3 law partners suspended for failing to supervise trusted-but-embezzling office manager

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Three partners in a former New York law firm have received six-month suspensions for failing to properly supervise a nonlawyer office manager who embezzled more than $200,000 from client funds.

The name partners in the former Garden City law firm Karol, Hausman & Sosnik were suspended in May 29 opinions by the Appellate Division’s Second Judicial Department of the New York Supreme Court (here, here and here). The Legal Profession Blog notes the decisions.

The law firm replenished the misappropriated funds and cooperated in the investigation, according to the court opinions. The firm had reported the problem in May 2013 after it was notified of a bounced check from its escrow account. The firm hired an accounting firm, which discovered the extent of the shortages.

The law firm learned during the review that the employee had been transferring money between escrow, operating and payroll accounts without “rhyme or reason” for a period of at least 3½ years.

The New York appeals court said in the three opinions that a review of monthly bank statements would have put the partners on notice of questionable transfers between accounts. Those transfers should have been an early warning to give the accounting records greater scrutiny.

The three partners—Louis Karol, Michael Hausman and Howard Sosnik—were suspended after a joint disciplinary hearing. The suspensions begin June 28 and continue until further court order.

Karol had testified that the office manager was a “dedicated and trusted employee.” He and his partners occasionally checked transactions to make sure disbursements equaled deposits, but they didn’t properly review the escrow account, the opinions said.

The partners decided not to report the employee to police. “We didn’t want it to get out there that we were foolish because that would hurt us,” Karol had testified. The firm did institute new bookkeeping practices, however.

Karol told the ABA Journal that the partners immediately notified ethics regulators, immediately investigated and immediately took corrective action. “We did everything right, except initially we didn’t supervise,” he says. “We’re good lawyers and lousy businessmen.”

Karol says he thinks ethics authorities understood that he and his partners were good people. “As the decision indicated, I have 33 years of unblemished record,” Karol says.

Other lawyers should know “it’s a bright line test,” he says. If someone else touches your escrow account, “you’ll get slammed; you’ll get spanked.”

“The cautionary tale is you can’t rely on people; you have to double-check yourself,” he says.

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