Late last month, three New York lawyers’ licenses were suspended for 6-months due to their failure to supervise a “dedicated and trusted employee” who embezzled more than $200,000 from their firm’s client trust account. The decisions are here, here, and here. The ABA Journal and Legal Profession Blog covered the story.
It wouldn’t surprise me if this hits a bit too close to home for several lawyers and firms.
Per Vermont’s Rules of Professional Conduct, a lawyer shall:
- safeguard client funds;
- reconcile trust accounts no less than monthly; and,
- put into place reasonable measures to ensure that nonlawyer employees act in a manner consistent with the lawyer’s obligations under the rules; and,
- bear responsibility for a nonlawyer employee’s conduct if the lawyer fails to adequately supervise.
In short, the rules do not prohibit a lawyer from delegating bookkeeping and accounting duties to a nonlawyer. However, responsibility for the consequences of the nonlawyer’s conduct is non-delegable.
I urge review of the New York decisions. One of the lawyer’s made interesting statements. Per the ABA Journal:
“Karol told the ABA Journal that the partners immediately notified ethics regulators, immediately investigated and immediately took corrective action. ‘We did everything right, except initially we didn’t supervise,’ he says. ‘We’re good lawyers and lousy businessmen.
“Karol says he thinks ethics authorities understood that he and his partners were good people. ‘As the decision indicated, I have 33 years of unblemished record,’ Karol says.
“Other lawyers should know ‘it’s a bright line test,’ he says. If someone else touches your escrow account, ‘you’ll get slammed; you’ll get spanked.’
“‘The cautionary tale is you can’t rely on people; you have to double-check yourself,’ he says.”
What jumps out to me is how readily apparent the embezzlement would’ve been had the lawyers simply looked. From the opinions:
- “While the respondent and his partners claim there were no early warning signs of the financial improprieties occurring in the escrow account, the record reveals otherwise. Indeed, the respondent testified that once they went online and looked at their accounts, they saw that, over a 3½ year period, [the employee] was transferring client funds between the Firm’s escrow, operating, and payroll accounts. Although the respondent and his partners were unaware that online access had been instituted for the Firm’s bank accounts, these questionable transfers were also listed on the monthly bank statements received by the Firm. It is also noted that online transfers were clearly designated as such on the bank statements. We find that had the Firm’s partners provided proper oversight, including a review of the Firm’s escrow account bank statements, the questionable transfers between the Firm’s escrow, operating, and payroll accounts, including those transfers which were made using online access, should have served
as an early warning to the respondent and his partners to undertake greater scrutiny of the escrow account transactions. The failure to detect these early warning signs is directly attributable to the respondent’s and his partners’ failure to provide proper oversight of the escrow account.”
The suspension orders also drive home a point I tried to make in an earlier post on trust accounting: improper handling of client funds will result in a serious and significant sanction even if the face of substantial mitigating factors. The responsibility to safeguard clients funds is an enormous one.
25 years ago, I never could’ve imagined a world in which I’d be writing about legal ethics and lawyer trust accounts. Even if I had, I can guarantee the vision wouldn’t have included thoughts of Ronald Reagan and Ice Cube. Yet, here I am.
When it comes to trust accounting, trust, but verify. And, as the New York lawyer suggested, double-check yourself, before you wreck yourself.