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In re PRB

Supreme Court of Vermont

August 24, 2016

In re PRB

         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.


         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.


         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.


         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, ...

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