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How to Protect Yourself from Dishonest Fiduciaries – Massachusetts

By Harry S. Margolis

The Massachusetts Supreme Judicial Court recently disbarred a South Boston attorney for taking advantage of two clients who had entrusted their funds with him.

In the first case, in 2001 an elderly client gave the attorney $98,200 to manage. The attorney put the funds into an IOLTA account, which is a common trust account that attorneys maintain to hold retainers and client funds that will be held for a short amount of time. Larger amounts or funds that will be held for longer periods are supposed to be maintained in separate interest-bearing trust accounts (though they’re not paying much interest these days).

In this case, apparently the attorney managed the funds responsibly for several years and then in 2008 and 2009 he used about $48,200 of the client’s money for his own business and personal expenses. Subsequently, he used funds from other clients to cover expenses for the original client.

In the second matter, in 2007 a disabled client who had inherited $113,400 gave it to the attorney to manage. In 2009, the attorney again used about $45,000 of the client’s money for his expenses, and then covered the disabled client’s costs with funds from other clients. One can imagine that the attorney fell on hard times during the recession and used the available funds to make ends meet.

In disbarring the attorney, the SJC made the following comments:

In both cases the clients were in a vulnerable position. The respondent made payments in restitution in the described cases, but his failure to account for all the trust funds he received and disbursed prevented ascertainment of the total amount of funds misused and the total restitution due these or other clients.

(Click here to read the entire decision.)

So, how could these clients have avoided this result? Here are a few tips they and others can take to make sure their funds are secure:

  • Use a trust or other written agreement. It appears that these clients simply gave their funds to the attorney with nothing in writing governing their use. The best practice is to use a formal trust.
  • Make sure the funds are kept in a separate account. The best approach is to have a trust account at a bank or investment company that the client can view at any time. The alternative would be to make sure the attorney keeps the funds in a separate escrow account.
  • Use co-trustees. While the attorney or other trusted professional might manage the funds, he will have to consult with a co-trustee and the co-trustee will have access to the funds. My guess is that in these cases there were not appropriate family members or friends to act as co-trustees.
  • Get regular account statements. This will help a lot if the accounts are kept individually at a bank or other financial insitution. However, if the attorney is simply reporting on his own escrow account you have something of a Bernie Madoff problem, since he could make up the statements.
  • Don’t use a solo practitioner. I don’t want to cast aspersions on solo practitioners, but an attorney who is part of a larger firm will be subject to its protocals and systems for managing client money. It’s like diversifying an investment portfolio — it’s not advisable to put all of your money into a single stock.

The attorney in this case had been practicing since 1982. He is probably as honest and as devoted to his clients as most other attorneys. He paid back what he took (as far as it could be determined). But in difficult circumstances, he raided the piggy bank, which would not have been possible if any of these safeguards had been in place. Both he and his clients would have been better off.

 



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