One of my corporate clients called me recently to discuss certain actions taken by the company’s CEO. The CEO had written himself a check in the amount of $50,000 two days prior to his anticipated termination from the company. He had also used an additional $50,000 in corporate funds to purchase a vehicle for his personal use.

He explained through his attorney that he appropriated the corporate funds in order to pay himself back wages and other perks that the company admittedly owed to him under his employment agreement. He explained further that the funds were taken to secure his immediate future after termination because he felt the company would not be fair to him during severance discussions. He even threw in a discrimination claim to boot, because he was nearing 60 years old.

The entire board of directors and the company’s shareholders were livid and called for blood. They contacted the CEO’s attorney and told him in no uncertain terms that they considered the $100,000 “advance” to be a clear misappropriation of corporate funds and that the funds should be immediately returned to the corporation. Against the advice of his counsel, the CEO refused to return the car and the funds.

The question became whether the CEO was guilty of embezzlement and what could be done to rectify the situation, and to prevent further harm to the company. Embezzlement is a statutory crime whereby an employee has proper custody of the company’s property (e.g., the checkbook), and that employee then intentionally exerts dominion and control over that property with the specific intent to permanently deprive the employer of the use and enjoyment of that property. As an officer of the company, the CEO was an employee of the company. The company’s policies made it permissible for the CEO to have the corporate checkbook and to write checks for the payment of the company’s debts. However, when he purchased the vehicle for his personal use and wrote a check to his personal account, each without proper corporate authorization, with the specific intent to keep these items, his actions were wrongful, and he subjected himself to criminal liability.

So what does a company do when it finds itself in this position? The interests of the employees, owners, and even the corporate counsel can become frustrated, fractured and at odds, with accusations of wrongdoing and all manner of skeletons flying out of the corporate closet and landing on the conference table with a sickening thud. Will the company negotiate with its former leader, or will it call the police and press charges? Will this require the remaining employees and company owners (the shareholders or members) to “lawyer up” and prepare for battle? These issues can be heady and not necessarily clearly defined when the people involved have longstanding relationships that go beyond the boardroom. The fallout can absolutely sink a company–and, perhaps, families, friends and colleagues.

In situations like these (despite the CEO’s blatant and material breach of his employment agreement–actions that the company can say negate its duty to pay him anything under the agreement) the parties might still look to that document for a solution. Mediation or binding arbitration provisions contained in the employment agreement may be used as a possible settlement tool.

The company may desire to take a hard line in the discussion. However, in the face of the CEO’s employment claims, the company might find itself on the wrong end of a complaint filed with the state labor commission, which may ultimately subject the company to severe penalties and interest that might be several times greater than the monies that were spirited away by the CEO. When potential legal fees are added to the mix, the company has a hard choice to make. Regardless of the final choice, a timely determination is imperative.

My clients entered into mediation with the CEO as was called for by the employment agreement. The company ultimately received the car from the CEO, and the money was returned. The CEO was not charged with any crime, but he had to sacrifice some of the back pay and perks that were owed to him by the company. Each side paid their own legal fees. The company also revamped its policies to prevent any one person from accessing so much cash. These were hard-learned lessons of accountability and protocol that none of the people involved will soon forget.

© 2011. All Rights Reserved. Shaune B. Arnold, Esq., is a practicing attorney, business strategist and Coach. Contact her directly at shaune@BusinessBootCampOnline.com. This article is intended for information purposes only. All legal issues should be considered in light of the particular circumstances involved. If you have legal questions, you should consult with an attorney.