New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

As the student loan scandal widens, it seems that most colleges and universities will have to examine and modify any existing internal policies that outline appropriate conduct between employees and outside service providers.

In both New Jersey and New York, news is unfolding of possible inappropriate practices of college and university employees accepting perks ranging from stock options, the use of vacation homes, trips, as well as cash provided by loan industry representatives in an effort to become one of the institution’s preferred lenders for prospective students.

More than 90% of all students have some form of student loan, and more than 80% utilize the private lenders recommended by the university. Since these loans are for the most part subsidized by the government, there is little risk of non-payment to the lenders, in fact student loans are not even dischargable in bankruptcy.

Colleges and universities must now face the reality that in spite of their enlightened existence, they too are subject to conflicts of interest, as well as possible civil and even criminal liability.

 

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Large-scale, industrial construction litigation naturally involves high volumes of documents exchanged through discovery, which must be marshaled, reviewed and compiled in some form by counsel. Many times, adverse parties seek access to such compilations of what are otherwise completely discoverable documents. The Federal Courts have protected compilations under what has been termed the "selection and compilation" theory of the work product doctrine. Federal Courts have held that, in cases that involve reams of documents and extensive document discovery, the selection and compilation of documents is often more crucial than legal research. James Julian, Inc. v. Raytheon Co., 93 F.R.D. 138, 144 (D.Del.1982). The most widely cited cases regarding the doctrine are the Third Circuit's decision in Sporck v. Peil, 759 F.2d 312 (3d Cir.1985), cert. denied, 474 U.S. 903 (1985), and the Eighth Circuit's decision in Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir.1986). In Sporck, defendants produced thousands of documents and defendant's counsel selected and had defendant review certain documents in anticipation of his deposition. Defendant’s counsel did not claim any of the documents were work product; however, the court upheld counsel's objections to deposition questions which sought the identification of documents the deponent reviewed to prepare for the deposition. The court held that counsel's selection and compilation of the documents fell within the category of highly protected opinion work product, because the compilation of the documents would reveal counsel's mental impressions and opinions as to how the documents related to the issues. It further held that an attorney's legal strategy, his intended lines of proof, his evaluation of the strengths and weaknesses of his case and the inferences he draws from the facts are all opinion work product. The court stated:

Such material is accorded an almost absolute protection from discovery because any slight factual content that such items may have is generally outweighed by the adversary system's interest in maintaining the privacy of an attorney's thought processes and in ensuring that each side relies on its own wit in preparing their respective cases.

Id. at 316.

In Shelton, defendant's in-house counsel refused to respond to deposition questions seeking information regarding the existence or non-existence of documents in defendant's possession. Counsel argued that: 1) relevant documents were already produced, interrogatories were answered, counsel’s knowledge was acquired solely in her efforts to assist her client in litigation and thus constituted work product; and 2) any recollection of particular documents on certain subjects would reveal those to which counsel attached particular significance, revealing her theories and opinions. The court held that counsel had no first hand factual information related to the claims and that the questions she was asked sought more than just information about the existence of documents. The court agreed that the selective review and recollection of documents reflects the attorney's professional judgment on the issues, as well as her legal theories and thought processes. It found that "[i]n cases that involve reams of documents and extensive document discovery, the selection and compilation of documents is often more crucial than legal research...." Id. at 1328; see also, In re Grand Jury Subpoenas Dated October 22, 1991 and November 1, 1991, 959 F.2d 1158 (2d Cir.1992) (applying the Sporck principle that production of otherwise unprivileged documents that could be protected from discovery if their disclosure presented a real concern that the thought processes of counsel would be exposed); Santiago v. Miles, 121 F.R.D. 636, 638-40 (W.D.N.Y.1988) (court applied Sporck, finding that Second Circuit has recognized the selection and compilation doctrine; while data in computer printouts consists of unprivileged facts, printouts were prepared at direction of counsel and reflect counsel's selection process and mental impressions, deserving of protection in absence of strong showing of necessity and unavailability).

Thus counsel’s selection and compilation of otherwise discoverable documents should be protected under the work product doctrine.

