Articles Posted in Breach of Fiduciary Duty

If someone is accused of defrauding investors in one city, does that mean that person can’t do business with another company in another city? Especially before the allegations of fraud have been determined by a court of law?

That’s the question James “Woody” Dillard’s attorneys and business partners are asking as investors who were allegedly defrauded by Dillard try to claim potential vendors for Dillard and his business partners should have all their facts in order before signing on the dotted line.

Dillard has recently partnered with Streamline Boats of Hialeah, Florida, which makes semi-custom fishing boats. Although the company is only a couple years old, it has already changed locations several times and is currently looking to sign a lease for warehouse space at the Port of Pensacola. The city of Pensacola has put the lease on hold while they investigate.

Specifically, the city is worried about styrene, a foul-smelling by-product from working with fiberglass, which is a prominent material used to make all kinds of boats these days. Having made strides in reducing their emissions and their impact on the environment, the city is concerned that having a boat manufacturer in their warehouse district will undo much of the work they’ve done towards making and maintaining a more eco-friendly city.

Sanchez, one of the managers of Streamline Boats, claims they use very little styrene in the production of their boats, and that they invest heavily in the warehouse space they use to make sure they don’t stink it up. Essentially, they strive to become ideal tenants.

But two investors who invested in another of Dillard’s business ventures claim emissions should be the least of the city’s concerns when deciding whether to approve the lease. Continue reading ›

Last fall, Alden Shoe Co. realized its CFO had allegedly been embezzling millions of corporate funds and transferring them to his own, personal accounts. More than half of what he allegedly stole from the shoe company he is claimed to have used to pay for gifts he gave to Bianca de la Garza, including a car, diamond jewelry, designer clothes and handbags, and investing in her production company, Lucky Gal Productions.

Unfortunately, Lucky Gal Productions according to news reports has never turned a profit in the six years since it was founded, making it unlikely the former CFO will ever see a return on his investment.

Richard Hajjar was hired by the shoe company back in 1987. His two brothers already worked for the company and his father had been the CPA for Arthur S. Tarlow Jr., Alden’s current president. No one questioned Hajjar’s loyalty until last fall when Tarlow realized Hajjar had allegedly been moving funds from the company’s bank account into family trusts. When he approached Hajjar about it, Hajjar allegedly dodged the question but assured Tarlow the funds would be transferred back into the company’s bank account.

Hajjar then according to news reports stopped showing up for working, texting Tarlow to say he wasn’t feeling well. When the funds didn’t show up in the bank account, Hajjar allegedly stopped responding to Tarlow’s text messages, and Tarlow went to his Santander bank branch, where the shoe company had accounts. Tarlow then discovered that $10 million in retained earnings was allegedly missing from the account. Continue reading ›

When a corporation hires an independent auditor to inspect its financials does that auditor owe fiduciary duties to its client? If no fiduciary duties exist as a matter of law, do they arise by virtue of a “special relationship” between the parties? In a matter of first impression, an Illinois appellate court wrestled with these questions and answered both in the negative.

Asian Human Services, Inc. (“AHS”) is a non-profit organization dedicated to helping lower income immigrants obtain health, dental, and employment assistance. After AHS was sued by another non-profit organization, AHS brought a third-party claim for breach of fiduciary duty against its long-time independent auditor, James Wong.

AHS alleged that Wong owed fiduciary duties to the non-profit by virtue of the special circumstances of the parties’ relationship. The complaint alleged that Wong had served as the independent auditor of AHS for more than a decade during which time he became an important advisor to the organization. Additionally, the complaint alleged that AHS relied heavily on Wong and that he even served an integral role in AHS’s hiring process for four separate Chief Financial Officers.

Wong filed a section 2-619 motion to dismiss AHS’s claim arguing that: (1) independent auditors do not stand in a fiduciary relationship with their clients, and (2) there were no special circumstances that created a fiduciary relationship. After briefing and oral argument on the motion, the trial court granted appellee’s motion to dismiss, with prejudice, and included Supreme Court Rule 304(a) language.

AHS appealed and argued that the trial court erred in relying on a federal case, Resolution Trust Corp. v. KPMG Peat Marwick, 844 F. Supp. 431 (N.D. Ill. 1994), which held, as a matter of law, that generally, an independent auditor does not owe a fiduciary duty to its client. Instead, the non-profit argued that the trial court should have relied on case law from various other state courts which have found that independent auditors owe fiduciary duties to their clients.

