Tuesday, June 18, 2024

Not A Faithless Servant

The New York Appellate Division for the First Judicial Department imposed a one-year suspension for fiduciary breaches outside the practice of law

On July 11, 2022, the Attorney Grievance Committee (the Committee) sought to obtain a finding that respondent was guilty of professional misconduct in violation of the Rules of Professional Conduct (RPC)(22 NYCRR 1200.0) rules § 8.4(c) and § 8.4(h) based on adverse findings against respondent at trial in a federal civil action in the United States District Court, Southern District of New York, wherein the jury determined that respondent, while employed as the corporate secretary of an oil company, and not as a lawyer, breached his fiduciary duty to his employer with respect to two separate matters.

In the first matter the plaintiff alleged that respondent as corporate secretary, and in his capacity as trustee of the affiliated oil company’s security trust, during the period the corporation was attempting to shield its assets from seizure by the Russian Federation, withdrew $500,000 from the trust funds and invested them for three years in his own name in a private equity hedge fund. Respondent did not tell the trust protector that the assets were invested in respondent's name. The protector upon discovering that the investment was in respondent's name, demanded a return of the funds to the trust account. Respondent returned the funds and was removed as trustee. Respondent's investment in the hedge fund almost doubled in value and plaintiff did not seek compensatory damages.

In the second matter respondent approved a "finder's fee" payment of $2.6 million from a Swiss bank to an oil company employee for help in securing an arrangement with the bank to hold some of the oil company’s assets. After respondent approved the "finder's fee," the employee loaned respondent $1.2 million to purchase a house in the Hamptons. The plaintiff alleged that the "finder's fee" was a kickback to respondent in the nature of a loan but did not seek compensatory damages from respondent because the matter was settled with the bank.

The jury awarded the plaintiff $5.00 in nominal damages which was reduced to $3.00 on appeal. Notably, respondent was never charged with committing a criminal offense, and there was no finding that he was guilty of conversion. The jury also determined that respondent did not act with evil motive or intent, or with reckless disregard or callous indifference to the plaintiff's rights when he breached his fiduciary duty, and that he was not a "faithless servant."

In the bar proceeding

At the hearing before the Referee, respondent acknowledged that his breach of fiduciary duty in the two matters reflected poor judgment on his part. Respondent  stated that in the first matter, as trustee, he was authorized to make the investment, however the private equity hedge fund would not allow the investment to be made in the security trust's name. Respondent acted on the advice of his friend that was the private equity hedge fund's employee and made the investment in his own name. Respondent claimed that the trust protector was informed, the investments were reported on the k-1 tax forms to the trust accountants and on the security trust’s tax returns, and he never made any money from these investments, which were highly lucrative as they almost doubled in value.

Respondent stated that in the second matter he had authority to approve the “finder’s fee,” as the sole director of the entity, and that it was the bank that suggested the fee. At the time he did not view the loan from the employee that received the "finder's fee" as a gift or a kickback. Respondent also produced promissory notes and proof of interest payments on the loan to demonstrate it was not a kickback.

There was significant mitigation, Respondent had not practiced law for 20 years

the Committee's motion pursuant to the Rules for Attorney Disciplinary Matters (22 NYCRR) §1240.8 (b), to disaffirm the Referee's Report and Recommendation should be denied, the report and recommendation to impose a one year suspension from the practice of law confirmed, and respondent is suspended from the practice of law for a period of one year, and until further order of this court. Any conditions regarding respondent’s reinstatement are to be addressed at the time respondent applies.

(Mike Frisch)


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