Lawyer theft case illustrates importance of accounting oversight 

Posted: 1:00 am Mon, January 25, 2010
By Barbara L. Jones

A Twin Cities lawyer was recently disbarred after pleading guilty to swindling the Bloomington law firm he and three other lawyers founded in 2005. Thomas A. Rothstein, 45, had been charged with thefts totaling $124,258 from Halberg Criminal Defense. Rothstein allegedly used firm checks and credit cards for personal expenses, including flowers, iTunes and fitness club bills. His sentencing hearing is slated for Jan. 27.

The case illustrates the potential problems that law firms face when trusted employees abuse that trust and cross the line into theft or fraud.

Rothstein was the only lawyer at the Halberg firm who spent much time with QuickBooks, the firm’s financial software, according to Brent Schafer, who now serves as the firm’s managing partner.

Schafer said that the firm has since added several levels of internal management over its books, including some outside oversight. “Giving one person control over one area is a great leap of faith,” he explained.

The best way for firms to guard against internal theft is to pay attention, lawyers say.

“Trust, but cut the cards,” said Winona attorney Kent Gernander, who recently completed a term as chair of the Lawyers Professional Responsibility Board.

Although it may seem obvious to some that more than one lawyer should be watching the money, lawyers – particularly those working in small firms — do need to be reminded, Gernander said. “We don’t see it frequently but it does happen,” he said.

While any small business is at risk from a dishonest principal or bookkeeper, law firms are particularly vulnerable because oftentimes the principals of the firm prefer to think of themselves as lawyers rather than as business people.

While lawyers may want to concentrate on their professional roles, they ignore the business side of their firms at their own peril, according to Gernander.

Todd Scott, vice president for risk management at Minnesota Lawyers Mutual, said that many firms are guilty of not effectively guarding against employee or partner theft or embezzlement. “Lawyers do not have a good reputation for running businesses,” he said.

A 2007 American Bar Association study showed that reports of intentional wrongs committed by lawyers had increased from 9 percent in 2003 to 13 percent in 2007.

Peter H. Berge, an attorney with Minnesota CLE, said anyone who is a principal at a law firm should have some oversight responsibilities. Lawyers don’t have to do their own books, but should get a good accountant or bookkeeper, particularly one with trust account experience, and have checks in place, he said.

“The risk ultimately falls back on the partners, and it’s up to them,” he said.

Checks and balances

Minneapolis attorney Eric Cooperstein, who writes and lectures on attorney ethics, said that more than one person should watch over the money, even in a small firm. For example, one person can write the checks and the other balance the checkbook, he pointed out.

The partners should be paying attention to the credit card expenditures as well. Rothstein allegedly charged thousands of dollars to fitness clubs, jewelry stores and a poker tournament.

“Those are not the types of things you should see on a business credit card,” Berge noted. “You’re not asking for trouble with a [firm] credit card, but there ought to be policies in place [about its use].”

Berge said that the safest course is for firms to have lawyers use their personal credit cards and then submit the expenses for reimbursement. This ensures some level of scrutiny, so long as the person doing the charging is also not the one in charge of making the reimbursement decisions. If a firm credit card is used, every charge should be looked at and accounted for, Berge said.

The most common lawyer theft is not stealing from the firm, but wrongfully diverting client funds, Cooperstein said.

Indeed, Schafer said the silver lining to the Rothstein case was that none of the firm’s clients lost any money. “We’re going forward,” he added.

Potential warning signs that something may be wrong with an employee

Lawyers should be attuned to the behavior of other firm employees. Individuals embezzling money from the firm sometimes give off behavioral hints that something is wrong.

“The most entrusted people are not immune from the pressures of life — gambling, addiction,” said Todd Scott, vice president for risk management at Minnesota Lawyers Mutual.

According to Scott, there are many potential warning signs, including:

• financial stress,

• illness,

• a change in purchasing behavior,

• working odd hours and

• never taking a vacation or sick day.

None of these signs alone means something untoward is going on, but they may merit further investigation.