Technorati Tags: New Jersey : Litigation

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It is well established that sub-subcontractors may not maintain direct actions against EPC contractors or owners based upon a theory of unjust enrichment or quantum meruit. The Appellate Division in Insulation Contracting, Inc. v. Kravco, 209 N.J. Super. 367 (App. Div. 1986), held that, in such situations, a basic premise of the theories of unjust enrichment and quantum meruit is that there must be a clear expectation by the defendant that it will be responsible for payment directly to the plaintiff. The fact that the defendant may have received a benefit for which it has not paid is not sufficient. Id. at 378.

Such was also the explicit holding in F. Bender, Inc. v. Muscarelle, Inc., 304 N.J. Super. 282, 285 (App. Div. 1997):

We know of no case where the statutory protections given to a subcontractor or sub-subcontractor by filing a notice of intention or stop notice could be replicated by a common law claim based upon quantum meruit. Such a rule would create havoc in the construction industry. See Insulation Contracting & Supply v. Kravco, Inc., supra, (denying similar reimbursement in a claim by a sub-subcontractor against the prime contractor after the subcontractor for whom the plaintiff had performed defaulted).

 In this case, Hertz had an obligation to pay its contractor, and, Muscarelle, the contractor, had an obligation to pay its subcontractor, Tri-Gee, who in turn had an obligation to pay plaintiff, its subcontractor. When plaintiff performed, it had a claim only against Tri-Gee unless it filed a notice of intention or stop notice in compliance with the Mechanics' Lien Law. It is true that Hertz and/or Muscarelle may have received the benefit of plaintiff's work; however, Tri-Gee owes plaintiff for that work.

Quantum meruit, which plaintiff seeks, requires that there be unjust enrichment. Callano v. Oakwood Park Homes Corp., 91 N.J. Super. 105, 108- 109, 219 A.2d 332 (App.Div.1966). Here, there was no unjust enrichment.

Id. at 284-5.

Therefore, the sub-subcontractor’s unjust enrichment and quantum meruit claims against the EPC contractor and owner will not support any cognizable claim for relief, and must be dismissed. Printing Mart-Morristown v. Sharp Electronics Corp., 116 N.J. 739, 746 (1989); Leon v. Rite Aid Corp., 340 N.J. Super. 462, 466 (App. Div. 2001); Rule 4:6-2(e). The sub-subcontractor is thus left to seek redress under the statutory provisions of the construction lien law, and through its direct contractual claims against the subcontractor.

Technorati Tags: New Jersey : EPC Contractors

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As a general rule, the plaintiff carries the burden of proving delay and constructive acceleration claims. According to well-settled law, the party claiming delay damages must demonstrate to the trier of fact (1) what delays occurred; (2) whether the delays are compensable; (3) who caused the delays; (4) whether the delay was offset by concurrent delays such as the delays of the opposing party or by compensable delays; and (5) the relationship between the delay and damages claimed. See, Fieldcrest Builders, Inc. v. Antonucci, 724 N.E.2d 49 (Ill. App. Ct. 1999); Premier Elec. Const. Co. v. American Nat. Bank of Chicago, 658 N.E.2d 877 (Ill. App. Ct.); Pathman Const. Co. v. Hi-way Elec. Co., 382 N.E.2d 453 (Ill. App. Ct. 1978). The claimant has the burden of proving the extent of the delay, that the delay was proximately caused by the other party, and that the claimant was harmed by the delay. See, Wilner v. U.S., 24 F.3d 1397 (Fed. Cir. 1994) The extent of the delay of each party must be clearly shown. See, Fieldcrest Builders, supra, 724 N.E.2d 49 (denying owner's counterclaim for delay damages in contractor's action for recovery in quantum meruit, finding that owner caused delays in contractor's work during the course of the project and the owner made no attempt to separate, explain, or identify which delays could be attributed to the contractor; also rejecting owner's argument that delay damages were mandated because project was delayed when owner terminated contractor from the project in August and could not find replacement until December).

In establishing a causal link between delay and the damages claimed, a contractor must show that the contractee's actions affected activities on the critical path of the contractor's performance of the contract. See, Kinetic Builder's Inc. v. Peters, 226 F.3d 1307 (Fed. Cir. 2000) (government contractor failed to show causal connection between Air Force's delay in correcting defective restroom design in building to be altered and slowing of contractor's progress in completing contract, so contractor was not entitled to time extension or reimbursement for extended job site overhead costs in connection with such delay). The party seeking delay damages bears the burden of establishing the alleged damages with a reasonable degree of certainty. See, Fieldcrest Builders, supra, 724 N.E. at 58 (1st Dist. 1999).

