An Introduction To Corporate
Regulation and Standardization

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Misrepresentation of Material Facts

This is the offence most often thought of when the term fraud is used. Misrepresentation cases can be prosecuted criminally or civilly under a variety of statutes or they might be the basis for common law claims. The gist of the offence is the deliberate making of false statements to induce the intended victim to part with money or property.

The specific elements of proof of misrepresentation vary whether the case is prosecuted as a criminal or civil action. The elements normally include:

         Material false statement;

         Knowledge of its falsity;

         Reliance on the false statement by the victim;

         (A loss) Damages suffered;

         A deceit or fraud constituting a false statement made wilfully or recklessly, which causes loss to another.

Not only is a misrepresentation fraudulent if it was known or believed by the maker of the representation to be false when made, but mere non-belief in the truth is also indicative of fraud. Thus whenever a person makes a false statement which he does not actually and honestly believe to be true, for purposes of civil liability, that statement is as fraudulent as if he had stated that which he did not know to be true, or knew or believed to be false. The motive of the person making the representation is irrelevant.

The maker of the representation will not, however, be fraudulent if he believed the statement to be true as he perceived it, provided that perception was one that might reasonably be held, though the court later holds that the representation objectively bears another meaning.

In civil cases, when determining whether a representation was made fraudulently, the standard of proof applicable is the balance of probability (i.e. more likely than not) and not the criminal standard of proof beyond reasonable doubt. However, the amount of evidence required to establish proof may vary according to the gravity of allegation to be proved.

The more serious the allegation the higher the degree of probability that is required. The question of whether there is any evidence to support an allegation that a representation made was fraudulent is a question of law. Subject to this, the question whether a false representation was actually fraudulent is, in every case a question of fact.

Normally, only material false statements may serve as the basis for a fraud case. Materiality usually refers to statements sufficiently important or relevant to the defendant to influence the defendant's decision.

In all fraud cases, the prosecution or claimant must prove that a false statement was intentional and part of a deliberate scheme to defraud. Under the law, there is no such thing as an accidental or negligent fraud. In some instances, particularly those involving civil actions for fraud and securities cases, the intent requirement is met if the prosecution or claimant is able to show that the false statements were made recklessly; that is, with complete disregard for truth or falsity.

In a civil case, it also might be necessary to prove that the victim relied upon the false statements and actually suffered a loss. These elements of proof might not be necessary in a criminal prosecution. Also, in some statutes, materiality is assumed and need not be proved.

In most instances, only false representations of "presently existing facts" may be prosecuted.

Opinions, speculative statements about future events, even if made with the intent to mislead, may not be the basis for a fraud case.

The rule limiting fraud cases to misrepresentations of existing facts is often applied to bar fraud claims in contract disputes. A party to a contract who promises to perform certain services by a particular date in the future but who fails to do so generally may not be prosecuted for fraud unless the claimant can demonstrate that the defendant had the intent not to perform the promised services when the contract was made.

Of course, the other party may bring an action for breach of contract.

Proof of damage in consequence of acting on the representation is required to found an action in deceit, be it pecuniary loss, personal injury, loss of property, real inconvenience and discomfort, or substantial mental distress. The purpose of damages in tort is to put the claimant into the position he would have been in had the representation not been made to him.

Damages are to compensate the claimant for all that he has lost. If the claimant is not fully compensated by the difference between what he paid and the true market value, he is entitled to consequential losses. Any damage flowing directly from the misrepresentation, whether or not such damage is reasonably foreseeable, may be recovered, subject to the claimant behaving utterly without rational. Aggravated damages may also be awarded to compensate the claimant for injury to feelings.

In discussing the misrepresentation of material facts the following concepts and laws will be set forth:

         False Opinions;

         False Statements Under Oath: Perjury;

         False Statements Under Oath (Not a Judicial Proceeding);

         Counterfeiting;

         The Forgery and Counterfeiting Act;

         Copyright;

         Trade Descriptions;

         The Weights and Measures Act;

         The Financial Services and Markets Act;

         Misleading Statements and Practices.

False Opinions

The rule precluding fraud actions based on false "opinions" is subject to certain exceptions, principally cases involving opinions provided by professional advisers, such as Certified Public Accountants.

An accountant may be prosecuted for fraud who:

         Certifies that a financial statement fairly presents the financial condition of the audited company when the accountant knows it does not;

         Falsely states that the audit was conducted in accordance with generally accepted accounting principles;

         Deliberately distorts the audit results.

FALSE STATEMENTS UNDER OATH: PERJURY - S.2

(As amended by the Criminal Justice Act 1948)

If any person lawfully sworn as a witness or as an interpreter in a judicial proceeding wilfully makes a statement material in that proceeding, which he knows to be false of does not believe to be true, he shall be guilty of perjury, and shall, on conviction thereof on indictment, be liable to imprisonment for a term not exceeding seven years, or to a fine or to both such imprisonment and fine.

