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UNITED STATES OF AMERICA

V.

NATHAN E. HARDWICK IV

Morris Hardwick Schneider, L L C, and LandCastle Title, L L C operated a law firm and title insurance agency headquartered in Atlanta, Georgia.

Morris Hardwick Schneider, LLC and LandCastle Title, LLC were wholly-owned subsidiaries of MHSL A W, Inc. (hereinafter referred to collectively as “MHS”).

MHS employed approximately 80 lawyers and several hundred non-lawyer employees in 16 states.

MHS specialized in residential real estate closings and default and foreclosure matters.

MHS also sold title insurance in connection with residential real estate closings.

 

ASHA R. MAURYA=

 

ASHA R. MAURYA was an employee of MHS in Atlanta from in or about April 2009 until her termination in or about November 2014. Defendant MAURY A was hired to be MHS’s Escrow Account Controller and was eventually promoted to the position of Chief Financial Officer of MHS’s , closing division.

Defendant MAURYA managed MHS’s attorney escrow account operations and other accounting operations under the supervision of defendant HARDWICK.

COUNT ONE Conspiracy to Commit Wire Fraud

COUNTS TWO through NINETEEN Wire Fraud

COUNT TWENTY-ONE
False Statement to a Federally-Insured Financial Institution 

COUNT TWENTY-TWO
False Statement to a Federally-Insured Financial Institution

COUNT TWENTY-THREE
False Statement to a Federally-Insured Financial Institution

COUNTS TWENTY-FOUR through THIRTY-FOUR – Mail Fraud

  
DOJ
OR IMMEDIATE RELEASE
Monday, October 15, 2018

Prominent Atlanta attorney convicted of embezzling millions of dollars

ATLANTA – A federal district court jury convicted Nathan E. Hardwick IV of twenty-one counts of wire fraud, one count of conspiracy to commit wire fraud, and one count of making false statements to a federally insured financial institution on October 12, 2018.

“Hardwick was motivated by unadulterated deceit and greed when he blatantly violated the trust placed in him by embezzling millions of dollars from his clients and partners,” said U.S. Attorney Byung J. “BJay” Pak. “The extravagant lifestyle that Hardwick enjoyed at the expense of others will now be traded for time in prison.”

“This case is especially troubling given the illegal actions were orchestrated by a lawyer who swore an oath to uphold the law and represent his clients with integrity,” said Chris Hacker, Special Agent in Charge of FBI Atlanta. “The magnitude of theft Hardwick is convicted of merits a lengthy sentence, one that will hopefully send a message that the FBI and U.S. Attorney’s Office will not tolerate this type of white-collar crime.”

According to U.S. Attorney Pak, the charges and other information presented in court: Hardwick and Asha Maurya engaged in a scheme to defraud MHSLAW, Inc. and its subsidiaries, Morris Hardwick Schneider, LLC and LandCastle Title, LLC, (collectively referred to as “MHS”). MHS owned and operated a law firm that specialized in residential real estate closings and foreclosures, and it ran a title business. MHS employed approximately 800 people in 16 states. Hardwick was the managing partner of the law firm and the CEO of the title business. He also ran the law firm’s closing division, which was based in Atlanta. Maurya managed MHS’s accounting operations under Hardwick’s supervision and control.

In early 2007, Hardwick and his law partners sold off part of their business, and Hardwick pocketed approximately $11.8 million. Hardwick quickly squandered that money, and by the end of 2010 he was broke and deeply in debt.

From January 2011 through August 2014, Hardwick siphoned off more than $26 million from MHS’s accounts to pay his personal debts and expenses and to finance his extravagant lifestyle. More than $19 million of that was client money that was stolen from MHS’s attorney trust accounts. Hardwick spent approximately $18.5 million of the fraud proceeds on gambling, private jets, and more than 50 different social companions.

MHS’s audited financial statements showed that the firm’s combined net income from 2011 through 2013 was approximately $10 million. During that same three-year period, Hardwick took more than $20 million out of the firm’s accounts.

Hardwick and Maurya conspired to cover-up the fraud and made numerous false statements to Hardwick’s law partners concerning the amount of money that Hardwick was taking out of the firm.

Hardwick and Maurya were originally indicted by a federal grand jury on February 9, 2016. The original indictment charged Hardwick and Maurya with conspiracy, wire fraud, and bank fraud. It also charged Hardwick with making false statements to a federally insured financial institution and charged Maurya with mail fraud. Maurya pled guilty to conspiracy on May 11, 2017. The grand jury returned a superseding indictment against Hardwick on December 5, 2017, charging him with conspiracy to commit wire fraud, wire fraud, and making false statements to a federally insured financial institution.

Hardwick’s trial began on September 17, 2018 and was presided over by U.S. District Judge Eleanor L. Ross. On October 12, 2018, after deliberating approximately nine hours, the jury convicted Hardwick on all counts.

Nathan E. Hardwick IV, 53, of Atlanta, Georgia, and Asha R. Maurya 43, of Atlanta, Georgia will be sentenced at a later date.

This case is being investigated by the Federal Bureau of Investigation.

Assistant U.S. Attorneys Russell Phillips; Doug Gilfillan, Chief of the Cyber & Intellectual Property Crime Section; and Lynsey Barron are prosecuting the case.

For further information please contact the U.S. Attorney’s Public Affairs Office at USAGAN.PressEmails@usdoj.gov or (404) 581-6016. The Internet address for the U.S. Attorney’s Office for the Northern District of Georgia is http://www.justice.gov/usao-ndga.

FOR IMMEDIATE RELEASE
Tuesday, February 12, 2019

Atlanta real estate attorney receives 15-year sentence for defrauding his law firm out of millions of dollars

ATLANTA –Nathan E. Hardwick IV has been sentenced to 15 years in federal prison for orchestrating a scheme to defraud his law firm out of millions of dollars. On October 12, 2018, following a four-week trial, a federal jury convicted Hardwick of wire fraud, conspiracy, and making false statements to a federally insured financial institution.

“This attorney violated the trust placed in him by his clients and his partners; as a result, he is now facing a lengthy prison sentence,” said U.S. Attorney Byung J. “BJay” Pak. “Lawyers who steal client money and embezzle from their partners can expect years in prison for their violation of trust.”

“It is especially troubling that this crime was orchestrated by a lawyer who swore an oath to uphold the law and represent his clients with integrity,” said Chris Hacker, Special Agent in Charge of FBI Atlanta. “Hardwick was in debt through his own fault and chose to steal from his clients and firm to pay back that debt and finance his extravagant lifestyle. Now he will pay back his debt to society in prison.”

According to U.S. Attorney Pak, the charges and other information presented in court: Hardwick and Asha R. Maurya engaged in a scheme to defraud MHSLAW, Inc. and its subsidiaries, Morris Hardwick Schneider, LLC, and LandCastle Title, LLC, (collectively referred to as “MHS”). MHS owned and operated a law firm that specialized in residential real estate closings and foreclosures, and it ran a title business. MHS employed approximately 800 people in 16 states. Hardwick was the managing partner of the law firm and the CEO of the title business. He also ran the law firm’s closing division, which was based in Atlanta. Maurya managed MHS’s accounting operations under Hardwick’s supervision and control.

In early 2007, Hardwick and his law partners sold off part of their business, and Hardwick pocketed approximately $11.8 million. Hardwick quickly squandered that money, however, and by the end of 2010 was broke and deeply in debt.

From January 2011 through August 2014, Hardwick siphoned off more than $26 million from MHS’s accounts to pay his personal debts and expenses and to finance his extravagant lifestyle. More than $19 million of that was client money that was stolen from MHS’s attorney trust accounts. Hardwick spent approximately $18.5 million of the fraud proceeds on gambling, private jets, and more than 50 different social companions.

