- Learn the top eight ethical financial mistakes that lawyers make and how to avoid them.
Lawyers carry many responsibilities. Among those are fiduciary duties to receive, hold, distribute and account for funds that come into their practice according to ethical and legal requirements. Breaching those requirements can lead to severe and long-term consequences. Here is a selection of eight ethical financial mistakes that lawyers have made:
Any financial abuse of the elderly or incapacitated is horrible; when that abuse is due to the actions of a lawyer who was entrusted with acting as a fiduciary to protect funds won for that client due to wrongdoing that was suffered by them, the abuse takes on a whole different ethical complexion.
Rule 1.15 of the ABA Rules of Professional Conduct requires a lawyer to segregate trust funds from all other funds in the practice and to safeguard those funds for their client.
Take Michael G. Reilly of Iowa. In November 2000, he obtained a settlement of $137,500 for a child who had sustained a serious eye injury.
A conservatorship was opened for this child.
Reilly, after receiving the settlement funds, did not deposit them to the conservatorship account. Rather, he deposited them into his personal bank account.
As it turned out, Reilly had an active gambling addiction. As a result his law license was revoked.
Later, he applied for reinstatement of his law license based on his addressing his gambling addiction.
Lawyers are granted an extraordinary power to hold client funds in trust. With that power comes an equivalent ethical and legal duty to not use those funds for any purpose save and except for the purpose for which they were given to the lawyer. In particular, a lawyer is not to mix (or commingle) those client funds with funds of the lawyer (except for funds kept in an account to offset bank fees) or to misappropriate them for a use not authorized by the client. It does not matter if the misappropriation or commingling was inadvertent or due to poor accounting practices. Harsh penalties await any lawyer accused of these wrongdoings, up to and including disbarment.
Model Rule 1.15: Safekeeping Property - states in part:
(a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five years] after termination of the representation.
Commingling client and lawyer funds is often a first step on the path to misappropriation of client funds.
Take the case of In re Stephen R. Robinson, No. 107,311 (Kan. Sup. Ct.). Robinson wrote to the Kansas State Bar and stated the following
The facts are these:
Robinson was held to have violated Kansas Rule of Professional Conduct 1.15 by failing to properly safeguard his client’s property when he deposited the $2,400 into his personal bank account and spent them on personal expenses.
The hearing panel further found a violation of Kansas Rule of Professional Conduct 8.4(c), which states:
“It is professional misconduct for a lawyer to . . . engage in conduct involving dishonesty, fraud, deceit or misrepresentation.”
The hearing panel determined Robinson was dishonest when he converted $2,400 of client money to his own use. He was disbarred by the Supreme Court of Kansas and subsequently by the USPTO.
Double-entry bookkeeping (DEB) was invented a very long time ago. Benedikt Kotruljević, who was born in Ragusa (now Dubrovnik), recorded the first description of double-entry bookkeeping in 1458 in his work: Book on the Art of Trade. The reason that DEB has persisted for centuries is simply that it works. All modern bookkeeping systems, paper or electronic, apply the principles underlying DEB. Done properly and carefully, DEB produces income statements, trust accounting statements, balance sheets and much more. DEB is the basis to determine the financial standing and performance of any and all businesses today. DEB is based on the fact that every transaction is entered twice, a a credit and a debit. This double-entry system is designed to be a self-checking system, since both the debits and the credits have to balance to ensure that everything has been recorded properly.
However, today we have spreadsheets. A spreadsheet does not follow DEB. It is a single-entry system. Spreadsheets are great for performing financial calculations but they are not designed to run and record the trust and general accounts of a law office since they lack the checks and balances that indicate all is well (or not, as the case may be). When your law license is dependent on keeping good, proper and accurate financial records, do not trust it to a spreadsheet, or indeed, anything other than a proper legal trust and general accounting system. Acquire a good trust and general accounting system and either learn how to use it properly, or preferably, hire a good bookkeeper who can run the systems for you and produce the reports that are necessary not only as required by your legal regulator, but that indicate the proper running of your law practice.
Take attorney Daniel B. Zonies of New Jersey. The Disciplinary Review Board of the Supreme Court of New Jersey stated:
“The core of respondent’s misconduct is his continuous and complete failure to comply with recordkeeping requirements, including, R_ 1:21-6(c)(1) (failing to maintain trust account records contemporaneously); R__~. 1:21-6(c)(1)(A) (failing to maintain a cash receipts and disbursements journal for trust account; failing to maintain fully descriptive monthly cash disbursements journals); R_ 1:21-6(c)(1)(B) (failing to maintain fully descriptive client ledger cards); and R___~. 1:21- 6(c)(1)(H) (failing to maintain monthly three-way reconciliations for a trust account; failing to maintain individual client ledger cards).”
