Investment bank worker pleads guilty to securities and mail fraud charges, receives jail sentence
An employer cannot escape liability for negligent supervision and retention by being “doubly negligent” and by shutting its eyes to its employees’ tortious practices and propensities, the State of New York Court of Appeals said in a recent case.
The case of The Moore Charitable Foundation v. PJT Partners involved PJT Partners, Inc. and Park Hill Group, LLC, which were an investment bank and one of its divisions. In 2013, they hired an employee to begin a business line focusing on fund recapitalization work and vested him with significant authority.
The employee succeeded in bringing in a substantial amount of work for his employer. However, as time passed, he allegedly started showing signs of dangerous and destructive behaviors during work hours, including:
- excessive high-risk securities trading via his personal accounts
- obsessively monitoring the value of his holdings with various devices, including those that the employer supplied to him
- drinking too much
- holding meetings with colleagues while inebriated
In 2014, the employee landed a large deal involving the recapitalization of a private equity fund managed by Irving Place Capital. He ended up diverting the $8.1 million fee to himself for the purpose of purchasing securities through his personal account.
After the deal’s closure in 2015, some of the employer’s other workers asked the employee about the delayed payment of the fee. He lied that a “stub closing” had to be completed before the fee would be paid. The employer did not challenge the employee’s explanation or make further inquiries.
The employee formulated a scheme for getting replacement funds from The Moore Charitable Foundation and carried this out over several months.
In 2016, the foundation discovered what the employee was doing. Before the federal court, the employee pleaded guilty to securities and mail fraud charges and received a four-year imprisonment sentence. He failed to pay restitution to the foundation.
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The foundation sued the employer to recover its losses. The employer was liable for negligent supervision and retention, conversion, and fraud, the foundation alleged. The employer’s negligent supervision of its employee led him to defraud the foundation of $25 million in his effort to cover up his embezzlements and personal trading losses, the foundation added.
The employer filed a motion to dismiss. The New York Supreme Court dismissed only the negligent supervision and retention claim. The Appellate Division agreed with the rejection of the negligence claim but decided to dismiss the rest of the foundation’s claims.
Negligence claim against employer survives
The State of New York Court of Appeals issued a decision reinstating the negligence claim, which the foundation adequately pleaded and which the lower courts should not have dismissed at the pleading stage.
First, the court ruled that the foundation’s complaint sufficiently alleged that the employer knew about the employee’s propensity to commit fraud – based on the missing deal fee and based on his “sloppy” attempt to cover up his embezzlement – before the employee ever interacted with the foundation.
The employee was involved in at least one other diversion-and-cover-up scheme, the foundation’s complaint also claimed.
Second, the court emphasized that the employer’ duty to supervise its employee did not extend only to dealings with customers. A customer relationship was not a prerequisite before filing a negligent supervision claim, the court said.
Third, the court noted that the allegations of the employee’s drinking and gambling problems did not, on their own, support a finding that the employer should have known about the employee’s propensity to commit fraud. There was a disconnect between these alleged acts and the employee’s fraud, the court said.
Excessive drinking and obsessive personal stock trading might be unprofessional or irresponsible for a financial advisor and could be deserving of oversight or discipline, the court acknowledged. However, these acts were not illegal, tortious, or indicative of dishonesty or a propensity to mislead or to intentionally harm others, the court said.
