Four Specific Indicia
Of Breach of Fiduciary Duty
This article examines four recurring indicia that courts consistently associate with breaches of fiduciary duty: self-dealing and secret profits, misappropriation or misuse of funds, manipulation of financial reporting and compensation structures, and the usurpation of corporate opportunities.
Introduction
Fiduciary duty cases rarely turn on abstract principles alone. Instead, courts look for concrete patterns of conduct that reveal whether a fiduciary has placed personal interests ahead of the party to whom loyalty is owed. In litigation, breaches of fiduciary duty often emerge through identifiable financial and operational red flags: undisclosed conflicts of interest, unexplained transfers of funds, manipulated accounting entries, excessive compensation, or the diversion of business opportunities. These warning signs frequently surface in the underlying financial records long before they are labeled as legal violations.
This article examines four recurring indicia that courts consistently associate with breaches of fiduciary duty: self-dealing and secret profits, misappropriation or misuse of funds, manipulation of financial reporting and compensation structures, and the usurpation of corporate opportunities.
Drawing on representative case law, the discussion focuses on how misconduct manifests in real-world transactions and how courts respond through remedies such as disgorgement, equitable forfeiture, and damages. While this article concerns legal issues, the author intends to express no legal conclusions and/or opinions. Forensic accountants should consult the counsel that engaged them.
Indicia #1: Self-Dealing Transactions and Secret Profits
One of the most straightforward indicators of a breach of fiduciary duty is self-dealing. This occurs when a fiduciary uses their position to benefit themselves financially, rather than acting in the best interests of the party to whom they owe the duty. Self-dealing can take many forms, but it almost always involves a conflict of interest (situations where the fiduciary effectively sits on both sides of a transaction or quietly diverts an opportunity for personal gain without full disclosure or informed consent).
It is the author’s understanding that courts are intolerant of this type of conduct. When self-dealing is established, fiduciaries are often required to disgorge any secret or improper profits, regardless of whether the principal can show a direct financial loss.
A frequently cited example is Ward v. Taggart.[1] In that case, a real estate broker entrusted with handling a land sale secretly inserted himself into the transaction as a middleman. He told his client that the seller would not accept less than $5,000 per acre, while simultaneously arranging to purchase the land himself for $4,000 per acre. Using the client’s own funds, the broker completed the purchase and immediately resold the property to the client at the higher price, pocketing the difference. The court had little difficulty concluding that this undisclosed self-enrichment was incompatible with the broker’s fiduciary obligations.[2]
The broker funded the purchase entirely using the client’s money from escrow, pocketing $1,000 per acre in profit without the client’s knowledge.[3] This kind of undisclosed double-dealing is a textbook example of a breach of the duty of loyalty. The court ordered the broker to forfeit the secret profit, treating him as “an involuntary trustee” holding the profit for the wronged party.[4]
Self-dealing can occur in any type of fiduciary relationship. In Ellison v. Alley,[5] [6] for instance, real estate agents who covertly profited in a property deal were compelled to disgorge their commissions for breaching their fiduciary duty to the client.
Similarly, in Lestoque v. M.R. Mansfield Realty,[7] an agent was found liable for breach of fiduciary duty (even absent fraud) when he obtained a secret profit in a transaction.[8] The consistent lesson is that a fiduciary must not have undisclosed self-interests in a deal. Any profit made through the fiduciary position belongs to the principal.[9]
Other common examples of self-dealing include related-party transactions that are not arms-length. If a company executive causes the company to do business with another company they secretly own (or with a relative’s business) on unfavorable terms, that is strong indicia of a breach.
Forensic accountants should be alert to transactions such as a sudden contract awarded to a family member’s firm at above-market rates, or loans made from the company to the executive on generous terms. Courts have indeed flagged such scenarios.
In one case, an employee “funneled subcontracts to a family member’s company at higher-than-market prices,” which was deemed a breach of loyalty.[10] These actions enrich the fiduciary or their family while harming the principal, fitting squarely in the category of self-dealing. Forensic accountants should seek to trace the benefits obtained and determine if they were disclosed or approved; undisclosed benefits are a red flag for breach.
Indicia #2: Misappropriation and Misuse of Company Funds
Outright misappropriation of funds (i.e., theft or embezzlement by a fiduciary) is among the most obvious and serious breaches of fiduciary duty. In these situations, the fiduciary directly converts the principal’s assets for personal use. Although such conduct may also give rise to claims of fraud or even criminal embezzlement, from a fiduciary-duty perspective it represents a fundamental violation of the duty of loyalty and, in many cases, the duty of care as well.
