On July 24th, the US Attorney for Massachusetts announced the indictment of Haverhill attorney Patrick J. Dolan for stealing more than $2 million from clients. This included the theft of $87,500 from a special needs trust which he used to make the down payment for his own home and of another $2 million from funds he was holding in escrow pending the results of a family trust lawsuit.
On June 23rd, the US Attorney for the middle district of Florida announced the indictment of investment manager Leo J, Govoni for the theft of more than $100 million from special needs trusts his firm managed. (Attorney General Pamela Bondi subsequently fired the lead prosecutor because he had previously been involved in the January 6th prosecutions.)
Massive Ponzi Scheme
We reported on the Govoni fraud when it came to light at the beginning of last year. Govoni, a Burlington, Massachusetts native, set up several entities that managed the finances for thousands of special needs trusts, often for beneficiaries who had won or settled personal injury lawsuits. His operation was a Ponzi scheme similar to Bernard Madoff’s in that he was able to create his own financial statements purporting to show the funds in the various trusts. In addition, even though he siphoned of tens of millions of dollars for his own purposes, including the purchase of corporate jets and renting luxury boxes at the Kentucky Derby, he maintained sufficient liquidity to disburse funds to beneficiaries as needed.
Two side notes: I happened to be in Tampa on the date of a hearing at which Govoni was questioned by the bankruptcy trustee for the nonprofit that acted as trustee of many of the trust. When asked about the corporate jet, Govoni proudly responded that he sold it for more than its purchase price.
Sadly, Will Lindahl, the founder and executive director of the CPT Institute, which the bankruptcy trustee had hired to take over management of the trusts in the Govoni bankruptcy, passed away suddenly on April 30th.
True Victims?
It’s not yet clear how much Govoni stole from special needs trust beneficiaries and how much from state and federal governments. Most of the trusts involved in the fraud were so-called “payback” trusts under which any funds remaining at a beneficiary’s death must be paid to the state Medicaid agency to reimburse it for whatever it paid out for the beneficiary’s care during their life. Other trusts Govoni managed were complicated Medicare set-aside trusts that are meant to pay for beneficiary medical expenses related to the injury for which they received a personal injury award. My guess is that Govoni simply never reimbursed the various state governments or paid out the medical expenses.
While the bankruptcy trustee is working to recoup as much of the stolen funds as possible for the trust beneficiaries, my fear is that a large portion of whatever is recovered will be eaten up with the high bills of all the lawyers involved.
Lessons Learned
While Dolan and Govoni hopefully will reap their just desserts (and Govoni is being held in jail pending trial), what lessons can their (alleged) thefts teach us to avoid other special needs trusts from being defrauded? By “us” I mean attorneys and other professional advisors because clients usually follow our recommendations regarding special needs trustees and financial managers.
Here are a few ideas I have:
- Legally-Mandated Oversight. Work with a bank, law firm or trust company that has legally-mandated oversight and checks and balances.
- Deep Pockets. The larger the entity, the more likely it will have “deep pockets” to replenish any accounts that are raided by an unscrupulous employee.
- Transparency. Or work with a trustee that keeps accounts in an investment firm such as Fidelity Investments or Charles Schwab where you or a person you designate has on-line access to the accounts. We don’t yet know as much about the alleged Dolan frauds but my guess is that the trust beneficiaries did not have on-line access to the accounts he managed.
- Checks and Balances. If you are working with a pooled trust, ask them about their systems and checks and balances. Of course, at least for a while after the Govoni scandal, the boards of directors of these trusts will be more careful to avoid situations.
It’s especially important that personal injury and special needs planning attorneys take these steps to ensure the integrity of the trusts they help create and fund since they are often dealing with especially vulnerable clients.