MHS’s audited financial statements showed that the firm’s combined net income from 2011 through 2013 was approximately $10 million. During that same three-year period, however, Hardwick took more than $20 million out of the firm’s accounts.

Both Hardwick and Maurya made numerous false statements to Hardwick’s law partners concerning the amount of money that Hardwick was taking out of the firm. And Hardwick and Maurya conspired to cover-up the fraud.

Nathan E. Hardwick IV, 53, of Atlanta, Georgia, was sentenced by U.S. District Judge Eleanor L. Ross to serve 15 years, forfeit over $19.9 million in criminal proceeds, given a $2,300 special assessment, and will be required to pay restitution to the victims of the offense. When he is released from prison, Hardwick will be required to serve six years on supervised release.  Judge Ross sentenced Asha R. Maurya to seven years in prison, and three years of supervised release.  Maurya was also ordered to forfeit $900,000 in criminal proceeds.  Their restitution hearing is scheduled for May 9, 2019.

This case was investigated by the FBI.

Assistant U.S. Attorneys Russell Phillips, Lynsey Barron, Kelly Connors, and former Assistant U.S. Attorney Doug Gilfillan prosecuted the case.

For further information please contact the U.S. Attorney’s Public Affairs Office at USAGAN.PressEmails@usdoj.gov or (404) 581-6016. The Internet address for the U.S. Attorney’s Office for the Northern District of Georgia is http://www.justice.gov/usao-ndga.

 

FOR IMMEDIATE RELEASE
Tuesday, February 12, 2019

ATLANTA REAL ESTATE ATTORNEY RECEIVES 15-YEAR SENTENCE FOR DEFRAUDING HIS LAW FIRM OUT OF MILLIONS OF DOLLARS

ATLANTA –Nathan E. Hardwick IV has been sentenced to 15 years in federal prison for orchestrating a scheme to defraud his law firm out of millions of dollars. On October 12, 2018, following a four-week trial, a federal jury convicted Hardwick of wire fraud, conspiracy, and making false statements to a federally insured financial institution.

“This attorney violated the trust placed in him by his clients and his partners; as a result, he is now facing a lengthy prison sentence,” said U.S. Attorney Byung J. “BJay” Pak. “Lawyers who steal client money and embezzle from their partners can expect years in prison for their violation of trust.”

“It is especially troubling that this crime was orchestrated by a lawyer who swore an oath to uphold the law and represent his clients with integrity,” said Chris Hacker, Special Agent in Charge of FBI Atlanta. “Hardwick was in debt through his own fault and chose to steal from his clients and firm to pay back that debt and finance his extravagant lifestyle. Now he will pay back his debt to society in prison.”

According to U.S. Attorney Pak, the charges and other information presented in court: Hardwick and Asha R. Maurya engaged in a scheme to defraud MHSLAW, Inc. and its subsidiaries, Morris Hardwick Schneider, LLC, and LandCastle Title, LLC, (collectively referred to as “MHS”). MHS owned and operated a law firm that specialized in residential real estate closings and foreclosures, and it ran a title business. MHS employed approximately 800 people in 16 states. Hardwick was the managing partner of the law firm and the CEO of the title business. He also ran the law firm’s closing division, which was based in Atlanta. Maurya managed MHS’s accounting operations under Hardwick’s supervision and control.

In early 2007, Hardwick and his law partners sold off part of their business, and Hardwick pocketed approximately $11.8 million. Hardwick quickly squandered that money, however, and by the end of 2010 was broke and deeply in debt.

From January 2011 through August 2014, Hardwick siphoned off more than $26 million from MHS’s accounts to pay his personal debts and expenses and to finance his extravagant lifestyle. More than $19 million of that was client money that was stolen from MHS’s attorney trust accounts. Hardwick spent approximately $18.5 million of the fraud proceeds on gambling, private jets, and more than 50 different social companions.

MHS’s audited financial statements showed that the firm’s combined net income from 2011 through 2013 was approximately $10 million. During that same three-year period, however, Hardwick took more than $20 million out of the firm’s accounts.

Both Hardwick and Maurya made numerous false statements to Hardwick’s law partners concerning the amount of money that Hardwick was taking out of the firm. And Hardwick and Maurya conspired to cover-up the fraud.

Nathan E. Hardwick IV, 53, of Atlanta, Georgia, was sentenced by U.S. District Judge Eleanor L. Ross to serve 15 years, forfeit over $19.9 million in criminal proceeds, given a $2,300 special assessment, and will be required to pay restitution to the victims of the offense. When he is released from prison, Hardwick will be required to serve six years on supervised release.  Judge Ross sentenced Asha R. Maurya to seven years in prison, and three years of supervised release.  Maurya was also ordered to forfeit $900,000 in criminal proceeds.  Their restitution hearing is scheduled for May 9, 2019.

This case was investigated by the FBI.

Assistant U.S. Attorneys Russell Phillips, Lynsey Barron, Kelly Connors, and former Assistant U.S. Attorney Doug Gilfillan prosecuted the case.

For further information please contact the U.S. Attorney’s Public Affairs Office at USAGAN.PressEmails@usdoj.gov or (404) 581-6016. The Internet address for the U.S. Attorney’s Office for the Northern District of Georgia is http://www.justice.gov/usao-ndga.

Closing Attorneys Call Hardwick Trial a ‘Wake-Up Call,’ Verdict a Relief

Atlanta residential closing attorneys expressed satisfaction this week after a federal jury found Nathan Hardwick IV guilty in his federal embezzlement trial on Friday.

The government charged Hardwick with stealing $26 million from his now-defunct residential real estate firm, Morris Hardwick Schneider—including almost $20 million from the closing operation’s escrow accounts. ( CLIENT FUNDS)

“I think there’s real relief among closing attorneys that the jury did understand that these were client funds,” said Gayle Camp, a past chair of the Real Property Law Section of the state bar and of counsel at Morris Manning & Martin. “There’s no excuse for a firm’s managing partner not having oversight over the escrow accounts. He’s absolutely responsible under our rules of professional conduct.”

Hardwick, who was MHS’s majority owner, held 55 percent of the shares until he was ousted four years ago by his minority partners, Mark and Gerard Wittstadt, and Fidelity National Finance, which stepped in to cover almost $30 million in escrow shortfalls.

National Interest

Atlanta attorneys, mortgage brokers and title insurers followed the trial closely, as did their counterparts around the country, because it was so “egregious,” said Monica Gilroy, a title-insurance litigator at The Gilroy Firm who is also a past chair of the real property section.

“This case in particular caught all our attention, due to the amounts in controversy plus the details—the salacious nature of some of the accusations and the fact that Fidelity had to become involved,” Gilroy said.

“That’s why this got national attention [in 2014] when the escrow shortfalls came to light, first from the lawsuits and then Nat’s indictment,” Gilroy said. “Even though so egregious, it’s isolated.”

“It’s just so sensational,” said Cate Hoskins, a partner at Georgia closing firm O’Kelley & Sorohan.

“The general consensus is we’re saddened by it, too. People lost their reputations and their jobs over one or two bad actors,” said Hoskins, a past president of the Georgia Real Estate Closing Attorneys Association. “To me, it’s a very sad story that someone could have such sick greed to go to such lengths,” she added.

Unconvincing Defense

The trial was “an active topic of conversation” at the American Land Title Association’s annual meeting in Los Angeles last week, Gilroy said. “People were freaking out on Friday, as it got closer to 5 p.m., whether it would be a ‘not guilty.’”

