Written by Chris Walton, JDThe bookkeeper, as alleged, never took a dollar. She was not alleged to have profited from the scheme at all. According to the third-party complaint, she recorded the cash her employer’s principal pulled from the vending machines as “loans” and “capital contributions” instead of revenue, withheld her internal records from the other owner, and kept the books in a way that let the diversion run for years. The trial court dismissed the claims against her at the pleading stage. The Appellate Division, Second Department, reversed.
Schiano v. Harsanyi, 230 A.D.3d 820 (2d Dep’t 2024), holds that a complaint sufficiently alleges both that a company’s bookkeeper owes a fiduciary duty of truthful and complete disclosure, and that knowingly misclassifying diverted cash while concealing the records states claims for aiding and abetting fraud and breach of that duty — even where the bookkeeper gained nothing. For litigation counsel, it confirms that the universe of viable defendants in a diversion case includes the person who keeps the books, not only the person who takes the money. For valuation professionals and forensic accountants, it is a case study in exactly how a cash business’s internal records get corrupted — and a warning about what you are relying on when you take a closely held company’s books at face value.
One calibration before the analysis, consistent with this series’ discipline: this was a motion to dismiss under CPLR 3211(a)(7). The court accepted the complaint’s allegations as true and held the claims adequately pleaded. Nothing has been adjudicated; everything described below is allegation, not finding, and the third-party defendants are entitled to contest all of it.
Start with the procedural architecture, because it contains the case’s most instructive fact. In March 2022, James Schiano sued for a judgment declaring that he is an equal shareholder or partner with Peter Harsanyi in Systems Vend Management Corp. (SVMC), a vending machine company. Schiano’s theory was that although Harsanyi was the sole owner on paper, Schiano had loaned and invested several hundred thousand dollars in the business over more than a decade and should be deemed a 50% owner. SVMC then brought a third-party action against Schiano and against Josephine J. Castro, SVMC’s bookkeeper — pursuing Schiano for the underlying fraud and diversion, and Castro for aiding and abetting fraud and breach of fiduciary duty.
Hold the two pleadings side by side and the structure turns recursive. The third-party complaint alleged that Schiano ran a scheme to retain and convert SVMC’s cash — the coins and bills collected from the machines — and that Castro recorded that cash as loans or capital contributions from Schiano to SVMC while purposefully withholding her internal records from Harsanyi. If those allegations are true, the fabricated ledger entries are not merely concealment; they are the documentary foundation of the main action itself. The very loans and investments on which Schiano’s 50%-ownership claim rests are, on SVMC’s telling, his own diverted takings — converted by the bookkeeping into a paper trail of contributions. The alleged fraud did not just hide money; it manufactured an equity claim.
Castro moved under CPLR 3211(a)(7) to dismiss the two causes of action against her. In an order entered March 17, 2023, the Supreme Court, Nassau County (Singer, J.), granted those branches, finding the aiding-and-abetting allegations insufficiently particular and the fiduciary-duty allegations conclusory. SVMC appealed, and the Second Department reversed on both.
On aiding and abetting fraud, the New York elements are an underlying fraud, the defendant’s actual knowledge of it, and substantial assistance in achieving it, pleaded with the particularity CPLR 3016(b) requires. The court found all three adequately alleged: Castro “deceptively” accounted on her books that cash Schiano obtained from SVMC was in the nature of loans or capital contributions; she “purposefully withheld her internal records from Harsanyi, thereby enabling Schiano’s fraudulent scheme to continue for years”; and she “acted with knowledge that Schiano was converting company money and that cash received by Schiano was not a loan to the business as represented.” The substantial assistance, in other words, was the bookkeeping — the misclassification that hid the diversion on the ledger and the concealment that kept the records from the one person positioned to catch it.
