Lawyer Suspended for Hiding Client’s Funds in Escrow Account

A lawyer who hid client funds in his escrow account was suspended from law practice for four years by the Supreme Court of New York, Appellate Division Mar. 21.

Despite several mitigating factors, the lawyer received a harsh sanction for his admitted “significant lapse in judgment.” The case is a cautionary tale that a lawyer’s hope that his unethical actions will help the client do the right thing may not help avoid disciplinary action.

Fredric H. Aaron represented Eric Aronson, who raised money for his various companies by soliciting investors. Aaron represented Aronson for about 1 1 2 years by helping to restructure debt. Several investors complained they were defrauded by Aronson, and some of Aronson’s assets were frozen after investors filed suit in New Jersey.

The parties settled and the freeze was lifted, but then Aronson became concerned about additional suits and asset freezes. So “in or about July 2010 on Eric Aronson’s behalf and as a result of a significant lapse of judgment, [Aaron] allowed Eric Aronson to put a portion of the company’s funds into [his] attorney escrow account,” the court said, citing Aaron’s plea allocution.

Aaron understood those funds would be used to fund operations despite any future freezes. In Aaron’s allocution, he also claimed he still thought Aronson sold a legitimate product and “hoped that Mr. Aronson would eventually be able to pay back his investors.” But when Aaron put the funds in his escrow account, he knew “there was a high probability that Aronson and others had conspired to defraud investors.”

On March 31, 2017, Aaron was sentenced by the U.S. District Court for the Eastern District of New York to 14 months in jail, then a year of supervised release, and payment of over $450,000 in restitution for his role as an accessory after the fact in covering up a multimillion-dollar conspiracy to commit securities fraud. Judge Arthur D. Spatt said Aaron “committed a ‘very serious offense’ and that he had ‘grossly violated [the rules governing escrow accounts] in the most outrageous fashion.'”

Aaron also agreed to be suspended from appearing and practicing before the SEC for five years.

On April 25, 2017, the Supreme Court immediately suspended Aaron and directed him to show cause why a final order of discipline shouldn’t be issued based on his conviction. After a show cause hearing before a special referee, the court suspended Aaron for four years without making it retroactive to his April suspension.

Won’t Be Tolerated 

In his disciplinary case, the court acknowledged several mitigating factors:

* clean disciplinary record
* misconduct was “aberrational”
* remorse
* held in high esteem in the community
* pro bono work
* cooperation with the authorities

For aggravating factors, it found:

* “knowingly used his escrow account to shield funds from creditors”
* “knowingly frustrated the judicial process” by doing so
* denied knowledge of fraud to minimize his blame
* experienced attorney who even worked for SEC for a year

The court disagreed with the special referee, who concluded that no clients were disadvantaged by Aaron’s conduct and that Aaron didn’t reap any financial gain by using the escrowed funds. The court said that the defrauded investors were harmed and Aaron “perpetuated the harm.” And he was paid $10,000 per month.

Justices William F. Mastro, Reinaldo E. Rivera, Mark C. Dillon, John M. Leventhal, and Robert J. Miller participated in the per curiam opinion.

The Grievance Committee for the Tenth Judicial District was represented by Catherine A. Sheridan, Hauppauge, NY. Aaron was represented by Emery Celli Brinckerhoff & Abady LLP.

The case is Matter of Aaron , N.Y. App. Div., 2016-12862, 3/21/18.