Examination ‘Bad Words’

How CFEs can Avoid Potential Defamation Pitfalls

July/August 2010

By By Jeff Windham, J.D., CFE

A Certified Fraud Examiner (we’ll call him Ted) competently investigated an alleged theft by a former employee of a client (we’ll call him Sam). However, during an informal conversation with representatives of the company (Ted’s client), Ted told them that in his opinion, Sam was a “crook.” Big mistake.

Ted had found significant circumstantial evidence against Sam, but Sam was never prosecuted for the theft because of a lack of direct evidence. As is typical in this kind of case, Sam sued Ted’s client for wrongful termination, among other things. However, when the complaint was filed, Ted was shocked to see that he was a defendant along with the employer. Sam had heard about Ted’s offhand remark and sued him for defamation.

Ted’s defense in court was frustrating, costly, and time-consuming, especially because it could have been avoided. Ted’s insurance company funded his defense costs, but it ended up settling the case prior to trial. Unfortunately, Ted had to spend significant time tending to his defense – collecting documents, giving a deposition, and communicating with attorneys – when he could have been working. Ted’s insurance premiums will likely increase, and the experience was extremely stressful.

In another actual examination, an internal auditor and CFE (“Bill”) for a large company was investigating two employees for potential kickbacks. During an informal lunch, Bill allegedly told someone who knew the employees that they were “going to jail for what they had done.” Unfortunately, a waitress, who knew one of the employees, heard the conversation and, of course, promptly told that employee.

The company fired both of the employees and prosecuted them. The court dismissed the criminal cases against them because of improper handling of evidence. The employees subsequently sued the company and Bill for several counts including defamation. The case is ongoing.

As CFEs, we’re constantly presented with situations involving potential criminal conduct. Our work product provides a great deal of evidence against alleged criminals. So how do we investigate and examine potential criminal activity, interview possible suspects, report on alleged illegal acts, and provide opinions without subjecting ourselves to defamation claims?

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By LMcGee
It's easy to get caught up in the moment when conversing with a witness, become overwhelmed with paperwork, or to "think out loud". I appreciate this article's warning on how to avoid "defamation pitfalls". It reminds me to stay focused and professional. Thanks!