[Post updated] Milwaukee is a blue-collar industrial city. It is not known as a center of financial fraud. That changed with the arrest and conviction of Sujata Sachdeva, former vice president of finance for Koss Corp.Koss is a manufacturer of stereo headphones headquartered in Milwaukee. While stories of insider fraud are nothing new, the magnitude of the Sachdeva’s theft makes this story a tale worth telling.
According to Koss’ annual report, the company had net sales last year of $41.7 million. Ms. Sachdeva was convicted of embezzling $34 million.In other words, over a few short years, Sachdeva stole almost as much money as the company made in a year.
Because Koss is a public company, its books and records are audited yearly.Notwithstanding the huge embezzlement, no one seemed to know that tens of millions of dollars went missing. Not the CEO, not investors and not even the company’s auditors, Grant Thornton.
According to their website, Grant Thornton is one of the largest accounting firms. They claim to understand “how important audited financial statements are to business, shareholders/owners, lenders, investors and other stakeholders.” They also say, “We consider it our job to keep our clients informed all year long of accounting, financial and regulatory developments that may impact their business.” Koss says that Grant Thornton failed in its mission and has filed suit against them.
If not by the auditors, how did Sachdeva get caught? She was caught after a security officer at American Express noticed she was using company wire transfers to pay her staggering credit card bills.
The stolen money was spent primarily on shopping – clothes, shoes and jewelry. According to federal prosecutors, she spent $1.4 million at one women’s boutique alone.
Sachdeva was just sentenced to 11 years in a federal prison.With good time, she will be eligible for release in about 9 years.
At sentencing, her lawyers argued for leniency.According to published press reports, one of her lawyers said she was driven to steal by a “compulsive shopping disorder.”Apparently she had so much stuff that she needed to rent storage facilities because there was no room left in her house.
U.S. District Court Judge Lynn Adelman wasn’t easily persuaded. He did show some leniency, however, because of her cooperation and remorse.
Because Koss is a public company, many people were hurt by her actions. Thousands of shareholders, some of them pension and retirement plans, saw their stock plummet by 50% in the wake of the embezzlement. Employees were denied profit sharing bonuses. A few corporate accounting people lost their jobs. And lawsuits will probably linger for years.
Efforts to Recovery Losses from Park Bank
Trying to get millions of dollars from someone sentenced to prison is futile. While prosecutors and lawyers can recover some tangible assets and sell them, we rarely see these recoveries exceed 20 cents on the dollar.
Koss filed suit against Park Bank shortly after the thefts were discovered. The company said the bank should have detected the many suspicious transactions. In its 2010 lawsuit, the company said that the bank should have questioned the $17 million in cashier’s checks that Sachdeva obtained through the bank.
Milwaukee County Circuit Judge David Borowoski ruled in 2016 that while the bank may have been negligent, that wasn’t enough. In a controversial decision, Borowoski dismissed the lawsuit. That dismissal was later upheld by the court of appeals.
In January 2019, the Wisconsin Supreme Court ruled in a 4 to 2 decision that Borowoski was correct. The lawsuit to recover from Park Bank the $34 million embezzled by Sachdeva was officially over.
In dissenting from the majority, Justice Daniel Kelly said, “There is no bad faith, Park Bank says, when it disburses funds from fiduciary accounts while intentionally remaining ignorant of whether the individuals making the requests have authority to transact business on those accounts. The court agreed——not as a matter of fact, but of law. Because the law does not require that conclusion, I respectfully dissent.”
Wisconsin law gives wide immunity to banks when they honor a check written by an authorized signatory. That gives immunity to the bank. But according to two justices, that immunity is not absolute. The Wisconsin bank immunity statute specifically carves out transactions where the bank has “knowledge of such facts that its action in paying the check amounts to bad faith.” According to Justice Kelly, Park Bank the trial court too narrowly defined this exception.
He said that bad faith should be defined as follows:
Neither criminal fraud nor downright corruption is an essential ingredient of legal ‘bad faith.’ The ‘bad faith’ test was borrowed from the Uniform Negotiable Instruments Act. The standard used in construing the term under that Act has not been evil motive. Instead courts have asked whether it was ‘commercially’ unjustifiable for the payee to disregard and refuse to learn facts readily available. At some point, obvious circumstances become so cogent that it is ‘bad faith’
to remain passive.
Third Party Recoveries Against Auditors, American Express
Koss Corp might not have been successful against Park Bank but their efforts to recover millions in losses from their auditor and a charge card company were mostly successful. Koss’ auditors during part of the time that Sachdeva was stealing, , Grant Thornton, paid $8.5 million in 2013. In 2016, American Express paid Koss $3 million. Koss said both companies should have detected the fraud.
Mahany Law is a fraud recovery and lender liability law firm concentrating in a wide array of fraud and professional malpractice issues. We help individuals and businesses who are victims of fraud including embezzlement, insider theft, audit malpractice, employee dishonesty and securities fraud. We also help collect court judgments where the assets are hidden or protected by phony trusts or corporations.
For more information, contact attorney Brian Mahany directly at or by phone at (414) 704-6731. We also invite readers to view our lender liability website and our investor fraud recovery information page.