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If you were anybody in McCook, Neb., you used Terry Malcom as your lawyer. He was chairman of the hospital’s fundraising campaign and commencement speaker at the community college. The governor appointed him chairman of the Nebraska Highway Commission. He sat on the board of one local bank and had his office in its basement. So when Jay Brown, a pharmaceutical executive and veterinarian, wanted to buy a veterinary equipment supply business near where he had first practiced as a veterinarian in McCook, he naturally turned to Terrence Malcom. Brown remembers Malcom vividly: “This guy was like Foghorn Leghorn. A big guy, smiling all the time, who would take care of your business and then insist you drink a whiskey with him that night.” Malcom was also a crook. And his crime spotlights what happens when a state’s client protection fund is poorly funded, not well-known and has rules that make it hard to get reimbursed. BROWN’S STORY In 1995 Brown exercised his stock options in the St. Louis pharmaceutical company where he worked. He gave $150,000 to Malcom as earnest money for the business whose purchase the lawyer had arranged. The deal was pending when Malcom was arrested on felony theft charges just after Thanksgiving 1996. Brown lost his money and the opportunity to buy the business. The owner sued him for breach of contract — a claim that was dropped only after Brown spent thousands more on attorney fees. Malcom had been playing a Ponzi-type game that many disciplinary counsel have seen before: stealing over many years, covering old thefts with new ones. When Malcom was sentenced to four years in federal prison, a judge’s restitution order put the amount of his theft at $2.7 million. Another veterinarian, Tom Noffsinger, lost $245,000 in money from livestock and real estate transactions that Malcom was handling. “There’s a dream ranch I would own today” if it weren’t for Malcom, Noffsinger says. “That’s changed my life goals and my life dreams.” Daniel Funk, a former banker who had known Malcom for 20 years, stood to inherit $96,000 from a larger estate of a friend. Funk was the designated administrator of the estate, but Malcom, who handled the estate, stole about half of it. Funk, as the personal representative, is being sued for negligence by charities that also stood to gain about $300,000 from the estate. That amount roughly equals his retirement fund. “Before I get done, it’s going to cost me my life savings,” he says bitterly. Big victims appear to have reaped little benefit from Nebraska’s client protection fund. Shrouded in secrecy, Nebraska’s fund was the only one to refuse to reveal statistical data to the American Bar Association, for its triennial survey of client funds, or to the NLJ. Interviews with those involved, however, indicate that the client protection fund paid a total of $12,000 to $20,000 to the victims of the $2.7 million in thefts by Malcom. THE COMPLAINT Unknown to those victims, Malcom’s downfall had already begun before Brown and other recent clients engaged him as a lawyer. Back on Labor Day weekend in 1993, he abruptly moved out of the law office of his then-firm, Colfer, Lyons, Wood, Malcom & Goodwin, and into quarters in the basement of McCook’s AmFirst bank. The move took his firm by surprise, says former partner Philip Lyons. The partners promptly requested an accounting of fees Malcom had collected. They discovered that Malcom had commingled funds. When he wasn’t forthcoming with an explanation, the firm sued and reported the violation to the Nebraska bar’s disciplinary counsel. It launched a confidential investigation. In May 1996, after two and a half years investigating the matter, the bar counsel charged Malcom with 10 counts of attorney misconduct related to his handling of client funds from 1989 through 1993. The allegations included misappropriating trust funds, failing to segregate trust funds, and keeping inadequate trust fund records. In May 1996, the charges were made public. But Malcom soothed his clients by explaining that the problem was nothing more than accounting errors, easily fixed, and unlikely to come to anything. None of the charges alleged a client loss, and Malcom vigorously fought them. But in October 1996, the referee assigned to the case recommended disbarment. Peter Burger, a lawyer at Burger & Bennett in McCook, and a former friend of Malcom’s, recalls that his charm still prevailed. “Even after this had been in the paper, he continued to do business because he could bullshit them and tell them stories that tended to make sense,” he says. Malcom assuaged the fears of Brown and Noffsinger by providing bank verification that he had their money in an escrow account. But it was a sham, court papers show. After opening a bank account in another town with a bad check, Malcom had the teller send the account balance to the two men. It wasn’t long before Malcom’s check bounced; he vanished to avoid the increasingly irate clients who called to find out where their money was. The debacle came to an end in the fall of 1996, after several clients began to compare notes. Brown flew into town, and he and several other clients went to the police and the district attorney with their complaints and evidence. An arrest warrant went out for Malcom, who finally came in after two days apparently spent driving around Nebraska and talking to his wife by cell phone. The Bar immediately suspended Malcom’s license — a step it hadn’t taken in the weeks since the referee recommended his disbarment. THE FUND Malcom’s victims tried to recover in civil court. Their lawyer had lived well. He owned an expensive house, drove new Buick and Oldsmobile cars, and traveled throughout the United