The breach-of-fiduciary-duty holding is the one with legs. Outside accountants, as a general rule under New York law, are not fiduciaries to their clients. But the court held the complaint sufficiently alleged a fiduciary relationship between Castro and SVMC, because Castro, as the company’s bookkeeper, had a duty to make truthful and complete disclosures to SVMC — citing Torrance Constr., Inc. v. Jaques, where the Third Department found a “confidential and fiduciary relationship of trust” in a company’s sole bookkeeper who had authority to write checks on a business account. The alleged breach was falsely reporting cash received as loans from Schiano, deceptively accounting embezzled cash as loans and capital contributions, and withholding from SVMC the truth about the funds. The doctrinal foundation will not surprise anyone steeped in New York employment law: an employee occupying a position of trust owes the employer duties of loyalty and good faith, a principle traceable to Lamdin v. Broadway Surface Advertising Corp., 272 N.Y. 133 (1936). What Schiano adds is that for the employee who controls the books, that duty includes truthful recording and complete disclosure — and a complaint alleging deliberate misclassification and concealment states its breach.
The striking feature is that Castro was not alleged to have received any of the diverted cash. Her exposure arises entirely from facilitating the concealment. As Farrell Fritz’s New York Business Divorce blog noted in its analysis of the case, there was no allegation that Castro, as opposed to Schiano, profited from the scheme — and the appeal was a complete reversal of the dismissal. The lesson for practitioners: the person who falsifies the records can be a defendant even if she gained nothing from the fraud she allegedly enabled. Knowledge plus substantial assistance is enough to plead; personal enrichment is not an element.
A companion doctrine belongs in any analysis of this fact pattern. Under the faithless servant rule, an employee or agent who is disloyal in the performance of his duties forfeits the compensation earned during the period of disloyalty — independent of, and in addition to, damages from the underlying misconduct, and available even where the principal can prove no separate loss. Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928 (1977). In a diversion case, that means the damages model may reach not only the diverted cash but the salary and benefits paid to a disloyal fiduciary while the scheme ran — a theory that can extend to a bookkeeper-defendant as readily as to a principal, and a quantification task that lands on the forensic expert’s desk.
Every valuation engagement begins with the company’s financial records — the income statement, balance sheet, general ledger, and bank statements are the foundation of every discounted-cash-flow model, every normalization adjustment, every excess-earnings calculation. If the records are corrupted, the valuation is corrupted. Schiano’s alleged mechanism shows precisely how, and the distortion runs in three directions at once.
On the income statement, cash that should have been booked as operating revenue is reclassified, so revenue and operating income come in understated, and any income-approach value built on the reported figures is depressed accordingly. On the balance sheet, the reclassification fabricates an insider claim — a loan from Schiano — that does not exist; in an equity valuation a phantom shareholder loan reduces equity value dollar for dollar, and in a buyout or business-divorce posture the diverter’s fabricated creditor position comes off the top of what the victim’s interest is worth. And then the Schiano twist, in the ownership ledger itself: the fabricated loans and capital contributions become the documentary record of the diverter’s claimed investment, underwriting an equity claim against the very company the cash was taken from. The victim is hit three times — the cash is gone, the enterprise looks less profitable than it is, and the person who took the cash holds manufactured paper against what remains.
The pattern is not exotic. The Association of Certified Fraud Examiners’ biennial Report to the Nations consistently finds asset misappropriation to be the most common category of occupational fraud; cash skimming and larceny concentrate in businesses where one person controls both the receipt of cash and its recording; and small organizations suffer disproportionate losses precisely because the segregation of duties that would interrupt these schemes does not exist. A vending company — like a restaurant, a laundromat, a car wash, or a parking operation — is the canonical environment.