In addition, Courts in the 4th Circuit have held that the party claiming it incurred added costs because of delay in performance required under the contract has the burden of proving these costs. Virginia Beach Mechanical Services, Inc. v. Samco Construction Company, 39 F. Supp. 661, 672 (E.D. Va. 1999) (citing United States v. Citizens & Southern Nat. Bank if Atlanta, 367 F.2d. 473, 480 (4th Cir. 1966). If there are factors for which the defendant is responsible and factors for which it is not, the party alleging a delay caused by a material breach must provide a reasonable basis for apportioning the damages. Id. Applying these principles to the facts in Samco, the Court held that at least one other subcontractor caused the delays and may have stalled the contract performance, and for this reason, it could not conclude what role the contractor played in delaying ultimate completion of the contract and causing the damages sought. Id. Finally, the Court found that the subcontractor did not provide a reasonable basis for apportioning damages among the contractor and other subcontractors, who were obviously a substantial factor in the delay that did result. Id.

Therefore, it is the subcontractor that bears the burden of proving that an EPC contractor’s actions caused delay and constructive acceleration.

Technorati Tags: New Jersey : EPC Contractors

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Section 7 of the Federal Arbitration Act (“FAA”) provides that "[t]he arbitrators ... or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case ...." 9 U.S.C. §7. Section 7 further provides:

[I]f any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.

Id.

F.R.C.P. 45 governs the issuance and service of subpoenas in federal district court. Thus, under the FAA, F.R.C.P. 45 also governs the service of arbitration subpoenas. F.R.C.P. 45(a)(2) provides that "a subpoena for production or inspection shall issue from the court for the district in which the production or inspection is to be made.” F.R.C.P. 45(b)(2) imposes territorial limits upon the area in which a subpoena may be served providing that:

a subpoena may be served at any place within the district of the court by which it is issued, or at any place without the district that is within 100 miles of the place of the deposition, hearing, trial, production, or inspection specified in the subpoena or at any place within the state where a state statute or rule of court permits service of a subpoena issued by a state court of general jurisdiction sitting in the place of the deposition, hearing, trial, production, or inspection specified in the subpoena.

Under the above rules, it is necessary to apply a two-step analysis in order to determine the geographic limitation of the enforcement of an arbitration subpoena. First, it is necessary to identify the proper district court in which to file a petition to enforce the arbitrator's subpoena. As noted above, the FAA requires the petition to be filed in the "district in which such arbitrators, or a majority of them, are sitting." This is the only Federal Court that can legally enforce the arbitrator's subpoena, no matter where the witness works or resides.

The next step is to identify the jurisdictional limitations of the particular court. F.R.C.P. 45(b)(2)restricts the District Courts' ability to enforce a subpoena to the area within 100 miles of the courthouse or within the state in which the trial or the hearing is being held. Because Section 7 invokes F.R.C.P. 45, this limitation applies to the Court's authority to compel a witness to attend an arbitration hearing. Thus, if a third party receives an arbitration subpoena to appear at the hearing but fails to show up, the remedy the FAA provides is to petition the District Court in the District in which the panel is sitting for an order to compel compliance with the subpoena. In the alternative, Section 7 authorizes the District Court to punish the non?complying party for contempt.

The Federal case law regarding non-party subpoenas is somewhat scarce, in most cases not on point, and has led to varying results. In Amgen, Inc. v. Kidney Center of Delaware County, 879 F. Supp. 878 (N.D. Ill.1995), the arbitration was pending in Illinois and the arbitrator issued a subpoena to the non-party out of state kidney center, which was based in Pennsylvania, to produce documents and a representative for a deposition in Illinois. The kidney center refused to honor the subpoena and the plaintiff sought to enforce the subpoena in Federal Court in Pennsylvania, which held that it lacked authority to entertain the petition. Plaintiff filed a new petition with the federal court in Illinois, where the kidney center was based. The Illinois federal court ruled that it had no power to enforce the arbitrator's subpoena under the FAA and F.R.C.P. 45, but held that the parties had expressly agreed to arbitrate their dispute under the Federal Rules. Thus, they inherently agreed to liberal discovery and to the arbitrator acting "with the power of a judge applying those rules." Accordingly, the Court held that the plaintiff could follow the procedure in F.R.C.P. 45(a)(3)(B), and have its attorney issue a subpoena on behalf of the district court in Pennsylvania where the kidney center was located.

