Breach of the Duty of Care in New York -Say Out of the Strip Clubs if you are using Corporate Funds

Skully, Fraud, Lawsuit

A recent lawsuit makes allegations that, if true, shows what not to do if your New York startup business obtains investment funding.

According to Business Insider, Marcus and Mitch Weller, the brothers who founded Skully, a company that designs next-generation “augmented reality” motorcycle helmets who raised millions in crowd-sourced funds, allegedly used those company funds for personal purposes

The allegations include:

  • Rent for a personal apartment in the Marina district of San Francisco, then the subsequent moving and painting expenses when they moved to the Dogpatch
  • Restaurant meals and personal groceries charged to the company AMEX card
  • A payout of $80,000 to an unnamed cofounder, which was recorded as a trip to China
  • A $13,000 Mai Tai and Extreme Tech Challenge in Las Vegas
  • A Lamborghini rental during a personal vacation
  • A “world tour” trip that included $2,000 for limos in Florida, $2,000 for a strip club, and $2,345 worth of paintings from Hawaii.

A notice on the company’s Indiegogo page now alerts customers who preordered the $1,450 helmet that they’ll have to go through bankruptcy court to try to reclaim any money.

Skully’s board of directors forced the brothers out mid-July, and it was reported this week that the company’s shutting down. This leaves a huge legal mess to clean up, as Skully raised 2.5 million dollars from crowdfunding sources and $11 million from venture capitalists.

If the allegations are true, the Weller brothers breached a fundamental duty in business – the fiduciary duty of care.  It is a legal principle that directors and officers of a corporation must act in the same manner as a reasonably prudent person in their position would act in making all decisions in their capacities as corporate fiduciaries.  Part of that duty is the responsible use of corporate funds.

Take this story as a cautionary tale: starting a business is a serious matter.  If you are lucky enough to obtain investment financing and crowd-sourced money, account for every single penny and recognize your responsibility to investors, creditors and your fellow management and ownership.

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