Readers of this series will recognize the corrupted-records problem from Kirdassi v. White, where the company’s books were a mess because the wrongdoer controlled them and the question was how an expert values a company on records it cannot fully trust. Schiano is the upstream case — it is about the person who makes the records untrustworthy in the first place — and it sharpens a due-diligence discipline that should already be standard on any closely held company, especially a cash-intensive one. Insider loans and capital contributions get traced to source documentation: a recurring “loan from a shareholder” should tie to a verifiable wire, deposit, or canceled check from the insider’s own account, because a loan funded with cash the company itself generated is not a loan — it is reclassified revenue, and possibly a manufactured claim. Reported revenue gets tied to operational metrics — machine counts, meter readings, route logs, seat counts, utilization — and material gaps between operating capacity and reported revenue get investigated, since simple deposit-pattern analytics on the bank data are cheap relative to what they catch. The control environment gets assessed and disclosed: where one person records the transactions, controls access to the cash, and decides what the other owners see, segregation of duties has failed and the records are inherently less reliable. And the bank records get obtained independently — from the institution or the banking portal, not from the bookkeeper’s own versions — because the difference between the bank’s records and the bookkeeper’s records is exactly where a diversion lives.
The professional standards anticipate this. A valuation analyst is not an auditor: the AICPA’s Statement on Standards for Valuation Services (VS Section 100) permits reliance on management-supplied information without auditing or reviewing it, but expects the analyst to consider whether that information is reasonable and to disclose the nature and source of the data relied upon, and USPAP requires disclosure of extraordinary assumptions and limiting conditions. A valuation that assumes the books are accurate should say so in exactly those terms — because if the books later prove corrupted, the disclosed limitation is what separates the analyst’s work from the bookkeeper’s. An audit under AU-C Section 240 affirmatively plans for fraud risk; a valuation engagement does not, and the report should never imply otherwise.
For the expert retained to quantify a diversion of this kind, the corrupted books are simultaneously the problem and the evidence. Three workstreams carry the engagement.
The first is reconstructing the actual cash flows from source records — bank deposits, register tapes, vending-machine meter readings, route collection logs — and comparing them against the ledger; the difference between documented cash receipts and recorded revenue is the diversion amount, or at least its starting point. In a vending operation, machine telemetry and route logs are the operational ground truth that bookkeeping cannot rewrite. The second is reversing the mischaracterized entries and restating: every insider loan and capital contribution that was actually diverted revenue comes off the liability or equity side and returns to revenue, and the restated financials show the company’s true economic performance — the basis any valuation should have used. In the business-divorce posture, that reconstruction does double duty, because quantifying the diversion and testing the diverter’s claimed contributions resolve to the same source documents.
The third is quantifying the consequential components beyond the diverted principal. Statutory prejudgment interest in New York runs at 9% simple per annum under CPLR 5004, recoverable under CPLR 5001 from the earliest date the claim arose — which, over a multi-year scheme, adds substantially to the exposure. Faithless-servant forfeiture (Feiger) can claw back compensation paid to the disloyal fiduciary during the period of disloyalty. Restating “loan proceeds” as revenue carries tax consequences, including amended-return exposure. And where the company was valued or sold during the diversion period, there is the transaction value lost to artificially depressed financials: if a buyer relied on understated books, the damage extends past the stolen cash to the bargain the seller never got.
Schiano sits in a developing line of New York cases recognizing that internal bookkeepers and financial personnel may owe fiduciary duties to the entities they serve. The principle is not that every employee is a fiduciary. It is that employees who occupy positions of trust over financial information — controlling the records, managing the accounting, holding access to the funds — may acquire fiduciary obligations by virtue of the role, not by virtue of a license or a written agreement. In Torrance, it was the sole bookkeeper with check-signing authority; in Schiano, the bookkeeper who allegedly controlled both the recording of cash and ownership’s access to the internal records. The common thread is that the employee controlled the financial information the owners depended on to understand their own business, and with that control came a duty of truthful and complete disclosure.
