Law firms make easy pickings for embezzlers

James Rittinger would like to forget about the paralegal who embezzled nearly $300,000 from his New York law firm in 2005.

But she won't go away. In late May, Rittinger learned that Kathy Foer-Morse had done it again, this time at a small practice in Pennsylvania. And if that weren't enough of a reminder, prosecutors told Rittinger that she was using the money pilfered from the Pennsylvania firm to pay restitution for stealing from his firm, Satterlee Stephens Burke & Burke.

Foer-Morse, who was out on bail for stealing from Rittinger's firm when she got the job at Norristown, Pa.'s High Swartz, now is in the Montgomery County jail. A spokesman for the Montgomery County District Attorney's office said that she currently does not have counsel. Prosecutors charge that she swiped nearly $101,000 from High Swartz by writing 12 company checks to herself. High Swartz did not respond to requests for comment.

Rittinger, chairman of Satterlee Stephens, said that the law firm had "a pretty good system" to keep track of money flowing through the 60-attorney shop when Foer-Morse worked there. It has a better one now. Rittinger said his firm "enhanced" its background checks after discovering that Foer-Morse had skimmed $285,000 from his firm's accounts. He said that the firm now has additional safeguards in place.

The connection between the two firms may be unusual, but both businesses were victims of what accountants, practitioners and trade groups say is a growing problem for firms: embezzlement. Recessionary pressures felt by employees and partners alike are increasing the likelihood that trusted colleagues or workers will steal from law firms, where large sums are often at employees' disposal.

Since March alone, at least 12 people have been in court for stealing from law firms. In early June, for example, securities class action attorney Steven Eugene Cauley admitted that he took $9.3 million from a client escrow account to make shaky investments and cover overhead expenses at his Little Rock, Ark., office.

While accounts of embezzlement committed by partners often involve the highest dollar amounts, embezzlement by staffers appears to be more common.

For example, since March:

• A legal assistant at a Portsmouth, N.H., law firm turned herself in after authorities accused her of stealing $80,000 from the firm where she worked.

• A former legal secretary was indicted on charges of stealing more than $550,000 from a one-man law firm in Downers Grove, Ill.

• A Connecticut woman pleaded guilty to embezzling $1.7 million from the South Windsor, Conn., law firm where she worked as a paralegal.

Law firms are especially vulnerable to embezzlement for a number of reasons, said Michael Downey, a partner in the St. Louis office of Chicago-based Hinshaw & Culbertson. His practice focuses on legal ethics and professional service risk management. Embezzlement happens most frequently within solo and small firms, Downey said. (About 80% of the nation's 1.1 million attorneys work in law firms of 50 attorneys or fewer, according to the latest information available from the American Bar Foundation).

Attorneys tend to delegate business matters to employees and provide too little oversight, he said. In small firms, one person often is handles accounts payable and receivable. "It's someone whom they rely on for almost everything," Downey said. Lawyers are more interested in practicing law and too seldom trained to run businesses, he said; they're eager to hand over financial responsibilities to staff.

In addition, attorney ethics rules require lawyers to maintain separate accounts for clients' funds, meaning that large sums of money sit idle in office accounts, tempting workers desperate to cover a mortgage payment or a child's tuition bill. Busy lawyers also tend to cut corners when conducting background checks and following up on an applicant's references, Downey said.

Law firm embezzlement is part of an overall increase in occupational fraud that cost the nation's businesses an average of 7% of their revenues in 2007, according to the Association of Certified Fraud Examiners (ACFE), a 50,000-member trade group. The ACFE defines occupation fraud as employee embezzlement, fraud by third parties, fraud by vendors, financial statement fraud and corruption.

The results of an ACFE survey released in April found that occupational fraud has increased since the recession began in December 2007. Of the 507 respondents, more than half said that they encountered more workplace fraud in 2008, and 49% said that fraud losses had risen in 2008. In addition, 70% said that they expected employee embezzlement to be the most common type of fraud perpetrated during the next 12 months and 88% expected fraud of all kinds to increase during the next 12 months.

The motivation for embezzling has changed amid the economic downturn, said Stephen Pedneault, principal of Forensic Accounting Services in Glastonbury, Conn.

"It used to be a sense of entitlement," Pedneault said. "Now, desperation comes up a lot." He helps law firms forensically analyze the fraud to determine when and how it occurred. A common thread in embezzlement cases, he said, is an absence of controls and procedures to track money running through the firm.

Once the crime has occurred, uncovering the details of the crime and setting up safeguards going forward often are the only comforts available. "Having someone arrested doesn't get your money back," Pedneault said. He advises law firms to buy insurance to cover intentional acts, but many don't take that step.

Columbia, Md., attorney Michael Nagle this month received a $29 check as partial reimbursement for the $700,000 that his firm, Nagle & Zaller, lost to embezzlement. Former office manager Christine McClain-Sloane wrote 250 fraudulent checks during eight of the 11 years she worked at the five-attorney firm. Nagle and his partner discovered the embezzlement weeks after she left in 2005. Had she stopped embezzling six months before her departure and covered her tracks, Nagle said, the firm likely never would have discovered the missing money. "As we were making more money, she took bigger and bigger amounts," he said.

McClain-Sloane pleaded guilty in 2008 to two counts of felony theft scheme and is serving an 18-year prison term. Before sentencing, Nagle said, McClain-Sloane repaid $50,000. The firm also got her five-year-old SUV, worth about $7,000. Since then, he has received that one small check this month "We're never going to see that money," he said of the rest.

Nagle & Zaller made changes to its operations after discovering the crime. It no longer has a single employee handling incoming and outgoing checks. It closely monitors accounts with heavy activity, such as one that it uses to pay court clerk fees, and it performs routine audits of its books. "Now we know," Nagle said.

Law firm embezzlers have common traits, said Downey of Hinshaw & Culbertson. Often, they are legal assistants — which means that they are likely to be women — who have worked at the firm for several years and have considerable control over the firm's accounts. They avoid taking vacations because others may discover their crimes in their absence. Drug, alcohol or gambling problems frequently are involved.

Besides the financial loss and sense of betrayal that the embezzlement can cause, attorneys left holding the bag risk running afoul of ethics rules. The American Bar Association's Model Rules of Professional Conduct, adopted by nearly every state, require law firms to hold client property in safekeeping and to keep client funds separate from other funds. They also make clear that attorneys have a legal fiduciary duty to their clients.

In general, a law firm is not obligated to notify police of embezzlement. In fact, a firm may try to recover the money by assuring the employee that it won't call in the police, Downey said. When the embezzler is an attorney, a firm has an ethical duty to notify the attorney ethics body. It also has an ethical obligation to notify clients when money from their accounts is taken.

At Nagle & Zaller, the office manager did not steal from client funds, said Nagle, adding that the firm was not negligent in handling its business matters. But, he added, "It's embarrassing that we trusted someone that much and got betrayed."

Leigh Jones can be contacted at leigh.jones@incisivemedia.com.

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