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Fraud By The Majority

When you suspect that your New Jersey business “partners” may have committed fraud, either on someone else or upon you, what steps should you take, and what remedies might you have? In New Jersey, certain steps often must be taken as quickly as possible, including retaining a forensic accountant who has experience in uncovering fraud and testifying in court. And certain pitfalls must absolutely be avoided.

Corporate fraud is certainly not limited to the huge companies of the world like Enron. In fact, it is all too common in small, closely held businesses, as anyone with an interest in reading this article may know all too painfully well. When a minority shareholder suspects that the majority shareholders (or partners) in control are committing fraud or “cooking the books,” what should he or she do? It is critical for the minority shareholder to realize the impact this may have upon him or her. Defrauding customers, vendors or taxing authorities (like the IRS) could cause the company significant liability, which could impact profoundly on the value of your investment. It is also possible that a shareholder who becomes aware of the fraud but fails to stop it may face personal liability to those defrauded – sometimes even criminal liability.

Of course, the fraud may be directed at the minority shareholder, as well. Books can sometimes be altered to justify the lack of dividend payment, or to justify a capital call – just two of many circumstances in which a fraud may occur. A minority shareholder who suspects that the fraud is directed at him or her also has certain rights in New Jersey. To begin with, any shareholder in New Jersey has the right to inspect very limited books and records of the company. Beyond that, the majority shareholders may not be required to provide any documentation unless a lawsuit is filed. Of course, such an action opens up almost all documents to the discovery process.

Fraud by the majority in New Jersey may give rise to a lawsuit entitling the minority shareholder to the remedies discussed above, including the right to be bought out at a price that takes into account the amount the shareholder was defrauded. In certain cases, the minority shareholder who was defrauded may be permitted to buy out the majority, if that is the minority’s desired result. Damages and an award of attorneys’ fees may also be available, and your partners may have to make the payment personally if the company has been raided and left with few assets.

If you suspect that your partner/majority shareholder may have committed fraud, it is critical not only to hire an attorney skilled at prosecuting such cases, but a forensic accountant who has the experience to uncover the truth. One mistake often made is seeking advice from your own accountant, who usually has little to no experience in uncovering fraud forensically. Another common mistake is to seek clarification of certain items from the company accountant, who is likely beholden to the majority shareholders/partners.

The best approach in such a case is to retain an experienced attorney, and leave it to that attorney to retain on your behalf an accountant with the skill and experience needed to help piece together the suspected fraud. If you wish to retain a forensic accountant directly, interview the accountant on his or her forensic experience and retain only an accountant experienced at uncovering fraud.