WASHINGTON, Sept 21 (Reuters) - Prosecutors in Manhattan are investigating whether a lawyer from the New York office of a prominent law firm stole $2.5 million in client money and fled the country for Hong Kong, according to people familiar with the matter.

The lawyer, Douglas R. Arntsen of Crowell & Moring, was arrested and arraigned earlier this week in Hong Kong and is expected to be extradited to the United States shortly.

Arntsen is suspected of embezzling approximately $2.5 million in funds deposited into an escrow account by a real-estate client of the firm.

The client, Regal Real Estate, discovered the missing funds last week and alerted the firm and local law enforcement, according to Regal's managing partner, William Punch.

The district attorney's office attempted to have Arntsen arrested last week at a meeting staged on a street corner in lower Manhattan, but he had already left for the airport, having apparently received a tip, Punch said.

"He went through this whole convoluted story, he had to go to Hong Kong to get the money back, and he wanted me to go to Hong Kong with him," Punch said.

Regal, which is owned by Manhattan landlord Maurice Laboz, had provided Crowell with around $4 million to hold as deposits on $40 million worth of real-estate deals.

But money started disappearing last week, when Arntsen disclosed he was leaving Crowell for a new job, according to Punch.

When Punch questioned Arntsen about the missing funds, "he broke down and told me he had used some of the escrow money," Punch said.

RARE PUBLIC EPISODE

On Sept. 13, Punch accompanied Arntsen to a Citibank branch in New York City, where Arntsen withdrew $1.8 million and gave it to Punch, according to a lawyer for Regal, Bruce Lederman of D'Agostino, Levine, Landesman & Lederman.

The two then went to a Wachovia branch, where Arntsen withdrew $43,000 more, Lederman said. Arntsen said that he had to go to Miami to get the rest of the money, but then said he needed to travel to Hong Kong instead, Lederman said.

The staged street-corner meeting was to take place the next day, Sept. 14.

Crowell told Regal it was investigating the matter, but declined to comment to Reuters.

In the buttoned-up world of white-shoe law firms, the episode is remarkable for playing out in public.

"We are waiting and expecting Crowell & Moring to immediately step up to the plate and replace the stolen money," Lederman said.

A spokesperson for the District Attorney did not return a request for comment.

A lawyer for Arntsen did not respond to a request for comment.

(Reporting by Aruna Viswanatha)

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