Liability Still an Issue for Former Dreier PartnersFeb 3, 2009 | Parker Waichman LLP Indicted New York lawyer Marc Dreier might not be the only member of his firm in trouble because of his alleged fraud. While Dreier was the only equity partner in Dreier LLP, an article in the New York Journal raises the possibility that non-equity partners could be facing legal issues because of the scandal.
Dreier was his firm's founder and managing partner. Last month, Dreier was indicted in Manhattan on charges of securities fraud that allegedly cost investors more than $400 million. The indictment charged that from 2004 through December 2008, Dreier conspired to sell fake notes supposedly issued by a New York real estate developer and by a Canadian pension plan. The indictment also said Dreier had misappropriated client funds, including funds placed into an escrow account and money obtained in the settlement of a client lawsuit.
Dreier has been in jail since his December 7 arrest, unable to meet stiff bail conditions that include $20 million and four co-signers. If he's convicted, he could spend 20 years in prison.
According to the New York Law Journal, many nonequity partners in Drier LLP began leaving the firm once they learned Drier had been taking money out of it's escrow accounts. In fact, most are already working at other firms, the Law Journal said. Drier LLP has also ceased to exist, but an ethics expert interviewed for the article said the former partners likely haven't left their old firm's woes behind.
The partners could face liability for the firm's debts, and they might also be in trouble over missing escrow funds. Many may also be required to return income they received from clients for work on unfinished matters they took with them when they left.
By far the biggest problem the old Dreier partners could face might be the escrow accounts. One expert quoted in the Law Journal said that while the firm's LLP (Limited Liability Partnership) status shields partners from another partner's malpractice, it "doesn't relieve partners of responsibility to ensure that assets are controlled and escrow accounts are properly monitored."
The New York Law Journal said the former partners will likely argue that they were mere employees of the firm, because they had no equity in the business, and because Drier had sole control of the firm's business, including the client escrow accounts. But if the individuals were presented to Dreier clients as true partners - not employees - that argument may not work.
"The place where so-called partners have the greatest exposure is with respect to money belonging to clients and held in the firm's client, trust or escrow accounts, and especially so when it involves lawyers' own clients and transactions," an ethics lawyer told the New York Law Journal. "In those circumstances, at least in connection with professional discipline, and possibly even with respect to fiduciary duty liability, the limited liability law probably does not operate to protect those lawyers, even if they were not themselves signatories on the accounts."
The same lawyer also told the Law Journal that in at least one previous case, a court found that attorneys who held themselves out as "partners" could face disciplinary action if the loss of client money is shown.