The law firm is wrong: you are NOT liable for the criminal actions of another person, even a former employee. Another person's criminal acts cut off your liablity unless it can be shown that you were particularly careless ("negligent") in some way and your negligence led to the crime. Otherwise, whether it was originally your check or not, you are not responsible--only the criminal is; that person can be sued for the money.To analogize: if you have a company van and someone steals it and runs another person over, you are not liable for their assault or hit-and-run unless you were extraordinarily careless: e.g. left the van unattended, motor running, in a some unsecure place, so that anyone could easily come by and take it and misuse it.In the situation you describe, there is nothing negligent about issuing a payroll check to any employee; you are not liable.