Courts take a particularly harsh view of fiduciaries who secretly siphon off the assets they were entrusted to manage. A striking example is Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard,[11] which involved a highly respected physician serving as president of a nonprofit foundation.[12] Over the course of several years, Dr. Nadal-Ginard treated the foundation as his personal piggy bank, awarded himself an excessive salary, negotiated a generous severance package, and used foundation funds to pay for personal expenses unrelated to the organization’s mission.[13]
The First Circuit described it as “the classic tale of a corporate officer who, when caught using corporate funds for personal gain, resists making amends for his misdeeds.”[14] After an 18-day trial, the court found the corporate office had misappropriated corporate funds and breached his fiduciary duties, entering a judgment of over $6.5 million against him.[15] This case highlights that personal use of company money, whether via unauthorized bonuses, inappropriate perks, or direct diversion of cash, will support a breach of fiduciary duty claim.
Forensic accountants investigating possible fiduciary breaches should scrutinize the flow of funds. Are there unexplained withdrawals, payments to the fiduciary directly, or to entities controlled by the fiduciary? Is the fiduciary using company credit cards or accounts to cover personal bills?
Such patterns, if not properly authorized and disclosed, indicate a potential breach. In one Texas case, a 50% shareholder of a company (Saden v. Smith)[16] operated the business in a way that denied the other shareholder his equal share of profits.[17] The evidence showed that Saden had withheld revenues and engaged in acts of “fraud, defalcation, and embezzlement” while managing the company, ultimately pocketing nearly $942,000 that should have been shared.[18]
The court not only awarded damages for lost profits to the wronged shareholder, but also imposed equitable disgorgement of Saden’s ill-gotten gains, citing the egregiousness of essentially stealing from his partner.[19] This illustrates that misappropriation can be executed by financial manipulation as well. By “cooking the books,” falsely inflating expenses, or siphoning off income before it is recorded, a fiduciary can covertly enrich themselves.
Even subtler forms of misuse, like using company funds to pay personal expenses or perquisites without authorization, fall under this category. In Guajardo v. Hitt,[20] [21] minority owners alleged the majority trio breached fiduciary duties by paying themselves “bonuses and commissions” (disguised profit distributions) without authorization and charging personal living expenses (an apartment for a family member) to the company.[22]
Such misuse directly reduced the funds available to other shareholders. When patterns like these emerge (personal travel billed to the company, relatives on payroll, unapproved bonuses, etc.), they serve as indicia that the fiduciary is treating the company’s money as their own, which is in violation of their duty. In such instances, forensic accountants can help quantify the amounts involved and show how they deviate from normal business practice or agreements.
Indicia #3: Manipulation of Financial Reporting and Compensation
Not every breach of fiduciary duty involves outright theft. In many cases, the misconduct is more subtle, taking the form of manipulated accounting entries or financial arrangements designed to benefit the fiduciary.
This risk is particularly acute when compensation or payouts are tied to financial metrics (such as profit-based bonuses, earn-out provisions, or formula-driven distributions) where even small changes to timing or classification can materially shift outcomes. Courts have repeatedly encountered situations in which fiduciaries adjusted records or transaction categories to tilt the numbers in their favor; conduct that violates both the duty of loyalty and the expectation of honest dealing.
A clear example of this type of misconduct can again be found in Saden v. Smith.[23] Under the parties’ agreement, Saden was required to split the company’s profits evenly with his co-owner. Instead, he used accounting manipulation to retain a disproportionate share for himself. The trial court found that Saden concealed revenue and inflated expenses, conduct that amounted to fraud and defalcation, and ultimately deprived his partner of nearly $1 million in profits.[24]
The court specifically noted that Saden had withheld profits through “acts of fraud, defalcation, and embezzlement,” which speaks to intentional financial manipulation.[25] As a remedy, the court required Saden to disgorge the gains he had wrongfully obtained, in addition to paying actual damages. In doing so, the court made clear that manipulating a profit-sharing formula designed to ensure fairness between fiduciaries constitutes a serious breach of fiduciary duty.[26]
Another common scenario arises when executives reclassify transactions or manipulate timing in ways that directly affect their compensation or equity payouts. For example, a CFO whose bonus depends on keeping year-end expenses below a certain threshold may improperly defer expenses into the following period. While the entries may appear facially reasonable in isolation, the timing can materially distort results and serves as a clear red flag. Similarly, a partner in a joint venture who anticipates a buyout based on net asset value may write down assets or accelerate depreciation to reduce the amount owed to the other partner, all while positioning themselves to benefit later.
