A couple of articles today about local business disputes reiterate the truism that, so long as humans are involved in a market economy, the risk of fraud is an essential element of virtually every transaction.
In this NY Times article, Kurt Eichenwald — whose recent Conspiracy of Fools (previous posts here) is the best book written to date on the Enron scandal — profiles a family-controlled business in Conroe, Texas (about 40 miles north of downtown Houston) that is now beset with competing allegations of business fraud between the brother-owners. As Mr. Eichenwald notes:

How could it happen? How could a small company be wrecked so quickly amid myriad accusations of financial wrongdoing that went undetected until the whole place came tumbling down?
The answer is, it happens every day. The Con-Tex story is not just the tale of the downfall of one company or one family. It is a microcosm, a look at an underbelly of the investing and corporate worlds where hokey deals and mysterious webs of linked investors are part of the workaday business.

Although the article is quite good and interesting, one point that Mr. Eichenwald missed is that, despite the popular urge to use governmental regulation to punish every instance of business fraud, it really makes no economic sense to do so. The cost of such a regulatory net that would catch all business fraud (assuming that one could even be devised) would be enormous and far in excess of what Americans would be willing to subsidize.
Meanwhile, Chronicle columnist Rick Casey reviews the saga playing out in Harris County Probate Court between former Houston businessman Robert Alpert and his former attorney, Mark Riley. Mr. Riley is the trustee of a couple of trusts that Mr. Alpert had set up for his children. After a falling out with Mr. Alpert, Mr. Riley filed a lawsuit against Alpert in which he alleges that Mr. Alpert is interfering with his work as the trustee of the trusts and that Mr. Alpert is fraudulently using the trusts as a tax dodge.
The interesting twist to this case is that, during the civil litigation, Mr. Riley hired a well-known local criminal defense attorney — Robert Scardino — to negotiate a “bounty deal” between Mr. Riley and the IRS in which Mr. Riley could receive 15%, up to $7.5 million, of any penalties, fines and back taxes that the IRS recovers from Mr. Alpert as a result of information that Mr. Riley supplies.
Mr. Casey is troubled that the Probate Judge in the case — who many years ago used to work for the law firm representing Mr. Riley — will not allow attorneys for Mr. Alpert to introduce a copy of the bounty agreement as evidence during the trial of the civil case between Mr. Riley and Mr. Alpert. My sense is that Mr. Casey’s suggestion is far-fetched that the judge’s motivation in not allowing admission of the bounty agreement is to protect his former law firm, but it doesn’t appear from the article that there is much of a reason that the jury should not be allowed to consider the bounty agreement in the context of the lawsuit between Mr. Alpert and Mr. Riley.
Just two more stories from the soft underbelly of the wild world of business litigation in Houston.