Thereafter, the U.S. District Court for the Southern District of New York, decided to strictly apply Section 7 of the FAA in Integrity Insurance Co. v. American Centennial Insurance Co., 885 F. Supp. 69 (S.D.N.Y. 1995), holding that it does not authorize an arbitrator to subpoena non-party witnesses for pre?hearing depositions. In Integrity, two non-party witnesses moved to quash an arbitrator's subpoenas for a deposition and documents. Though the non-parties were in the same jurisdiction, the Court granted the motion to quash as to the depositions, holding that the arbitrator only had the power to compel a witness to attend the hearing. The Court modified the subpoenas to provide for the non-party witnesses to appear at the hearing. It also enforced the subpoena for documents, but modified it to require production in advance of the hearing.

Most recently, in Legion Insurance Co. v. John Hancock Mutual Life Insurance Co., 2002 WL 537652 (3d Cir. 2002), the U.S. Court of Appeals for the 3rd Circuit refused to enforce an arbitration subpoena for a deposition of a non-party who resided outside the court's jurisdiction and refused to enforce the portion of the subpoena requesting document production. There, the arbitration was to take place in Pennsylvania, and the third party resided in Florida. The 3rd Circuit based its refusal to enforce the arbitrator’s non-party subpoena on the ground that the witness resided beyond the Court's territorial jurisdiction under F.R.C.P. 45.

Though there is a paucity of cases addressing an appearance at an arbitration hearing, as opposed to depositions and the production of documents, it is clear that the rules regarding arbitration subpoenas for non-party out-of-state witnesses are strictly construed by the Federal Courts. It is also clear that Federal Courts have held that there is a direct relationship between Section 7 of the FAA and F.R.C.P. 45, such that arbitration subpoenas for non-party out-of-state witnesses are restricted in that they must be issued in the same jurisdiction or within 100 miles of the location of the arbitration hearing.

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Within the terms of virtually every EPC contract is an indemnification provision in which the EPC contractor must indemnify and hold the property owner harmless from the construction liens and lien enforcement lawsuits of the project subcontractors and sub-subcontractors. As such, the EPC contractor can be placed in the unenviable position of having to defend against the claims of a sub-subcontrator, while being saddled with an adverse owner and an unresponsive or insolvent subcontractor. In such situations, the New Jersey Construction Lien Law ("CLL") imbues the EPC contractor with standing to defend against the sub-subcontractor’s claims.

The lien claimant sub-subcontractor must file suit against the subcontractor, property owner, EPC contractor and any possible parties the subcontractor knows to have an interest in the real property that would be adversely affected by the judgment. The CLL permits the EPC contractor the right to defend against such foreclosure regardless of the position taken by the subcontractor or property owner:

N.J.S.A. 2A:44A-16. Party defendants joined by claimant, entitlement to defense

a. A claimant shall join as party defendants the contractor or subcontractor who is alleged to have failed to make the payments for which the lien claim has been filed and any other person having an interest in the real property that would be adversely affected by the judgment. A party required to be joined under this subsection shall be joined if feasible pursuant to R.4:28-1(a) of the Rules Governing the Courts of the State of New Jersey, unless prohibited by law.

b. Any party to an action to establish a lien shall be entitled to any defense available to any other party in contesting the amount for which a claimant seeks to have his lien reduced to judgment.

(emphasis added);see, also, Kvaerner, 368 N.J. Super. 200 ("We are mindful that N.J.S.A. 2A:44A-14a(2) confers upon a lienee the opportunity to force an evaluative review of the lien claim. Logic suggests that the property owner's representative, a general contractor, should have the same opportunity").

In this manner, an EPC contractor enjoys standing to object to and defend against the sub-subcontractor’s lien claim, regardless of the position taken by the owner or subcontractor.

