Investment bank may be liable for ex-partner's $25 mln fraud: NY court

PJT Partners

13/06/2023 20:06

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      Bank says it lacked notice that partner had propensity for
fraud
    

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      But missing $8 mln fee was a red flag, NY top court rules
    

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      Ex-partner was hit with prison sentence for defrauding
investors
    

  
    By Daniel Wiessner
       June 13 (Reuters) - A Wall Street bank could be held
liable for allegedly failing to stop a former partner from
defrauding a charitable foundation of $25 million in a fake
investment scheme, New York's top state court ruled on Tuesday. 
    The New York Court of Appeals in a 5-2 decision rejected
claims that the bank, PJT Partners Inc, could not be liable to
The Moore Charitable Foundation for negligence because it was
not aware of any prior similar misconduct by the ex-partner,
Andrew Caspersen. 
    "An employer cannot avoid liability for negligent
supervision and retention by shutting its eyes to the tortious
practices and propensities of its employees — that is, by being
doubly negligent," Judge Anthony Cannataro wrote for the court. 
    A representative of PJT declined to comment. Lawyers for
Moore did not immediately respond to a request for comment. 
    According to court filings, Caspersen in 2015 closed a major
deal to recapitalize a private equity fund and then embezzeled
an $8.1 million fee the fund had paid to PJT. Caspersen lost the
money gambling on risky securities trades, according to filings
in the case.
    To recoup the money owed to PJT, Caspersen defrauded Moore,
which supports environmental nonprofits, into investing $25
million in the deal even though it had already been completed.
Moore says it discovered the fraud in 2016.
    Caspersen in 2016 pleaded guilty to defrauding Moore and
other investors of more than $38 million that he used to make
personal securities trades, and was sentenced to four years in
prison. He worked for Park Hill Group, which is now a subsidiary
of PJT. 
    The foundation sued PJT the following year, claiming the
bank had been negligent in failing to more closely supervise
Caspersen after he delayed in remitting the $8.1 million fee to
the bank. 
    A state judge dismissed the claim for negligent supervision
and retention, saying Moore had not alleged that PJT was put on
notice of Caspersen's propensity to commit fraud. A mid-level
appeals court affirmed in 2019. 
    The Court of Appeals on Tuesday reversed. Caspersen's fraud
should have been foreseeable in light of the missing $8.1
million fee "and Caspersen’s purportedly sloppy attempt to cover
up his embezzlement,"  Cannataro wrote. 
    In dissent, Judge Madeline Singas said the ruling would
expose New York-based financial institutions to limitless
liability for actions by rogue employees. 
    That, she said, "will unsettle our financial and other
commercial institutions, to the point that doing business in a
state in which they face undefined, exponential liability might
soon prove unpalatable."
    Singas was joined by Judge Michael Garcia.
    
    The case is The Moore Charitable Foundation v PJT Partners
Inc, New York Court of Appeals, No. 52.
    For Moore: Stephen Shackelford of Susman Godfrey
    For PJT: Aidan Synnott of Paul Weiss Rifkind Wharton &
Garrison
    
    Read more:
    Wall Street scion Caspersen gets 4 years in prison for $38.5
million fraud
    Wall Street scion Caspersen pleads guilty to $38 million
fraud