Fraud

Educational institutions can be either the victims of fraud or, through their administration or governing boards, the perpetrators of fraud. When institutions are the victims, fraud may stem from the actions of employees, students, or contractors. Common types of fraud against institutions include unauthorized spending and the falsification of credentials or other documents. The penalties to follow findings of such fraud may include dismissal, suspension, or demotion of employees; criminal prosecution; voiding or rejecting renewal of credentials; and suspension of agency contracts.

When institutions are the perpetrators, fraud actions may arise within a variety of contexts. One notable area is fraudulent conduct by private institutions in order to enroll students. In this regard, the California legislature has noted that “Students have been induced to enroll . . . through various misrepresentations including misrepresentations related to the quality of education, the availability and quality of equipment and materials, the language of instruction and employment and salary opportunities” (California Education Code § 94850). Institutions also may commit fraud when, for example, failing to accurately report compensation for purposes of retirement benefits or when fraudulently appropriating institutional funds.

The act of fraud is a deceptive representation intended to induce another to give up property or legal rights. Fraud is a statutory or common-law tort action that allows for parties injured by fraud to take private actions in civil courts in order to recover damages. In some cases, fraud rises to the level of a criminal offense. For instance, the Federal Mail Fraud Act provides for criminal penalties for certain fraudulent acts.

Fraud can be distinguished from lying or perjury in that the victim of fraud must suffer actual harm from a reliance on the misrepresentation. Fraud is also distinct from general misrepresentation in that fraud traditionally requires deceptive intent.

According to Section 525 of the Restatement (Second) of Torts, four elements are usually required to establish fraud: (1) a knowingly false statement that might influence the victim’s decision making, (2) an intent to deceive, (3) a reliance on the statement, and (4) resulting damages.

Establishing a fraud cause of action in court can be complicated by the difficulties posed by establishing the element of intent to deceive. But intent to deceive can be inferred from such elements as motive to conduct the fraud and opportunity to do so. There are certain types of fraud claims, however, in which deceptive intent is not required, provided that the facts of a situation meet particular requirements. For instance, a constructive fraud claim requires a breach of a legal duty to another, but the establishment of actual intent is not required. In addition, negligent fraud can occur when a person provides false information that he or she actually believes to be true, so long as that belief is not warranted by the information at hand and the person should have reasonably known it to be false.

Fraud based on deceptive intent can take a variety of forms. Fraud may be committed through statements or through conduct and may take the form of misrepresenting present circumstances or making false promises about the future. Furthermore, fraudulent statements or conduct may be outright false or merely misleading in nature. The U.S. Court of Appeals for the First Circuit, relying on Massachusetts law, has ruled that an educational institution may commit fraud even when its misleading statements are couched in terms of personal opinion if the opinion implies the existence of untrue facts upon which the opinion is based. The Court also found that school disclaimers disavowing statements of the type at issue (in this case, regarding the school’s chances of accreditation) are an insufficient defense against fraud. In addition to these overt actions, fraud also may be committed through concealment or silence regarding that for which there is a duty to disclose, such as an error noticed in a contract.

Victims of fraud may understand what they are doing when they give up their rights or property but be encouraged to do so through misrepresentation (fraud in the inducement), or they may fail to actually understand what they are agreeing to (fraud in the inception or execution). In California, victims of fraud face a three-year statute of limitations for seeking damages or relief; however, the three-year clock does not begin to run until the victim discovers, or reasonably should have discovered, the existence of the fraud.

Rosalia Ibarrola

See also Educational Malpractice; School Boards; School Finance Litigation

Legal Citations

  • California Education Code § 94850. 
  • Mail Fraud Act, 18 U.S.C. §§ 1341 et seq. 
  • Restatement (Second) of Torts §§ 525, 539 (1977). 
  • Rodi v. Southern New England School of Law, 389 F.3d 5 (1st Cir. 2004). 
  • 3 Witkin, Summary of California Law, Contracts (10th ed. 2005) §§ 298–299.