NeYo Vs. Foster: A Lesson In Financial Trust

I came across a case recently that should serve as an objective lesson in knowing who to trust with your money.

R&B singer NeYo sued his former business manager in Federal Court recently, alleging the theft of $8 million. The Grammy-winning musician, who’s real name is Shaffer Smith, claims that he allowed former manager and confidant Kevin Foster to take control of his bank accounts in 2005. Using that control, Foster then transferred money out of the account without permission.

Jasenhudson at the English language Wikipedia [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 , from Wikimedia Commons

The list of alleged offenses is substantial. Smith claims that Foster forged his signature on two loan documents for $400,000 and converted monies for his personal use. Foster allegedly neglected his duties as a business manager by failing to file tax returns for Smith and his companies on time. Smith claims that Foster invested $3.5 million of his money in OXYwater, a company that went bankrupt, leading to its founder’s indictment on related charges.

Further, Smith claims that Foster was the company’s president, but declined to disclose this fact. There is also a payment of $300,000 to an attorney with which Smith had no relationship, according to the R&B star.

In 2014, Smith changed business managers to Nigro Karlin of Segal Feldstein & Bolno. The new managing company began to “uncover potential improprieties” committed by Foster, Foster & Firm and V. Brown, according to the lawsuit. Smith is seeking $8 million for securities violations, fraud, conversion, negligence and breach of contract. Let’s take a look at the less common of these terms to consider how this lawsuit might play out.

Securities Violation

Securities are any type of financial instrument that represent some type of financial value, like stocks, bonds and notes. There are a number of types of securities violations, but the two that are most likely to apply in this case are “breach of fiduciary duty,” and “unauthorized trading.” Which one is applied may depend on the specifics of the case.

The latter, unauthorized trading, would only apply if it were to be revealed that Smith did not know Foster was investing $3.5 million in OXYwater. While trustees have some freedom to make prudent investments, they generally are not allowed to trade against the stock holder’s wishes.

The former, breach of fiduciary duty, applies to situations in which there is a conflict of interest. For example, if the allegation that Foster was president of a company in which he compelled Smith to invest without disclosing this fact, he would likely be found guilty of a breach of fiduciary duty.

Conversion

Conversion is defined as an unauthorized act that deprives an owner of property without consent. In this case, it seems that the two $400,000 loans are considered to have been “converted.” Conversion can apply in a wide variety of cases – even to a pizza delivery person who accidentally delivers a pie to the wrong address. In this case, however, the penalty would likely be much more serious.

The lesson learned here is to be very careful with whom you trust your money. It is a lesson that I suspect NeYo won’t soon forget.