SCOV Law Blog: A case of sufficient supervision

Editor’s note: This piece from the SCOV Law Blog is by Andrew Delaney. 

In re PRB File No. 2016-042, 2016 VT 94

[E]very once in awhile, the SCOV likes a Professional Responsibility Board (PRB) decision so much that it publishes it as a SCOV opinion. This leads to me making the same Beyoncé-says-put-a-ring-on-it joke ad nauseam. Wuh uh oh uh uh oh oh uh oh uh uh oh.

Respondent is licensed in both of the twin states. He focuses on transactional law. While he was working for a firm, he hired a non-lawyer assistant to work for him. She’d previously worked for his wife and done a good job. She seemed smart and capable, so when respondent started his own firm, he took her with him.

While with the old firm, the employee hadn’t handled the accounts. But at the new firm, she did. Respondent made the deposits himself and confirmed they were recorded in QuickBooks. But employee did most of the other stuff — for example, she opened the monthly statements and reconciled the accounts.

Something tells me this is not going to end well.

Respondent performed some limited oversight. He’d check the ledgers at the end of the month. He’d also check the final ledger when a matter was concluded. A CPA reviewed the accounts annually and never found anything off. Respondent’s title insurance company also did periodic reviews of his IOLTA accounts and never found irregularities.

But if respondent had dug a little, he would’ve found discrepancies. He would’ve compared the monthly statements with the QuickBooks and he would’ve noticed that, well … Grover and friends explain.

See, employee was taking money from the operating account. She was using various methods and fudging the QuickBooks so that things on the surface appeared to be in balance.

The employee wrote one check for just over $2,000 out of a trust account. She forged respondent’s signature and put it in QuickBooks as a business expense.

When respondent tried to pay his estimated taxes from his operating account, it didn’t fly due to insufficient funds. Respondent went to the bank and discovered the embezzlement. He was devastated that his 24-year employee was ripping him off. He felt betrayed. I’d imagine it was a “WTF” moment — but not like this mom’s definition.

He immediately fired the employee and hired an experienced replacement. He told the cops. He hired his CPA firm to go through his accounts with a fine-toothed comb. Everything was gone over. There was a lot of money missing from the operating account, but the trust accounts seemed to be entirely intact. Nonetheless, respondent self-reported the embezzlement to disciplinary counsel.

Because respondent used his Vermont trust account mostly for real estate closings and such, it didn’t normally carry a large cash balance. Money would go in and right back out.

In a “bizarre coincidence,” respondent’s accounts were selected for a compliance review. So respondent and his new paralegal reviewed the accounts and found the roughly $2,000 check mentioned above. So respondent immediately transferred his own money from his operating account to replace it and told disciplinary counsel about it.

Disciplinary counsel’s CPA completed the examination. All that was found was the one check for $2,000. Respondent has implemented internal controls to make sure this doesn’t happen again. He personally reviews statements and does reconciliations (or at least carefully reviews them with his paralegal).

Respondent, the PRB notes, was negligent. There was no intent for his former employee to steal money. The PRB does note that though she took a whole lot of money (nearly a cool mil over the

years), it was almost entirely respondent’s money (except for that one check).

So, the injury was limited to that one check for about $2,000. There was a high potential for injury here, however. Even with a lot of people looking at the accounts, nobody noticed anything “off.” At least theoretically, money could’ve been taken from the trust account and nobody would’ve been the wiser.

But, his Vermont trust account didn’t usually have a whole lot of money in it, and the funds were for specific purposes, so that made the likelihood of theft lower. Additionally, the title insurance company audits lowered the likelihood of theft.

Respondent submitted letters of support to the hearing panel from two Vermont attorneys, his banker, and his rabbi. The letters said respondent is a good and competent dude and the victim of his former employee’s wrongdoing.

We have rules of professional conduct to protect the public from people who aren’t fit to serve as attorneys and to maintain public confidence in the bar. As much as I might enjoy a good lawyer joke, this is important. I think we’re one or two places above “serial killer” on the most-respected professions list. We need to turn that around.

But this may not be the case to make an example. A charge of professional misconduct must be supported by clear and convincing evidence. If proved, then one or more sanctions may be imposed. The purpose of sanctions is not to punish attorneys but to protect the public from harm and maintain public confidence by deterring future misconduct.

Rule 5.3 of the Vermont Rules of Professional Conduct covers non-lawyer assistants. Lawyers are responsible for any non-lawyer employee’s misconduct. Sufficient oversight must be maintained when a non-lawyer employee handles client funds. Because respondent let the employee handle client money without sufficient policies and procedures in place, he violated the rule.

The rule also requires a lawyer to make reasonable efforts to ensure that the lawyer’s employees’ conduct is compatible with the lawyer’s professional obligations. There’s case law on this and it’s pretty well established. Here, again, respondent didn’t quite come up to snuff. The fact that the employee stole so much over time shows that respondent was negligent, regardless of any ill will or improper motive.

Rule 1.15 requires a lawyer to act as a fiduciary when holding onto client property and to hold such funds separate and maintain proper books. Respondent failed to do that here and so violated Rule 1.15. The PRB is clear that the violations apply only to the trust account.

In determining what sanction applies, the PRB applies the ABA Model Standard and considers “the duty violated, the attorney’s mental state, the actual or potential injury caused by the misconduct, and the existence of aggravating or mitigating factors.”

The PRB articulates the duty violated like so: “Respondent’s failure to carry out internal controls and supervise his employee’s work resulted in $2,020.18 of client funds being misappropriated.” His “failure to supervise his employee constitutes a violation of Rule 5.3(b).”

Respondent’s mental state was negligent. He didn’t have intent to misappropriate funds or to encourage his employee’s wrongdoing. And he didn’t benefit in any way.

The injury was that the lack of internal controls meant a little over $2,000 was misappropriated. There was no actual injury because he promptly ponied up his own cash to cover it. There’s no evidence of actual injury other than to respondent.

The PRB does note that “law enforcement, Respondent’s CPA, and the forensic specialist,” all missed the misappropriation from the trust account, even though their job was to catch it. This indicates that it could’ve been much worse. The risk for potential injury was low due in large part to minimal balances in the account, and the regular auditing by the title insurance company.

The PRB determines that the presumptive sanction is a reprimand. This is because respondent was negligent and there was at least the potential for client injury.

Regarding aggravating factors, there’s one: Respondents has been practicing law for more than 40 years.

There are a lot of mitigating factors. He has never before been disciplined. He had no selfish or dishonest motive. He neither benefitted from nor condoned the misconduct. When he found out about it, he used his own money to make the trust account whole and told disciplinary counsel about it. He also hired a special accountant and a forensic specialist to go over his accounts. He self-reported the violation. He made a full and free disclosure. He cooperated fully with disciplinary counsel and the board.

Respondent has an excellent reputation and good character. His reaction to the embezzlement was forthright and what we’d hope for. He’s a good dude. He’s genuinely remorseful. And he’s a victim of a serious criminal offense.

All this means that the mitigating factors outweigh the aggravating factor. Because of all those mitigating factors—and after spilling a significant amount of ink on analogous cases because that’s what lawyers and judges do—the PRB concludes that the proper sanction is a private admonition. And that, boys and girls, is why I keep writing “respondent” despite our preference for using actual names here.

While all we lawyers owe it to our clients and the public to keep a close eye on the property they place in trust with us, I have to say that on these facts and under these circumstances, respondent does not appear to be the kind of lawyer that we need to make an example of. What do you think? Let us know in the comments.