The jury returned the unanimous guilty verdict after nine hours of deliberation and 12 days of sometimes confusing testimony from witnesses—including an expert forensic accountant for the defense—as well as voluminous financial and legal documents from both sides.

Closing attorneys said they did not buy Hardwick’s defense that he thought he was taking money that was due him from available cash in MHS’s operating accounts when he asked the controller, Asha Maurya, to wire $100,000 to $500,000 at a time to casinos, private jet companies and his personal holding company, Divot Holdings, which he used to pay women, creditors and other expenses.

“That sounds crazy to anyone who is a partner at a law firm and knows how it operates,” Hoskins said. “It would never wash with anybody that you take any money by just telling your controller to write a check.”

“Those arguments were preposterous,” said Vanessa Goggans, who heads Morris Manning & Martin’s residential real estate practice, “as if he were going to the ATM to see how much money he had in the account today to spend.”

“Every lawyer is clothed with responsibility for the escrow accounts,” Goggans added. “While we do delegate responsibility, it was Nat at the top—and Nat who was required to make sure adequate protections were in place.”

Defense Confusion

The case was “very straightforward,” Gilroy said. “My hope was that the jury would see through some of the items raised by the defense, especially the forensic accountant.”

She was referring to expert witness J.P. Gingras, who testified that there actually were no escrow account shortfalls, based on MHS’s 2014 tax return—and that MHS still owed Hardwick $470,000.

As deliberations wore on Friday afternoon, Gilroy said, her concern was that the jury would have “some sort of reasonable doubt, not from the forensic accountant’s testimony, which seemed far-fetched, but from the volume of information presented.”

Lawyers following the trial also said they couldn’t swallow Hardwick’s argument that Maurya operated alone and paid out almost $20 million from the escrow accounts to Hardwick without him realizing it.

The defense’s assertion that Marya was the sole culprit was “hard to believe,” Goggans said, because he gained a lot more from the conduct than she did.

Camp called it “very distressing” that a lawyer “would try to throw all the blame on a staff member. It’s the professional who has the responsibility”

Maurya has admitted to stealing almost $900,000 from MHS and pleaded guilty to one count of wire fraud conspiracy last year. She cooperated with the government but did not testify in Hardwick’s trial.

‘Wake-Up Call’

Gilroy called the case a “wake-up call.” When the problems at MHS were first reported in August 2014, she said, it sparked an industry discussion that “we all are responsible for knowing what our partners are doing.”

“This case is not just about the escrow shortages—but what Nat did to his partners,” Gilroy said.

“Just because you are not the partner that deals with the day-to-day operations, you still need to know what is going on,” Gilroy said. “Until something like this happens to your brothers and sisters in the bar, it never occurs to you that it could happen to you.”

Attorneys at firms with large closing practices said Hardwick could not have gotten away with the escrow embezzlement at their firms, because of checks and balances in place.

Morris Manning’s Camp said the title insurer, Fidelity, did not maintain proper oversight. “Something went wrong in that process, but it wasn’t addressed in this trial.”

MHS passed numerous audits from Fidelity and its other title insurers until a Fidelity audit uncovered an altered bank statement in July 2014 and the escrow shortfalls came to light.

“You never let the person who is writing the checks do the reconciliation,” said Goggans, a GRECAA past president, adding that Morris Manning uses an outside vendor, AgencySecure, through Stewart Title Insurance to perform daily, third-party reconciliation of its escrow accounts.

The vendor has access to Morris Manning’s escrow accounts so it can monitor cleared checks and wires—and it gets the bank statements directly from the banks, not a firm employee, Goggans said. “It prevents them from getting bogus information.”

“Fidelity Title may have missed the problems earlier, but they stepped up to protect consumers whose money was in the escrow accounts,” she added, and Hardwick’s partners “did the right thing,” by quickly notifying state bar associations and “shutting down the people believed to be at fault.”

“My heart goes out to those lawyers and staff people who lost their jobs,” Goggans said. “Morris Hardwick was a good firm, and one person managed to taint that legacy. Nat did so much damage

Hardwick’s Ex-Partner Recounts Big Debts, Expenses in Embezzlement Trial

The federal embezzlement trial of Atlanta lawyer Nathan Hardwick IV continued Tuesday with testimony for the prosecution by Hardwick’s former law partner, Art Morris.

Morris told the jury that their now-defunct firm, Morris Hardwick Schneider, had paid off personal debts for Hardwick to keep bank clients happy, but he and Randy Schneider, who co-founded the residential real estate closing and default firm 40 years ago, had refused to pay for Hardwick’s frequent private jet travel.

The jury paid close attention after weathering a day of testimony Monday about MHS’s shareholder agreements and financial audits.

“I did not appreciate Nat Hardwick taking money from the firm I spent 46 years building,” Morris concluded, after more than three hours of questioning from Assistant U.S. Attorney Lynsey Barron and lead defense counsel Ed Garland of Garland, Samuel & Loeb.

Federal prosecutors indicted Hardwick, who’d been the majority owner of the now-defunct firm, in February 2016, alleging that he stole millions of dollars from client escrow accounts and spent almost $18 million on charter jets, casinos, bookies and women alone.

The government also indicted the firm’s former controller, Asha Maurya, in 2016 as a co-conspirator, alleging that she helped Hardwick embezzle money from the firm from 2011 until August 2014, when the escrow account shortfalls were discovered.

Maurya pleaded guilty to a single count of conspiracy to commit wire fraud last year and is cooperating with the government. Hardwick’s defense team has maintained that Maurya was the culprit, not Hardwick.

Reluctant Partners

Morris said he and his longtime partner, Schneider, brought Hardwick in as a partner in 2005 with an eye to their firm’s future—only to see it collapse nine years later. The duo had built the residential closing firm, Morris & Schneider, that they started in 1978 into a 42-office enterprise at the time of the merger with Hardwick’s smaller firm, Jackson & Hardwick, to form MHS, an 80-lawyer firm with about 60 Southeastern offices.

Morris said it was Schneider who recruited Hardwick. “I wasn’t comfortable with Nat,” Morris told the jury. “I didn’t like the deal. We didn’t need him. I didn’t like his attitude about things.”

Schneider, “an operations person,” Morris told the jury, ran the closing firm and wanted Hardwick to handle business development with the goal of expanding MHS throughout the Southeast.

Morris acquiesced to the merger, saying his own focus was a separate default firm, Morris, Schneider & Prior, and that he was preoccupied because his wife was dying of cancer. “Randy was my best friend, so I went with his judgment.”

Money Problems

Hardwick soon gained a $15 million windfall from his merger, Morris told the jury, because MHS sold off its REO division to a private equity firm soon after. As a then-minority shareholder, Hardwick shared in the gains.

Even so, Morris said, he learned by about 2008 that Hardwick was having financial problems, adding that Hardwick was spending money on casino gambling, bookies, a golf course and alimony to his ex-wife, to whom he owed $5.5 million in a divorce judgment.

“We’d get calls from banks saying ‘Nat owes $200,000—and we’re not going to do business with you if you don’t pay it off,’” Morris said. “So Randy and I would step up and take care of it.”

Morris said MHS’s clients were big lenders like Fannie Mae and Bank of America, so they couldn’t “afford to have a major partner file bankruptcy.”

The firm also was paying off a $2.2 million loan Hardwick incurred to buy out his partner from Jackson & Schneider and deducting the payments from his income, Morris said.

MHS’s partnership agreement specified that the partners receive quarterly distributions of net income, but Morris said Hardwick received more frequent payouts. “There was constant pressure on Nat from creditors,” which included MHS’s bank clients, Morris testified, explaining that he and Schneider allowed Hardwick more frequent distributions to keep the banks’ business.