When this type of strategic financial misrepresentation is undertaken for the fiduciary’s personal benefit and to the detriment of the principal, courts often view it as a breach of fiduciary duty under the idea of constructive fraud (even if it does not meet the elements of actual fraud).[27] Even in the absence of an outright lie, the conduct violates the heightened duty of trust inherent in fiduciary relationships.
In cases like these, forensic accountants should look for unusual accounting entries, inconsistent application of policies, or deviations from GAAP that coincide with a period in which the fiduciary stood to gain financially. When such patterns consistently favor the fiduciary, they may reflect intentional manipulation rather than mere accounting judgment.
The author understands that fiduciaries may also breach their duties by using their control over an organization to award themselves compensation or benefits that go well beyond what is reasonable or what the parties agreed to in advance. For example, when a majority shareholder pays themselves an outsized salary or bonus that reduces the profits available to minority owners, courts may view that conduct as a breach of fiduciary duty (particularly in closely held companies or companies where majority owners often owe heightened duties to the minority).
The Nadal-Ginard case illustrates this risk.[28] The organization’s president not only misused foundation funds but also engineered an unusually generous severance package for himself without proper authorization. Courts closely scrutinize this type of self-enrichment through compensation decisions.
From an accounting standpoint, a forensic accountant can compare executive pay to industry benchmarks, internal compensation policies, or the company’s financial performance to assess whether the compensation served a legitimate business purpose or functioned primarily as a vehicle for personal gain.
When an engagement involves evaluating executive compensation or partner withdrawals, forensic accountants should be particularly alert to sudden pay increases, large bonuses paid shortly before a resignation, sale, or merger, or other anomalies that suggest the fiduciary may have been “feathering their own nest” at the expense of those to whom duties were owed.
Indicia #4: Usurping Business Opportunities and Competing with the Principal
Fiduciaries are generally forbidden from stealing business opportunities that belong to the company or otherwise competing against the principal while still owing a duty of loyalty. When a fiduciary quietly benefits from opportunities the company could or should have pursued, courts tend to view the conduct as a serious breach.
This can take many forms, including running a side business, using company resources or confidential information for personal ventures, or diverting customers or revenue away from the organization. At its core, this behavior violates the fundamental obligation of loyalty, which requires fiduciaries to act in the best interests of the principal and not for their own competing advantage.[29]
A good example is the Fifth Circuit’s decision in Advanced Nano Coatings, Inc. v. Hanafin[30] [31] In that case, a senior employee secretly operated on the side, diverting customers for his own benefit while still employed by the company. The court concluded that he had breached his fiduciary duties by “self-dealing with [his employer’s] customers,” effectively usurping business opportunities that belonged to the company. As a result, the employee was ordered to repay everything he gained by virtue of his position, including profits from the side business, his salary, and even expenses the employer had paid on his behalf.[32]
In other words, not only did the disloyal employee have to give up the profits from his side deals, but even the salary his employer had paid him during the period of disloyalty was subject to clawback (since he was being paid to work in the company’s interest, but did the opposite).
This illustrates the legal remedy of “disgorgement,” or forfeiture, which is frequently applied in such cases to strip the wrongdoer of ill-gotten gains. The underlying rationale is that a fiduciary should not be permitted to profit from his breach; even if the principal did not suffer a calculable loss, the fiduciary’s gain can be taken as a matter of equity.[33]
Another well-known case in this category is ERI Consulting Engineers, Inc. v. Swinnea (Swinnea).[34] [35] In that matter, Mark Swinnea (a business partner) secretly formed a competing company while still involved in the original firm. Without disclosing his competing interests, he persuaded his partner to buy out his ownership stake at an inflated price. After completing the buyout, Swinnea began diverting clients and revenue to the new company he had established with his wife, placing himself in direct competition with the business he had just exited.[36]
The Texas Supreme Court held that this conduct (“fraudulent inducement coupled with active competition”)[37] constituted a clear breach of fiduciary duty. As a result, the court upheld not only an award of actual damages but also equitable forfeiture of the $500,000 buyout payment Swinnea had received.
The court explained that when a partner “fraudulently induce[s] another partner to buy out his interest,”[38] the consideration paid is subject to forfeiture as a remedy for the breach. In practical terms, Swinnea was required to give back the money because it was obtained through disloyal conduct. The case is frequently cited for the broader principle that even where the injured party cannot point to a precise monetary loss, courts may still order disgorgement of ill-gotten benefits (such as buyout proceeds or compensation) as an equitable response to a fiduciary breach.