FALSE STATEMENTS ON OATH MADE OTHERWISE THAN IN A JUDICIAL PROCEEDING - S.2

(As amended by the Criminal Justice Act 1948)

If any person -

(1) being required or authorised by law to make any statement or oath for any purpose, and being lawfully sworn (otherwise than in a judicial proceeding) wilfully makes a statement which is material for that purpose and which he knows to be false or does not believe to be true; or

(2) wilfully uses any false affidavit for the purposes of the Bills of Sale Act, 1878, as amended by any subsequent enactment, he shall be guilty of a misdemeanour, and, on conviction thereof on indictment, shall be liable to imprisonment for a term not exceeding seven years, or to a fine or to both such imprisonment and fine.

Counterfeiting

It is an offence under s.92 of The Trade Marks Act 1994 as well as under s.25 of The Theft Act 1968 to make an exact copy of (something) in order to deceive:

(1) A person commits an offence who with a view to gain for himself or another, or with intent to cause loss to another, and without the consent of the proprietor

a. applies to goods or their packaging a sign identical to, or likely to be mistaken for, a registered trade mark, or

b. sells or lets for hire, offers or exposes for sale or hire or distributes goods which bear, or the packaging of which bears, such a sign, or

c. has in his possession, custody or control in the course of a business any such goods with a view to the doing of anything, by himself or another, which would be an offence under paragraph (b).

(2) A person commits an offence who with a view to gain for himself or another, or with intent to cause loss to another, and without the consent of the proprietor

a. applies a sign identical to, or likely to be mistaken for, a registered trade mark to material intended to be used

i. for labelling or packaging goods,

ii. as a business paper in relation to goods, or

iii. for advertising goods, or

b. uses in the course of a business material bearing such a sign for labelling or packaging goods, as a business paper in relation to goods, or for advertising goods, or

c. has in his possession, custody or control in the course of a business any such material with a view to the doing of anything, by himself or another, which would be an offence under paragraph (b).

(3) A person commits an offence who with a view to gain for himself or another, or with intent to cause loss to another, and without the consent of the proprietor

a. makes an article specifically designed or adapted for making copies of a sign identical to, or likely to be mistaken for, a registered trade mark, or

b. has such an article in his possession, custody or control in the course of a business, knowing or having reason to believe that it has been, or is to be, used to produce goods, or material for labelling or packaging goods, as a business paper in relation to goods, or for advertising goods.

(4) A person does not commit an offence under this section unless

a. the goods are goods in respect of which the trade mark is registered, or

b. the trade mark has a reputation in the United Kingdom and the use of the sign takes or would take unfair advantage of, or is or would be detrimental to, the distinctive character or the repute of the trade mark.

(5) It is a defence for a person charged with an offence under this section to show that he believed on reasonable grounds that the use of the sign in the manner in which it was used, or was to be used, was not an infringement of the registered trade mark.

(6) A person guilty of an offence under this section is liable

a. on summary conviction to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or both;

b. on conviction on indictment to a fine or imprisonment for a term not exceeding ten years, or both.

The Forgery and Counterfeiting Act 1981

Forgery is the use of a "false instrument" to induce another to act to his disadvantage. A false instrument is one that misleads about itself, e.g., a forged cheque, rather than a document that contains false information. The 1981 Act provides criminal sanctions for forgery.

(1) A person is guilty of forgery if he makes a false instrument, with the intention that he or another shall use it to induce somebody to accept it as genuine, and by reason of so accepting it to do or not to do some act to his own or any other person's prejudice.

Sections 14 and 15 of The Forgery and Counterfeiting Act 1981 - also included in Part 1 of The Criminal Justice Act 1993 to implement the requirements of the EU Framework Decision on increasing penal sanctions against counterfeiting in connection with the Euro.

SECTION 14

(1) It is an offence for a person to make a counterfeit of a currency note or of a protected coin, intending that he or another shall pass or tender it as genuine.

(2) It is an offence for a person to make a counterfeit of a currency note or of a protected coin without lawful authority or excuse.

SECTION 15

(1) It is an offence for a person

a. to pass or tender as genuine any thing which is, and which he knows or believes to be, a counterfeit of a currency note or of a protected coin; or

b. to deliver to another any thing which is, and which he knows or believes to be, such a counterfeit, intending that the person to whom it is delivered or another shall pass or tender it as genuine.

(2) It is an offence for a person to deliver to another, without lawful authority or excuse, any thing which is, and which he knows or believes to be, a counterfeit of a currency note or of a protected coin.

