Suing to Recover Stolen Funds: The Pros and Cons

May 13, 2014

When an employee theft is discovered, the company must make a decision about what steps to take to recover the amount stolen.

Restitution may be ordered as part of a criminal prosecution, but a plea bargain may leave the company with less than the full amount lost. If that is the case and the company cannot reach an acceptable settlement with the ex-employee, the decision of whether to pursue civil litigation must be made.

The reality is that nearly half of victims of employee fraud (48.7 percent) do not recover any of their losses, according to the most recent report of the Association of Certified Fraud Examiners.

But about 15 percent get a full recovery, and 30 percent recover at least half.

Only about 23 percent of victim organizations filed a civil suit in the latest ACFE report in 2012. Those cases involved the most money – the median loss in those cases was $400,000.

When the victim’s organization did pursue a civil action, they received a judgment in their favor about half the time, down considerably from past years when the victim won settlements in about two-thirds of cases. Settlements with the perpetrator in 2012 happened in 31 percent of cases. The judgment was for the perpetrator in about 15 percent of cases, according to the 2012 ACFE report.

The decision to file an action against a wrongdoing employee may seem simple at first, particularly if the employee has been convicted after a criminal trial or has pleaded guilty.

The ex-employee in such cases will be stopped from contesting the issue of guilt, so the only fact to be established will be the amount of the loss. The only real question will be whether the judgment can be collected.

Even if there has been no criminal proceeding, the facts indicating guilt may be so overwhelming that winning a civil suit appears easy.

Of course, the ex-employee may lack the resources to oppose a civil suit effectively, in which case the defrauded employer’s task – and its choice – are relatively easy. But if the evidence is less than conclusive, and there has been no criminal prosecution, the decision will probably not be so clear-cut.

A contested litigation will undoubtedly entail attorneys’ fees that, if the case is complex and goes to trial, may be considerable. The amount of these fees must be weighed against the amount at stake and the likelihood of collection, even if a judgment is obtained.

Another downside of bringing a civil action is the possibility that the employee will mount a defense that blames the loss on other employees or carelessness by management.

Courts often are liberal in granting discovery to defendants. If the matter goes to trial, facts may come to light about lax internal controls, poor performance by other employees or other day-to-day events that might not reflect well on the company. This information otherwise would not come to the attention of the public or, depending on the size of the company, of many other employees.

While the company may still prevail in such cases – especially if the court denies admission of such evidence on relevance grounds – the price of victory may be high, particularly if the chances of ultimately collecting are remote.

These factors show that deciding to sue civilly is not always an easy decision. However, in many cases, it will still be desirable.

Aside from the concern that justice needs to be done, pursuing all possible avenues against a wrongdoer sends a powerful message. Employers need to make it clear that employee theft will be dealt with harshly, both as a deterrent to other potential wrongdoers and as part of a larger emphasis on integrity and loyalty to the company.

Moreover, failing to act forcefully against wrongdoers may cause a loss of respect in the marketplace. It could cause any regulatory agencies with jurisdiction to question the company’s commitment to principles of ethical behavior, which can lead to further adverse consequences. These considerations will often outweigh any concerns over the information that may be disclosed in the course of litigation or whether any money will ever be recovered.

There is no hard and fast rule about whether a civil suit should be brought after discovery of an employee theft. Each case should be weighed on its own merits in conjunction with the company’s counsel. But in the current atmosphere, the need to reaffirm the paramount importance of ethical behavior often combines with the desire for justice to tip the scales in favor of proceeding with a civil action when the criminal process alone does not give full restitution.