Escrow, money laundering cases draw attention to the perils of handling client money
By Laura Ernde
The State Bar’s Office of Chief Trial Counsel has noticed a possible uptick in prosecutions involving attorneys mishandling money they agreed to hold in escrow, in some cases siphoning hundreds of thousands of dollars for their, or another’s, personal benefit.
This trend, along with a recent high-profile money laundering case that ensnared a California lawyer, is prompting a reminder to attorneys of their ethical responsibilities, particularly when dealing with large sums of money.
Attorneys should use caution when holding money for clients or third parties and be aware of the ethical rules as well as some common red flags. Releasing escrow funds contrary to escrow instructions, even if it is not for the personal benefit of the attorney/escrow agent, may constitute a breach of fiduciary duty and misappropriation of entrusted funds.
Here are five recent examples of prosecutions involving escrow accounts:
● Bruce Haglund, [bar #92683]. The 65-year-old Irvine attorney agreed to serve as an escrow attorney for a trust account used in a prime bank investment scheme. In that capacity, he accepted $6.3 million in investments from 24 investors and disbursed it almost immediately after deposit. Of that amount, Haglund disbursed $472,500 to himself. His disbarment is awaiting a final order from the California Supreme Court.
● Thomas Osmonde Russell III [bar #107800]. The 67-year-old Huntington Beach attorney agreed to act as an escrow agent in a transaction to sell shares of a company. After collecting $31,500, he immediately began paying out the funds to various individuals, including himself. The State Bar Court Hearing Department recommended disbarment in January.
● Ronald Lee Bartholomew [bar #47428]. The 85-year-old Newport Beach attorney with one prior record of discipline agreed to act as an escrow agent in a transaction to sell shares of a company. He collected $100,000 from two individuals and deposited them in his client trust account. Over the next 30 days he withdrew all but $102. His disbarment is awaiting a final order from the California Supreme Court.
● David Q. Meyer (bar #287761]. The 36-year-old San Diego attorney acted as an escrow in at least five financial transactions in which parties to the escrow were seeking standby letters of credit. In each case, the respondent collected the money and immediately released it to the “escrow company.” That company appears to have been a sham. Losses totaled $332,446. His disbarment takes effect Feb. 19.
● Michael Vance Wright [bar #162159]. The 57-year-old Huntington Beach attorney agreed to act as an escrow in a financial transaction in which a company was attempting to get a standby letter of credit. The company deposited $100,000 with respondent who immediately released $96,500 to the other party to the transaction and collected the remainder in escrow fees. He was disbarred effective Jan. 6.
Acting Deputy Chief Trial Counsel and Assistant Chief Trial Counsel Melanie J. Lawrence noticed the trend through anecdotal information. The office does not keep statistics based on type of offense.
Attorneys also need to be cautious of getting involved, even unwittingly, in money laundering schemes related to trust accounts, said Elena Enzweiler, who handles IOLTA compliance and bank relations for the State Bar. One attorney’s recent conviction tells a cautionary tale.
Richard Medina Jr., 41, [bar #228010] was sentenced in September to five years in prison after being convicted of felonies related to a money laundering scheme. He is no longer eligible to practice law and the State Bar’s Office of Chief Trial Counsel will seek disbarment after his appeals are exhausted.
Medina was retained by a client to hold funds in an IOLTA (Interest on Lawyers’ Trust Account) trust account, which is intended to raise money for nonprofits that provide free legal services in civil matters.
Medina admitted collecting nearly $12 million from people across the country and putting the cash in IOLTA accounts, bypassing a federal law that requires reporting of cash transactions that exceed $10,000 per day.
Here are some suggested practices and potential red flags that attorneys should be aware of when holding money for clients or third parties:
● Take care to know, understand and follow any escrow instructions. Remember that when an attorney acts in the capacity of an escrow agent, holder, or trustee, the attorney owes the parties to the transaction the same fiduciary duties that an attorney owes to his or her clients.
● Read A Lawyer's Guide to Detecting and Preventing Money Laundering. The October 2014 guide – put together by the International Bar Association, the American Bar Association and the Council of Bars and Law Societies of Europe – notes that criminals sometimes seek legal counsel to provide “cover” for illegal transactions and are increasingly using sophisticated and complex methods to mask illicit funds.
● Know your client, or the third parties who have enlisted you to hold and disburse funds. Verify their identities. Know where they live. Understand the client’s circumstances and business. Take reasonable measures to identify the ultimate beneficiary of disbursed funds. If questions are raised, dig deeper.
● Consider the amount and source of funds involved in the transaction. Verify the source of funds in the proposed transaction or business relationship. Determine whether the source is consistent with what you know about the parties and their business. Ultimately you are responsible for ensuring that only legally obtained funds are being deposited into your trust account.
● Read ABA Formal Opinion 463, which outlines a lawyer’s ethical obligations to deter and combat money laundering under the ABA Model Rules of Professional Conduct.
● Visit the State Bar of California's Client Trust Accounting Resources page for more information on rules, statutes, publications, articles, and ethics opinions.
● Consult the State Bar’s Client Trust Accounting Handbook for detailed information about trust accounting rules.