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How Hiring Right Affects Leadership's Duty Of Care To Stakeholders And Shareholders

The Florida Supreme Court ruled in an ethics case to disbar a lawyer who hired a convicted felon who then embezzled $4.8 million from his law firm.

In February 2005, the lawyer interviewed the felon based on a referral from a friend. He learned in the interview that the applicant was living in a halfway house because he had been convicted of federal wire fraud. The lawyer hired him anyway for a bookkeeper position.

The felon claimed to be "a disbarred New York attorney and a certified public accountant," but in fact was neither. The hiring lawyer did not run a criminal background check before hiring the felon. A background check would have shown that the applicant went to prison for embezzling more than seven million dollars.

In April 2005, the lawyer signed a form, acknowledging the risk of employing the felon for the felon's probation officer, who told the lawyer that hiring the felon for an accounting position was a bad idea. Five months later, the felon forged a $21,000 check. The lawyer terminated him, but later provided the felon with therapy and rehired him in October 2005.

The lawyer eventually gave the felon full control over the firm's real estate closing section, and later named him as the firm's chief financial officer.

The felon embezzled $4.8 million from the law firm over a four-year period. He did so by transferring funds deposited into the firm's trust account to pay off mortgages on client properties to a shell company that he controlled. The embezzlement was discovered when a lawyer called the firm in 2014 to ask why a client's mortgage was kept alive when it should have been satisfied.

The law firm's title insurer had to pay more than $3.6 million. The lawyer paid over a million dollars to individuals who lost money in the scheme, in addition to paying one million dollars in personal losses. Debra Cassens Weiss "Lawyer who hired embezzling felon is disbarred after failing to notice theft of nearly $5M" abajournal.com (Mar. 26, 2018).


Commentary

The facts of this case show incredibly poor judgment on behalf of the hiring attorney.

Attorneys are fiduciaries of their clients, especially their client’s funds. Likewise, directors and officers have an obligation to their clients, as they would to shareholders and other stakeholders, to manage the company in a reasonable manner. Hiring a person to manage money who has a federal wire fraud conviction is negligent and is a breach of leadership’s duty of care.

Employers must perform due diligence before hiring an employee and have an even higher duty to do so, if that person will manage or handle money. Failing to do so opens them up to negligent hiring and negligent supervision claims. If an employee with a record of financial wrongdoing is hired and commits fraud, directors and officers may have to cover financial losses suffered by clients.

Although employers should not immediately disregard an applicant with a criminal background, they do need to consider type of crime, when it was committed, and how it pertains to the open position. In general, employers should never hire someone convicted of financial fraud for an accounting position and should never compound that error by putting that individual in sole control over the organization’s finances.

In addition to a criminal background check, employers should also require several references for all applicants. For applicants for accounting positions, ask former employers if audits ever revealed possible fraud while the applicant was working for them. It is also a good idea to Google the applicant and check his or her social media pages for any signs of possible wrongdoing.

In the above case, the lawyer said he reviewed the hired felon’s work, his financial reconciliations, and “looked at the first and last page of bank account statements,” but obviously that was not enough to spot fraud. If you do decide for some reason to hire a financial felon for a financial position, perform thorough, repeated, and routine audits. Have multiple employees check the organization’s ledgers and financial accounts. Have periodic forensic audits performed by outside professionals. Only a strong system of oversight can keep you away from liability.

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