Fiduciary Fraud

FIDUCIARY FRAUD, a branch of white-collar crime that has witnessed rapid growth since the 1980s, involves a breach of trust committed by financial institutions such as banks and savings and loans, insurance companies, financial service companies, and pension funds. Embezzlement by lowerlevel employees, still the most popular form of fiduciary fraud, has been overshadowed by the misdeeds of upper-level staff who mismanage and loot their own companies.

A fiduciary, commonly a trustee, possesses powers that normally belong to another person. As such, the fiduciary bears a legal obligation to act primarily for the client's benefit in financial matters[Page 318] and not for the fiduciary's own personal interest. Fiduciaries are duty-bound to always act in complete fairness and to not exert any influence or pressure, take selfish advantage, or deal with the client in such a way that it benefits the fiduciary or prejudices the client. Business shrewdness, hard bargaining, and taking advantage of the forgetfulness or negligence of the client are totally prohibited actions. Fiduciary responsibilities exist for persons other than trustees such as between solicitor and client and principal and agent.

The most publicized and most expensive type of fiduciary fraud involves savings and loan institutions. In the 1980s, savings and loan fraud cost $200 billion in short-term losses to taxpayers with the eventual costs projected to be about $500 billion as interest accumulates over the next few decades. The biggest bank failure in American history took place when California entrepreneur Charles Keating plundered the Lincoln Savings and Loan Association. Some financial experts have attributed bank fraud to owners pushed to the brink of insolvency by adverse market conditions. These owners then gamble by making risky investments that would theoretically produce a high rate of return. This view neglects to take into account the evidence that the worst thrift failures, such as the Lincoln case, can be traced to investments that were unsafe, illegal, and involved substantial fraud.

Insurance insolvencies have also increased dramatically since the early 1980s. While the public usually describes insurance fraud as beneficiary fraud perpetrated by customers who file false claims, this is not the type of fraud that causes the most damage to the public. Premium diversion is a type of fiduciary fraud whereby funds intended to cover claims are diverted for other purposes. The fraudsters, typically owners of small businesses, simply vanish after collecting premiums from customers. More sophisticated schemes rely on creating a network of service and affiliate companies that bill larger companies for ambiguous items such as “operating costs.”

Some analysts point out the insurance industry is dangerously under-regulated. Insurers must demonstrate that they have sufficient assets to meet capitalization requirements to pay potential claims. But many can and do cheat by inventing phony assets, renting assets, or temporarily acquiring assets to place on the books for only a day to meet reporting standards. One Texas company claimed that it owned $20 million in real estate but the property had been condemned by San Antonio authorities and did not possess a market value anywhere near the claimed amount.

...