consequences. Criminal negligence is negligence that is aggravated, culpable or gross.

DUE CARE : Due care refers to the effort made by an ordinarily prudent or reasonable party to avoid harm to another, taking the circumstances into account. It refers to the level of judgment, care, prudence, determination, and activity that a person would reasonably be expected to do under particular circumstances. This standard is applied in a vast variety of contexts, whether the duty may be driving on the road or performing a background check. The precise definition is usually made on a case-by-case basis, judged upon the law and circumstances in each case.

DUE DILIGENCE : Due diligence is a broad sense refers to the level of judgment, care, prudence, determination, and activity that a person would reasonably be expected to do under particular circumstances. In corporate law, due diligence is the process of conducting an intensive investigation of a corporation as one of the first steps in a pending merger or acquisition. In a company acquisition, due diligence would include fully understanding all of the obligations of the company: debts, pending and potential lawsuits, leases, warranties, long-term customer agreements, employment contracts, distribution agreements, compensation arrangements, and so forth.

FRAUD : Fraud is generally defined in the law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading.

FRAUDULENT CONVEYANCE : A fraudulent conveyance is the transfer of property for with the intent of delaying or defrauding a known creditor. If such a fraudulent intent can be proven, the creditor may bring a lawsuit to void the transfer. However, if the transfer was made without knowledge of the claim or before a debt has matured, for other legitimate reasons, and/or in the normal course of business, then the creditor will usually be unable to set aside the conveyance.

FRAUDULENT INDUCEMENT : A successful fraudulent inducement claim requires a claimant to establish that it “reasonably relied” upon promises of future conduct made by another party. However, a court may find it unreasonable for a party to rely on statements or promises, for instance, when not contained within a written agreement, when that agreement contains a merger clause. In such cases, reliance on the oral promises may be found to be unreasonable, and it will not be held that there was reasonable reliance on such representations.

Fraud in the factum occurs by deception causes the other party to misunderstand the nature of the transaction in which he or she is engaging, especially with regard to the contents of a legal document, such as a contract or promissory note. It is the type of fraud that obtains a party's signature to an instrument without knowledge of its true nature or contents.

GROSS NEGLIGENCE : Every person is responsible for injury to the person or property of another, caused by his or her negligence. Gross negligence involves a reckless disregard for the safety of others, and may be the basis for an award of punitive damages, in addition to general and special damages. It typically involves intentional or willful indifference or lack of care. Gross negligence is a failure to use even the slightest degree of care.

INTERSTATE COMMERCE : Interstate commerce refers to the purchase, sale or exchange of commodities, transportation of people, money or goods, and navigation of waters between different states. Interstate commerce is regulated by the federal government as authorized under Article I of the U.S. Constitution. The federal government can also regulate commerce within a state when it may impact interstate movement of goods and services and may strike down state actions which are barriers to such movement. (Think FedEx, UPS, DHL, Airborne, etc. who are commonly used for carrying documents and contracts.)

MAIL FRAUD : It a Federal crime or offense for anyone to use the United States mails in carrying out a scheme to defraud. In order to be proven guilty of mail fraud, it must be shown that the person knowingly and willfully devised a scheme to defraud, or for obtaining money or property by means of false pretenses, representations or promises and that such acts were carried out by means of use of the U.S. Postal Service. Obtaining a payment in response to a fraudulent offer or making a fraudulent offer through the mail is sufficient to claim an offense of mail fraud.

MALFEASANCE / MISFEASANCE : Misfeasance refers to an improper and unlawful carrying out of an act that, if correctly done, is in itself is lawful and proper, and results in harm to another. Malfeasance is a related term, but is distinguished by an intention to cause harm by doing an act which should not be done. Misfeasance is careless or accidental in nature, while malfeasance is deliberate and knowing. The terms malfeasance and misfeasance are comprehensive terms and include any wrongful conduct that affects, interrupts, or interferes with the performance of official duty.

NEGLIGENCE : Every person is responsible for injury to the person or property of another, caused by his or her negligence. Negligence is the failure to use reasonable care. Negligence may consist of action or inaction. A person is negligent if he fails to act as an ordinarily prudent person would act under the circumstances. What constitutes negligence will depend on the facts of each individual case. Generally, a trier of fact needs to determine what a “reasonable” person would do or not do in the given situation.