Technorati Tags: New Jersey : Construction Lien Law : EPC Contractors

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Today's Star Ledger reports on Tyco International's disclosure to regulators that it hired outside counsel to review whether one of its business units violated the Foreign Corrupt Practices Act by making improper payments to foreign officials. The Foreign Corrupt Practices Act has a self reporting provision which requires companies to act as their own monitor and alert regulators when perceived improper practices are discovered. In this particular case, Tyco reported the results of its review to the Justice Department and the Securities and Exchange Commission.

This situation is a good example of a circumstance where it is important for an organization to bring in independent counsel who can objectively investigate alleged infractions.

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A turf war seems to have erupted between United States Attorney Christopher Christie and State law enforcement officials such as Attorney General Peter Harvey and Monmouth County Prosecutor John Kaye. One has to ask if the strife between these powerful officials is hindering the effective prosecution of corrupt public officials, or is it just another "black eye" for New Jersey.

To some degree tension has always existed between the various offices. However this tension was usually relieved by the relationships that existed between the U.S. Attorney and various State officials. There was also an unwritten rule governing the prosecution of different types of Criminal activity. As a result, a cordial relationship between these offices existed for many years which was kept alive by the movement of career law enforcement officials between the Federal and State agencies. Yet today we see that the era of civility is officially over, its end marked when new leaders with political connections, and more importantly political aspirations, assumed control of the two offices.

Christopher Christie had plenty of political connections and very limited law enforcement credentials when he was appointed. He quickly realized that to further his political ambitions he needed to be noticed, and no type of case generates publicity like political corruption. Christie sent a clear message to his office to develop corruption cases. Meanwhile on the State's side, beginning with the appointment of Peter Veniero as Attorney General and continued with the appointment of Peter Harvey, the State Attorney General has been more concerned with protecting the Governor's reputation than eliminating corruption.

Christie does have an advantage over the State Attorney General in that he does not have a Governor to protect, and can therefore commence corruption investigations without alienating people to whom his boss owes favors. Attorney General Harvey on the other hand has had to stand by and watch the numerous faus paux of his former boss, Jim McGreevey.

Christie has won the corruption fight hands down. He has brought case after case against public officials both enhancing his name recognition among Republican partisans and embarrassing the Democratic public officials who he has primarily targeted. The turf war has now escalated with the recent Indictments by Christie of what seems 50% of the public officials in Monmouth County. In doing so Christie has now stepped on the toes of a more formidable opponent Monmouth county Prosecutor John Kaye.

Kaye, the longest tenured county Prosecutor has long had a reputation as a hardliner on things such as drug prosecutions. In fact Kaye has developed a reputation that there is much less crime in his county because of his ruthless prosecution of one and all. Imagine his displeasure when he found out that Christie had imported from Florida an out of control cooperating witness who seemed to offer bribes to every public official he could find. The prospect of this occurring in Kaye's County, much less without his approval caused the two principles to engage in a very public dispute. Christie claims that Kaye sabotaged the federal investigation by calling in some of the targets for questioning. Kaye claims that Christie refused to advise his office of the investigation of public officials within his county. Christie has now subpoenaed Kaye, and Kaye not only threatening to subpoena Christie, but is attempting to go over his head by appealing directly to the Justice Department with his complaints.

The bad blood between Christie and Kaye has now reached a fever pitch. Last week, The Star Ledger reported that Kaye's support is quickly eroding. Senator John Adler, chairman of the Judiciary Committee, along with Senators Tom Kean and Ellen Karcher, are all calling for Kaye's immediate removal. Even acting Governor Richard Codey has said that he will not reappoint Kaye when his term expires in four months, and he may demand Kaye's resignation sooner. Christie's corruption prosecutions have scored him points with the power elite while Kaye's twenty-two year history of writing his own rules regarding law enforcement in Monmouth County has left him isolated and targeted for removal from office.

When all is said and done, the drama playing out in New Jersey is all about politics, and the loser once again are the citizens of New Jersey.

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United States v. Booker

The United States Supreme Court on Wednesday January 12, 2005 rendered the long awaited decision regarding the constitutionality of the U.S. Sentencing Guidelines (Guidelines). In an interesting decision, two separate groups of Justices essentially rendered two opinions in the one case, the first determining that the Guidelines violate the Sixth Amendment, to the extent that they allow judicial rather than jury fact finding to form the basis for the sentence, and the second determining that the Guidelines can continue to be used, as long as they are advisory rather than mandatory.

