Mordicai.. below is an excerpt from a legal website (link below).. Jim has been charged with Securities Fraud.. isn't that correct? Unless, as you say, there is a provision in the statutes which states he "should have known", I think their choice or wording makes no sense.
WHAT CONSTITUTES FRAUD Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim’s reliance on the statement and damages.
There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC’s financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include
Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts’ expectations. Or, if managements’ compensation is tied largely to earnings performance, documenting that would help establish motive.
Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. To prove this element the lawyers would call witnesses from ABC to testify and introduce documents relating to job descriptions. The CPA usually would help identify the specific control weaknesses or overrides that allowed the fraud to occur.
Repetitive acts. Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error. Or if an employee steals once, he or she may be able to explain that away. Frauds, whether involving asset misappropriations or fraudulent financial statements, usually are not single acts. For example, assume that someone at ABC Corp. decided to inflate last year’s earnings by falsely debiting accounts receivable and crediting sales. Since one single large entry might draw attention, it is more likely there would be numerous false entries of smaller amounts. This fact makes it more difficult for the ABC fraudster to claim it was an error.
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