Surprisingly, this was not Zonies’ first instance of conduct before the disciplinary system. Rather, it was his fifth. Zonies was disciplined twice for recordkeeping infractions - a 2003 reprimand and a 2018 censure. In 2015, the OAE again investigated his lack of recordkeeping. In 2017, the OAE informed Zonies that his accounting records were grossly incomplete and in violation of the Rules. Yet, Zonies’ recordkeeping deficiencies continued through the date of the execution of the stipulation, in August 2019.
As a result of his actions or inactions, Zonies was reprimanded by the Supreme Court of New Jersey.
As stated above, failure to properly run your trust account can get you into disciplinary trouble. Recordkeeping is just one part of the larger picture when it comes to trust accounting. Attorneys should do monthly reconciliations and promptly investigate issues that may arise. The reason for a monthly reconciliation of your trust account is to safeguard your clients’ funds. An error in the recordkeeping by an attorney or staff will be found quicker and this makes it easier to rectify. Even a bank can make mistakes sometimes. The Model Rules of Professional Conduct are silent as to who can handle trust account funds and many attorneys delegate some of these tasks to staff. However, the ultimate responsibility of the trust account and protecting client funds belongs to the attorney.
Take the case of attorney Blanca Greenstein, In re Blanca Perper Greenstein, No. SC19-919 (Fl. Sup. Ct.)
Greenstein hired a bookkeeper at the behest of her husband, who was the CFO of the law firm. She gave the bookkeeper full authority to handle the trust account. From April 2016 through June 2017, the bookkeeper embezzled over $150,000 from the firm’s trust account. When Greenstein found out about the misappropriation, she immediately restored the money to the account. The Florida Supreme Court suspended Ms. Greenstein for three years and ordered her to pay investigative fees of over $8,000. The court ruled that she was negligent in hiring the bookkeeper and not properly supervising her trust account. Greenstein never looked at her bank statements or did any reconciliations for over two years. They also found that a simple background check on the bookkeeper would have found that she had previously been convicted of theft.
Model Rule 5.4: Professional Independence of a Lawyer states:
Law Firms And Associations
(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
Paying a referral fee is regarded as sharing fees. While paying a referral fee to another lawyer is permissible in certain circumstances (and outside the purview of this article), the situation of paying a referral fee to a nonlawyer is another matter entirely. This situation has come under scrutiny particularly with the growth of online service providers that have sought to offer limited scope legal services to be provided by a local attorney, within set rates, with the payment of a fee to the online company. The online company seeks to define the legal services to be provided, the scope of the legal representation, the fees charged and perhaps other aspects of the representation.
Much of this type of arrangement is troubling from an ethical and regulatory perspective. For example:
Model Rule 1.5: Fees - states:
(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:
Overcharging your client is a definite no-no. Take Lawrence Reich, a Long Island, N.Y., private practitioner who claimed in government legal bills to have worked more than 1,200 days in a single year. This led to a massive probe of state pensions being paid to attorneys (per the ABA Journal).
Reich will no longer receive the $62,000 annual pension or lifetime health coverage he was awarded as a result of being simultaneously reported as a full-time employee of five school districts.
The ABA Journal stated:
“This lawyer epitomized the systemic waste and abuse in a state public pension system that routinely paid out millions in public funds to private-sector professionals who weren’t entitled to them,” says N.Y. Attorney General Andrew Cuomo. “His claims defied logic.”
Funds that are deposited into the trust account do not belong to the attorney. These funds belong to their clients and other third parties. According to the Model Rules, they have a duty to give a full accounting of the funds at the request of these parties.
Model Rule 1.15: Safekeeping Property – states in part:
(d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.
Taking client trust funds except for the purposes of paying your duly rendered and earned legal account is a big no-no.
Take the case of Kentucky lawyer Timothy Belcher. It is one thing for a lawyer to steal trust funds. It is an order of magnitude greater when those stolen trust funds were part of a settlement the lawyer won in 2004 for the children of a man killed in a car accident.
According to Mountain News WYMT.com: “For years, Belcher transferred money from the account to his own checking account and used it for business and personal expenses, including mortgages, food, insurance and cell phones, the indictment said.” Belcher estimated he had taken around $600,000 from the account, but the Kentucky Supreme Court indicated it could have been “quite a bit more”.
Belcher was indicted on seven charges of fraud and three charges of filing false tax returns. e received a sentence of 41 months in federal prison, was ordered to pay $817,000 in restitution and was suspended from the practice of law.
Setting up, recording, reconciling, maintaining and supervising your accounting systems (general and trust) are not just management tasks. When those funds belong to other persons, then how you go about running those accounts can have legal and ethical implications for your practice and your reputation. Take the time to properly manage your finances to avoid ethical problems.