The background for this decision relates back to the June 2004 decision in Blakely v. Washington, where the Court in a groundbreaking opinion held that Washington State's Guidelines violated the Sixth Amendment guarantee of a trial by jury in criminal cases. Washington's guidelines allowed judges rather than juries to make certain findings of fact that increased an offender's sentence. The Court held that a judge may impose a sentence solely on the basis of facts reflected in the jury verdict or admitted by the defendant.

The U.S. Sentencing Guidelines, like Washington State's allow judicial fact finding to play a role in determining the sentence. After, Blakely the federal courts were immediately faced with the prospect that the Guidelines also violated the Sixth Amendment, thus raising the thorny question of whether all sentences determined under the Guidelines were unconstitutional. Thankfully, the Court granted quick review of two cases that raised the issue, Booker and United States v. Fanfan.

As was set forth above, not surprisingly, a majority of the Court composed of Justices Stevens, Scalia, Souter, Thomas and Ginsburg found the same Sixth Amendment violation that they found in Blakely. The reasoning followed the Scalia opinion in Blakely, by holding that "Any fact which is necessary to support a sentence exceeding the maximum authorized by the facts established by a plea of guilty or a jury verdict must be admitted by the defendant or proved to a jury beyond a reasonable doubt."

In practical terms, a defendant appears for sentencing after having either pled guilty, or having been convicted by a jury. In entering a guilty plea, the defendant must allocute under oath the facts that establish th defendant's guilt. Likewise a jury must make findings of fact, at a minimum, facts necessary to establish that the legal elements of the crime were proven. Fast forwarding to sentencing, the Guideline sentencing range requires a finding as to the "criminal history category" and "offense level". Particularly, with the offense level, the sentencing Judge is required to make factual findings that are often beyond the proven facts including evidence that would not be admissible at trial.

The second part of the Court's holding dealt with whether the Guidelines by virtue of the Sixth Amendment problem are null and void. The Court's answer was surprisingly, no. This answer was given by a different majority comprised of Justices Breyer (a former Chairman of the Sentencing Commission), Rehnquist, O'Connor, Kennedy, and Ginsburg (the one common denominator). This majority sought to determine whether Congress would have intended the Guidelines be defunct, or would it have intended that a partially altered set of Guidelines continue to be in effect.

The Court believed that Congress would have intended the Guidelines to survive in a way that allowed them to comply with the Sixth Amendment. That was accomplished by the Court determining that the Guidelines now become advisory rather than mandatory. Thus the Guidelines help judges choose an appropriate sentence between a statutory maximum and minimum, but no longer dictate the result. Therefore judges must consider the Guidelines, but are not bound to follow them. This is an outcome that few predicted. In fact Justice Stevens noted in his dissent from the second holding, "Neither the Government, nor the respondents, nor any of the numerous amici (friends of the court) has suggested [this]."

The guidelines were intended to create uniformity, certainty and parity in sentencing. Put simply, they were meant to ensure that similarly situated defendants were treated more or less alike. Prior to the Guidelines, the result depended on the particular judge that imposed sentence. The Guidelines by constraining judicial discretion were designed to change that by making sentencing a matter of rational decision making, not just the luck of the draw as to the sentencing judge.

Now that the guidelines are merely advisory, it will be interesting to see if they will continue to serve their purpose. Will judges feel constrained to apply them or will they ignore them. An educated guess is that most judges will continue to follow the guidelines except in those special cases were a judge feels strongly enough to depart from the guidelines, and set forth the reasons for the departure.

The most likely beneficiaries of the new Guideline approach will be those charged with white collar offenses. White collar defendants prior to the Guidelines generally stood a better chance of avoiding jail time. Under the Guidelines the discretion of the sentencing judge was taken away, forcing many judges to impose sentences of incarceration in white collar cases based upon the application of the Guidelines. With that discretion being returned, it will be interesting to see if sentencing judges become more willing to consider non custodial type sentences for first time white collar offenders.

The ball has been passed squarely into the lap of Congress to decide whether a new sentencing system needs to be developed. It will be interesting to see what happens next.

