I haven't researched yet, waiting till after tax season to do that.  But this previous post is where I am going to start and maybe calling the IRS CPA/Tax Practician hotline and select the Legal Advisor sections within that menu.  

Fraud is theft, and if it ocurred with your clients S-Corp it would be deductable. Be sure to keep good records to support the loss. Research pub 584-B, and instructions for form 4684 section B.