ORIGINAL
JURISDICTION Professional Responsibility Board DOCKET NO.
2016-042
ENTRY ORDER
Paul
L. Reiber, Chief Justice
In the
above-entitled cause, the Clerk will enter:
¶
1. Upon review of the hearing panel decision in this matter,
the Court concludes as follows: The decision presents a
well-reasoned discussion and resolution of a problem common
in legal practice, particularly for small firms and solo
practitioners. Accordingly, the Court orders review of the
decision on its own motion, adopts the hearing panel decision
in its entirety as a final order of this Court, waives
briefing and oral argument, and orders that the decision be
published in the Vermont Reports.
STATE
OF VERMONT PROFESSIONAL RESPONSIBILITY BOARD
Decision
No. 198
The
Hearing Panel hereby approves Respondent receiving a private
admonition from Disciplinary Counsel for violation of Rules
1.15(a), 5.3(a) and 5.3(b) of the Vermont Rules of
Professional Conduct, as Respondent failed to maintain proper
control and oversight of his client trust accounts.
Hearing
Panel No. 10, consisting of Joseph J. O'Dea, Esq., Chair,
Jonathan M. Cohen, Esq. and Mr. Roger Preuss, has received
and considered Disciplinary Counsel's and
Respondent's written submissions. Disciplinary Counsel
and Respondent jointly requested that this disciplinary
matter be resolved by private admonition by Disciplinary
Counsel. Based upon the parties' submissions, including
the Stipulation of Facts, Joint Recommendation for
Conclusions of Law, Disciplinary Counsel's Sanction
Memorandum, letters of support submitted on Respondent's
behalf, and Joint Recommendation for Admonition by
Disciplinary Counsel, the Hearing Panel makes the following
findings of fact and conclusions of law.
I.
FINDINGS OF FACT
Respondent
is an attorney licensed to practice law in Vermont and New
Hampshire. He was admitted to the New Hampshire bar in 1972
and the Vermont bar in 2000. Respondent currently works as a
sole practitioner. Respondent maintains an office is in New
Hampshire, but represents clients in both Vermont and New
Hampshire. His practice is focused on business law,
commercial transactions, business litigation, and real estate
transactions.
In
1991, Respondent joined a New Hampshire law firm and was
assigned to the firm's new satellite office. Respondent
hired a non-lawyer employee to work with him. Respondent knew
the employee prior to hiring her, as the employee had worked
for Respondent's wife for five years, prior to
Respondent's and his wife's marriage. The
employee's work for Respondent's wife was highly
regarded.
For the
first nine years the employee worked with Respondent, the
employee did not handle money or Respondent's office
accounts because those tasks were handled by staff at the law
firm's main office. Respondent found the employee to be
smart and capable. During their years working together,
Respondent and the employee became personal friends.
In
2000, Respondent left the law firm, established his own
office, and began working as a solo practitioner. Respondent
hired the employee to work for him in his new office.
At the
new office, Respondent assigned the employee some new duties,
including handling Respondent's operating account and
client trust accounts.[1] (Respondent maintained client trust
accounts in New Hampshire and Vermont.) Respondent would make
all of the bank deposits himself, and confirm the deposits
were recorded in his QuickBooks accounting system.
Respondent's employee was responsible for all of the
other bookkeeping tasks associated with Respondent's
accounts. For example, the employee opened the monthly bank
statements and performed the monthly reconciliations for each
account, including the client trust accounts.
Respondent
performed some limited oversight of his client trust
accounts.[2] At the end of each month, the employee
prepared a ledger report for each client's trust account,
showing all deposits to and withdrawals from each
client's trust account. Each ledger report also stated
the balance for each client's trust account as of the end
of the month. Each month, Respondent reviewed the
employee's ledger reports for each client's trust
account. The employee's ledger reports showed the
client's respective trust accounts were in balance and
there were no problems with the accounts. When Respondent
concluded work on a client's matter, the client's
trust account would be reduced to zero by payment of
outstanding fees and costs, and by refunding the unexpended
balance to the client. After final disbursement from the
client trust account, the employee prepared a final ledger
report for the client's trust account for
Respondent's review. Respondent always reviewed the
employee's final ledger report to confirm that the
client's trust account showed a zero balance.