The meaning of "counterfeiting notes and coins" is dealt with in s. 28:

SECTION 28

(1) For the purposes of this Part of this Act a thing is a counterfeit of a currency note or of a protected coin

a. if it is not a currency note or a protected coin but resembles a currency note or protected coin (whether on one side only or on both) to such an extent that it is reasonably capable of passing for a currency note or protected coin of that description; or

b. if it is a currency note or protected coin which has been so altered that it is reasonably capable of passing for a currency note or protected coin of some other description.

(2) For the purposes of this Part of this Act

a. a thing consisting of one side only of a currency note, with or without the addition of other material, is a counterfeit of such a note;

b. a thing consisting of parts of two or more currency notes; or

i. of parts of a currency note, or

ii. of parts of two or more currency notes, with the addition of other material, is capable of being a counterfeit of a currency note.

(3) References in this Part of this Act to passing or tendering a counterfeit of a currency note or a protected coin are not to be construed as confined to passing or tendering it as legal tender.

Copyright

Copyright gives the person who holds it the right to control the exploitation of the work in which the right subsists.

SECTION 107 OF THE COPYRIGHT DESIGNS AND PATENTS ACT 1988 - as amended by s.1(2) Copyright etc. and Trade Marks (Offences and Enforcement) Act 2002 and The Copyright and Related Rights Regulations 2003 (SI 2003/2498), provides a criminal remedy for dealing with infringing copies:

(1) A person commits an offence who, without the licence of the copyright owner -

a. makes for sale or hire, or

b. imports into the United Kingdom otherwise than for his private and domestic use, or

c. possesses in the course of a business with a view to committing any act infringing the copyright, or

d. in the course of a business sells or lets for hire, or

i. offers or exposes for sale or hire, or

ii. exhibits in public, or

iii. distributes, or

e. distributes otherwise than in the course of a business to such an extent as to affect prejudicially the owner of the copyright, an article which is, and which he knows or has reason to believe is, an infringing copy of a copyright work.

(2) A person commits an offence who

a. makes an article specifically designed or adapted for making copies of a particular copyright work, or

b. has such an article in his possession, knowing or having reason to believe that it is to be used to make infringing copies for sale or hire or for use in the course of a business.

(2A)A person who infringes copyright in a work by communicating the work to the public

a. in the course of a business, or

b. otherwise than in the course of a business to such an extent as to affect prejudicially the owner of the copyright, commits an offence if he knows or has reason to believe that, by doing so, he is infringing copyright in that work.

(3) Where copyright is infringed (otherwise than by reception of a communication to the public)

a. by the public performance of a literary, dramatic or musical work, or

b. by the playing or showing in public of a sound recording or film, any person who caused the work to be so performed, played or shown is guilty of an offence if he knew or had reason to believe that copyright would be infringed.

(4) A person guilty of an offence under subsection (1)(a), (b), (d)(iv) or (e) is liable

a. on summary conviction to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or both;

b. on conviction on indictment to a fine or imprisonment for a term not exceeding ten years, or both.

(4A)A person guilty of an offence under subsection (2A) is liable -

a. on summary conviction to imprisonment for a term not exceeding three months or a fine not exceeding the statutory maximum, or both;

b. on conviction on indictment to a fine or imprisonment for a term not exceeding two years, or both

Trade Descriptions

It is not lawful for a business to:

         Put a false trade description on goods;

         Sell or supply goods that have a false trade description on them;

         Offer to sell or supply goods that have a false trade description on them;

TRADE DESCRIPTIONS ACT 1968 - SECTION 1: FALSE TRADE DESCRIPTIONS BY MAKING FALSE DESCRIPTIONS OF GOODS

(1) Any person who, in the course of a trade or business,

a. applies a false trade description to any goods; or

b. supplies or offers to supply any goods to which a false trade description is applied;

c. shall, subject to the provisions of this Act, be guilty of an offence.

Weights and Measures Act 1985

Sections 28 and 29 provides for criminal liability for misrepresentation in shorting weight, etc.

SECTION 28

(1) Subject to sections 33 to 37 below, any person who, in selling or purporting to sell any goods by weight or other measurement or by number, delivers or causes to be delivered to the buyer

a. a lesser quantity than that purported to be sold, or

b. a lesser quantity than corresponds with the price charged, shall be guilty of an offence.

(2) For the purposes of this section

a. the quantity of the goods in a regulated package (as defined by section 68(1) below) shall be deemed to be the nominal quantity (as so defined) on the package, and

b. any statement, whether oral or in writing, as to the weight of any goods shall be taken, unless otherwise expressed, to be a statement as to the net weight of the goods.

Nothing in this section shall apply in relation to any such goods or sales as are mentioned in section 24(2)(a) or (b) above.