States, often, some say, staying in places like the Waldorf Astoria in New York. He also was quoted in the Lincoln Journal-Star and the McCook Daily Gazette shortly before his arrest as having loaned his college-age son tens of thousands of dollars to purchase a scent so he could start a cologne business. But while the U.S. attorney’s pre-sentencing investigation report verified that Malcom had spent well above his income, he actually had few assets. In the end, there was little to be recovered. Some clients, at the direction of their attorneys, began filling out applications to the Nebraska Client Security Fund. Established in 1974, it theoretically offered victims of client theft compensation of up to $25,000 per client claim, with a $50,000 cap for all claims involving thefts by the same lawyer. Conversations with Malcom’s victims and attorneys involved make it clear that the fund largely didn’t work. Several said they understood that because of the $50,000 cap, the fund would reimburse 12 victims the same amount — about $4,100 — regardless of the size of their loss. That meant that some clients would receive 50 cents on the dollar, others two cents or less. Some of the 12 say that they didn’t even get that much. Brown says that he was offered $1,800 for his $150,000 loss, which he considered an insult. He refused. Noffsinger’s attorney advised him not to bother applying to the fund because, in his experience, it didn’t really pay out. Tom Hartley, a Colorado cattle rancher who was trying to buy land near McCook, lost $26,559 to Malcom. He says that he never heard of the fund. Funk, the ex-banker, says he filled out an application and sent it in but never heard from the fund. Russel Schaffert, a farmer who lost $313,000 due to Malcom’s theft of his father’s estate, has never collected any money from the fund. He says he filled out an application and had negotiations with the fund about the amount he would collect, but that the issue just faded away. Some of Malcom’s victims say that they collected small amounts. Dean Lawson, a farmer who lost $8,634 that he had entrusted to Malcom to give to his son, received about $4,000. That’s what Wesley and Ilene Spicklemier got, too. They lost $30,000 that they gave to Malcom to arrange the repurchase of a farm. Cindy Cawthra, who lost a $32,300 inheritance, received $4,100. Two other victims listed in the federal court papers were the estates of Richard A. Cottingham (out $293,000) and Charles A. Barber (out $1.4 million). They could not be reached, and their attorneys declined to discuss the matter. Officials of the fund also refused to comment. Its Web site indicates that the state Bar has set aside $20,000 in dues since 1992, and it describes the application procedures and caps. But Jane Schoenike, the Bar association’s executive director, declines to answer any questions about the fund, saying, “The whole process is confidential.” Amy Longo, the Bar president, also refuses to discuss the fund, either specifically or generally. “I have no more to add after talking to staff,” she says. A LAWYER’S APPEAL Burger, the ex-friend of Malcom, represented some of the victims. He says he was horrified by what happened and concerned about how this would reflect on the profession. He also was appalled by the small amount the Bar was offering victims. “I felt like it was an illusionary thing,” he says. “We suggest to the public we have a client [protection] fund, then we don’t fund it, and we seek to find ways to avoid paying it out.” He went to the Bar to talk about the inadequacy of the fund. In May 1997, he met for two hours with a Bar executive committee that looked at fund issues. He tried to persuade the members to raise money for Malcom’s victims by imposing a surcharge on lawyers’ dues (as many states do) to help pay for the losses suffered by Malcom’s victims. “They looked at me like what I was saying was ridiculous,” Burger says. He took a more pragmatic tack, suggesting the scandal could result in the supreme court’s auditing trust accounts or requiring that lawyers be bonded. The experience left him disgusted with the organization. “There was no interest among the Bar leadership to do anything,” he says. “The Nebraska State Bar exists basically so that they can have black-tie dinners in the fall. They have an excuse for a tax deduction for the three-day party.” Howard Olsen, who was the Nebraska Bar president in 1997 — and, according to Burger, was present at the May meeting — refuses to comment. “I think the only person authorized to speak on behalf of the association is Amy Longo,” he says. Longo again declined to comment. Nebraska Supreme Court Chief Justice John V. Hendry sheds some light on why Bar association officials might have been embarrassed to talk. He says that the Bar came to the court in 1998 and requested dissolution of the fund. Chief Justice Hendry says the Bar association was struggling for money, and that was “one of the thoughts they brought to the table.” But the court refused to abolish the fund. Hendry says that, at the request of the court, the ABA evaluated the state’s disciplinary system. As a result, the state supreme court will take over disciplinary duties from the Nebraska Bar Association. The court, he says, felt that lawyer self-policing didn’t create “a favorable impression with the citizenry.” But the court won’t take over the fund. Although it will remain with the Bar, Hendry says, “it’s going to continue and be funded at a higher level.” Many of the victims feel that the legal community as a whole was partly to blame for their loss. The Colfer firm is involved in litigation with Funk, who alleges it was partly responsible for Malcom’s theft.

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