From an accounting perspective, this type of breach often comes to light when evidence shows that a fiduciary was operating a side business (particularly one in the same industry or serving the same customer base). E-mail correspondence, customer lists, and vendor records may reveal outside dealings that were never disclosed. Financial records may also point to the problem, such as unexplained payments to entities controlled by the fiduciary or abrupt declines in revenue that coincide with the fiduciary’s involvement. In Swinnea, for example, the record showed that he allowed the revenues he generated for the company to decline while quietly diverting business elsewhere, a pattern that proved central to the court’s analysis.[39]
Forensic accountants should also look for the misuse of confidential or proprietary information. This may include evidence that a departing employee took trade secrets, customer lists, or other sensitive data (conduct that, standing alone, can constitute a breach of fiduciary duty). Courts in many jurisdictions have consistently held that the unauthorized use or disclosure of proprietary information violates the duty of loyalty.[40]
For example, courts have found a clear breach where an employee shared confidential pricing information with a competitor to secure future employment. Other cases involve employees who secretly worked for competing businesses at the same time or who misappropriated confidential information and provided it to competitors. As noted in the PilieroMazza survey, these fact patterns recur frequently and are widely recognized as classic examples of fiduciary misconduct.[41]
The common thread running through these cases is that a fiduciary cannot serve two masters. When a fiduciary quietly benefits from a competing business or personal venture while still owing loyalty to the principal, that divided allegiance constitutes a breach of duty. Accounting analysis often provides the key evidence by “uncovering the paper trail” through contracts, bank records, and communications. This often reveals both the fiduciary’s conflicting interests and the personal benefits derived from them.
Conclusion
Taken together, the indicia discussed in this article demonstrates that fiduciaries are held to a higher standard, precisely because they control assets, information, and decision-making that directly affect others. Whether through overt theft, hidden profits, accounting manipulation, or secret competition, courts will not allow fiduciaries to retain benefits obtained through divided loyalties or self-interest. Forensic accountants and legal professionals play a critical role in uncovering these breaches by tracing financial flows, identifying conflicts, and quantifying ill-gotten gains, thereby providing the evidentiary foundation necessary for courts to unwind improper transactions and restore equity to the wronged parties.
[1] Ward v. Taggart, 51 Cal. 2d 736, 336 P.2d 534 (1959).
[2] https://law.justia.com/cases/california/supreme-court/2d/51/736.html#:~:text=acre%2C%20which%20Sunset%20accepted,came%20from%20the%20Ward%20escrow
[3] Ibid.
[4] Ibid.
[5] Ellison v. Alley, 842 S.W.2d 605 (Tenn. 1992) (“Ellison v. Alley”).
[6] https://law.justia.com/cases/tennessee/supreme-court/1992/842-s-w-2d-605-1.html
[7] Lestoque v. M.R. Mansfield Realty, Inc., 36 Cal. 3d 157, 680 P.2d 1230 (1984) (“Lestoque v. M.R. Mansfield Realty”).
[8] https://law.justia.com/cases/colorado/court-of-appeals/1975/74-360.html
[9] https://law.justia.com/cases/california/supreme-court/2d/51/736.html#:~:text=is%2C%20unless%20he%20has%20some,from%20his%20dealings%20with%20them
[10] https://www.pilieromazza.com/disloyal-employees-disgorgement-offers-employers-some-reprieve/#:~:text=2,a%20competitor%2C%20among%20other%20examples
[11] Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429 (1st Cir. 1996) (“Boston Children’s Heart Foundation, Inc. v. Nadal-Ginard”).
[12] https://law.justia.com/cases/federal/appellate-courts/F3/73/429/556985/
[13] https://caselaw.findlaw.com/court/us-1st-circuit/1343624.html#:~:text=These%20appeals%20present%20us%20with,affirm%20the%20district%20court%27s%20decision
[14] https://caselaw.findlaw.com/court/us-1st-circuit/1343624.html#:~:text=These%20appeals%20present%20us%20with,affirm%20the%20district%20court%27s%20decision
[15] Ibid.
[16] Saden v. Smith, 415 S.W.3d 450 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) (“Saden v. Smith”).
[17] https://law.justia.com/cases/texas/first-court-of-appeals/2013/01-11-00202-cv-0.html
[18] https://law.justia.com/cases/texas/first-court-of-appeals/2013/01-11-00202-cv-0.html#:~:text=its%20judgment%2C%20did%20conclude%20that,equitable%20disgorgement%20from%20Saden%20of
[19] https://law.justia.com/cases/texas/first-court-of-appeals/2013/01-11-00202-cv-0.html#:~:text=supported%20by%20,awarded%20Smith%20%24941%2C907%20on%20his
[20] Guajardo v. Hitt, 296 S.W.3d 693 (Tex. App.—Houston [14th Dist.] 2009, pet. denied) (“Guajardo v. Hitt”).
