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Volume 118 - Issue 1


Square-Peg Frauds

Miriam H. Baer | August 27, 2023

The square-peg fraud is a kind of case that until very recently enjoyed the widespread support of prosecutors, jurists, and the general public. Rather than punishing a scheme that rids a victim of her money or property, the square-peg prosecution has long focused on deprivations of intangible property. For years, enforcement actors have employed this concept to pursue innumerable varieties of corruption.

Nowhere has the square peg been more essential than in the government’s prosecution of higher education scandals. From the Varsity Blues parents who wrongfully secured elite college slots for their children, to the business school dean who shaped certain facts to inflate his school’s U.S. News ranking, the government has relied on various intangible property “hooks” to shove highly specific fact patterns within fraud law’s boundaries.

The aim of this Essay is to explore this square-peg phenomenon and highlight one of the less-explored reasons for being wary of it, which is its expressive effect. Whatever its benefits, the square-peg prosecution conveys counterproductive signals about victimhood, which stymie the movement towards deeper, systemic reforms.

One of criminal law’s strongest justifications is that it conveys a moral lesson. In the higher education context, however, the square peg perverts that lesson. To show a loss of property in the Varsity Blues cases, prosecutors denominated universities and standardized testing companies as “victims,” notwithstanding their moral complicity in an admissions system that is only superficially meritocratic. To establish an actionable property loss in the rankings fraud case, the government’s case treated the U.S. News graduate school rankings as a reliable arbiter of value. Not only are these narratives questionable, but they also promote the very competitive, winner-take-all attitude that undergirds higher education’s corruption problem.

Recent decisions by the Supreme Court and First Circuit might well dampen the appetite for intangible property fraud prosecutions. But there will always be new theories and new square pegs. Accordingly, we would all do well to take note of the square peg’s drawbacks. Using higher education as its exemplar, this Essay sets us on that path.

America’s Anti-Fraud Ecosystem and the Problem of Social Trust: Perspectives from Legal Practitioners

Edward J. Balleisen | August 27, 2023

This contribution revives an autobiographical genre present in law reviews roughly a half-century ago, in which seasoned legal practitioners offered perspective on vital issues. Here, a senior deputy attorney general, a former federal prosecutor, a corporate defense attorney, and a legal aid lawyer each draw on their career experience to explore what they see as significant problems related to the law of consumer and investor fraud and the nature of consumer and investor trust. Their reflections emphasize the significance of law in action—how key actors seek to deploy legal mechanisms related to fraud and adjust their strategies in light of institutional changes, with powerful implications for legal culture and the practical workings of the legal system. They also offer sometimes conflicting recommendations for how American law might better respond to the enduring, thorny problem of deception in marketplaces. The practitioners all agree about the importance of leveraging data analytics to focus attention on the most problematic practices and firms, as well as the need to design disclosure rules that take behavioral realities into account. But there is instructive disagreement about the extent to which current rules appropriately balance the capacity of individuals who have experienced fraud-related harms to gain redress, against the imperative of shielding innocent firms from abusive allegations of wrongdoing. A brief analytical introduction emphasizes the advantages of an ethnographic approach as a means of understanding both positive and normative dimensions of fraud law.

Health Care Fraud and the Erosion of Trust

Katrice Bridges Copeland | August 27, 2023

In health care, trust is a foundational concept. Patients must trust that their medical practitioners are competent to treat them. The trustworthiness of medical practitioners encourages patients to disclose intimate facts about their medical issues. Further, patients must trust health care providers to demonstrate impartial concern for the patients’ well-being, also known as fidelity. In providing care, the needs of the patients, rather than financial incentives, must drive medical practitioners. Without this trust, patients may not cooperate with diagnosis and treatment. In addition to trusting providers, care outcomes are better if patients trust the health care system as a whole.

This Essay examines the importance of the government’s role in building and maintaining trust in health care providers and the health care system. Due to programs such as Medicare and Medicaid, the government is a “participant-payer” in the health care system as well as a “regulator-enforcer” of the system. As regulator-enforcer, the government has many laws and regulations aimed at promoting trustworthy conditions between patients, health care providers, and the health care system. For example, the Anti-Kickback Statute prohibits all health care providers that participate in federal health care programs from benefitting financially from referrals to other providers. It is a criminal law that has substantial penalties attached to it.

While the government’s efforts to promote trustworthy conditions as regulator-enforcer are not without criticism, most of the focus has been on the government’s failure (as participant-payer) to design a payment system that properly incentivizes health care providers to deliver cost-efficient quality care that prioritizes the well-being of patients. Historically, Medicare and Medicaid have used a fee-for-service reimbursement mechanism which reimburses providers for every item or service provided. This incentivizes providers to increase the volume of care, which drives up the costs of providing health care without improving patient outcomes. Thus, fee-for-service reimbursement misaligns the incentives of providers because it serves as an enticement for providers to put their financial aspirations above their patients’ well-being.

