Thanks to Google Books and Dictionary.com, it didn't take long to find an answer!
Documents of the Assembly of the State of New York By New York (1846). Legislature.
Annual Report of Canal Commissioners By New York Canal Commissioners, New York (1847).: "
Defalcation means misappropriation of money or funds held by an official, trustee, or other fiduciary.
Here's another reference to the scandal. Unfortunately, the reference isn't complete and this is all that's available. I'm hoping that John Campbell Harris has a thing or two to say about this in the Philadelphia archive!
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