• Bank says it lacked notice that partner had propensity for fraud
  • But missing $8 mln fee was a red flag, NY top court rules
  • Ex-partner was hit with prison sentence for defrauding investors

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

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Thomson Reuters

Dan Wiessner (@danwiessner) reports on labor and employment and immigration law, including litigation and policy making. He can be reached at daniel.wiessner@thomsonreuters.com.

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