Annually,
Respondent hired an outside certified public accountant
("CPA") to review his financial records and prepare
his tax returns. The CPA's work included a review of all
of Respondent's QuickBooks entries. The CPA never brought
any issues to Respondent's attention concerning
Respondent's accounts or financial records.
Respondent's
title insurance company periodically reviewed
Respondent's IOLTA accounts and, it appears, the title
insurance company never discovered any irregularities.
Respondent
did not implement or follow reasonable procedures to
safeguard client funds while he worked as a sole
practitioner. Respondent did not personally review the
monthly bank statements or cancelled checks. Respondent did
not review his employee's monthly account
reconciliations. Respondent's oversight was limited to
reviewing the ledger reports prepared by his employee. Had
Respondent compared the employee's ledger reports against
the corresponding bank statements, Respondent would have
discovered significant discrepancies, as the information
recorded in his QuickBooks accounting system did not match
the transactions reported in corresponding bank statements.
Unbeknownst
to Respondent, the employee was engaged in an embezzlement
scheme, and was periodically taking money from
Respondent's operating account. The employee used
different techniques to embezzle money from the operating
account. For example, the employee wrote checks payable to
herself, forged Respondent's signature on the checks, and
cashed the checks. The employee did not record these checks
in QuickBooks, but she would reduce the amount of a deposit
previously recorded in QuickBooks by the amount of the check
she had just written to herself. Following this procedure,
the QuickBooks accounts always appeared to be in balance. The
employee would also write checks payable to herself and
record the checks in QuickBooks as payment of an office
expense, thereby disguising her theft as a business expense.
During
the course of her employment, the employee engaged in one (1)
instance of embezzling money from Respondent's client
trust account. In November 2014, the employee wrote one trust
account check, payable to herself, in the amount of $2,
020.18, and forged Respondent's signature on the check.
The employee recorded the check in QuickBooks, falsely
designating "Capitol One" as the payee.
In
January 2015, Respondent needed to pay his fourth quarter
estimated taxes. To make the payment, Respondent tried to
transfer funds from his operating account, but the transfer
failed due to insufficient funds. Respondent went to the bank
to look into the matter and discovered his employee's
unauthorized withdrawals from his operating account.
Respondent was in disbelief that his trusted employee, with
twenty-four years of service, had stolen money from him.
Respondent felt completely betrayed.
Respondent
immediately terminated the employee. Respondent hired an
experienced paralegal to take over the former employee's
duties. Respondent promptly notified law enforcement about
the embezzlement.[3] Respondent asked the CPA firm that
annually prepared his tax returns to examine all of his
accounts and financial records. Respondent also engaged the
services of the CPA firm's forensic specialist to do a
specialized review. Law enforcement and Respondent's
title insurance company conducted their own examinations of
Respondent's accounts and financial records. All of
Respondent's financial records for his operating accounts
and his client trust accounts were thoroughly examined.
The
investigations revealed a substantial sum of money was
missing from Respondent's operating account, but no money
appeared to be missing from Respondent's client trust
accounts. Respondent self-reported the embezzlement to
Vermont Disciplinary Counsel, out of an abundance of caution
and a desire for transparency.
In
August 2015, Disciplinary Counsel selected Respondent's
Vermont client trust account for a compliance examination.
Once notified of the upcoming examination, Respondent and his
paralegal re-reviewed the records for his client trust
account. Respondent discovered his former employee had
written a check to herself in November 2014 for $2, 020.18,
as described above. On discovering the misappropriation,
Respondent immediately transferred money from his operating
account to the client trust account, to cover the loss caused
by the misappropriation of funds. Respondent also reported
the misappropriation of client funds to Disciplinary Counsel.