For litigation counsel, the practical force is collectability and leverage. The primary wrongdoer in a diversion case may be judgment-proof or may have dissipated the funds; the bookkeeper who allegedly facilitated the concealment is a second defendant with a different collectability profile — and a witness whose cooperation incentives change the moment she becomes a party. The claim does not require proof that she profited; it requires knowledge of the fraud and substantial assistance through misclassification and concealment, pleaded with CPLR 3016(b) particularity. One discipline on expectations, though: Schiano establishes that such claims survive a motion to dismiss on well-pleaded allegations. Proving knowledge at trial — as distinct from sloppy bookkeeping or deference to the boss — remains the hard part, and nothing in the decision lowers that bar.
Plenty of forensic and valuation engagements never come near this fact pattern. If you are valuing a company with audited financials, segregated accounting functions, and an independent controller — or a cash-light business where revenue is captured electronically and reconciles cleanly to deposits — the Schiano problem is not your problem, and the reconciliation work scales down accordingly. This is a checklist for the harder case: a closely held, cash-intensive business with one person controlling both the books and the owners’ access to them, a disputed insider “loan” account, or a diversion you have been retained to reconstruct. It is not an argument that every set of books needs forensic treatment before anyone can rely on it.
Schiano v. Harsanyi answers a question most practitioners had not thought to ask: can a bookkeeper who did not profit from a fraud be sued for facilitating it? In New York, at the pleading stage, the answer is yes — on both aiding and abetting fraud and breach of fiduciary duty. On the allegations, the bookkeeper’s control of the financial records and disclosures to ownership created a fiduciary relationship, and deliberate misclassification plus concealment states its breach, regardless of personal benefit. And the case’s structure carries the deeper lesson: in a closely held cash business, the ledger is not just where fraud hides — it is where competing ownership claims are manufactured. The same fabricated entries allegedly concealed a diversion and documented the diverter’s claimed equity.
For litigation counsel, the bookkeeper is a viable defendant, the faithless servant doctrine adds a forfeiture remedy, and the complaint survives dismissal when it alleges knowledge, deceptive accounting, and withheld records with particularity. For valuation professionals, the internal records you rely on are only as trustworthy as the people who create them and the controls that govern them — and in a cash business with a single bookkeeper controlling both the records and the access, the reconciliation done at the start of the engagement is what keeps the Schiano problem from becoming the valuation’s problem.
Chris Walton, JD, is President & CEO of Eton Venture Services. He can be reached at [email protected].
If you’re investigating suspected financial irregularities in a closely held business and need the internal records reconstructed — or you’re valuing a cash-intensive company and want the revenue reconciled to operational metrics before anyone relies on the books — we’re glad to discuss the approach. The reconciliation done at the start of the engagement is what keeps the Schiano problem out of the valuation.
Schiano v. Harsanyi, 230 A.D.3d 820 (2d Dep’t 2024), rev’g in part an order of Sup. Ct., Nassau Cnty. (Singer, J.), entered Mar. 17, 2023.
Bookkeeper and internal-personnel fiduciary duty: Torrance Constr., Inc. v. Jaques, 127 A.D.3d 1261 (3d Dep’t 2015); Hausen v. North Fork Radiology, P.C., 171 A.D.3d 888 (2d Dep’t 2019).
Employee duty of loyalty and faithless servant: Lamdin v. Broadway Surface Advertising Corp., 272 N.Y. 133 (1936); Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928 (1977) (forfeiture of a disloyal agent’s compensation).
New York procedure: CPLR 3211(a)(7); CPLR 3016(b); CPLR 5001; CPLR 5004 (9% simple statutory interest).
Commentary: Farrell Fritz, P.C., Bookkeeper Liability? It’s a Real Thing, New York Business Divorce (Oct. 2024).
Professional standards and fraud data: AICPA Statement on Standards for Valuation Services (VS Section 100); Uniform Standards of Professional Appraisal Practice (extraordinary assumptions and limiting conditions); AICPA AU-C § 240 (consideration of fraud in a financial statement audit); Association of Certified Fraud Examiners, Report to the Nations.
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