Random audits would aim to deter lawyers who steal clients' real estate deposits

Two Long Island state lawmakers are trying to mitigate the long-running problem of stolen real estate escrow funds by creating a random audit compliance program.

For the last two decades, a little-known state fund has called for a deeper look at the problem, which was the subject of a Newsday investigation in December. Newsday found that real estate escrow theft has led to over $112 million in payouts to clients wronged by dishonest lawyers from the New York State Lawyers’ Client Protection Fund. 

State Sen. Siela Bynoe (D-Westbury) and Assembly Judiciary Chairman Charles Lavine (D-Glen Cove) introduced legislation last month to address the issue. "Long Island’s proliferation of bad actors in this space led me to" file the legislation, Bynoe said in an interview, noting she "became aware of this by Newsday’s reporting."

Long Island attorneys account for more than a quarter of all payouts in the fund’s four-decade history, and no judicial district in the state has had more claims attributed to it than Nassau and Suffolk counties.

In recent years, Long Island lawyers have made headlines for stealing millions of dollars from their clients. One was charged with stealing over $750,000 in escrow funds after Newsday's December report.

"It’s an utter betrayal of trust," said Lavine, who described the news coverage as "alarming."

Since at least 2004, the Lawyers’ Client Protection Fund has continued to "encourage bar and judicial leaders to consider and adopt measures to address the recurring problem of escrow thefts in real property transactions." Nearly identical language has been printed in the fund's annual report, year after year.

Random audits

The proposed legislation would require the fund to carry out a statewide random audit compliance program to "ensure that law firms appropriately handle client funds, maintain required records of clients’ funds and attorneys’ fees," according to the bill.

Under the proposal, New York would join a number of other states, including New Jersey and Connecticut, with random audit programs.

The fund’s board of trustees is reviewing the legislation, according to its executive director, Gabriel Huertas.

The legislation takes direction from a recent report from the New York City Bar Association’s Professional Discipline Committee, which analyzed the value of a random audit system.

"What I really tried to impress upon the court is that this is essential," said Kathryn Donnelly, a former grievance counsel in New York and current chair of the bar association committee that authored the report.

Donnelly emphasized in an interview with Newsday that lawyers should "want even more transparency, because this is client money."

"There shouldn’t be any mass scramble to get the records," Donnelly said. "And if you don’t have the records, well, that’s the point of the random audit program — that you learn how to do this, if you don’t know, or that you better your bookkeeping habits."

If passed and signed into law, the legislation would subject law firms that handle real estate escrow funds to a potential audit no more than once in a five-year window.

Educating lawyers

The intention of the legislation is not only to find the misappropriation of client funds, but also, according to the bill, "educating attorneys on compliance and ethical responsibilities," "providing a deterrent effect," an "incentive to keep good records" and to "avoid temptation to misuse trust funds."

Bynoe said after a meeting with the office of Senate Judiciary Chairman Luis Sepúlveda (D-Bronx), she spoke with officials at the state Office of Court Administration about the legislation. The measure does not provide any financial assistance for the proposal, but Bynoe said the court system could help.

Bynoe is pushing for the bill this legislative session.

"I want to leave it all on the field because we’re talking about protecting our community residents’ life savings," Bynoe said, "so this is a matter of urgency."

Newsday’s reporting noted that the overwhelming majority of money the fund has to dole out comes from attorney registration fees. The amount of money that goes to the fund from that fee, $65 per registration, has gone unchanged for decades despite the state adjusting many other elements of government for inflation. The fund also has capped maximum payouts at $400,000 for a decade.