Fraud can cause substantial financial harm to a business and undermine the relationships upon which the company’s success depends. In situations where a transaction was based on a material misrepresentation, important information was knowingly concealed, or another party benefited financially from deceptive conduct, significant legal and financial disputes can arise. However, it’s important to be aware that under New York law, proving fraud requires more than simply showing that someone made a false statement or failed to disclose information.
When fraud is suspected, the strength of a potential legal claim depends upon the available evidence and the circumstances surrounding the misconduct. The following steps can help business owners understand what may be necessary to establish fraud and evaluate whether litigation might be the best course of action.
1. Identify the Specific Misrepresentation or Concealed Information
The first step in proving fraud in a business dispute is specifically identifying what was false or concealed. Under New York law, a fraud claim must be pleaded with “particularity.” General allegations that a business partner or the other party “lied” or “acted dishonestly” are not sufficient in litigation. Rather, a complaint must allege specific factual details that give rise to a strong inference of fraud or fraudulent intent.
2. Gather Evidence to Demonstrate the Fraud
After identifying the specific misrepresentation or concealment, the next step is to gather evidence to prove that fraud occurred. These matters typically hinge upon documentary evidence, communications, financial records, and other direct and circumstantial evidence showing what was misrepresented, the true facts, and what the defendant knew at the time. Such evidence can include:
- Emails and text messages
- Accounting and financial records
- Bank statements and tax returns
- Contracts and agreements
- Electronic files and metadata
- Communications with customers, vendors, and third parties
- Corporate records
- Notes from meetings
Notably, potential evidence of fraud can be more difficult to obtain as a dispute escalates. Records may be deleted, altered, or lost over time. It’s crucial to have a skilled business attorney involved from the outset who can evaluate what evidence is relevant and help ensure it is preserved.
3. Establish the Defendant Knew the Information was False
A false statement alone does not necessarily demonstrate fraud for legal purposes. A plaintiff must also establish that the defendant knew the statement was false or acted with fraudulent intent. Referred to as “scienter,” this element can be challenging to prove. While direct evidence of a defendant’s thoughts isn’t always available, evidence in these cases is often circumstantial.
Evidence that can be presented to show the defendant’s knowledge and intent can include:
- The defendant’s access to financial information
- Communications with the defendant acknowledging the true facts
- Efforts to conceal or alter records
- Financial benefits received by the defendant because of the alleged fraud
A pattern of conduct, contradictory records, or efforts to conceal information may also help demonstrate that the alleged misrepresentation was not simply an innocent mistake.
4. Show the Misrepresentation was Material
Not every false statement will support a fraud claim. The alleged misrepresentation must concern a material fact. This means the information must have been significant enough to influence the business decision at issue. For instance, a misrepresentation about a company’s financial condition may be material if it induced someone to invest in the business or purchase an ownership interest. The importance of the alleged misrepresentation must be evaluated in the context of the specific transaction or business relationship.
5. Demonstrate Reasonable Reliance on the False Information
To prove a claim for fraud, a plaintiff must also demonstrate that they reasonably relied upon the alleged misrepresentation. In other words, the false information must have influenced the plaintiff’s decision to enter into a transaction, invest money, sign a contract, or otherwise proceed, and that the defrauded party utilized readily available information to determine, and confirm, the accuracy of the Defendant’s alleged false statement. Evidence of reasonable reliance can include communications showing what information the plaintiff considered and records that demonstrate the action taken as a result.
6. Prove the Financial Losses Caused by Fraud
A fraud claim generally requires proof of financial damages caused by the fraudulent conduct. A plaintiff must be able to identify the monetary losses suffered and connect those losses to the misrepresentation or concealment. Depending on the circumstances, proving damages may require analyzing financial records, conducting an accounting, or retaining an expert who can determine the actual amount of monetary loss. A plaintiff who can prove the necessary elements for fraud and establish the resulting damages may be entitled to recover compensation for the financial losses caused by the defendant’s fraudulent conduct.
Contact an Experienced Long Island Business Litigation Attorney
If you believe you or your business suffered financial harm because of false statements, concealed information, or other fraudulent conduct, a knowledgeable business litigation attorney can evaluate your case and advise you regarding your options. At Barnes & Barnes, P.C., we offer experienced counsel for a wide range of business disputes across Long Island, including those involving fraud. Contact us at (516) 673-0674 to schedule a consultation and learn how we can assist you.
