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 CodeSection 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.
1. 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.
2. 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.
3. 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.
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.