> Option #3: Stay on, try to convince them it's bad idea. In this case I'd go for "I think this is fraud, it's too risky", with nice broad paper trail that will be trivially findable by discover if they get sued later, and copies of paper trail kept by you.
This approach requires great care. You could easily leave a paper trail that makes it look like you (1) knew it was fraud, (2) advised against it because you thought it was risky, not because you thought it was wrong, (3) when the company went ahead with it you went along.
I think you want something more along the lines of "This seems like it could be fraud, or at least appear to be fraud, but I'm not a lawyer...are we sure this is legal?", and the paper trail needs to have someone that you have reason to trust answering that it has been checked out and is OK. If it hits the fan legally, either civilly or criminally, you need to come off as someone who was an inside victim, not an inside accomplice.
An interesting thing too you may experience at discovery is that the other party has documented their own parallel but self-serving version of events via emails to themselves.
e.g. "Today Harry repeated his threats to sue us for fraud. Todd and I are trying to work out how to deal with it, its new territory for us."
Option #3 leaves you open to this unpleasant scenario.
This approach requires great care. You could easily leave a paper trail that makes it look like you (1) knew it was fraud, (2) advised against it because you thought it was risky, not because you thought it was wrong, (3) when the company went ahead with it you went along.
I think you want something more along the lines of "This seems like it could be fraud, or at least appear to be fraud, but I'm not a lawyer...are we sure this is legal?", and the paper trail needs to have someone that you have reason to trust answering that it has been checked out and is OK. If it hits the fan legally, either civilly or criminally, you need to come off as someone who was an inside victim, not an inside accomplice.