The government’s newest reimbursement method—value-based reimbursement—requires the government to pay for outcomes rather than volume of services. With value-based reimbursement, providers take on financial risk based on the quality of care they provide. Value-based reimbursement promotes relationships between providers and continuity of care. Thus, it also has the potential to increase trust in health care providers and the system as a whole because it takes away some of the improper financial incentives inherent in fee-for-service reimbursement.

While value-based reimbursement is promising, it carries its own fraud risks, such as manipulation of quality data, which are not currently addressed by the fraud and abuse laws. This Essay maintains that if value-based reimbursement is going to be successful at realigning incentives, the government as regulator-enforcer must enact criminal fraud laws and regulations to address the fraud risks in value-based reimbursement. Without assurance that the government is closely monitoring fraud and protecting the interests of patients, patients may not trust value-based reimbursement which could ultimately undermine trust in providers and the health care system.

Consumer Fraud, Home Financing, and the Erosion of Trust

Linda E. Fisher | August 27, 2023

Consumer fraud is a civil violation of a remedial statute not requiring specific intent to deceive. Most consumer fraud statutes define violations as unconscionable, misleading, or deceptive practices irrespective of intent, in derogation of the principle of caveat emptor. They do not apply to business-to-business transactions. Trust plays a central role in business-to-consumer transactions. Because consumers are individuals, there is often an inherent inequality in consumer transactions. Sophisticated marketing techniques—especially target marketing that follows potential customers all over the internet—hound consumers’ online lives and manipulate purchasing decisions. The increasing monetization of almost everything exacerbates these effects. This transactionalism itself erodes trust because commercial trust is less robust than interpersonal trust.

“Consumers” are not a monolithic category and the effects of consumer fraud depend on one’s education, business sophistication, and ethnicity. The neoclassical model of a universal, rational, self-interested, decontextualized individual has numerous limitations, and we now know that rationality is bounded in any event—we are unable to incorporate all relevant information in our decision-making. Further, the neoclassical model does not accurately represent the financial situations and daily realities of most American consumers, who are working to middle class, struggling economically, and lacking in financial literacy.

This Essay applies this framework to the phenomenon of home lending fraud, which was the primary cause of the Great Recession and the worldwide financial meltdown of 2008. Home lending fraud of all sorts erodes trust in our system and country. Trust tends to be eroded more in consumers who do not realize the risks taken when entering into these transactions, which is disproportionally the case with lower income consumers. They are hit especially hard because they have fewer resources, and if they own a home, it is generally their only valuable asset. In this Essay, I focus particularly on the example of land contracts—rent-to-own arrangements often accompanied by predatory features—that have looted many millions of dollars of wealth from low- to moderate-income Americans.

The Essay finally turns to the post-Great Recession Dodd–Frank Act and its creation of the Consumer Financial Protection Bureau. The Bureau is the first federal agency with the sole mission to regulate consumer financial products. Dodd–Frank regulations and oversight have helped increase trust in consumer financial markets since the last financial crisis. Supervision of lending institutions—some of which were not previously subject to federal regulation—is a critical tool in resisting forces that continue to undermine trust in our system.

Toward a Multilevel Sociology of Fraud

Brooke Harrington & Camilo Arturo Leslie | August 27, 2023

This Essay applies a distinctively sociological multilevel analysis to fraud to provide novel insights and recommendations on an old problem. Rather than treating fraud as a problem of “criminogenic environments” or of individual psychologies and motivations, this multilevel analysis investigates the ways in which individuals (the micro level) interact with organizations (the meso level) and institutional systems (the macro level) to produce fraud. We illustrate these interactions and the insight that an interactive analysis can provide by using ethnographic data from an in-depth case study of the R. Allen Stanford offshore financial fraud. The case, which occurred in the Caribbean island nation of Antigua and Barbuda in the 1990s and early 2000s, is not just the story of a bad actor. It is one that illustrates the ways that regulatory agencies, legislatures, and the offshore system can facilitate—or impede—fraud at various levels of analysis. We conclude with the practical insights that can be derived from this multilevel perspective.

The Persistent Limits of Fraud Prevention in Historical Perspective

Emily Kadens | August 27, 2023

Fraud has been ubiquitous throughout history, and so have the methods of fraud prevention. History demonstrates that no anti-fraud measures have fully succeeded in eliminating deceptive market behavior. Instead, this Essay uses evidence from premodern England to argue that societies and individual contracting parties balance tolerating a certain amount of fraud against the costs of fraud prevention.

