Preventing or Prosecuting Theft by Fiduciaries by Paula McCann, Esq., Ron Morgan, Esq., and John Newman, Esq.


Living Well on Other People’s Money: What Lawyers Need to Know about


Vermont is the number one state in the nation for embezzlement thefts from corpo- rations and nonprofits.1


In fact, we may well


be on our way to another dubious number one ranking: for thefts by fiduciaries from estates of all types—guardianships, dece- dents’ estates—and by agents acting under powers of attorney.2


It appears that living


well on other people’s money has become a way of life for some Vermonters. The pur- pose of this article is to begin a conversa- tion among our brethren on this issue and ask that you join us to make it more diffi- cult for fiduciaries to steal the money and assets from the people they are supposed to protect. In our practice, we have seen a range of disturbing cases over the past five years in- volving fiduciaries converting to their own personal purposes money placed in their charge. These cases involve the misuse of powers of attorney, defalcation by trust- ees, thefts by guardians, and the diver- sion of funds by executors. Under the laws of this state, fiduciaries (agents, guardians, trustees, executors/administrators) are giv- en tremendous power over other people’s money and assets; yet, in our experience, defalcating fiduciaries have been able to act with impunity, virtually unquestioned by those who are responsible for supervising their actions, specifically us—the lawyers— and the courts. Unfortunately, we find that most of the fiduciaries in the cases we have handled have “gotten away with it” be- cause, frankly, under our current system, the thefts are not coming to light until it is too late and our laws are too outdated to deal with the modern reality of thefts from vulnerable adults or the dead. After presenting several case examples of the problems we have seen, we will dis- cuss how these problems could have been avoided or how the process of recovering assets could be improved within our legal system. We hope you will consider these issues and, perhaps, consider changes to your own practice to make it more difficult for a fiduciary to steal from the people they have been entrusted to protect.


Case Studies


Theft under Power of Attorney: Estate of RAW, 2007 Superior Court Case In this case,3


the son, along with his sister, served as co-agents under a power of attor- 18


ney for his mother. The son was one of nine children, and the only one to attend col- lege. He had worked for a major Vermont company.


In establishing the power of attorney, the son and his sister consulted with a non-law- yer engaged in giving advice to elders who were in need of long-term care. The moth- er executed a standard form power of at- torney document giving her two children agency authority over her financial and le- gal matters. We were told by the sister that the agents were then advised to put all of their mother’s money into a joint bank ac- count in their own names for Medicaid asset planning reasons and to privately pay her care for what was then a three-year Med- icaid look-back period for transfers for no value.4


Acting under the power of attorney, the two children transferred all of their moth- er’s funds into a joint account in their own names, not a power of attorney account. The son was the first name on the account, and it was arranged that he receive all bank statements. The son was supposed to send copies of the statements out to his eight siblings on a routine basis so that all of the children would be informed of the status of their mother’s funds. The son did send out bank statements to his siblings for several years, showing a declining bal- ance as funds were supposedly used to pay for their mother’s care. The mother died in 2007. The day after the mother’s funeral, the daughter found that, contrary to what she and her siblings had been told, there was no money in the account and, in fact, the account had been closed years earlier by the son.


After attempting unsuccessfully to get the local state’s attorney to prosecute the son for theft of well over $100,000 from a vulnerable elder, the decedent mother’s es- tate filed suit in superior court under the Vermont power of attorney statute (14 VSA 3501 et seq.).5


The state’s attorney’s office


did not revise their position even after they were shown fraudulent bank statements that had been created by the son through a rather talented use of a computer program and mailed to his siblings every month for several years through the U.S. Postal Ser- vice.


Ultimately, the son admitted liability and has been paying money back into the es- tate. The estate will only recover a fraction


THE VERMONT BAR JOURNAL • SPRING 2012


of the funds taken from the mother. The ex- pense of bringing the case in superior court reduced the estate’s recovery by approxi- mately one-half of the agreed repayment amount.


Theft by Trustee–Criminal: United States vs. Donah Smith, Case No: 5:11-cr-26-1 Donah Smith worked at ARC, a charity in Rutland, Vermont, until May 18, 2010, when she was terminated for theft from her cli- ents’ Social Security accounts. Ms. Smith’s job had been as a caseworker for disabled adults living in the Rutland area and, as part of her job, she became the Social Se- curity Representative Payee for her clients. That meant that each month, accounts she controlled received the federal cash ben- efit paid under Social Security for her cli- ents. It came to light after the U.S. Attorney and F.B.I. became involved that Ms. Smith was also serving as trustee of two different supplemental needs trusts (SNTs) for two of her clients and had stolen funds from those SNTs for her personal benefit. In the end, Ms. Smith was charged with stealing $41,225 from fifteen clients, including the Social Security accounts and the two SNTs. Ms. Smith pleaded guilty to multiple counts of mail and wire fraud, including thefts from the SNT accounts. She is cur- rently serving twenty-four months in a fed- eral prison in West Virginia and will pay res- titution once she is released.6 Gregory Waples, Esq., the assistant U.S. attorney who brought the case, along with Special Agent William McSalis of the F.B.I., who investigated the case, focused this fi- nancial exploitation case on the vulnerabil- ity of the victims, not the total dollar figure. AUSA Waples brought the federal charges and added the state charges of theft from the SNTs, successfully arguing that since all of the amounts taken were part of a sin- gle scheme or pattern of theft, the Court should order full restitution of all funds tak- en by Ms. Smith from her former clients. AUSA Waples and Special Agent McSalis


are excellent resources for lawyers who find themselves in the position of having a client who has been a victim of theft by a fiduciary where federal funds (Social Security) are in- volved. In many cases, the victims may have a better path to recovery of assets via the criminal court process rather than through the civil court system. To assist with this case, our office ob-


www.vtbar.org


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