Truth-Default Theory and White-Collar Criminal Cases

If you practice or investigate white-collar crime, I recommend you understand Truth-Default Theory, which Malcolm Gladwell wrote about in his excellent book Talking to Strangers.  As a prosecutor and as a defense lawyer, I thought a lot about the theory’s basic concepts even before I heard the term.

As Gladwell asks in his book, how did a CIA counter-intelligence agent fail to catch a double agent who was secretly working on behalf of Cuba for years?  And why did people not catch onto Bernie Madoff or other Ponzi schemers until it was too late? 

Because people assume that the people they’re working with or trust are telling them the truth. 

Because people do not see the red flags or inconsistencies that seem obvious with the benefit of hindsight.

This is the core of the “truth-default” theory that was developed by Professor Tim Levine, whose work was the basis for much of Gladwell’s book.  And this is so important that I even read some of Gladwell’s book to one client when we were preparing for trial.

Let’s go back to the CIA example.  In hindsight, there were times when a CIA counter-intelligence agent almost caught the double agent (Ana Montes) as a traitor.  Was he negligent for missing those signs? Gladwell writes:

“Not at all. He did what Truth-Default theory would predict any of us would do: he operated from the assumption that Ana Montes was telling the truth, and – almost without realizing it – worked to square everything she said with that assumption.  We need a trigger to snap out of the default to truth, but the threshold for triggers is high.”

The problem is that when a scandal or problem arises, people want someone to blame.  And once everything has blown up, the red flags seem glaringly obvious to an investigator who sees them only with the benefit of hindsight.  People “must have” seen these red flags and they “must have” known what was really going on, the investigators believe.

As a result, some people get blamed and even charged with crimes because investigators and prosecutors simply cannot believe (with the benefit of hindsight) that people actually trusted the people whom they trusted.  Because people default to truth as they live their lives, and investigators and prosecutors (with the benefit of hindsight) default to fraud in their investigations. The threshold for triggers that Gladwell discusses is high in real-time, but investigators sometimes apply a lower threshold because they are influenced by what they know ultimately happened.

In health care fraud, my main practice area, millions if not billions get spent every year on claims that should not have been billed.  But why those improper claims were submitted is the key to how cases should get resolved, especially when multiple people are involved with the improper claims. Here were some of the questions I considered when deciding whether to bring charges in cases where it was obvious, with the benefit of hindsight, that claims had been submitted improperly:

• What did each person know and do at the time of the improper claims? 

• Did anyone know enough that his or her involvement was a crime? 

• Or were people defaulting to truth and simply making mistakes or poor judgments that were unfortunate but not crimes?

Actions speak louder than words, and I tried basing my charging decisions on conduct, not just assumptions about what people knew. For example, if a doctor or company created false patient files to match the billing, this was a very strong signal that the doctor or company had not just made a mistake. Even so, the only defense that I worried about in most of my healthcare fraud cases was if the defendant were to just get up there and say that they were really sorry and now realized that they had made a mistake.

I’ve now been in private practice for more than five years, and I’ve unfortunately seen many cases where the government has incorrectly assumed that people knew more than they actually did about what was going on.  I’ve even seen some instances where the government ignored evidence about how people were lied to and manipulated by others, believing that those people still “must have” known that what they were doing was wrong.   

This came up a lot in a trial that I recently did involving a client who operated a durable-medical equipment company and who relied heavily on a marketer, a biller, and others.  Some of those people lied to him, but he defaulted to truth and did not see the red flags that were shown to a jury years later.

Showing that the government had “defaulted to fraud” when he had actually “defaulted to truth” took a lot of work. 

• First, during the government’s case-in-chief, we tried to normalize the idea that everyone relies on the word of other people and that sometimes that reliance is misplaced.  We did this in part by showing instances where government witnesses had relied on others within the government who turned out to have made mistakes.  Everyone defaults to truth.

• Second, we highlighted the huge difference between (1) what was actually true and (2) what my client believed at the time to be true.  We showed that the information that the jury saw at trial was very different from the information that my client saw at the time.  And we showed that some things which were red flags to the government were in fact the opposite to my client given the additional information he had and that the government had not known or dismissed.

• Third, my client testified.  We knew that we were asking the jury to see things the way that my client saw things at the time, and we knew that this would be difficult if he himself did not explain what he had seen.

Ultimately, the jury understood what my client thought at the time as he lived through the events, not just making faulty assumptions with the benefit of hindsight about what he “must have” thought years earlier.

If you’re a prosecutor considering charging someone, make sure that you really have more than your belief that the person “must have” known.  Everyone makes mistakes and everyone defaults to truth – even you and your agents.  Make sure that you can identify clear triggers or “red flag moments” that your target actually recognized at the time as such, and make sure that you can show that your target actually chose to do the wrong thing at that moment.

And if you’re a defense attorney, do what you can to have the jury understand what your client really knew, not what your client “must have” known.  And look for the moment when your client actually had enough information, if he or she ever did.

In my client’s case, my client and his business partner finally consulted a lawyer who provided a detailed, written explanation of legal concerns.  They did not fully understand everything the lawyer said, but they finally had enough information to reach the trigger threshold that Malcolm Gladwell talked about.

The key to the case, I believed, was what they did in that moment – they shut the business down.

Fortunately, when the jury heard the whole story, they found my client and his business partner not guilty. They had made mistakes and been too trusting, but mistakes and misplaced trust are not crimes.

Don’t just assume that people “must have known.”  Look for the trigger threshold, and look at what they did at that moment.

About the Author: Stephen Lee was a federal prosecutor for 11 years and has been a defense lawyer in private practice since 2019. He was a reporter for the Chicago Tribune before becoming a lawyer.