Definition of fraud in brief

• Fraud is an intentional and deliberate misrepresentation of fact through words or conduct or the concealment of information material to another party, with the purpose of inducing another party to rely and act on the misrepresentation or concealment.
• Fraud can be both a civil tort (a wrong committed by one party against another) and a criminal act punishable by law.
• The goal of fraud is to deceive a party for financial or personal gain or to assume a false identity.
• For conduct to constitute fraud, the misrepresentation or conduct must be intentional and knowing, not as the result of a mistake or an act negligently disregarding the misrepresentation’s falsity.
• Common areas of fraud that lead to lawsuits include bank fraud, corporate fraud, and real estate fraud.

The following information is provided by Michael Ballases, a Texas attorney and expert in real estate law, awarded best lawyer designation in 2023 and 2024.

What is fraud?

Fraud is an intentional false representation that is established by proof of six elements:

1. There must be a false representation.
2. The person or party making the representation must know that it’s false or acted with reckless disregard for its falsity.
3. The representation must be words or conduct and not merely an obvious statement of opinion.
4. The person or party must have intended another person or party to do or to refrain from doing something specific.
5. The false representation must have actually caused the other person or party to act or refrain from acting in a certain way and that there was justifiable reliance on the representation.
6. The false representation must result in economic or monetary loss or in “mental anguish.”

To establish fraud has been committed, all six elements must be proved. Further, the false representation must be about a material (important) fact significantly affecting one party’s expectations of an agreement. It can involve deceptive or misleading statements, or it can result from concealing a material fact.

However, generally there is no duty to disclose all material facts to the other party, although there may be an affirmative duty. For example, the Truth in Mileage Act is a federal law requiring the seller of a car to inform a potential buyer of the mileage on the car – an affirmative duty created by the U.S. Congress in passing the Act in 1986.

Another example of affirmative duty is found in the federal Security and Exchange Commission requiring banks and savings and loan institutions to disclose certain information to investors such as distribution of assets and liabilities and average bank deposit balances.

Both federal and state laws cover fraud. Federal law applies to issues of interstate (nationwide) concerns cutting across state boundaries, such as fraud involving Social Security, banking, publicly traded stocks, Medicare and Medicaid payments to healthcare providers, and misuse of the U.S. Postal Service for criminal purposes.

Conversely, state fraud laws apply to intrastate issues (within each state) under the U.S. Constitution’s delegation of so-called police powers to the states – responsibilities to safeguard the safety, health, and welfare of citizens. This deference is provided explicitly in the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”

Fraud laws in Texas

State fraud laws in Texas generally parallel federal law. To illustrate the wide variety of types of fraud law, Texas legislation identifies nearly two-dozen categories of criminal fraud (Penal Code, Title 7, Offenses Against Property, Chapter 32). Fraud under state law ranges from forgery to trademark counterfeiting, to fraudulent transfer of a vehicle, to “illegal recruitment of an athlete.”

In Texas common law, state courts have held that any person or legal entity has a duty to reasonably protect himself against fraud. For a purported fraud victim to prevail in a fraud civil lawsuit in a state court, he must be prepared to show that he exercised the care of “a reasonably prudent person” with similar experience, background, and knowledge by attempting to discover relevant facts under the circumstances.

As in federal law, under Texas fraud law, opinions cannot be construed as a materially false representation.

Bank fraud definition

Bank fraud is any act of deception with the intent to receive money or other property from a bank or other financial institution. This kind of theft can occur multiple ways: through identity theft, use of stolen credit cards, loan scams, and phishing (cyberattacks that trick a victim into sharing bank account numbers or online-banking login credentials), to name a few.

To convict a defendant of bank fraud, a prosecutor must establish guilt beyond a shadow of a doubt by proving three elements: 1) The fraud must be against a financial institution. 2) The fraud must have been undertaken to obtain funds, assets, securities or other property under the control of or owned by the financial institution. 3) The gains must have been procured through false representations, pretenses, or promises.

For example, a borrower commits bank fraud when he misstates his assets or takes out a loan knowing he will file for bankruptcy soon after. In such an instance, the borrower has an affirmative duty to disclose his bankruptcy plans.

Bank fraud also includes check forgery and use of stolen checks, as well as identity theft for the purposes of accessing an online bank account. Bank fraud is largely committed online, according to LexisNexis. Online banking accounted for one-third of U.S. banks’ fraud costs in 2021, and mobile transactions resulted in another 29% of costs.

The effects of bank fraud

Bank fraud can include the theft of a few hundred or thousand dollars from a single victim; and it also can involve millions of dollars and even bring down a financial institution. For example, in 2014, a U.S. District Court in Cleveland convicted an Ohio man in a $70 million bank-fraud case that led to the collapse of a credit union in

The scheme involved the credit union’s chief operating officer, who took more than $1 million in bribes, kickbacks, and gifts for a thousand fraudulent loans; the insider was sentenced to 14 years in prison and ordered to pay $71.5 million in restitution (payment ordered by a court to prevent someone’s unjust enrichment or to compensate for loss or another kind of harm).

