Quantifying Misuse of Corporate Funds in a Shareholder Dispute
Case Summary: Following the suspension of the majority shareholder of a professional services agency, two minority shareholders alleged in a countersuit that the majority shareholder had misused and misappropriated agency funds for personal use, and violated his fiduciary duties to the agency.
Expert Analysis: An inspection of the entity’s books and records was facilitated by a new controller who was suspicious about certain actions of the majority shareholder and inconsistencies in recordkeeping. A second set of accounting records was uncovered, reflecting transactions for personal purchases and services solely benefiting the majority shareholder, and which had been effectuated using entity funds, as well as transactions that purported to represent “repayments” of the misused funds.
Counsel for the minority shareholders retained a forensic accounting expert to perform exhaustive tracing and comparison of entity bank statement activity, personal bank statement activity for the majority shareholder, internal accounting journal entries in the entity’s books and records, and a handwritten “ledger” constituting the second set of accounting records. This analysis determined that there were hundreds of transfers between agency and personal accounts, dozens of personal purchases and payments to contractors and other third parties for goods and services that did not relate to the operations of the business whatsoever, and ultimately that there was a substantial shortfall in any purported “repayments.”
A report was issued, quantifying the net outflows that might constitute misuse and/or misappropriation of agency funds in the millions of dollars. Both deposition and trial testimony were provided in support of the written opinions.
Result: After a bench trial, the Court agreed with the claims of the minority shareholders as to the misuse and misappropriation of entity funds and found the majority shareholder to have perjured himself in attempting to support the transactions. The expert analysis, testimony, conclusions, and calculations were all heavily cited in the Court’s decision.
