Fiduciary Duties And The Family Office

A reality television star was sued by her estranged husband for millions of dollars. He claims she used her position as the CEO of their company, Elite World Group (EWG), to spend at least one million dollars of company money on her personal expenses without authorization.

Court papers show the defendant spent approximately $125,000 on "cosmetic procedures"; $500,000 at Louis Vuitton; $180,000 at Chanel; $140,000 at Dior; $160,000 on makeup and hair styling; and $500,000 on lavish trips for herself and her family.

Her estranged husband also claims in his lawsuit that between 2018 and 2021, EWG's earnings before interest, taxes, depreciation, and amortization declined from six million dollars to negative $10.4 million, "due primarily" to the defendant's "mismanagement of EWG and excessive spending."

In February 2022, the reality television star was removed as CEO of EWG. The day following her termination, she allegedly withdrew $850,000 from an account she shared with the plaintiff, despite having signed an agreement not to withdraw more than $250,000. She also filed for divorce hours after being terminated.

According to the allegations contained in the lawsuit, the defendant is "not entitled to any compensation for services performed during the period during which she engaged in activities constituting breach of her duties of good faith and loyalty." Sara Nathan "Julia Haart sued for millions, allegedly used company as 'personal piggy bank'" pagesix.com (Feb. 23, 2022).

Commentary and Checklist

The two main fiduciary duties are the duty of care and the duty of loyalty.

Duty of care means the fiduciary must act deliberately, as a reasonable and prudent person, considering all options and information before making decisions. This includes spending and all other financial decisions. The duty of loyalty means the fiduciary must put the interests of the company above their own, making decisions that are consistent with the purposes of the organization.

Embezzling from your organization would constitute not only a crime, but also a violation of the duty of loyalty. Violating fiduciary duty can lead to significant civil liability.

Here are some ways to help prevent embezzlement in your family organization:

  • Require the organization to establish a system of checks and balances so that no single person has sole control over your family's finances.
  • Apply the same review and discipline standards to every staff member and leaders. Consistency is key for reducing the risk of embezzlement.
  • Mandate the periodic review of receipts and invoices to make sure they are legitimate and to help spot fraud.
  • Monitor funds to watch for illegitimate transfers or withdrawals.
  • Have a reporting procedure so that staff can report suspected wrongdoing easily and without fear of retaliation. If possible, have an outside party to whom staff can report.
  • Have a third party perform routine audits on finances to look for any discrepancies that may suggest fraud.
  • If you fall victim to fraud, make sure to re-examine your policies and security measures.
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