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Firm: No Reason to Suspect $4.3M Theft by Bookkeeper Who Is Partner's Brother
New York Law Journal
November 13, 2007
Artful lies, trusting co-workers and lax bank procedures allowed the long-time bookkeeper of a Garden City, N.Y., law firm to loot an escrow account of more than $4.3 million over a two-and-one-half-year period, according to court documents and several interviews with the alleged embezzler's brother -- a partner at the firm.
"Until his confession to no less than four members of the firm, there was never a reason presented to be suspicious," said Peter J. Galasso, 51, of Galasso Langione & Botter. "[My brother] had worked for us for almost 15 years, had from all perspectives a close and loving relationship with his two children, an intimate relationship with the members and employees of the firm, and was generously compensated for his services."
The case highlights the reality that law firms, like many businesses, may be vulnerable to theft from even trusted employees. And it draws attention to the obligation of lawyers to protect their clients' funds.
Anthony Galasso, 54, of West Babylon, N.Y., was arrested in January (New York Law Journal, Jan. 23), but details of his alleged wrongdoing have emerged only recently. He was indicted last month on 22 charges, including two of grand larceny in the first degree, for allegedly taking $4.3 million from one of the firm's escrow accounts. People v. Galasso, 2349N/07. District Attorney Kathleen Rice said at the time that Anthony Galasso had been living in the "lap of luxury."
Galasso faces up to 25 years in prison if convicted. He has pleaded not guilty and is free on $200,000 bail. He has been sued by the firm, which has also filed suit against the bank where the escrow account was kept. Galasso Langione & Botter v. Anthony Galasso, 07/010038; Galasso Langione & Botter v. Signature Bank, 07/019108.
Mark Goidell of Garden City is representing the firm in both suits.
Anthony Galasso argued in an answer filed to the firm's civil suit that the partners had a duty to vigilantly monitor their client's escrow account and should be held liable for contributory negligence. He also claimed that the firm did not adequately train and supervise its employees.
Moreover, the answer states, "Any actions allegedly taken by defendant Anthony Galasso in his employment capacity at [the firm] were at the behest of the firm's partners, in particular Peter Galasso and James Langione."
Peter Galasso responded in an interview that the firm complied with all ethical standards. He added that it cannot be held liable for the loss of the money from his brother's criminal action.
"The only way to protect against such a diabolical act is for the attorney to generate the fees, perform the legal work, personally collect the fees, personally deposit the fees, personally receive the bank statements from the mail, personally reconcile the bank statements by arranging for direct contact with bank personnel and hope that the mail has not been manipulated nor the bank representative corrupt," he said. "Basically, an attorney would have to assume the role of counsel, bookkeeper, office manager and accountant and eliminate business delegation entirely ... . A crime such as the one committed by the defendant here is so unthinkable that its occurrence could never be prevented outside of a one person practice."
As a result of the theft, the firm now has its books overseen by an attorney.
'SECRETIVE MACHINATIONS'
According to court documents, on June 10, 2004, the firm entered into an agreement on behalf of a client, Stephen Baron, to hold in escrow $4,840,862 from the sale of a building in Hicksville, N.Y., pending his divorce from Wendy Baron. Ms. Baron's lawyer, Jerry Winter, of Garden City, declined to comment.
Peter Galasso and his partner James Langione signed a Signature Bank escrow agreement listing them as the only authorized signators and prohibiting any cash withdrawals, wire or Internet activity. The account was also not to be linked to any other accounts, and monthly bank statements were to be mailed to the firm's Garden City offices.
However, the firm claims that Anthony Galasso, before depositing the real estate proceeds, destroyed or hid the original application. In its place, he substituted an application adding himself as a signator and forged the two partners' names.
The firm's lawsuit and the indictment claim that Anthony Galasso then siphoned money from the account. According to a press release from Rice, Galasso spent the money on private jets to Atlantic City and other casinos, on payments for a 2007 Mercedes Benz E350, and on a $16,000 stay for his family at the Ritz Carlton Hotel in New York City. Rice said Galasso also used the funds to purchase more than $200,000 worth of concert and sporting event tickets, paid his son's tuition at New York University Law School, made extensive improvements to his West Babylon, N.Y., home, and took his family on a Disney World vacation.
The firm claims that he was able to get the money even though Signature account manager Stephen Reinhardt knew that Anthony Galasso was not an attorney or a fiduciary.
"He was able to hide his secretive machinations by diverting bank mail to a post office box, and then giving us fabricated, authentic-looking bank statements," Peter Galasso said, adding that the firm forwarded the statements to the client, as the accruing interest seemed to be in order with what the money would have been earning. "We would look at the statements and it seemed in line with what the interest was. He was pretty diabolical."
Anthony Galasso came clean on Jan. 18, after a court ruling issued on distributing the escrow funds, in finalizing Mr. Baron's divorce, according to court documents. When the firm went to cash out the account, it discovered just $460,000 remaining.
"We expected my brother to plead guilty, it's inexplicable, unfathomable, really," Peter Galasso said, adding that there was a significant paper trail to corroborate the four confessions, including $900,000 in checks Anthony Galasso allegedly wrote to himself.
A breast cancer survivor, Anthony Galasso was often absent from the office, purportedly seeing pain specialists after surgery, his brother said, and avoided socializing with the other employees outside of work.
Attorneys and support staff interacted with Anthony Galasso frequently, his brother said. A monthly meeting was held to review reports prepared by him dealing with the firm's expenses, among other things. But no one noticed any problems, Peter Galasso said.
"No good deed goes unpunished ... . No matter how many safeguards one may erect, a criminal mind continues to have the ability to do the unfathomable," said Peter Galasso.