Morris said he gave Hardwick $750,000 to pay for some “personal obligations” early on, because “it was important to me that Nat remain financially solvent.”

When Barron asked if Morris’ role at the firm was “to keep Hardwick afloat,” Morris replied: “I was his daddy for 10 years.”

Expensive Jets

Morris agreed with Garland, on cross-examination, that his role at the firm was as “a big-picture guy,” which is how Garland had earlier described Hardwick.

Hardwick “marketed very well,” Morris acknowledged.

While both had similar business development roles—Morris for the default and Hardwick for the closing operation—they did not see eye to eye on expenses. Morris said it was fine for partners to spend $5,000 to $10,000 per month to entertain clients, who were often also friends, but he and Schneider balked at covering the millions that Hardwick spent on private jet travel.

Hardwick spent $8.5 million on private jet charters from 2007 through mid-August 2014, according to the prosecution’s tally of his bills.

Of the $26 million the government alleges Hardwick embezzled with Maurya’s help during the charged conspiracy time period, from 2011 until August 2014, he spent $3.7 million on charter jets to take people to casinos, golf tournaments and football games for his alma mater, the University of South Carolina, according to its pretrial filings. Another $10 million went to casino gambling and bookies, and Hardwick spent roughly $5 million on girlfriends and other women, according to the government’s filings.

Morris himself “lived on airplanes,” he testified, traveling constantly to bring in business for the default operation, and he flew commercial. He and Schneider told Hardwick that “the firm was not going to pay for his private jet travel. Period.”

Charter jets cost $6,000 to $8,000 an hour, Morris added. “There is no need for that in our business. Delta is fine.”

Hardwick’s Exit

Morris Hardwick Schneider had grown to about 800 employees in 13 states when the escrow account shortfalls came to light in July 2014. “To save the firm,” Morris said, he asked Hardwick to resign and give up his interest, which had expanded to 55 percent.

Fidelity National Title, MHS’s largest title-insurer, had agreed to cover the escrow account shortfalls—then estimated as high as $30 million—in exchange for Hardwick’s departure and a majority stake in MHS’s title company, LandCastle Title.

Schneider had retired in 2010, and Morris followed in 2013, under a shareholder agreement that gave him $350,000 in annual deferred compensation and 10 percent of MHS’s profits for another decade.

Hardwick asked what he’d get in return for giving up his interest in MHS, Morris testified, and he replied that their choices were limited. “I told him it was about 800 people who’d lose their jobs who live paycheck to paycheck. These were people who’d worked for me for 35 years.”

Hardwick resigned August 18, 2014. The firm filed for bankruptcy 11 months later.

A federal jury has rejected Atlanta lawyer Nathan Hardwick IV’s defense that the $26 million he took from his now-bankrupt, residential real estate closing firm, Morris Hardwick Schneider, were funds he thought legitimately due to him as the majority owner.
 

HARDWICK SENTENCED TO 15 YEARS FOR ‘GREEDY AND DECEITFUL’ CONDUCT

The judge said Hardwick—convicted of embezzling from his firm—should face consequences for his “egregious behavior” and “actual theft of funds from client accounts.”

By Meredith Hobbs | February 12, 2019 at 12:01 PM

Atlanta lawyer and convicted embezzler Nathan Hardwick IV on Monday received a 15-year sentence to be followed by six years of supervised release.

“You are seriously a disappointment to our legal profession,” said Judge Eleanor Ross of the U.S. District Court for the Northern District of Georgia to Hardwick on Monday. “I think your conduct in this case has been egregious—and not just as to your spending. It is indisputable that you were a greedy and deceitful person.”

“I’m not sure you’ve grasped how serious this is. I hope you do in custody,” Ross said, noting he called the proceedings a “show” during his trial testimony.

During the daylong sentencing hearing, Hardwick, 53, said he was learning about “personal responsibility.”

“I now see how my actions had the unintended consequence of hurting my clients and partners,” he said in his statement to the judge, adding that his “personal spending was irresponsible and reckless.”

Twelve jurors unanimously convicted Hardwick on Oct. 12 on all 21 counts of wire fraud, plus separate counts of conspiracy to commit wire fraud and making false statements to federally insured banks. They rejected his defense that the $26.5 million that the government documented he took from his now-bankrupt, residential real estate closing firm, Morris Hardwick Schneider, from the charged period of 2011 through mid-2014 were funds he thought legitimately due to him as the majority owner.

The judge’s sentence fell in between the parties’ recommendations. Assistant U.S. Attorneys J. Russell Phillips and Lynsey Barron had asked for almost 22 years—a stiff, 262-month sentence—while Hardwick’s defense team of Ed Garland, Kristen Novay and Robin Loeb of Garland, Samuel & Loeb had said he should serve only eight years.

In a hearing that lasted until 7 p.m. Monday, Ross allowed 31 levels of sentencing enhancements under the federal guidelines—short of the 37 sought by the government—which would mean a sentence of 108 to 135 months, up to 11.25 years.

But after victim-impact statements from Hardwick’s ex-partners and a Fidelity National Finance representative, plus statements from Hardwick and his parents, the judge in her final ruling increased the sentence to 15 years. She explained that her decision was “based on what I see as egregious behavior and lack of remorse—not about the egregious spending but the actual theft of funds from client accounts.”

VICTIMS’ LOSSES

Hardwick’s former law partners, Mark and Gerard Wittstadt, who are brothers, and Art Morris all advocated for a stiff sentence.

Mark Wittstadt, 53, said that Hardwick “lied and stole from me and my brother.”  The Wittstadts had merged their foreclosure firm, based in Baltimore, with Atlanta-based Morris Hardwick Schneider’s residential closing firm, but the foreclosure and closing operations were run separately.

“We did everything we could to try to save this law firm,” Mark Wittstadt said. “I lost all my clients and my law firm—and, on our [foreclosure] side, our 700 employees all lost their jobs.”

He added that he’s fought four years to repair the damage to his reputation from the escrow account shortfalls that came to light in 2014 and the subsequent failure of Morris Hardwick Schneider.

Wittstadt, who has a wife and two children, said he’s incurred thousands of dollars in attorneys’ fees over civil litigation prompted by the shortfalls and the bankruptcy proceedings for Morris Hardwick Schneider and that he’s had to “sell everything” except his home.

Morris, a retired partner, said Hardwick “took down a firm of 800 people.”

“I spent 46 years—my whole life—building it,” he added. “Think about those families,” he said. “In my opinion, he deserves the maximum of every guideline.”

Morris said he put $1.5 million into Morris Hardwick Schneider after the escrow shortfalls were discovered in 2014 and that he’s lost about $4 million from the firm’s failure.

“Have you seen any remorse from this guy? Not a word,” Morris said. “He will hurt someone again.”

Gerard Wittstadt asked the judge to give Hardwick the maximum sentence of 262 months, using the government’s enhancements.

At 54, with a wife and four children, Gerard Wittstadt said he’s had to sell his family home, beach house and farm and has purchased a handgun because he feels unsafe after threats he received after the firm’s demise.

He added that he’d hoped to be a judge one day like his father, Gerard Wittstadt Sr. “I do not think that is a reality now,” he said.

David Baum, the Southeast regional manager of title insurer Fidelity National Financial, said Hardwick “violated the trust” of homebuyers placing their funds in escrow with Morris Hardwick Schneider.

If Fidelity had not stepped in, he said, those people would have lost their homes. Instead, “Not a single consumer was harmed,” Baum said, because Fidelity spent $29.5 million to prop up the escrow accounts.