NEGLIGENCE PER SE : Negligence per se is negligence due to the violation of a public duty under a law that defines the failure of care required to constitute negligence. For example, driving laws may specify that exceeding a certain rate of speed is legally negligent. Negligence per se may also be declared when a person does or omits to do something which is so beyond reasonable behavior standards that it is negligent on its face.

RACKETEERING : Racketeering is the federal crime of conspiring to organize to commit crimes, especially on an ongoing basis as part of an organized crime operation.

The Racketeering Influenced and Corrupt Organizations Act (RICO) is a federal law allowing the federal government to place in trusteeship organizations which are convicted of being dominated by racketeers or organized crime.

A person injured as a result of a RICO violation can recover treble damages and reasonable attorneys' fees. In order to prove a RICO violation, the person must be able to show that he or she was injured by a person associated with an “enterprise” that has been engaging in a “pattern of racketeering,” which consists of at least two “predicate acts” during a ten-year period. The list of “predicate acts” includes securities fraud, mail fraud and wire fraud but does not include commodity fraud. In some circumstances, however, conduct involving futures transactions may constitute mail fraud or wire fraud. The legal requirements for proving a RICO violation are complex and vary from circuit to circuit.

USURY : (I put this here only as a thought-provoker. The real definition of usury appears, alarmingly, to EXCLUDE BANKS. Go figger.) Click the link and see it for yourself.

Anecdotally, as I write this, “safe” Treasury notes are yielding in the range of 2.5% - 3% per year while many working people are servicing consumer and credit-card debt with interest rates exceeding 30% per anum. All the while, the banks are sucking in barge-loads of “free” tax money, AKA “bailouts”. It seems the wolves are scratching at the front door and the back door. Imagine taking in virtually unlimited amounts of TOTALLY FREE MONEY (income tax-free, too) from taxpayers and loaning it back to them at 30% PLUS per year until they're broke, then foreclosing on their homes when they predictably fall behind. And, to top it off, banks are paying little or no interest to depositors! What a business model!

- David

WIRE FRAUD : See mail fraud but substitute facsimile, internet, telephone, and any other form of intra-state or inter-state electronic communication for “the mails”.

That should be a good start to refresh your understanding. It appears that these torts and crimes have occurred in mega-doses during the pump-up phase of the SEQUENTIAL BUBBLES that were induced by policies pursued over the past 15 years - starting with stocks, then real estate and credit, then commodities, now ballooning into U.S. government debt and the US$. As we're seeing, it's impossible for any bubble to end well.

In the context of our current financial situation, the above terms should especially be used in all conversations and communications with our elected officials - since they're the ones who are charged with upholding and enforcing the civil as well as the criminal laws. Without their formal response and definitive corrective action, we can only surmise that our voices are not being heard and it may even seem that no one is listening.

Everyone agrees that there must be consequences for the perpetrators as well as for the enablers of the crisis. Innocent Citizens must not be the only ones who pay - as appears to be the case now. We must be certain that ill-gotten gains are not leaving our shores. This should be easy to monitor with all the high-tech spy mechanisms and the subsequent “legal powers” that were rushed in as a result of terrorism and money-laundering fears of the recent past. We surely need all the money we can get right here at home to right our ship and solve problems that are quickly growing toward the scale of “crimes against humanity”.

It's high time we dropped the old “cold-case” mentality with respect to some dubious decades-old rape and murder cases and deployed those valuable investigative assets in the direction of something more immediately beneficial to society, at large. For now, those old cases are best left for TV entertainment. There will be time and resources to go back after them in a few years if need be but for now, it's a misappropriation of scarce public resources. They're certainly not “mission critical” where investigating financial crimes is imperative.

For now, it's most urgent that we get on with the much-needed “ethical correction” that will enable us to rebuild confidence in our financial and our governance systems so that we may begin the hard work of putting millions of disrupted lives back together again. This must happen sooner or later. Let's roll up our sleeves, swallow the bitter medicine, and start now.

For more interesting articles and commentary please visit:

    By David Haas

    In my consulting practice, I work with individuals, business owners, and professionals.  I assist business owners and professionals in several critical areas ranging from business start-up, marketing, operational challenges, employee retention, and strategic planning to personal asset protection, financial, and retirement income planning.  Often, these areas relate and need to be integrated to work most effectively.  I also assist business owners in developing exit-strategies that enable them to maximize the value of their business interests and preserve their lifestyle in retirement.  For individuals, I primarily focus on tax reduction, financial, and retirement income planning.

    © 2009 David Haas, Consultant

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