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Increase in Fraud and Bankruptcy Cases Highlights Importance of Digital Evidence

Surge in Subprime Litigation is also Driving Computer Forensics Demand Cases involving financial misconduct are on a dramatic rise, and digital evidence is playing an increasingly important role in fraud detection. Consider this:

  • Bankruptcy filing jumped nearly 30% in the year ending March 31, 2008
  • Subprime-related cases filed in federal court doubled during the second half of 2007
  • Virtually every participant I the subprime collapse is being sued
  • U.S. organizations lose an estimated 7% of their annual revenue to fraud. The median fraud loss is $175,000, but more than one-quarter of all frauds involve losses of at least $1 Million
  • Law firms are scrambling to recruit attorneys to serve an exploding bankruptcymarket.

A Case Study in Electronic “Shredding”
The financial planner, a party in a bankruptcy case had a problem: he knew Electronically Stored Information (ESI) on his office computers would almost certainly reveal his role in a financial scheme involving the hiding of his client’s assets and an alleged fraudulent conveyance. He also knew the court-appointed computer forensics examiner would probably find the evidence…and that would implicate him in a fraud. His solution? he, (or someone with access to his company computers) installed hard drive wiping software on several of his office PCs just hours before the arrival of the computer forensics examiner.
Unlike paper shredding, however, electronic shredding leaves digital fingerprints behind,
including the date, time, identity of the computer user, and sometimes the file names of
deleted documents. At a subsequent hearing, the financial planner’s ill-conceived plan
came unraveled when the computer forensics expert disclosed his finding. The result: a
default judgment, sanctions, and an adverse inference against the defendant.5

“…the expert’s report indicates that somebody has basically shredded or destroyed the relevant and other data on the three computers under Mr. Schlossberg’s control or direction for which he should be held responsible…”
– Judge John H. Squires

This case illustrates just one successful application of computer forensics technology as an
effective fraud detection tool for litigators. As cases involving fraud, white collar crime, and
bankruptcy increase in frequency, computer forensics will be an effective tool indeed.

The Digital DNA of a Fraud: How Computer Forensics Can be Applied to Fraud Cases

  1. The recovery of hidden or deleted entries in financial / accounting software
  2. User internet activity (especially often overlooked web mail) can create an electronic trail to unknown bank accounts or other undisclosed assets.
  3. Debtor’s user documents can reveal fraudulent “changes” (sometimes found in metadata) to financial statements and other electronic documents which can demonstrate fraud.
  4. Account numbers, passwords and text messages may be recovered from user’s BlackBerries, cell phones, and other PDAs
  5.  Creating a computer forensic image of a departing employee’s computer can help preserve potential electronic evidence when they depart under suspicious circumstances
  6. A covert inspection of an employee’s work computer can provide proof (or can dispel suspicions) when performed after receiving a tip regarding alleged employee financial misconduct
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About Jeff Hartman

Jeff is a 30 year veteran of the corporate security, computer forensics, and eDiscovery community and a co-founder and partner at 4Discovery. 4Discovery is a leading provider of computer incident response and computer forensics services to attorneys, corporate security executives, and the information protection community.