That caused Fidelity a net loss of $22.4 million—plus $4.5 million in legal fees, Baum said. “Mr. Hardwick never showed any remorse or apologized for the problems he caused.”

SENTENCING BATTLE

The major bone of contention during the sentencing hearing, taking up almost four hours of arguments, was the size of the loss that Hardwick caused. The government needed to show that Hardwick took between $9.5 million and $25 million from the firm for the 20-level enhancement it sought.

Phillips, the prosecutor, referenced FBI agent and fraud investigator Kimberly Johnson’s testimony during the trial that Hardwick received $26.5 million from the firm, including $19.5 million from the escrow accounts, from 2011 through mid-2014, according to the government’s documentation. The prosecutor added that Hardwick took $20.6 million from 2011 to 2013 alone—when the firm’s net income was only $9.9 million, according to an audited financial statement.

The judge said it was clear that Hardwick took more than $20 million from the firm over the charged period but noted the defense’s argument that some of that was from legitimate distributions.

“We stand convicted of taking more than our share,” Garland said, but he argued that this did not establish the actual loss to the firm. Forensic accountant J.P. Gingras appeared for the defense to argue that the loss to the firm was minimal to nonexistent.

Ross ruled that the government’s proposed $19.5 million loss figure—the amount Hardwick received from the escrow accounts—did not show actual loss by a preponderance of evidence.

Instead, the judge used the total figure of more than $6 million from the 21 wire fraud charges of which Hardwick was convicted and granted 18 levels of enhancement (applicable for more than $3.5 million in losses).

She granted another two levels for hardship suffered by victims, two levels for Hardwick’s role as organizer of a criminal activity and two levels for abuse of a position of trust—on top of a base seven-level enhancement—for a total 31-level enhancement. That was short of the government’s request for a 37-level enhancement.

Hardwick’s restitution hearing is set for May 9.

CO-CONSPIRATOR

Co-conspirator Asha Maurya, who has pleaded guilty to one count of conspiracy to commit wire fraud, is scheduled to be sentenced Tuesday.

Maurya is the former controller for Morris Hardwick Schneider’s residential closing side. She facilitated wire transfers from the firm’s operating and escrow accounts to pay Hardwick’s bills for casinos, private jets, women and other expenses.

The government has asked for a 63-month sentence for Maurya. Her lawyers, Page Pate and Jess Johnson of Pate & Johnson, have instead asked for 33 to 41 months, citing her extensive cooperation with the government and acceptance of responsibility for her actions.

JUDGE SENTENCES HARDWICK CO-CONSPIRATOR MAURYA TO SEVEN YEARS

“I find this provides sufficient punishment and deterrence—especially deterrence,” the judge said about the sentence of Asha Maurya, the former controller for now-defunct Morris Hardwick Schneider.

 

After sentencing Atlanta lawyer Nathan Hardwick IV to 15 years in prison on Monday for embezzlement, a federal judge the next day sentenced his co-conspirator, Asha Maurya, to seven years followed by three years on supervised release.

That was a sharp increase from the 33 months indicated by the sentencing guidelines.

Judge Eleanor Ross of the U.S. District Court for the Northern District of Georgia said Tuesday it was uncommon for her to sentence above the guidelines, but she did so because of Maurya’s “egregious conduct,” the number of people she harmed and her repeated thefts.

“I find this provides sufficient punishment and deterrence—especially deterrence,” the judge said at the sentencing hearing Tuesday.

Maurya was the controller for Hardwick’s now-defunct firm, Morris Hardwick Schneider. She helped Hardwick steal millions of dollars from the firm by facilitating wire transfers from its operating and escrow accounts to pay his bills for casinos, private jets, women and other expenses.

Once the largest residential real estate closing firm in the Southeast, Morris Hardwick Schneider filed for bankruptcy less than a year after the discovery in mid-2014 that more than $30 million was missing from its escrow accounts.

The discovery of a bank statement that Maurya admitted to altering brought the escrow account shortfalls to light.

Maurya has been cooperating with the government since she pleaded guilty to one count of conspiracy to commit wire fraud in 2015 and admitted embezzling $900,000 for herself.

Despite Maurya’s assistance, the government had asked for 63 months imprisonment, calling her “a career fraudster who embezzled from numerous employers before and after the charged conspiracy.” The charged conspiracy period was from 2011 through mid-2014.

While it was Hardwick who directed Maurya to wire millions of dollars from the firm’s accounts to casinos, private jet companies and his personal holding company, Divot, for his benefit, Maurya was as culpable in the destruction of the firm and the damage it caused to its 800 employees and others, said Assistant U.S. Attorney Lynsey Barron on Tuesday.

“If she did not help drive the firm $30 million into the hole and then into bankruptcy, the firm would still be a going concern,” the prosecutor said.

MAURYA APPEARS

Maurya took full responsibility for her crimes in a statement to the judge. “I betrayed everyone. I outright broke the law,” she said.

“I have no words to diminish the harm and pain I caused to the 800 partners, staff and employees, [owners] Mark and Gerard Wittstadt, Art Morris and [title-insurer] Fidelity,” Maurya said.

Maurya had submitted eight letters to the judge from family, friends, her current employer and a therapist before the hearing, asking for clemency.

Her sister-in-law and the therapist wrote that Maurya had experienced horrific physical and emotional abuse from her father and her brother while growing up, which contributed to her need to keep her employers happy and comply with their demands.

“I understand incarceration. I’ve been living in a prison since my childhood,” Maurya told the judge.

Ross asked Maurya how many employers she’d stolen from, and Maurya said four.

“I’ve never seen anything like it,” the judge said, calling the thefts a pattern. “I’m not sure how it relates to the abuse you suffered earlier in life, but I take note of the abuse,” Ross added.

“Ms. Maurya is not beyond redemption,” said her lawyer, Jess Johnson of Pate & Johnson.

‘SHIFTING STORY’

“Ms. Maurya presented an unusual problem,” Barron, the prosecutor, said. The former Morris Hardwick Schneider controller dutifully met with the government each of the 11 times they asked her—but “her story kept shifting,” the prosecutor said.

Maurya was expected to be the government’s star witness at Hardwick’s three-week trial last fall, but Barron told the judge the prosecutors found out two weeks before it started that she’d “embezzled from every single employer” except her current one.

“So we could not put her on at trial,” Barron said. “But she was critical to help get a handle on the firm’s finances.”

Similarly, Barron said, Maurya disclosed neither to Hardwick’s co-owners in the law firm, Mark and Gerard Wittstadt, nor to title-insurer Fidelity National Finance, which stepped in and paid $29.5 million to plug the escrow hole, that she’d stolen $900,000 herself. Instead, a former prosecutor on the case, David Chaiken, now a partner at Troutman Sanders, discovered her theft.

At the trial, the judge allowed Hardwick’s defense team, led by Ed Garland of Garland, Samuel & Loeb, to call two of Maurya’s former employers to testify. That included Tony Thrash, CEO of Pro Care Emergency Services, an ambulance company where she worked after her ouster from Morris Hardwick Schneider.

Thrash alleged in his testimony that Maurya wrongly charged $15,000 on a corporate credit card when she worked as his company’s controller in 2014. After three months, he fired her for falsifying financial statements to inflate the company’s revenue—and called the FBI.

At that point, Maurya was already cooperating with the FBI in the Hardwick case.

Hardwick’s lawyers were unable to convince the jury that Maurya, not Hardwick, was the culprit for the millions embezzled from the firm. The jurors unanimously convicted Hardwick on 21 counts of wire fraud, one count of conspiracy to commit wire fraud and one count of making false statements to banks.

