REPRESENTATIVE LITIGATION MATTERS

Embezzlement Scheme

Legal Issues:

1. Fiduciary responsibility of bank to corporate customers.
2. Wire and bank fraud.
3. Embezzlement.
4. Duties under UCC Article 4.

Situation:

Alleged Facts:

Two of ABC’s employees, working in collusion with each other, embezzled approximately $800,000 from their employer utilizing a fictitious account set up at the defendant bank. The embezzlement caused the employer’s insolvency. The employer sued the defendant bank $800,000 for its direct losses and $12,000,000 for consequential losses.

Potential Liability for Financial Institution:

1. Liability for permitting a fictitious account to be established with the financial institution and the financial institution’s acceptance of checks and wire transfers into the fictitious account that were not properly payable to ABC.
2. Loss of the case. The Plaintiff had previously rejected a generous six figure settlement offer that the bank had tendered in order to avoid more expenses attributable to continuing defense and trial.
3. Claim was before a jury in a county hostile to the financial institution as a result of the recent acquisition of the defendant bank and the soon thereafter downsizing initiatives.

Analysis:

HSG found that one employee, working alone, initiated the embezzlement. In addition, the embezzlement involved three other banks and was started approximately 15 months prior to the fictitious account being established at the defendant bank. HSG proved that the total amount stolen exceeded 2 million dollars. HSG also discovered that the second employee was brought into the scheme after he uncovered the embezzlement. Further, it found that the ineffectiveness of ABC’s internal controls allowed the perpetrators to carry out their scheme unnoticed by ABC’s owner.

HSG assigned a small team consisting of two principal participants to this assignment. One was a CPA with many years of experience in public accounting and auditing and the second person was a retired controller of both large and small companies. Working closely together, they were able to determine that the Plaintiff’s weaknesses in internal controls and reporting were intentional. The team was able to provide the Expert witness (H. Stephen Grace, Jr., Ph.D.) with details of the embezzlement that had gone undetected by the U. S. attorney that had investigated the criminal charges of wire fraud by the employees.

HSG determined that Plaintiff’s damage calculations were unsubstantiated and based on faulty assumptions. HSG also highlighted the discrepancies and disarray in Plaintiff’s reporting and control systems.

Result:

Highly favorable for HSG client. Jury found no consequential damages, and determined there were $120,000 of direct damages on which there was joint contribution. The jury found the Plaintiff liable for 95% of these joint direct damages and HSG’s client responsible for 5% (or $6,000).