High Profile Embezzlements Result in Client Trust Account Protection Program

In the legal profession, the safeguarding of entrusted funds stands as a non-negotiable legal requirement and a fundamental tenet of ethical practice. Attorneys, as custodians of client funds, are duty-bound to maintain a clear demarcation between these funds and their personal and business accounts. This obligation extends to keeping meticulous records and providing timely and comprehensive reports to clients.

Unfortunately, there have been some recent, high-profile abuses of this fundamental fund handling retirement by California attorneys like Tom Girardi and Michael Avenatti.  As a result, the State Bar of California (State Bar) enacted a new program called the Client Trust Account Protection Program (CTAPP), which requires attorneys to report trust account information to the State Bar and reminds attorneys of the paramount importance of upholding these standards.

The CTAPP is aimed at fortifying public protection and equipping attorneys with the essential tools to fulfill their client trust accounting duties. A significant development in legal oversight, the State Bar has mandated that nearly all lawyers, with few exceptions, adhere to requirements designed to bolster accountability.  Central to these obligations are:

Annual Registration: Attorneys must annually register all trust accounts with the State Bar. This can be done individually or through their respective law firms or organizations.

Self-Assessment: Lawyers are required to conduct an annual self-assessment of their client trust account management practices, responding to a set of questions probing various aspects of fund management.

Certification: Attorneys must certify with the State Bar that they understand and comply with the stipulations and prohibitions outlined in rule 1.15 of the Rules of Professional Conduct, specifically addressing the safekeeping of funds and property of clients and other individuals.

These new regulations are courtesy of a couple of legal sagas currently unfolding in Los Angeles.  The first is the case of Tom Girardi, a former personal injury lawyer, was indicted by a federal grand jury and accused of embezzling over $15 million from several of his legal clients. Though Girardi has been disbarred by the State Bar, the criminal case has been in limbo as Girardi’s defense team is arguing that he is not competent to stand trial. Girardi’s attorneys contend he suffers from dementia, with parts of his brain atrophying, resulting in memory loss and an apparent unawareness of his disbarment and unpaid client debts. The competency hearings, held in August and September, presented conflicting evidence from Girardi’s defenders and experts retained by the Los Angeles U.S. Attorney’s Office. Earlier this month, the federal judge presiding over the case ruled that Girardi is competent to stand trial and the case is moving forward accordingly.

The second public case of embezzlement in California involves Michael Avenatti, who was convicted of embezzlement of client funds in December of 2022. Once a prominent lawyer, Avenatti gained national attention for representing adult film actress Stormy Daniels in lawsuits against Donald Trump. His media presence expanded with frequent television appearances, and he briefly entertained political ambitions, considering a run for the Democratic presidential nomination in 2020. Aside from the embezzlement case to which Avenatti plead guilty, Avenatti was convicted in New York related to defrauding Stormy Daniels and attempting to extort Nike.  Avenatti is actively appealing the New York convictions.

As the legal profession navigates the dual narratives of ethical fortification and a high-profile legal drama, it is imperative that the attorneys champion accountability and provide information to clients and the State Bar warranting their compliance with their ethical obligations relative to trust funds.