SHARED CULPABILITY

Hardwick’s ex-partners in the law firm agreed with the government that Maurya shared culpability with Hardwick. “But for her actions, this catastrophe would not have happened,” said Mark Wittstadt.

Wittstadt said he told Maurya when Hardwick made her the controller of the law firm’s closing operation that “her duty was to the firm, not to any one individual,” and if she saw anything amiss, she should come to him or his brother, Gerard Wittstadt.

“She decided instead that, if Nat Hardwick was going to steal, then she was, too,” he said.

In the early days of the crisis, after the escrow shortfalls came to light, Wittstadt said, he and retired partner Art Morris asked Maurya how much money was missing. She told them “two or three million,” he said, when the shortfall was actually more than $30 million.

If they had known the enormity of the shortfall then, in late July 2014, Wittstadt said, they would have gone to Fidelity immediately for help (which they did two weeks later in exchange for Fidelity’s eventual ownership of the firm’s title company). Instead, they allowed Hardwick to borrow $5 million from his client, golf pro Dusty Johnson, and local businessman Jim Pritchard to replenish the escrow accounts.

Hardwick made Morris Hardwick Schneider the guarantor for the loans without the Wittstadts’ permission, they have said, and, after his forced exit in August 2014, the firm refused to pay them.

That prompted well-publicized suits from Johnson and Pritchard that Wittstadt said did him serious and unfounded reputational damage.

Maurya remains free on bond until her restitution hearing, which is set for May 9, the same day as Hardwick’s.

JUDGE AWARDS $40.3M IN RESTITUTION TO VICTIMS OF NAT HARDWICK

Judge Eleanor Ross ruled late Thursday that former law firm partner Nathan Hardwick IV and a co-conspirator were both liable for recompensing Hardwick’s ex-partners and Fidelity National Title Insurance.

 

Federal judge Eleanor Ross awarded $40.3 million in restitution on Thursday to the victims of convicted law firm embezzler Nathan Hardwick IV and his co-conspirator Asha Maurya.

The judge held Hardwick and Maurya jointly and severally liable for the sum.

Ross awarded the bulk of that, $23,307,431, to Fidelity National Title Insurance Co. for the losses it incurred backstopping the escrow accounts of Hardwick’s now-defunct residential real estate firm, Morris Hardwick Schneider, after multimillion dollar shortfalls in the accounts surfaced in July 2014.

Ross ruled that Hardwick’s former law partners, Mark and Gerard Wittstadt, who are brothers, were due $6 million apiece for their losses from the firm’s implosion, and that Art Morris, a retired founder of the firm, was due $5 million.

Hardwick was convicted in October on 21 counts of wire fraud, plus conspiracy to commit wire fraud and making false statements to banks, for embezzling millions from Morris Hardwick Schneider to pay for casinos, private jets and women.

Morris Hardwick Schneider was once the largest residential real estate firm in the Southeast.

Maurya was the controller for the firm’s closing side during the charged fraud period, from 2011 until July 2014, when what would turn out to be almost $30 million in escrow account shortfalls were first discovered. She pleaded guilty to a single count of conspiracy to commit wire fraud last year for her role in making wire transfers for Hardwick and moving money among the firm’s many accounts to cover the shortfalls.

Ross sentenced Hardwick, 53, to 15 years in federal prison on Feb. 12. Now at a federal prison in Ashland, Kentucky, Hardwick did not appear for the restitution hearing.

Ross sentenced Maurya, 43, to seven years in prison the next day. She is due to report to a prison in New Jersey, near her mother, who has health problems, in the next few days.

Thursday’s restitution hearing ended at noon in a bit of a cliff-hanger.

The government and the defense had asked Ross for widely divergent restitution amounts. Prosecutors sought $58.3 million, with Hardwick and Maurya jointly and severally liable. Hardwick’s lawyer, Kristen Novay of Garland, Samuel & Loeb proposed $6.1 million.

Maurya’s lawyer, Jess Johnson of Pate & Johnson, had asked that she be liable only for the $900,000 she’d admitted taking for her own benefit and had agreed to pay in restitution as part of her plea bargain.

Before adjourning, Ross asked for post-hearing briefings from both sides, saying she would make her ruling after considering them.

But federal prosecutor J. Russell Phillips reminded her there is a 90-day deadline for the restitution order after sentencing—and added that it was day 87.

Ross dispensed with the post-hearing briefing and issued her order later that afternoon.

THE VICTIMS

The judge awarded Fidelity to the penny what it had asked for in restitution.

Fidelity’s lawyer, Ed Burch of Smith Gambrell & Russell, said Fidelity spent $29,530,391 to fund the firm’s escrow accounts. He said $2.3 million should be deducted for the fair market value of the firm’s title company, Landcastle Title, which Fidelity acquired as part of its agreement to prop up the firm’s accounts—along with another $3.9 million that Fidelity had recouped in claims owed the firm.

That left Fidelity with a loss of $23.3 million from the fraud, Burch said.

Fidelity recouped another $3.4 million from insurance, he said, adding that per statute, the company was not deducting that money from its restitution claim. “When you have a crime of conspiracy there is broader scope for the victim,” he explained.

The Wittstadts ran Morris Hardwick Schneider’s foreclosure division, a separate operation, from Baltimore. They had each asked for $15 million in restitution.

The bulk of the Wittstadts’ losses from the fraud, which surfaced in July 2014, and the firm’s subsequent bankruptcy a year later were due to their decimated income, Mark Wittstadt testified at the restitution hearing. Gerard Wittstadt did not testify because he was recovering from surgery, but his brother said their income and losses were similar.

“I’ve had to start over,” said Wittstadt, 53, adding that he’s had to do so handicapped by tremendous damage to his reputation from Morris Hardwick Schneider’s failure.

He said his income from Morris Hardwick Schneider dropped from $2.3 million in 2013, the year before the fraud was discovered, to $370,000 in 2015, the year the firm filed for bankruptcy. Instead of making $2.5 million a year, he added, his income is now less than a tenth of that.

“I don’t expect to ever get any money from Nat Hardwick or Asha Maurya, but I’m here to make the effort,” Wittstadt said.

Phillips had asked for $5 million in restitution for Morris—the amount the judge ruled he was owed—but Morris testified at the hearing that he lost a lot more than that from the firm’s implosion.

Morris said his retirement agreement guaranteed him $350,000 a year and 10% of the firm’s profits for a dozen years. There were still 10 years left when the fraud was discovered, which came to $3.5 million in lost retirement income. Morris also paid $1.5 million to Fidelity to help cover the escrow shortfalls.

Morris said he also paid the firm’s creditors $600,000 to settle and an additional $700,000 to Fidelity, plus between $300,000 and $400,000 in legal fees.

And his reputation has taken a hit, Morris said. “When I Google myself now, I think my name is Nat Hardwick. That’s all I see,” he said.

“It’s been painful to see the bankruptcy of a firm I spent 40 years building,” he added

Reading Time: 13 minutes

LAWYER TRUST ACCOUNT GUIDELINES

Overview Rule 1.15 of the Mississippi Rules of Professional Conduct imposes strict fiduciary standards on every Mississippi lawyer who holds the property (“trust funds”) of clients or third parties.

Mishandling trust funds, whether intentional or not, is “the cardinal sin for lawyers.”

Miss. Bar v. Coleman, 849 So. 2d 867, 874 (Miss. 2002) (emphasis added).

It is in both the lawyer’s and the client’s best interest that the lawyer thoroughly understand and strictly follow the fiduciary duties and rules surrounding trust funds.