SECTION 29

(1) Subject to sections 33 to 37 below, any person who

a. on or in connection with the sale or purchase of any goods,

b. in exposing or offering any goods for sale,

c. in purporting to make known to the buyer the quantity of any goods sold, or

d. in offering to purchase any goods, makes any misrepresentation whether oral or otherwise as to the quantity of the goods, or does any other act calculated to mislead a person buying or selling the goods as to the quantity of the goods, shall be guilty of an offence.

(2) Subsection (2) of section 28 above shall have effect for the purposes of this section as it has effect for the purposes of that section.

(3) Nothing in this section shall apply in relation to any such goods or sales as are mentioned in section 24(2)(a) or (b) above.

Financial Services and Markets Act 2000

Section 397 provides for two criminal offences concerning misleading statements and practices. Persons found guilty of either of these offences may be subject to a maximum of up to 7 years imprisonment or to a fine, or to both.

SECTION 397: MISLEADING STATEMENTS AND PRACTICES

(1) This subsection applies to a person who

a. makes a statement, promise or forecast which he knows to be misleading, false or deceptive in a material particular;

b. dishonestly conceals any material facts whether in connection with a statement, promise or forecast made by him or otherwise; or

c. recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive in a material particular.

(2) A person to whom subsection (1) applies is guilty of an offence if he makes the statement, promise or forecast or conceals the facts for the purpose of inducing, or is reckless as to whether it may induce, another person (whether or not the person to whom the statement, promise or forecast is made)-

a. to enter or offer to enter into, or to refrain from entering or offering to enter into, a relevant agreement; or

b. to exercise, or refrain from exercising, any rights conferred by a relevant investment.

(3) Any person who does any act or engages in any course of conduct which creates a false or misleading impression as to the market in or the price or value of any relevant investments is guilty of an offence if he does so for the purpose of creating that impression and of thereby inducing another person to acquire, dispose of, subscribe for or underwrite those investments or to refrain from doing so or to exercise, or refrain from exercising, any rights conferred by those investments.

(4) In proceedings for an offence under subsection(2) brought against a person to whom subsection(1) applies as a result of paragraph(a) of that subsection, it is a defence for him to show that the statement, promise or forecast was made in conformity with price stabilising rules or control of information rules.

(5) In proceedings brought against any person for an offence under subsection(3) it is a defence for him to show

a. that he reasonably believed that his act or conduct would not create an impression that was false or misleading as to the matters mentioned in that subsection;

b. that he acted or engaged in the conduct

i. for the purpose of stabilising the price of investments; and

ii. in conformity with price stabilising rules; or

c. that he acted or engaged in the conduct in conformity with control of information rules.

(6) Subsections (1) and (2) do not apply unless

a. the statement, promise or forecast is made in or from, or the facts are concealed in or from, the United Kingdom or arrangements are made in or from the United Kingdom for the statement, promise or forecast to be made or the facts to be concealed;

b. the person on whom the inducement is intended to or may have effect is in the United Kingdom; or

c. the agreement is or would be entered into or the rights are or would be exercised in the United Kingdom.

(7) Subsection (3) does not apply unless

a. the act is done, or the course of conduct is engaged in, in the United Kingdom; or

b. the false or misleading impression is created there.

(8) A person guilty of an offence under this section is liable

a. on summary conviction, to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or both;

b. on conviction on indictment, to imprisonment for a term not exceeding seven years or a fine, or both.

(9) "Relevant agreement" means an agreement

a. the entering into or performance of which by either party constitutes an activity of a specified kind or one which falls within a specified class of activity; and

b. which relates to a relevant investment.

(10) "Relevant investment" means an investment of a specified kind or one which falls within a prescribed class of investment.

(11) Schedule 2 (except paragraphs 25 and 26) applies for the purposes of subsections(9) and(10) with references to section 22 being read as references to each of those subsections.

(12) Nothing in Schedule 2, as applied by subsection(11), limits the power conferred by subsection(9) or(10).

(13) "Investment" includes any asset, right or interest.

(14) "Specified" means specified in an order made by the Treasury.

Concealment of Material Facts

Closely related to misrepresentation, an action for fraud may be based on the concealment of material facts, but only if the defendant had a duty in the circumstances to disclose. The essential elements of fraud based on failure to disclose material facts are:

         That the defendant had knowledge;

         Of a material fact;

         That the defendant had a duty to disclose;

         And failed to do so;

         With the intent to mislead or deceive the other party.

The duty to disclose usually depends on the relationship between the parties. Those people who occupy a special relationship of trust, such as the officers or directors of a corporation, a lawyer, accountant, trustee, stockbroker or other agent, may be found to have a duty to fully and completely disclose material facts to the parties who rely upon them.

Proof that the concealed fact was material probably is the most important element in a concealment case; there can be no liability if the withheld information would not have affected the other party.



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An Introduction to Corporate Regulation and Standardization