[21] https://caselaw.findlaw.com/court/tx-court-of-appeals/1958945.html
[22] https://caselaw.findlaw.com/court/tx-court-of-appeals/1958945.html#:~:text=In%202013%2C%20Guajardo%20learned%20from,of%20those%20profits
[23] https://law.justia.com/cases/texas/first-court-of-appeals/2013/01-11-00202-cv-0.html#:~:text=its%20judgment%2C%20did%20conclude%20that,equitable%20disgorgement%20from%20Saden%20of
[24] Ibid.
[25] https://law.justia.com/cases/texas/first-court-of-appeals/2013/01-11-00202-cv-0.html#:~:text=its%20judgment%2C%20did%20conclude%20that,equitable%20disgorgement%20from%20Saden%20of
[26] https://law.justia.com/cases/texas/first-court-of-appeals/2013/01-11-00202-cv-0.html#:~:text=supported%20by%20,awarded%20Smith%20%24941%2C907%20on%20his
[27] https://www.adamsandreese.com/hubfs/People/PDF/Guide-to-Fraud-Claims-Under-Texas-Law-Anzenberger-Moeller-August-2020.pdf?hsLang=en#:~:text=%5BPDF%5D%20Fraud%3A%20Texas%20,1st%20Dist.%5D%202013%2C%20pet
[28] https://caselaw.findlaw.com/court/us-1st-circuit/1343624.html#:~:text=These%20appeals%20present%20us%20with,affirm%20the%20district%20court%27s%20decision
[29] https://www.hutchesonbowers.com/wp-content/uploads/sites/1603269/2016/05/Moonlighting-Employee.pdf#:~:text=S,%E2%80%94El%20Paso%202013%2C%20no%20pet
[30] Advanced Nano Coatings, Inc. v. Hanafin, 478 F. App’x 838 (5th Cir. 2012). (“Advanced Nano Coatings, Inc. v. Hanafin”).
[31] https://www.hutchesonbowers.com/wp-content/uploads/sites/1603269/2016/05/Moonlighting-Employee.pdf#:~:text=Advanced%20Nano%20Coatings%2C%20Inc,The%20appellate%20court%20also
[32] https://www.hutchesonbowers.com/wp-content/uploads/sites/1603269/2016/05/Moonlighting-Employee.pdf#:~:text=Advanced%20Nano%20Coatings%2C%20Inc,The%20appellate%20court%20also
[33] https://www.pilieromazza.com/disloyal-employees-disgorgement-offers-employers-some-reprieve/#:~:text=Disgorgement%20is%20not%20limited%20to,24
[34] ERI Consulting Engineers, Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010) (“ERI Consulting Engineers, Inc. v. Swinnea”).
[35] https://thelitigationgroup.com/equitable-forfeiture-remedies/#:~:text=%E2%80%9CWe%20hold%20that%20when%20a,%E2%80%9D
[36] https://thelitigationgroup.com/equitable-forfeiture-remedies/#:~:text=%E2%80%9CWe%20hold%20that%20when%20a,%E2%80%9D
[37] https://thelitigationgroup.com/equitable-forfeiture-remedies/#:~:text=%E2%80%9CWe%20hold%20that%20when%20a,%E2%80%9D
[38] https://thelitigationgroup.com/equitable-forfeiture-remedies/#:~:text=%E2%80%9CWe%20hold%20that%20when%20a,%E2%80%9D
[39] https://thelitigationgroup.com/equitable-forfeiture-remedies/#:~:text=company%20to%20buyout%20his%20share,Snodgrass%2C%20but%20not%20before%20heavily
[40] https://www.hutchesonbowers.com/wp-content/uploads/sites/1603269/2016/05/Moonlighting-Employee.pdf#:~:text=and%20,%E2%80%94El%20Paso%202013%2C%20no%20pet
[41] https://www.pilieromazza.com/disloyal-employees-disgorgement-offers-employers-some-reprieve/#:~:text=2,a%20competitor%2C%20among%20other%20examples
Miranda Kishel, MBA, CVA, CBEC, MAFF, MSTCA, a Manager at Gould & Pakter Associates, LLC, supports the completion of business valuations, business calculations, forensic accounting, economic damages, and asset tracing engagements, focusing on in-depth financial analysis including modeling, forecasting, research, and report preparation. Her previous experience lies in small business consulting, commercial lending, accounting, real estate development, and economic development.
Ms. Kishel may be contacted at (218) 404-4877 or by e-mail to mkishel@litcpa.com.