Failure to strictly comply with Rule 1.15 puts trust funds at risk of attachment by creditors of the lawyer. Likewise, it puts the lawyer at risk of disbarment or lengthy suspension.

Every lawyer is responsible for properly depositing and maintaining trust funds – a lawyer cannot delegate this responsibility to another lawyer or to a non-lawyer.

Rule 1.15 imposes duties on every lawyer with regard to trust funds.

The duties include:

** Keeping trust funds separate from the lawyer’s own funds.

** Taking reasonable steps to safeguard trust funds.

** Keeping trust funds in a separate trust account located in the state where the lawyer’s office is located.

** Maintaining records for a period of seven years after the representation has terminated.

** Promptly notifying the client or third party when the lawyer receives trust funds.

** Promptly delivering trust funds to the client or third party.

** Promptly rendering a full accounting of the funds when requested to do so.

Who Must Maintain a Lawyer Trust Account? Rule 1.15

(f) requires every licensed Mississippi attorney to maintain a trust account if the lawyer

(1) is engaged in the private practice of law, whether fulltime or part-time, and

(2) holds funds in which a client or third party has an interest.

“IOLTA”

What is an IOLTA Account?

“IOLTA” is an acronym for “Interest on Lawyer Trust Accounts.”

An “IOLTA account” is a type of pooled Lawyer Trust Account in which client funds that are nominal in amount or short term in nature earn interest for the benefit of the Mississippi Bar Foundation.

In turn, the Bar Foundation funds programs designed to improve equal access to justice.

Trust funds that are other than nominal in amount or short-term in nature may earn interest for the client or third party.

The lawyer must determine whether the costs of a non-IOLTA account are greater than the interest to be earned. Irrespective of whether the account is an IOLTA or other lawyer trust account, the lawyer never has a right to the interest on the funds – just as he or she has no right to the funds themselves.

What Constitutes “Trust Funds?”

Rule 1.15 defines trust funds as funds in a lawyer’s possession in which a client or third party has an interest.

Generally, trust funds include:

1. Fees paid in advance by clients, until the fees are actually earned.

2. Expenses paid in advance until they are actually paid.

3. Funds from clients or third parties that are being held for disbursement at a later time, such as personal injury awards, support payments, real estate conveyance funds, and litigation settlements.

It is the lawyer’s responsibility to exercise good judgment in determining what funds should be deposited in the trust account.

Likewise, it is the lawyer’s responsibility to exercise good judgment in what funds should be withdrawn from the trust account. Ownership of trust funds held by the lawyer can change during the representation.

For example, once the lawyer earns previously advanced fees, ownership of the funds in the amount earned changes from belonging to the client to the lawyer. Since the lawyer must keep his or her funds separate from the client’s, the lawyer must withdraw earned fees from the lawyer trust account and place them in a general operating account.

The lawyer should remove the earned fees from the lawyer trust account on a reasonably timely basis.

Where Must Trust Funds Be Placed?

Rule 1.15

(a) requires that trust funds be deposited in an account separate and apart from the lawyer’s, at a financial institution in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third party.

The lawyer or law firm should deposit trust funds in one of, or when necessary a combination of, the following insured checking accounts which provide for:

1. a pooled interest-bearing IOLTA account for the deposit of all trust funds that are nominal in amount or expected to be held for a short period of time;

2. a separate interest-bearing account for each matter, on which the interest will be paid to the client or a third party; or

3. a pooled interest-bearing account containing the funds from several matters, with sub-accounting that will provide for computation of interest earned in each matter and payment thereof to the proper person or entity.

As a practical matter, almost every lawyer will ultimately use either the first or second type account listed above.

Most transactions through a lawyer trust account are either nominal in amount or held for a short period of time.

Many banks have chosen not to charge fees on lawyer trust accounts. As such, most transactions can be placed into a pooled IOLTA account.

On the other hand, when a lawyer holds a substantial amount of funds clearly identifiable to a client or third party for a long period of time, the lawyer should deposit those funds in a separate interest bearing account for the benefit of the client or third party.

The definition of “substantial” depends on the circumstances of each case—the larger the amount of funds, the shorter the period of time needed to justify the establishment of separate accounts for the funds and vice versa.

The lawyer must also exercise good judgment in determining how trust funds are to be deposited or invested. As a fiduciary of funds entrusted by the client or third party, the lawyer must err on the side of safety rather than rate of return.

A court may also control where the funds should go. For example, a lawyer may be ordered to set up a guardianship account for a person under a disability.

The court will direct the lawyer where the funds should be placed and disbursed.

The lawyer’s duties with regard to these accounts are the same as lawyer trust accounts.

Are IOLTA Accounts insured?

Most bank accounts in Mississippi are protected by insurance through the Federal Deposit Insurance Corporation (FDIC).

As of June 1, 2012, FDIC insurance covers IOLTA accounts so long as the account is clearly identified as an IOLTA account and proper records are maintained so that the ownership of the funds can be readily ascertained.

The regulations currently in place may change from time to time. For example, the current regulations expire automatically on December 31, 2012.

Are There Ways To Minimize Errors and Prevent Theft?

A lawyer routinely deals in funds in his or her practice that should be placed in or withdrawn from the lawyer trust account. Likewise, he or she has other funds that should be kept and paid from a general operating account. Problems exist when, through clerical error, trust funds are mistakenly placed in the general account and vice versa. The lawyer can to take steps to separate trust funds from the lawyer’s own funds and to protect client funds from unauthorized access.

The steps include:

1. Maintain the lawyer trust account at a financial institution other than where the lawyer’s operating account is maintained.

2. Prominently include the term “TRUST ACCOUNT” in the title of lawyer trust account.

3. Prominently include the term “TRUST ACCOUNT” on the lawyer trust account checks.

4. Use checks that are a different color than those from the operating account.

5. Keep lawyer trust account checks and deposit tickets in a location separate from the general operating account, preferably under the exclusive control of the lawyer.

6. Give the lawyer exclusive authority to withdraw funds from the lawyer trust account.

7. Personally reconcile the account on a monthly basis to verify all deposits have been properly recorded and checks properly cleared.

8. Have an independent auditor examine the account on an annual basis.

9. Deposit a reasonable, small amount in the lawyer trust account to handle bank fees or charges. (See section “Handling Bank Charges”)

TRUST FUNDS GUIDELINES

What Records Should Be Kept?

Under Rule 1.15

(a), the lawyer must keep “complete records” of trust account funds for a period of seven years after the representation has been terminated. A good accounting system can be a manual system such as the one described here or a computerized accounting package that offers similar features. Regardless of the system used, the lawyer should establish and maintain a system so the lawyer can readily document:

1. the total amount on deposit in the trust account at all times;

2. the amount on deposit in a pooled account that belongs to each client or third party; and,

3. the manner in which each transaction is processed. Simply maintaining and balancing a checkbook with deposits and checks will not suffice.

A pooled lawyer trust account is comprised of one or more subaccounts containing clients’ funds.

Knowing the total balance owed to several clients is meaningless because the lawyer must know how much each individual client has of the total balance. Therefore, the lawyer will have to use a system that incorporates records for the total account (Trust Account Checkbook) and each subaccount (Trust Ledger). The Trust Account Checkbook.

A checkbook register allows a lawyer to maintain an accurate record of the total balance of the trust account and to show a chronological journal of the receipt and disbursement activity. If properly documented, the checkbook register can also act as a redundant system to the Trust Ledger.

Good documentation includes the following:

Deposits/Receipts Checks/Disbursements

Receipt date

Disbursement date

Amount received

Amount disbursed

Source of funds Check Number

The name of the owner of the funds

Payee’s name

A brief explanation

A brief explanation

For example, when the lawyer receives funds, he or she should indicate in the check register that on January 31, 2012, $6,000.00 was received from ABC Insurance for Joe Jones for settlement of Jones v. Smith personal injury case.