The appellate court acknowledged that no Illinois case law addressed the issue of whether independent auditors owe fiduciary duties to their clients. But ultimately the appellate court found that AHS waived the argument. In the trial court, AHS expressly stated that it was “not arguing that Mr. Wong became a fiduciary to AHS because he acted as an auditor.” AHS’s attorney in the trial court told the trial judge at oral arguments on the motion to dismiss: “One thing I want to make clear is that we’re not arguing that Mr. Wong became a fiduciary to AHS because he acted as an auditor. Now, clearly that would be the antecedent relationship and it makes his actions that much more strange, but that’s not the basis.” Continue reading ›

The Illinois Appellate Court found that a marketing company adequately pleaded a claim for breach of fiduciary duty against one of the former founders of the company who left to work for a competitor. James P. Keane Sr. was one of the founders of Advantage Marketing Group Inc. and owned 35% of the company. When he left his company to purchase and operate a competing business, Advantage sued. The trial court dismissed Advantage’s breach of fiduciary duty claim finding that because Keane was not an officer or director at the time of the alleged conduct, Advantage failed to establish that he owed a fiduciary duty to the company.

The appellate court rejected the argument that only officers or directors of a company owe fiduciary duties to the company. The Court explained that the determination of whether a fiduciary relationship exists must be made based on an examination of the realities of the relationship rather than the employee’s title. Accordingly, the Court examined the nature of Keane’s relationship with Advantage to determine if Advantage adequately alleged that Keane owed fiduciary duties to the company. Continue reading ›

The primary laws that govern the disclosures to shareholders and the marketplace include the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules adopted by the Securities and Exchange Commission (the “SEC”).  These laws have come subject to scrutiny in the Camping World Holdings, Inc. who suffered financial losses in excess of $100,000 due to a failure to disclose.  Some of their executives have been charged with failing to disclose material information during the Class Period, violating federal securities laws.

Generally speaking, causes of action have been interpreted by the federal courts to specifically set forth in the statutes and to address claims brought as class actions.  These types of claims are often brought forward and against the corporation, its directors and officers, purchasers and sellers of securities, persons otherwise having a duty to investors who participate in the alleged disclosure violation.  Sometimes accountants and underwriters and persons required to make public filings with the SEC.  The history behind it is entrenched in common law notions of disclosure claims such as fraud and negligent misrepresentation. Continue reading ›

We all know the basic concept of supply and demand. When supply is low and demand is high, prices tend to go up. When this happens with houses, realtors refer to it as a “seller’s market,” but what if it’s really a “realtor’s market?”

That allegation is at the heart of a recently proposed class action lawsuit against Houlihan Lawrence, a large brokerage firm with 30 offices spread throughout the northern New York suburbs and Fairfield County, Connecticut.

The lawsuit was filed by Pamela Goldstein, an associate general counsel for a communications company who fell in love with a four-bedroom, white, colonial house located in White Plains, New York. The agent who showed her the house, Daniel Cezimbra, allegedly told her there were other offers on the house and that she had better act fast and bid above the $599,000 asking price.

Goldstein took his advice, and eventually bought the house for $637,000, but then she discovered something that made her question that interaction – and her agent’s motives.

It turns out that Houlihan Lawrence was also representing the person selling the house. This meant that, when Cezimbra was supposed to be negotiating on Goldstein’s behalf and representing her interests in the bidding war, he was going up against his boss – who also happens to be his brother-in-law. No matter how hard people work to be fair and unbiased, it has to be hard to do your best negotiating when the person across the table from you has the power to fire you. Continue reading ›

The past few years of Shari Redstone’s life sound like something taken directly from a soap opera after her aging father, Sumner Redstone, fell ill and required a full-time nurse to take care of him.

You probably know Sumner Redstone as the media mogul who ran the National Amusements theater chain (which owns CBS) for more than half a century. When he got sick, Shari kicked his long-time girlfriend out of his mansion, moved in herself, and took control of her father’s media company. Sumner’s girlfriend is suing Shari for having kicked her out and allegedly turned Sumner against her.

But now Shari Redstone has a bigger problem on her hands. Leslie Moonves, the CBS chief executive, has led a sort of a coup against her with other CBS directors. Moonves and the board of directors are suing Redstone for allegedly acting in her own best interests, even when it allegedly went in direct opposition to the best interests of the company’s shareholders. As a result, they are seeking to dilute Redstone’s voting rights as the majority shareholder of CBS and to strip her of much of her control over the media company.

