Suspension For Escrow Account Neglect

On February 15, 2023, the Appellate Division for the Second Department decided the most recent case concerning escrow account mismanagement. The Court imposed a three-year suspension on an attorney who failed to safeguard funds held in escrow and failed to supervise two non-lawyer employees who improperly transferred funds from that account to their own accounts. Despite the fact that the lawyer was essentially the victim of a theft, he was suspended for three years.

A Failure To Supervise Escrow Accounts

As the Court explained, the attorney failed to notice that his employees were secretly transferring funds out of the escrow account into their own accounts:

Charge two alleges that the respondent failed to adequately supervise the work of two nonlawyer employees of his law firm … in violation of rule 5.3 of the Rules of Professional Conduct, as follows: In or about 2011, the respondent hired nonlawyer Hector Rojas to serve as the firm’s office manager and nonlawyer Nilesh Sanghavi to handle the firm’s financial matters, including the escrow account. The respondent failed to review the bank statements and records for the escrow account. The respondent relied on summary reports of the escrow account activity prepared by Rojas and Sanghavi. The respondent, thus, failed to notice that between August 2013 and November 2014, Rojas and Sanghavi transferred client funds totaling approximately $467,079 from the escrow account to their own bank accounts.
2023 NY Slip Op 00866

In addition, the Court observed that the attorney failed to take appropriate action in response to obvious red flags:

The respondent testified at his examination under oath that one year before he learned about the dishonored check, he learned that Rojas had signed an escrow account check. Even after the respondent was alerted about this irregularity, he did not inquire further about the integrity of the escrow account. The respondent, moreover, failed to notice approximately 21 wire transfers by Rojas and Sanghavi from the escrow account during the period August 2013 to November 2014, even though it was not part of the firm’s practice to wire funds.
Id.

Significant Mitigation, But Still A Suspension

In imposing a three-year suspension, the Court noted significant facts in mitigation; however, the Court concluded that the failure to supervise employees for an extended period of time was improper:

In determining an appropriate measure of discipline to impose, we have considered, in mitigation, that the respondent accepted responsibility and expressed remorse, the conduct occurred during a time when the respondent experienced personal stress, the respondent notified the police of his employees’ theft, and the respondent replenished the remaining shortage of $20,000 in the escrow account after Rojas and Sanghavi returned most of the misappropriated funds. Notwithstanding the advanced mitigation, we find that the respondent has engaged in serious misconduct by failing to provide proper oversight of two nonlawyer employees for an extended period, resulting in the misappropriation of funds entrusted to the respondent as a fiduciary.
Id.

The Lesson: Supervise Properly

This case once again highlights the importance of robust trust account management and employee supervision in legal practice. Outside bookkeepers provide an additional layer of oversight that ensures compliance with regulatory requirements and ethical standards. We can help prevent mismanagement, embezzlement, or errors in record-keeping that could lead to regulatory violations, legal liabilities, or reputational damage. Moreover, outside bookkeepers can provide an unbiased and independent assessment of the law firm’s financial performance, which can be helpful in identifying opportunities for cost savings, revenue growth, or risk mitigation.

Please note that the information provided on this website is for general informational purposes only and is not intended as legal or tax advice. The information is subject to change, and it is important to consult a specialist before making any decisions. Law Ledgers provides accounting services to New York lawyers and law firms, including escrow protection, tax advice and bookkeeping administration. Contact us today for personalized support.