Banks are not the only victims. From 2019 to 2022, the cost of fraud to merchants rose by nearly one-fifth. Unlike bank robbery, in which the robber commits an offense openly, bank fraud is a white-collar crime in which the perpetrator acts in secret, hoping to conceal his acts.

Federal laws governing bank fraud

Most bank deposits are insured against loss by the Federal Deposit Insurance Corporation (FDIC), while the National Credit Union Administration (NCUA) insures credit unions. Accordingly, bank fraud is generally a federal crime (18 U.S.C. §1344) investigated by the Federal Bureau of Investigation (FBI).

Bank fraud is a felony, and penalties can range up to $1 million in fines and 30 years in prison, depending on the convicted defendant’s prior criminal history, position of trust, and whether a gun was used in the crime. Convicted offenders may also be ordered to make restitution.

A bank, business, or person need not actually lose any money or assets for bank fraud to have occurred. Fortunately for depositors, banks and other financial institutions usually bear the burden of proving authorization of a transaction. This responsibility helps them recover lost depositors’ funds in some cases.

For fraud victims who are depositors at banks and other financial institutions, sometimes lost funds can be fully or partially recovered through arbitration. Arbitration – a form of dispute resolution outside of a trial in court – begins when both parties agree to presenting evidence to a neutral third party, who ultimately makes a binding decision on the outcome.

Corporate fraud

Corporate fraud is another kind of white-collar crime. It constitutes either a company or a company employee acting in the capacity of employment to illegally or deceptively defraud a victim or victims.

For a lawyer or law firm specializing in fraud, uncovering corporate fraud and identifying the offenders can be notoriously difficult. Often the fraud is hidden by complex accounting practices that take years or even decades to be revealed.

For example, one of the most famous corporate fraud cases was that of the Enron Corporation of Houston, Texas. A company with $60 billion in assets, Enron responded to shareholder pressures through intricate and that not only led to the company’s bankruptcy and closure but also caused the dissolution of Arthur Andersen LLP, one of the world’s largest accounting and auditing companies.

Corporate accounting fraud

Stockholder expectations and demands form a common basis for corporate fraud. Stockholders usually expect publicly held corporations to earn a steady and lucrative return on their investments, sometimes luring a company into inflating revenues and profits.

Likewise, a corporation may misrepresent financial performance in a bid to attract new investors or a well-heeled buyer willing to pay top price to purchase the company outright. Because virtually all companies go through financial ups and downs, the temptation can be great among insiders to hide declining revenues and profits for these and other reasons.

Corporate product fraud

In other instances, defective products or services may lead to corporate fraud. Years ago, the German automaker Volkswagen was caught in an infamous fraud by installing a “defeat device” on some of its cars to circumvent emission standards.

In 2006, company executives ordered the installation of illegal software on VW vehicles that increased pollution controls only when an emissions test was in progress. After the decision became publicly know, in 2016 the carmaker agreed in a settlement with the U.S. Department of Justice to pay as much as $16.7 billion for the fraud.

Real estate fraud

Real estate fraud is any deception used to improperly obtain money, personal or real property, or information of value through a scheme involving the buying, renting, or ownership of real property (land and the structures attached to it).

This type of fraud can involve millions of dollars in each instance. For example, buyers and sellers of real estate can use the transactions to launder billions of dollars earned through drug sales and black market dealing.

Other kinds of real estate fraud include mortgage fraud in which a borrower obtains a property loan under false pretenses; bait-and-switch rental offers in which an advertised property suddenly becomes “unavailable” and the victim is coerced to take a lesser-quality or higher priced rental; and wire fraud in which agents provide buyers with the wrong bank account information to divert payments to their own control.

The most famous real estate scam artist in history was probably Victor Lustig, a highly skilled con artist who nearly managed to sell the Eiffel Tower in Paris twice. In both instances, he convinced two groups of prospective buyers that the city wished to sell the tower for scrap metal, eventually conning one victim out of 70,000 francs – a veritable fortune at the time.

On a smaller scale, of note is Texas law requiring a seller of a single-family home to disclose in writing their knowledge of the condition of the property, with a description of any material defects. A form is available from the Texas Real Estate Commission which must be completed and delivered to the prospective buyer on or before the date of the sales contract.

In addition, Texas law follows the statute of frauds. This is a legal doctrine requiring an agreement for the sale of real estate to be in writing and identify the property by location with sufficient description of size, shape, and boundaries.

About T. Michael Ballases, Texas trial attorney

Anyone entering a construction contract can benefit understanding the difference between direct liability and vicarious liability. Let a legal expert help. With more than two decades of legal experience, T. Michael Ballases has a 90% courtroom win rate and a practical, common sense approach. His philosophy is simple: Determine what the client seeks and focus on attaining it by utilizing a big-picture methodology and avoiding meaningless clutter.

Learn more about Michael Ballases.

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