Fiduciary relationships are key to many professional and personal interactions in California. A fiduciary is legally trusted to manage money, property, or assets for another person, called the beneficiary.
Roles such as trustees, executors, corporate officers, attorneys, and financial advisors must uphold the highest legal standard of care, acting in the beneficiary's best interests while avoiding conflicts of interest and self-dealing.
A breach of fiduciary duty, also known as fiduciary negligence, often leads to civil litigation, with financial compensation as the usual remedy.
However, when negligence involves intentional misconduct, fraud, or theft, it can lead to criminal charges under California law, underscoring the need for awareness of criminal intent and responsibility.
Our California criminal defense lawyers will explain below when fiduciary negligence could be prosecuted as a criminal case..
Key Takeaways
- In California, criminal charges for fiduciary negligence are typically filed when the negligence includes intentional misconduct like theft, embezzlement, fraud, or forgery, rather than just accidental errors.
- Some examples include a trustee stealing trust assets, an attorney misusing client funds, or a corporate officer embezzling company money for personal gain.
- Other examples encompass deliberate deception for personal advantage, like misrepresenting an investment's worth to a client, falsifying documents to breach duties, and falsely claiming property or assets for personal gain.
- Simple mistakes or poor judgment leading to financial harm are usually addressed as civil issues through lawsuits, where penalties generally involve monetary damages or restitution rather than criminal charges.
- Poor communication or mismanagement of investments is typically considered a civil issue rather than a criminal one.
- Criminal charges apply when there is a clear intent to commit a crime, like theft or fraud. Most breaches of fiduciary duty, such as basic accounting errors, are addressed in civil court and do not result in criminal charges.
Fiduciary Duties in California Law
California courts recognize three primary fiduciary duties:
- Duty of Loyalty: Loyalty mandates that a fiduciary must act exclusively in the best interests of the beneficiary. They are prohibited from engaging in self-dealing or in activities that conflict with their fiduciary duties or personal interests.
- Duty of Care: Fiduciaries are required to exercise reasonable care, skill, and caution when managing the assets or affairs entrusted to them. This involves making prudent investment choices, maintaining accurate records, and exercising diligent oversight.
- Duty to Avoid Conflicts of Interest: Fiduciaries are required to stay impartial and prevent scenarios where conflicting personal or professional interests might unfairly sway their judgment. Any potential conflicts of interest must also be disclosed.
When Does Fiduciary Negligence Become Criminal?
Many fiduciary failures are not crimes. Simple negligence often involves a failure to act with reasonable care, such as a trustee making a poor investment resulting in a loss.
While beneficiaries might sue in civil court, criminal charges require proof of intent to commit a crime, such as theft or fraud, which is rarely present in honest mistakes.
Criminal liability arises when there is clear evidence of intent to steal or defraud.
Prosecutors must demonstrate that the fiduciary knowingly and willfully misappropriated funds, deceived the beneficiary, or used their position for personal gain, emphasizing the importance of intent in establishing criminal charges.
Let's examine some common ways criminal fiduciary misconduct can lead to criminal charges, emphasizing the importance of vigilance and integrity in fiduciary roles.
Embezzlement (CA Penal Code 503 PC)
The most common criminal charge associated with fiduciary misconduct is embezzlement. Defined under California Penal Code 503 PC, embezzlement is the fraudulent appropriation of property by a person to whom it has been entrusted.
Unlike standard theft, where a person takes property they do not own, embezzlement involves property the fiduciary legally possesses but then uses improperly. For a conviction, the prosecution must prove:
- An owner entrusted their property to the defendant.
- The owner did so because they trusted the defendant (a fiduciary relationship).
- The defendant fraudulently converted or used that property for their own benefit.
- The defendant intended to deprive the owner of the property's use.
Grand Theft (CA Penal Code 487 PC)
While embezzlement is a specific type of theft, fiduciaries can also be charged under the general grand theft statute, Penal Code 487 PC. This charge applies when the value of the money, labor, or real or personal property taken exceeds $950.
In the context of fiduciary duty, grand theft often overlaps with embezzlement or fraud. It serves as a catchall for significant asset misappropriations. If a corporate officer uses company funds to purchase a personal luxury vehicle without authorization, this is grand theft.
Financial Elder Abuse (CA Penal Code 368 PC)
In California, fiduciaries face serious criminal liability for elderly individuals. Under Penal Code 368 PC, it is a crime to cause unjustifiable physical pain, mental suffering, or financial exploitation of elders.
Fiduciaries such as caregivers, those with power of attorney, or court-appointed conservators are closely monitored. If someone knowingly or negligently allows the theft or embezzlement of property from an elder (65+) or a dependent adult, they may face criminal charges.
Corporate Fraud and Securities Fraud
For fiduciaries operating in business or investment capacities, negligence can evolve into corporate or securities fraud.
Corporations Code Section 25401 makes it illegal to sell or offer securities in California by means of written or oral communications that include an untrue statement of a material fact or omit to state a material fact.
If a financial advisor or corporate director knowingly provides false information to investors to secure capital-and subsequently loses that money-they are not just facing a civil lawsuit for breach of fiduciary duty.
They may be prosecuted for securities fraud. This includes "churning" accounts (making excessive trades to generate commissions) or operating Ponzi-like schemes where new investor money pays off earlier investors.
Corporate record forgery occurs when an individual uses their position or access to create deceptive documentation that others will rely on as genuine.
Forgery (CA Penal Code 470 PC)
Fiduciaries often have access to checks, contracts, and legal documents. If a fiduciary signs a beneficiary's name without specific authorization to facilitate a transfer of assets, they commit forgery under Penal Code 470 PC.
Even if the fiduciary believes the transaction is beneficial, signing another person's name without consent to alter legal rights or obligations is a crime.
For instance, a trustee forging a beneficiary's signature on a real estate deed to expedite a sale can be criminally prosecuted, regardless of whether the sale price was fair.
Legal Defenses and Intent
When facing criminal charges related to fiduciary duties, the central issue is almost always intent. California law generally requires that the accused act with "fraudulent intent."
A defense often relies on proving that the fiduciary acted openly and avowedly under a claim of title preferred in good faith, even if that claim is untenable.
Essentially, suppose you genuinely believed you had the right to use the funds in that manner. In that case, it may negate the criminal intent required for a conviction, leaving the matter as a civil dispute rather than a criminal one. For more information, contact our criminal defense law firm, Eisner Gorin LLP, in Los Angeles.
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