The question in this case is whether an employer whose employee commits fraud is liable for fraud under an apparent-authority theory if the employer knew of no facts that would have put it on notice of the employee’s criminal propensity.
Andrew Caspersen was a partner at PJT Partners, an investment bank and advisory firm that is a division of Park Hill Group. In 2015, Caspersen stole funds that a client, Irving Place Capital, paid to PJT. He used the funds from the Irving Place transaction to trade securities in his own name. The securities lost all their value. To cover up his theft, Caspersen induced the Moore Charitable Foundation to invest $25 million in a fake deal—which he claimed related to the Irving Place transaction—and then used a portion of the Foundation’s investment to repay PJT the money he had stolen. The Foundation eventually became wise to Caspersen’s scheme and reported him to the authorities. Caspersen was arrested and prosecuted and is now in federal prison. PJT repaid the Foundation a third of the funds it had invested; Caspersen has not paid any restitution. The Foundation and Kendal JMAC, the vehicle through which the Foundation invested with Caspersen, sued PJT, Park Hill, alleging that PJT and Park Hill were liable for fraud, negligent supervision, and conversion.
Supreme Court dismissed the negligent-supervision and conversion claims but allowed the fraud claim to proceed. The court recognized that the complaint failed plead that PJT and Park Hill were liable on a respondeat superior theory, because it did not plead that PJT and Park Hill benefitted from Caspersen’s scheme. Instead, the complaint pleaded, at most, that Caspersen used the money to benefit himself personally by covering up his theft of funds from Irving Place. The court held, however, that the complaint pleaded fraud on an apparent-authority theory. To plead apparent authority, the complaint had to allege that PJT’s and Park Hill’s “words or conduct” gave rise to the “appearance and belief that [Caspersen] possesse[d] authority to enter into the transaction” with the Foundation, and that the Foundation reasonably relied on PJT’s and Park Hill’s words or conduct. The court found those elements satisfied because PJT and Park Hill “promoted Caspersen” as a specialist in transactions with investors like the Foundation and because PJT and Park Hill authorized Caspersen to enter into the Irving Place transaction, to which the Foundation’s investment purportedly related. The court also held that the complaint alleged reasonable reliance.
The First Department reversed Supreme Court’s ruling on the fraud claim and affirmed its other rulings. The court concluded that the complaint failed to plead apparent authority because it “does not allege that defendants were aware of the facts that plaintiff contends would have put them on notice of [Caspersen’s] criminal propensity.” Without such allegations, the court concluded, the apparent-authority theory cannot proceed. The court also held that the complaint failed to plead respondeat liability for fraud, negligent supervision, and conversion.
The Court of Appeals granted leave to appeal.