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Most small businesses struggle in their formative years due to difficulties associated with obtaining sufficient working capital. Assuming that you have cleared that hurdle, your business should move forward and begin to grow. Internal control systems generally take time to refine and are usually behind other systems in terms of development. In fact, the faster you are expanding the more likely that internal control systems are neglected. Without dedicated, loyal, and honest employees, you would probably not be able to grow in the first instance.

Statistics have shown that thefts by employees from their employers account for losses of approximately $40 Billion a year. That number is staggering when you consider that it is larger than the Gross National Product of some Third World Nations. No matter what type of business you are in, you are not immune. Professional practices, service companies, banks, and manufacturing companies are all equally susceptible to this universal problem.

Initially, before conducting any internal audit or investigation, you should be mindful of your employees' right to privacy. Courts have shown a great willingness to protect an employee's privacy from invasion by their employer. Therefore any employer must be cautious not to offend the sensibilities of their employees. If an employee suspects that he/she is being placed under scrutiny company moral may be adversely affected, leading to more serious labor troubles.

People that embezzle from their employers do not fit any one mold that can be easily identified. Experience has shown that dishonest employees are as diverse as the schemes that they originate. For example, I have seen acts that involved false bank accounts, false bank records, false billing statements, false receivable records, and even false computer records. However there exist some similarities in these various schemes.

One common theme is that the employee is almost always highly trusted and otherwise dependable. This employee usually has delegated authority and supervisory responsibilities. If it is any consolation, a dishonest employee normally has a great incentive to insure that the business is successful, because the more successful the business, the greater the opportunity to continue a scheme. Often the employee has two reasons for making sure that neither third parties nor other employees gain an advantage in their business dealings. First, the dishonest employee wants to be the only person taking advantage of the company. Second, such aggressive protection of the business' interests usually does not go unnoticed by Management, which can lead to more responsibility and less scrutiny of their activities.

Another common characteristic is that the dishonest employee will generally work long sometimes irregular hours. Typically they will arrive early or stay late when few other employees are present. This permits an opportunity to act without co-workers observing their actions. This employee will frequently not take their vacation or spend long periods away from the business. Extended absences result in a greater chance of detection.

Another popular misconception is that you are protected if your company books are routinely audited or reviewed by your accountant, or bookkeeper. However, an essential part of any embezzlement scheme is a method of preventing detection. No one engages in criminal activity if they think that they will be caught. The initial temptation to embezzle is usually associated with a determination of how easy it would be to accomplish, without being detected. In most business situations, a competent employee can design a scheme that would not likely be noticed. Your accountant may, unwittingly, contribute to the development of a scheme by specifying what records are needed for the audit. A predictable audit, either in terms of timing, or the documents to be reviewed, will not necessarily be a deterrent.

Additionally, the employee very often has supervisory control over the company's payables, receivables, and banking relations. Since this is an area where revenue transfers in and out of the company, special scrutiny is required.

Even employees for whom special allowances have been made are capable of embezzling from their employer. Many employers are shocked to learn the identity of a dishonest employee when an embezzlement is discovered. Often I have heard an employer lament that this was an exceptional individual who received special favors or treatment due to their status as a loyal and trusted employee. In many of these cases, regardless of the size of the loss, employers are more distressed by feelings of betrayal then the actual loss suffered.

The local police while being very helpful may not recover what has been taken. If the money involved is a sizable amount, then jurisdiction probably rests with the county prosecutors office. Due to the fact that a Civil action can be brought against the dishonest employee, authorities may not be as helpful as expected. A far more effective response is to retain either an attorney or accountant that specializes in this area. Note that once funds have been embezzled, the likelihood of recovery diminishes very quickly. The typical dishonest employee does not invest the proceeds in conservative investments. Rather the money may be indulged on luxuries that would not normally be afforded by the employee on their normal salary. For this reason it is imperative that quick action be taken to locate whatever assets can be frozen in order to maximize any recovery.

Other significant issues exist with respect to the termination of the employee. A confrontation should be avoided until sufficient information has been developed, otherwise there is the possibility of a wrongful discharge suit being filed by the employee.

In closing it is important to stress that not all employees are dishonest, and this article is not intended to imply that all companies have a problem but merely to suggest that the company be sensitive to the issue and prepared to deal with the problem should it arise.

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