The legal definition of fraud states that fraud is a misrepresentation of a matter of fact, by false or misleading allegations, or by concealment of what should have been disclosed that deceives and is intended to deceive another so that the individual will act upon it to his or her injury. As the legal dictionary states, "fraud is commonly understood as dishonestly calculated for advantage." In recent years, some of the most notorious people convicted for fraud have paid the price for their nefarious behavior. The poster child for fraud would be the infamous Bernard Madoff who was convicted of investment advisor fraud, mail fraud, and wire fraud to name a few. Fraudulent behavior includes false statement of material facts, knowledge on the part of the defendant that the statement was untrue, intent by the defendant to deceive, a reliance by an investor or victim on the statement, and injury to the alleged victim.
TSB's Case Study is directed at our legal eagles that read our blog. Let's say we have a fictitious company in the spine industry, for sake of discussion let's call them Company X. In four years, company X has burned through roughly $20-25 million in investment capital, revenue is weak, and "X" has exhausted all means by which it can raise additional capital. Company X decides to issue a Press Release on Orthopedics This Week reporting that within the past few months Company X has had record breaking sales, a result of making multiple changes to their instrumentation, and substantiating this claim by stating that they have received plaudits from surgeon customers, not informing a potential investor that 80% of its revenue is generated by investing surgeons. Furthermore, the declaration that Company X has had a record breaking quarter is in print. All the while revenue has been flat, or as any financial analyst would interpret, in decline.
Company X really hasn't had a record breaking quarter or month. The numbers have been inflated by a one time sale to a foreign stocking distributor that inflated the metric utilized by the company to measure its progress, since the company has always based its progress on surgical implantations. In Gladwell's World this would be considered an outlier occurrence. Company X's intent is to use the Press Release to inflate the company's image, with the intent of enticing or attracting former or potential investors into infusing additional capital into the company. Company X decides to enlist Doctor Famous, a surgeon investor and BOD to call on former and potential investors. Doctor Famous is well aware of Company X's financial status.
The Legal Question
The Legal Question
Is Doctor Famous or the CEO committing fraud if they are knowingly soliciting capital by misleading potential or former investors? Or, is this another situation whereby the old adage applies, caveat emptor? What happens if the seller is knowingly selling a latent defect? TSB wants to know what our readers think?