Legal Question in Business Law in California

My father-in-law owns a small trucking business in CA. When the business was first opened in 2005 he and his brother-in-law put up the capitol to open the business and took on a 3rd partner who was a family friend of my father-in-law who knew the ins and outs of the business but did not put up any capitol since he provided experience from being a trucker at a previous employer. Well it has come to our attention that he has been cashing checks coming in directly from clients into a personal checking account under his name only. The accounts are not business related and what's more suspect is that his wife works for the particular bank where the personal checking account was opened at and where the checks were being deposited. The business checking account was also held at that bank but was closed as soon as we became aware of these deposits. When we found out about this we came to learn that his secretary was also involved in obtaining the checks since she would receive the checks from clients and give them to the partner before my father-in-law had a chance to see them so they were as if we never received the funds from these clients. we had contacted these clients and they had informed us that the checks had been sent and cashed and sent over records that the checks had been paid. It appears that the partner secretary became aware of this and the secretary just stopped showing up to work and abandoned her job and my father-in-law confronted the partner in a frustrated but professional manner and there was to be an agreement for the partner to sign a document to release his partnership from the company but he has become difficult to deal with and now refuses to sign any document. He is now causing chaos by contacting some of the clients directly and providing them with wiring instructions to his own personal bank account with another bank. As a result, these payments from clients, which is potential profit to the company and pay for its employees and funds to keep the business running is going to the partner. My father-in-law is facing personal financial setback since there are not enough funds to even pay himself since they are now falling behind on there own payments. We feel that if this continues long enough he will drive the business into the ground. There is already record that he has allocated over $50,000 to upwards of possibly $100,000 for his own personal use on top of his own salary or wages within the past year. What legal grounds do we have to prosecute this partner or sue? Also, we have concern that this may have tax ramifications since we don't know if it will affect the business when filing taxes and still have to report these embezzled funds as profit still. Will the partner have to report this as taxable income and possibly be audited by the IRS?

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