A previous post here discussed how sexual abuse lawsuits are forcing companies to seek protection under either Chapter 7 or Chapter 11 of the Bankruptcy Code. But, there is another issue that may cause companies to seek bankruptcy protection: embezzlement by a trusted employee.
The debtor noted in a recent article is the literary agency Donadio & Olson that is based in New York City. The agency recently filed a Chapter 7 petition in the bankruptcy court for the Southern District of New York, listing assets of $47,241.90 and debts of $186,613.90. The embezzling employee was sentenced to prison on December 17 after pleading guilty to various crimes relating to the embezzlement, and the judge released letters written by the firm’s two principals that described the events that led to the bankruptcy filing and the dissolution of the agency.
The employee served as the firm’s bookkeeper for about 20 years. During this time, he took over responsibility for all of the agency’s “back office” operations, which included writing checks, depositing payments into the firm’s bank accounts and otherwise managing the firm’s financial affairs. Over time, the bookkeeper established secret bank accounts and prepared fraudulent financial reports that allowed him to hide the funds that he stole. The bookkeeper even managed to arrange the firing of an assistant who “asked too many questions.” The stolen funds are estimated to total $3.4 million, far more than the bookkeeper can repay. The embezzlement caused significant losses to the firm’s two principals and to their clients.
This case shows how misplaced trust can have devastating consequences for a business. Any business that is worried about malfeasance by a trusted employee may want to get more information about bankruptcy options.