Constructive Fraud

Another defense is commonly referred to as the “constructive fraud” defense, since case law has long said that frauds cannot be purely constructive. Constructive fraud, as opposed to actual fraud, is not intentional but instead the result of reckless business conduct that amounts to gross negligence. This concept applies mainly to the situation where an officer of one corporation serves on the board of another and fails to disclose some material fact. This mere nondisclosure, absent some real or contemplated loss, is not by itself criminal, and referred to as “constructive fraud”. In determining whether a “contemplated loss” existed with regard to the undisclosed information, judges will decide whether the employee had reason to believe that the information would lead a reasonable employer to change its business conduct. If so, depending on jurisdiction, intent to defraud may be found. The best bet for such a dual officer who finds himself amid such a conflict of interest (before any mail or wire fraud charges arise) is to reveal the conflict and remove himself from all participation. Remember, it is the undisclosed conflict of interest that satisfies the “scheme to defraud” element of the crime, not just the existence of a conflict of interest.