Legal Question in Employment Law in California

My guess would be the illegal conduct is irrelevant to whether or not you terminiated the person so it is irrelevant in determining whether they are entitled to unemplyment. If you can show that you definitely would have found out about the illegal activity by a certain date [when annual audit is done, etc.] and fired him then, you might be able to argue that benefits should end as to that date, but the EDD might consider that too unusal an argument to be accepted.