The firm has employee theft insurance, but it only covers $10,000 per incident and will not cover the loss. It also cannot turn to the state Lawyers Fund for Client Protection because the alleged thief is a nonlawyer.
Thomas F. Liotti, who is representing Anthony Galasso in both the civil and criminal cases, said in an interview that his client was an extremely sick man who was burdened with lots of responsibility by a firm that paid him around $52,000 a year.
In addition to bookkeeping, Anthony Galasso ordered supplies, helped file papers and attended medical examinations for firm clients. According to its Web site, Galasso Langione is a six-attorney firm with an emphasis in personal injury, medical malpractice, trusts and estates and commercial litigation.
Liotti said that at least some of the responsibility for the lost funds lays with principals of the firm.
"If I had that much money in an escrow account, I'd be watching it very closely, like every second," said Liotti. "The lawyers can't delegate that responsibility to anyone else."
Liotti added: "I don't care if it is your brother, you have to take a look at the accounts ... . I think a full and fair investigation is in order."
Galasso Langione has also hit Liotti with a $2 million defamation suit for the following statement that appeared in the Oct. 25 edition of Newsday:
Anthony didn't do anything that he was not instructed to do by his superiors. Whatever he did, he did with their full knowledge and consent. Dipping into company accounts was a common practice among attorneys there. Is the Galasso firm going to say they never went to a concert or sporting event using this money? I think that's something that should be addressed.
Liotti refused to comment on the lawsuit against him.
LAWYERS' RESPONSIBILITY
The state's Code of Professional Responsibility dictates that "a lawyer in possession of any funds or other property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary, and must not misappropriate such funds or property or commingle such funds or property with his or her own." Disciplinary Rule 9-102.
Further, a law firm has the obligation to "adequately supervise" the work of nonlawyer employees. "The degree of supervision required is that which is reasonable under the circumstances, taking into account factors such as the experience of the person whose work is being supervised, the amount of work involved in a particular matter, and the likelihood that ethical problems might arise in the course of working on the matter." Disciplinary Rule 1-104.
"Whether a lawyer may be disciplined for misappropriation of client funds by an employee depends on all the facts and circumstances," said Joseph E. Neuhaus, of Sullivan & Cromwell in Manhattan, who chairs the New York State Bar's Committee on Professional Ethics.
In this case, Stephen Gillers, a New York University Law School professor, said that sanctions under the code would be unlikely, absent a showing that Galasso Langione's partners did not make a good faith effort to monitor client funds.
"While the firm may be responsible to its clients for lost property or funds, unless the lawyers ignored warning signs or their office procedures were woefully inadequate, they do not risk discipline," Gillers said.
Peter Galasso said his firm fully complied with the code's guidelines. He argued that his brother's conduct constituted an isolated incident, comparable to a rogue agent who spies on his country. In other words, he said, it could not have been foreseen.
"The fact that we trusted the bank representatives, the bank statements received, the oversight by the firm's accountant and the review by our client's accountant, and a family member who worked for the firm for over 15 years and was in all respects a normal family man who had recently undergone life altering confrontation with cancer, who received the full support of the firm and all its members, the fact that we delegated to him the bookkeeping function for the firm should not adversely reflect upon the firm," he said.
Galasso said the firm's relationship with Stephen Baron remains "cordial" although he was "obviously upset."
Mr. Baron is now represented by Steven Eisman, of Abrams Fensterman Fensterman Eisman Greenberg Formato & Einiger in Lake Success, N.Y.
"It's an incredibly novel legal situation," said Eisman of the divorce action that has yet to be finalized due to the theft of the money. "The proceeds of the sale were stolen after the decision [ordering the proceeds to go to the former Ms. Baron] ... . It wasn't my client's responsibility. As of right now, we don't know who's responsible."
Mr. Baron has not sued Galasso Langione, and Peter Galasso said any legal action against the firm would not be successful.
"Our liability is governed by the escrow agreement with Mr. Baron, which contains the typical 'willful misconduct or gross negligence' standard that governs most escrow arrangements," Galasso said. "For the firm to be liable under that standard, we would have had to have directed the release of the escrow to my brother. Clearly, our oversight of authentic looking monthly bank statements that withstood the audit of our client's accountant could never be deemed to be negligent, let alone grossly negligent."
CIVIL LITIGATION
In its civil suits, the firm has named as defendants Anthony Galasso, the firm's two former banks -- Signature Bank and M&T Bank branches in Garden City -- and the firm's former accountant.
Galasso Langione has accused Signature of violations of the Uniform Commercial Code's Article 4, negligence and breach of contract. It demands that the bank pay back $4.4 million -- the amount it allegedly allowed Anthony Galasso to steal, plus interest.
In an unrelated action, Signature is suing the law firm, claiming it has defaulted on $405,227 in loans. Signature Bank v. Galasso, Langione & Botter, 07-014211.
According to the firm's court papers, in November 2005 it directed Anthony Galasso to transfer the Signature accounts to M&T Bank. The bookkeeper persuaded M&T to leave the Baron escrow account at Signature.
Moreover, the firm claims that M&T permitted Anthony Galasso to deplete $699,800 in IOLA accounts due to clients. The action against M&T repeats the same causes of action as those against Signature.
Susan Lewis, a Signature spokeswoman said the bank would have no comment on pending litigation. Signature is represented by Westerman Ball Ederer Miller & Sharfstein, of Mineola, N.Y.
"It's our understanding that this case has just commenced and counsel's office for M&T Bank still needs to finish reviewing the filing," said Chet Bridger, vice-president of communications for M&T in an e-mail statement. "No decision has been made yet as to whether outside counsel will be retained for this case."
Galasso Langione also claims that its former accountant should be held liable because he failed to notify the firm of unpaid expenses by Anthony Galasso and did not catch discrepancies in financial reports.