Likewise, the lawyer may indicate in the check register that on February 15, 2012, he or she issued check number 1001 in the amount of $4,000.00 to Joe Jones, noting the amount was 2/3 of 5 the settlement amount from ABC Insurance for settlement of Jones v. Smith personal injury case.

Trust Ledger

The Trust Ledger is critical to properly maintaining a lawyer trust account.

This ledger consists of a master listing of all the funds in the lawyer trust account (master sheet) and separate, individual records that document the receipts and disbursements as well as a running balance for each individual client (subsidiary ledger sheets).

Without separate records for each client, the lawyer cannot ascertain a particular client’s ownership of the pooled funds.

The subsidiary ledger sheet for every client documents what funds the lawyer has received and disbursed on behalf of each particular client or third party.

It will also show the balance owed to each client. It also allows the lawyer to give an accurate accounting of the trust funds belonging to a particular client or third party immediately on request.

The master sheet allows the lawyer to quickly determine the balance of each client’s funds within the pooled account and aids in reconciling bank records to the lawyer’s records.

As a further measure to insure the lawyer is keeping accurate records, he or she may organize the subsidiary ledger sheets into two binders.

The first binder is an “Open Account” ledger, containing separate subsidiary ledger sheets for each client or third party for whom the lawyer is holding trust funds.

The second binder is a “Closed Account” ledger containing subsidiary ledger sheets for clients or third parties for whom the lawyer held, but is no longer holding, trust funds.

Closed Account ledgers must be maintained for a period of 7 years after the representation is terminated pursuant to Rule 1.15

Monthly Reconciliation

Trust account(s) should be reconciled on at least a monthly basis.

A monthly trial balance of the entire subsidiary ledger, also showing the name of each client or third party’s subaccount, should agree with the month-end checkbook register’s running balance of the trust account.

This figure is computed by taking the beginning balance, adding the total of funds received for the month and deducting the total of funds disbursed for the month. Bank Reconciliation.

When the bank sends a bank statement for the lawyer trust account, the lawyer should immediately perform a reconciliation to make sure the trust account bank balance, the checkbook balance, and the subsidiary ledger trial balance total all agree (See Trust Account Reconciliation Sheet, page 11).

This reconciliation should also include deposits which do not appear on the bank statements and all outstanding checks.

All reconciliations should be saved with the bank records for future references. As an additional internal control, if the lawyer allows an assistant to maintain the trust account bookkeeping activities, he or she should have a different person, preferably the lawyer himself or herself, perform the reconciliation.

Accounting to Clients or Third Parties“

The lawyer should periodically advise each person whose funds are held of the status of those funds.

In this way the lawyer is satisfying, in part, his or her obligations under Rule 1.4 to keep the client adequately informed of the status of the case as well as the requirement to account for the funds being held under Rule 1.15(b).

Additionally, the lawyer should account to the client for funds received and disbursed at the completion of the case.

Rule 1.15(b)

requires the lawyer to prepare a full accounting upon request. The better practice is to provide the accounting on a periodic basis while the case is ongoing and to provide a full accounting at the conclusion of the case, regardless of whether the client or third party requests it.

The accounting should adequately describe each receipt and disbursement and any unexpended balance.

Under Rule 1.15(c), if there is objection to any proposed disbursement, the lawyer must keep the disputed amount in the trust account pending the resolution of the dispute. However, the lawyer should promptly disburse the portion of the funds not in dispute.

What Funds Should Go Into the Trust Account?

Rule 1.15(a) requires that all funds that qualify as trust funds shall be deposited into a trust fund account. Qualifying funds include:

1. Prepaid expenses

2. Unearned fees

3. Settlement proceeds

4. Any other funds belonging to a third party or a client for which the lawyer acts as an intermediary.

The lawyer should have a clearly expressed written policy specifying what funds should be deposited into the trust account. The lawyer is ultimately responsible for determining proper placement of funds in the appropriate account.

When Should Funds Go Into the Trust Account?

The lawyer should deposit trust funds promptly to the trust account. Once funds are received, the lawyer is required to promptly notify the client or third party of receipt under Rule 1.15(b).

In most cases, promptly means the same day. The lawyer should avoid keeping trust funds overnight.

If trust funds must be kept overnight, the lawyer should place them in a fireproof safe under lock and key. If the lawyer is not personally handling deposits, he or should give written instructions that will adequately document the receipt of the funds and direct the person charged with handling the transaction to deposit the funds into trust. Written communication avoids later arguments regarding deposit instructions and provides a needed audit trail.

When Should Funds Be Paid From the Trust Account?

Rule 1.15(j) requires the lawyer to make disbursements only from collected funds.

Collected funds are those funds that have been deposited, finally settled, and credited to the lawyer’s trust account. The term “finally settled” means the funds have cleared the financial institution of the person or entity that issued a check or other form of remittance to the lawyer. In other words, the lawyer needs to make sure the check will not be returned for insufficient funds, for stop payment, or other reason.

Rule 1.15(j) lists four limited exceptions to the “collected funds” requirement when the uncollected deposit has limited risk and the attorney has sufficient personal funds available (not other client funds) to replace the uncollected funds. See Rule 1.15 (j), MRPC, for more information. Notwithstanding these limited situations, the lawyer should use caution when paying out uncollected funds.

The lawyer must be prepared to replace a failed deposit with personal funds within three days of notice the deposit failed. A lawyer cannot use one client’s funds for the benefit of another.

Proper maintenance of the trust account ledgers insures this will not occur. Trust fund disbursements from a particular ledger must not exceed the funds received from or on behalf of that person.

As a precautionary measure, the lawyer should personally verify the balance of the subsidiary ledger sheet for the client or third party before authorizing disbursement of trust funds. 8 Other internal controls include:

1. Requiring a written disbursement authorization that identifies the ledger of the client or third party’s account to be charged, the reason for the transaction, and the approval for issuance of a trust account check by the lawyer.

2. Determining who will sign the trust account checks. Generally, the person who prepares the checks should not have sole signatory authority. A better practice is to require two signatures on all trust account checks.

3. Preparing a written procedure for handling deposits to and withdrawals from the lawyer trust account. Given the legal and ethical ramifications of failing to do so, a lawyer must maintain the maximum level of control of his or her trust account.

LAWYER TRUST FUNDS GUIDELINES

What about Bank Charges?

The lawyer or law firm can and should deposit a small amount in the trust account to cover bank charges associated with the costs of printing checks and deposit tickets; monthly service charges; or a returned deposit item or some other special charge.

This practice might appear to be the commingling of personal funds with that of others.

Although not specifically authorized, this practice is a recognized exception to the general rule of commingling since the funds are deposited with the purpose of being consumed rather than being disbursed and such funds will prevent the misappropriation of a client’s or third party’s funds.

The lawyer should account for such funds in the trust account by preparing a subsidiary trust ledger sheet named “Bank Charges.”

Charges are then recorded as they are incurred.

When the balance gets low, the lawyer can replenish the funds.

————————————————————————————

9 Subsidiary Trust Ledger Sheet Name of Person with Interest in Funds ____________________________

Legal Matter or Adverse Party _____________________________________

File or Case Number _____________________________________

Date

Description of Transaction

Check No.

Funds Paid

Funds Received

Running Balance

10 Trust Account Reconciliation Sheet As of the Month Ended ______________, 20__.

Subsidiary Trust Ledger Sheets Amounts ___________________________ $________

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