Oct. 3 (Bloomberg) -- Whitney Group LLC, a 20-year-old recruiting firm that helped Wall Street banks hire executives, sued its former chief financial officer, claiming his financial ``misappropriations'' caused the company to collapse.

Ex-Finance Chief Jeffrey Sussman, 51, committed fraud when he advanced ``millions of dollars'' without authorization over four years to Hunt-Scanlon Corp., a company that tracks the executive-search market, according to a complaint filed Sept. 25 in New York State Supreme Court in Manhattan. Whitney also sued Hunt-Scanlon, alleging the Riverside, Connecticut-based company owes it $7 million from the money transfers.

Whitney is insolvent, unable to meet payroll obligations and plans to ``wind up'' its affairs under New York's Debtor and Creditor law, according to the complaint. Whitney said it ousted Sussman on Aug. 29 based on ``the substantial and unauthorized cash advances.'' Sussman filed his own suit against his former employer a month later, saying Whitney fired him to ``cover up'' the loss of major clients.

Whitney suffered as the world's biggest banks cut more than 130,000 jobs since July 2007, victims of more than $580 billion in credit market losses and writedowns for mortgage-related securities, data compiled by Bloomberg show. The bankruptcy of Lehman Brothers Holdings Inc. and the takeover of Merrill Lynch & Co., the third-biggest U.S. securities firm, by Bank of America Corp. may lead to additional job cuts.

Management Buyout

Thomas Chase, an attorney for Whitney Group, declined to comment and Gary Goldstein, the company's chief executive officer, didn't return phone calls. Sussman declined to comment when reached at home, as did his lawyer, Mark Carey. Hunt-Scanlon's Chris Hunt and Scott Scanlon were also named as defendants in the Whitney suit. Hunt declined to comment and Scanlon didn't return a call.

Whitney's Goldstein led a management buyout of the firm in 2003 from Headway Corporate Resources Inc., where he was CEO. Whitney was a Headway unit at the time.

The 53-year-old CEO put his eight-bedroom, 6,300-square foot house in Bedford Hills, New York, up for sale two weeks ago. It's being offered at $6.9 million, according to a Houlihan Lawrence property listing.

``He's lost his bulge-bracket clients either because they've disappeared or they are not doing any hiring,'' said Richard Lipstein, a managing director at Boyden Executive Search in New York, which specializes in financial services. ``It's not a good sign.''

`Actively Concealed'

Whitney alleged in the complaint that Sussman's advances were made in ``small and irregular'' amounts to Hunt-Scanlon and individuals that had personal, professional and family relationships with the company.

``Sussman failed to disclose and actively concealed his misappropriations from Whitney Group until, as the company became starved for cash in August, he had no choice but to confess the indebtedness of the Hunt-Scanlon Defendants to Whitney Group was in excess of $7 million,'' according to the complaint.

Whitney Group, which has offices in New York, London, Boston and Hong Kong, generated revenue of $30 million last year. As of August, it had a no cash balance and accounts receivable of less than $100,000 in New York, according to Sussman's complaint.

The company's ``intentional and willful termination was a `cover-up' for the extreme financial distress of the company, unrelated to Sussman's authorized actions,'' Sussman's suit said. ``The defendant simply could not generate enough revenue to cover monthly costs well in excess of $500,000 in the New York office alone.''

Korn/Ferry Link

Sussman also alleged that executive search firm Korn/Ferry International considered buying Whitney Group in August and that he helped prepare financial information to give to them. Michael DiStefano, a spokesman for Los Angeles-based Korn/Ferry, said he had no immediate comment.

The Whitney Group ``is falsely manufacturing a story of corporate intrigue involving one of its own officers in order to overcome its own financial insolvency,'' Sussman said in court papers. ``An insolvency that directly resulted from its own extreme downturn on the financial executive-search business.''

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: October 3, 2008 02:05 EDT