Since Redstone has the power to fire anyone from the board of directors, why would they do all this at the risk of their own jobs? Continue reading ›

It may have once been thought that officers constituted as being fiduciaries in a manager-managed LLC setting. Who or what are fiduciaries? Fiduciaries are individuals in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit. Typically, it has been those members who operated the business that owed fiduciary duties of loyalty and reasonable care to non-managing LLC owners.  They normally uphold legal positions of trust with one or more parties and  take care of money or assets for another person.  Now, a managing member of an LLC is an individual who holds an ownership interest in the company, participates in its day-to-day management and has authority to contract on behalf of the company. So are managing members fiduciaries? Since most states have codified the fiduciary duties owed by officers and directors, a recent First District Court has affirmed a trial court finding that this is NOT the case.

In the case of 800 South Wells Commercial LLC v. Cadden, 2018 IL App (1st) 162882 (May 9, 2018) Cook Co., 3rd Div, (FITZGERALD SMITH), the courts looked at these issues in greater depth and length and gave more definitive answers in terms of scopes and duties of member-managed LLCs.  It looked at a situation that involved a manager-managed Illinois LLC which was formed to obtain a leasehold interest in River City Complex’s commercial space and parking garage and the manager and member appointed Cadden to be the LLC’s vice president. Within four years, the LLC defaulted on both its mortgages. The LLC claimed that fiduciary duties were owed only because he held the title of vice president. The Court was quick to grant summary judgment which went further to say that there was no evidentiary basis to demonstrate that any fiduciary duty was owed to the LLC.  Consequently, there was no breach.  Continue reading ›

While not all Catholic priests decide to take a vow of poverty when they’re ordained, a priest with a 10-acre estate in Williamston that includes six bedrooms, 12 bathrooms, 10 fireplaces, three barns, an indoor swimming pool, and stained-glass windows seems pretty suspicious. And that’s just one of his properties. The priest in question has been maintaining (although allegedly not paying taxes on or properly insuring) other properties for his personal use – all allegedly funded by money that was intended for his parish.

Reverend Jonathan Wehrle, who founded St. Martha Church in Okemos, Michigan, has recently been accused of embezzling more than $5 million from his church, and prosecutors are pointing to his vast estate as evidence of the theft. Wehrle allegedly spent $45,000 on an indoor swimming pool, $55,000 on stained-glass windows, and more than $134,000 on landscaping. According to a statement from the police, bills for the construction and landscaping did on the property match checks written from St. Martha.

Lawrence Nolan, the attorney representing Wehrle in the lawsuit, claimed the priest had an agreement with a bishop that allowed Wehrle to use parish money to fund his private residence. Unfortunately, that bishop is no longer living.

But Andrew Stevens, the assistant prosecutor for Princeton Excess and Surplus Lines Insurance Corporation, which insures the Catholic Diocese of Lansing, Michigan, tells a different story. According to Stevens, Wehrle had maintained almost complete control over the church and its funds since founding it in 1988. Continue reading ›

Although bitcoin’s meteoric rise in price and prominence has some people wondering if it’s a bubble, the Chicago Mercantile Exchange and CBOE Futures Exchange agreed to start trading in the digital currency in December. Just a few months later, the first criminal lawsuit over bitcoin was filed against a Chicago trader.

At 24 years old, Joseph Kim, who was working as an Assistant Trader for a Chicago firm called Consolidated Trading, was accused of stealing $2 million from his employer from September to November of 2017 – right before bitcoin became eligible for trading in the local exchanges. In fact, it may have been the preparation for trading on the exchanges that alerted the firm to Kim’s alleged illegal activity.

According to the complaint, Kim allegedly funneled millions of dollars in the form of bitcoin and Litecoin from the firm’s funds into his possession. He allegedly used the digital currency to cover his personal trading losses, then lied about the funds to cover up his illegal activities. The firm’s management discovered Kim’s alleged misappropriation of their funds and charged him with fraud.

A short hearing was recently held regarding the allegations of stolen digital funds. Kim was charged with wire fraud, but he has not yet entered a plea. His bond was set at $100,000, and if he gets released on bond, he is not allowed to travel outside of northern Illinois, except to Arizona, where he owns a home. The bond deal also prohibits him from communicating with his former co-workers. Kim agreed to all terms of the bond deal and readily surrendered his passport. Continue reading ›

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