Monday, February 16, 2009

Fraud Trial For Teacher - Conflict Of Interest And Self-Dealing

The Los Angeles Times has an article about a math teacher awaiting a verdict in a federal fraud trial in downtown Los Angeles. Teacher Matthias Vheru is accused of making nearly $1 million by arranging for L.A. Unified School District to order 45,000 copies of his algebra textbook without revealing his financial interest in the transaction.

As an interim director of mathematics for Los Angeles Unified, Vheru recommended the district order 45,000 copies of his textbook at a cost of $3.7 million without revealing his financial interest in the transaction. Vheru received about $930,000. "He's not charged with being a bad teacher," Assistant U.S. Atty. Paul Rochmes told jurors in his closing arguments last week. "This is a case about deception."

This case has gone on for some years. Vheru was asked to resign in May 2005 and there was a civil lawsuit where he was ordered to pay the district $300,000 and give it any future royalties.

Commentary: Fraud trials often turn on basic notions of honesty and whether anything was hidden. Where there is a conflict of interest or self-dealing, that evidence is used to show the person is not honest and has the criminal intent to defraud. Prosecutors have become more creative in charging individuals where there are conflicts of interest, breaches of fiduciary duty or where the person (or his family) in charge of making the purchasing decision could benefit financially.

The purpose for conflict of interest laws is to prohibit public employees from personally benefiting at the expense of the public interest. When a public official betrays his duty for personal gain, he commits what the courts call "theft of honest services." Courts have consistently held that breaches of fiduciary duty are felonies. The courts treat any and all legal duties of public officials as "fiduciary."

In California, the Public Reform Act of 1974 enacted laws to address these issues. For example, the law in California is that “No public employee at any level of state or local government shall make, participate in making or in any way attempt to use his [or her] official position to influence a governmental decision in which [s/he] knows or has reason to know [s/he] has a financial interest.” Gov’t Code § 87100. Any person who willfully violates the general prohibition is guilty of a misdemeanor. Gov’t Code § 91000.

We do not know whether an early intervention or settlement in this case and offer to repay the district would have precluded criminal charges or not. However, we have seen clients (especially those from other cultures like Vheru who is from Zimbabwe) not appreciate the conflict of interest and self-dealing rules and how those facts can be used to charge fraud.

What could Vheru have done to avoid being where he is today? He should have announced the financial interest creating the conflict, and have disqualified himself from involvement in the decision. Even where a true conflict of interest does not exist, employees should be sensitive to the appearance of conflict, and should carefully consider whether to participate in a decision-making process whenever they have any financial interest at stake. Seek a legal opinion on the issue so that you can rely on the "advice of counsel" if you are not sure how to proceed.

Any questions or comments should be directed to:
Tracy Green is a principal at Green and Associates in Los Angeles, California. They focus their practice on the representation of individuals, businesses and licensed professionals and providers, including executives, employees, and public employees, and businesses who contract with the government.


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