Gender and Deception: Moral Perceptions and Legal Responses

Gregory Klass & Tess Wilkinson-Ryan | August 27, 2023

Decades of social science research has shown that the identity of the parties in a legal action can affect case outcomes. Parties’ race, gender, class, and age all affect decisions of prosecutors, judges, juries, and other actors in a criminal prosecution or civil litigation. Less studied has been how identity might affect other forms of legal regulation. This Essay begins to explore perceptions of deceptive behavior—i.e., how wrongful it is, and the extent to which it should be regulated or punished—and the relationship of those perceptions to the gender of the actors. We hypothesize that ordinary people tend to perceive deception of women as more wrongful than deception of men, and that such perceptions can affect both case outcomes and decisions to regulate.

This hypothesis is consistent with research into gender stereotypes, which has shown, for example, that women are perceived as less capable of protecting themselves against deception, and that men have special duties to protect women. Our approach is also of a piece with recent work on moral typecasting, which explores how attributions of agency and patiency affect perceptions of moral wrongfulness, as there is evidence that men tend to be associated with agency and women with patiency.

We report the results of three experimental vignette studies, using simple hypotheticals to elicit subjects’ off-the-cuff intuitions about men and women deceiving and being deceived. We examine the effects of gender by randomly varying party names (Ashley or Josh), by randomly varying the gender associated with a product—e.g., beard trimmer vs. hair dryer—and by randomly varying the gendered noun identifying the victims of a fraud (brothers vs. sisters). We ask subjects to report on their reactions to different deceptive situations by reporting on the ethicality of a behavior, on their support for a regulatory approach, and on their preference for level of punishment. We also explore differential responses of male- and female-identified subjects.

We find preliminary support for the proposition that men deceiving women and firms deceiving women are regarded as somewhat more problematic than men or firms deceiving men. We find suggestive but limited evidence that paternalistic regulation of women’s transactions is more welcome than that of regulation of men’s consumer choices. We find robust support for the proposition that women are more likely than men to regard deception in the marketplace as an ethical wrong. The studies reported here also suggest the challenges of studying gender as a causal explanation for legal decision-making. We suggest how future research might tease out the explanatory mechanisms that link perceptions of gender to perceptions of deception.

Fraud in a Land of Plenty

Jonathan R. Macey | August 27, 2023

This Essay discusses the regulation of fraud in a developed economy and offers some explanations for why fraud appears to be on the increase. Ironically, regulation designed to combat fraud can actually increase fraud by attracting economic activity to fraud-ridden industries. In other words, regulation can create problems of its own by fostering the false perception that fraud is being addressed even when it is not. This analysis is relevant in the context of the current surge in sentiment to regulate cryptocurrencies in the wake of the FTX and Sam Bankman-Fried debacle. Such regulation threatens to attract more resources to cryptocurrency trading, which is a dubious proposition in light of the fact that cryptocurrencies produce little social value and merely transfer wealth rather than create it.

The Essay discusses some of the reasons why fraud may be on the increase. First, strong market forces aimed at reducing managerial agency costs have had the unintended consequence of increasing the incentives of top corporate managers to commit fraud. The market forces both richly reward managers for generating strong returns for shareholders and severely punish managers for failing to reach investors’ expectations regarding corporate performance. While these rich rewards and strong punishments serve the interests of shareholders and society, they also enhance executives’ incentives to commit fraud.

Another factor in the increase in fraud in financial markets has been the expansion of the concept of fraud. Historically, the term fraud was used to describe conduct that was truly egregious and involved purposeful deceit designed to provide the perpetrator with unlawful gains. As shown here, however, in the financial context the concept of fraud has been expanded to include behavior that is entirely inadvertent and benign. The expansion of the concept of fraud threatens to increase the incidence of traditional fraud by depriving the term “fraud” of its historic capacity for shaming because the prospect of being shamed is a significant deterrent to committing fraud.

Notes and Comments

Auditing Overseas: How the United States Can Learn from Recent Financial Audit Reform in the United Kingdom

Daniel Damitio | August 27, 2023

Financial auditing is one of the cornerstones of an effective capital market structure. When performed correctly, an independent financial audit provides investors with the security they need to effectively transact based on company disclosures. When this system fails, however, the results for investors and the economy as a whole can be devastating. In recognition of this danger, the market for financial auditing in the United States is regulated by a number of governmental and nongovernmental bodies charged with maintaining its health and effectiveness. But stakeholders within the U.S. market and government have criticized these regulators for failing to adequately respond to concerns lurking in the country’s financial auditing system. While audit reform can be an expensive and convoluted process, this Note argues that U.S. regulators can streamline the field’s development by monitoring and building upon the actions taken by U.K. regulators.

This Note describes the current audit regulatory structure employed by the United States and examines the most pressing concerns expressed by interested parties. It then analyzes the findings and proposals offered in the U.K. Competition and Markets Authority’s comprehensive report on competition and audit quality in the U.K. financial auditing market. This Note proposes that the conclusions of the Competition and Markets Authority’s report should serve as both a warning and a guide for domestic audit regulators. The United States is past due for a comprehensive examination of their financial auditing system. Using the U.K. findings as a guide will provide more immediate and relevant data for policymakers and regulators alike.