In
September 2015, Disciplinary Counsel's CPA completed the
compliance examination of Respondent's Vermont IOLTA
account. The CPA found no evidence that the former employee
had misappropriated funds from Respondent's client trust
account, excepting only the one check for $2, 020.18 written
in November 2014. The CPA informed Disciplinary Counsel that
Respondent's Vermont IOLTA account was used solely for
Vermont real estate closings and refinances. Respondent
averaged about two Vermont closings per month and, typically,
the Vermont trust account did not carry a substantial
balance. Respondent's title insurance company
periodically reviewed Respondent's IOLTA account, and his
former employee knew the title insurance company was
conducting these reviews. In the CPA's opinion, the risk
of a substantial misappropriation of client funds from
Respondent's Vermont IOLTA account was low.
In
response to the defalcation, Respondent implemented internal
controls to assure the safekeeping of client funds held in
his trust accounts. On a monthly basis, Respondent personally
reviewed the bank statements for both his operating account
and his client trust accounts. Each month Respondent would
either personally reconcile his bank statements or closely
review the reconciliations performed by his paralegal.
Respondent
did not intend for his former employee to embezzle client
money from his Vermont trust account, nor did he know that
she had done so. Respondent's mental state was one of
negligence. The degree of Respondent's negligence is
shown, in part, by the fact the employee repeatedly embezzled
money from Respondent's operating account, over a period
of many years, without being discovered. The former employee
embezzled a total of about $962, 000 from Respondent's
operating account. (It must be emphasized that
Respondent's operating account only held Respondent's
money, not client money, and whatever losses Respondent
suffered as a result of the thefts from his operating account
were his alone.)
The
injury suffered in this case is limited to the $2, 020.18 of
client funds, which Respondent refunded with his own money
placed once he discovered client money had been
misappropriated. The potential for injury was not
insignificant, as suggested by the employee 's repeated
thefts from Respondent's operating account over many
years. The potential for injury is also shown by the fact
that Respondent, the CPA, the forensic specialist, and law
enforcement all reviewed his trust accounts looking for
irregularities, but found none. This fact suggests money
could have been misappropriated from the trust account
without being discovered.
The
potential for injury, however, was mitigated by several
factors. Typically, Respondent's Vermont trust account
did not maintain a substantial balance. Client funds held in
Respondent's trust account were earmarked for specific
purposes (i.e., mortgage payoffs, filing fees and other
closing costs), making an attempted embezzlement more
obvious, and therefore, less likely. The former employee was
also aware that Respondent's title insurance company was
periodically reviewing Respondent's client trust
accounts, thereby discouraging theft of client funds.
Disciplinary Counsel's CPA assessed the risk of potential
for injury as low.
Respondent
submitted letters of support to the Hearing Panel from two
Vermont attorneys, from Respondent's banker, and from a
man who was both Respondent's client and rabbi. The tenor
of the letters is that Respondent is a man of integrity, who
adheres to the highest professional and ethical standards.
One of the attorneys stated that Respondent is conscientious
and attends to details when representing a client. The letter
submitted by Respondent's banker attested to
Respondent's thoroughness and skill. The banker stated
that Respondent's "efforts and competencies in the
legal aspects of Real Estate transactions have greatly
benefited [the bank and its] clients." Respondent's
rabbi stated that, as a rabbi and client, he trusted
Respondent's skill and judgment in matters both legal and
non-legal. The letters emphasize that Respondent is the
victim of his former employee's callous wrongdoing.
II.
CONCLUSIONS OF LAW
A.
Applicable Legal Standards
"In
general, the [Rules of Professional Conduct] are
'intended to protect the public from persons unfit to
serve as attorneys and to maintain public confidence in the
bar.' " In re PRB Docket No. 2006-167, 2007
VT 50, ¶¶ 9-10, 181 Vt. 625, 626-27, 925 A.2d 1026,
1028-29 (citing In re Berk, 157 Vt. 524, 532, 602
A.2d 946, 950 (1991) (per curiam)); accord In re PRB
Docket No. 2006-167, 2007 VT 50, ¶ 9, 181 Vt. 625,
626, 925 A.2d 1026, ...