Lawyers Not Immune to Scam

August 9th, 2016

Lawyers are often called upon to safeguard their clients in individual cases, and also to help them develop defensive procedures. But as is often the case in many fields, lawyers are often less guarded in managing their own affairs than they are when handling clients’ business.

Several years ago, a well-known Richmond law firm got stung by a common internet scam. Posing as a foreign business, the scammer asked the firm to handle a sizeable collection case for a percentage fee. Shortly after the law firm got involved on its supposed client’s behalf, the debtor ended its allegedly long holdout and made what appeared to be payment in full via cashier’s check. The scammer OK’ed the law firm’s depositing the cashier’s check to the firm’s trust account, then using the funds to pay its own fees, with the net funds then being remitted to the “client.”

But of course, the cashier’s check was a phony, so the lawyers’ bank reversed the deposit credit. This left the law firm’s trust account out of balance, due to the outstanding checks that paid the firm’s bill and the balance seemingly due to the “client.” The law firm had to restore its fee to the trust account, but by the time the problem surfaced, the “client” and that money were both long gone. The “client’s” check did not bounce, because the law firm’s trust account had a high balance comprised of other clients’ moneys. The law firm had to make good on restoring those funds to its real clients.

A variation on this scheme ensnared a venerated Lexington law firm recently. There, instead of asking the firm to handle a collection case, the scammer hired the firm to handle a business deal involving sale of a substantial asset to a local purchaser. The deal went through, the buyer paid, and the law firm put the buyer’s money into its trust account. The firm deducted its fee and then sent the net funds on to the “client.” When the buyer’s cashier’s check again turned out to be counterfeit, the law firm found itself out nearly $270,000.00.

In both cases, the firms may have been protected by insurance, and in addition, partial recoupment was achieved in suits against the law firms’ respective banks. In both cases, the lawyers involved claimed that they had disbursed funds only after bank personnel had assured them that the funds deposited were “good.”

But in such situations, any bank customer should fully appreciate the difference between the expiration of a common bank “hold” on newly deposited funds, on the one hand, and the expiration of the period in which a bank might revoke a prior deposit credit, on the other. A “hold” typically ends in less than 24 hours, so the bank will usually allow drafts on the funds that quickly. But the banks almost always have language in their account agreements giving them much longer to reverse deposit credits if the instruments deposited turn out to be no good.

The Virginia State Bar has emphasized this distinction to lawyers for years, always admonishing that trust funds may not be distributed until the longer time frame has passed. Unfortunately, it seems that even among experienced attorneys, this key distinction often goes unappreciated. Years of disbursing upon cashier’s checks without incident seem to leave even lawyers wrongly assuming that no risks remain.

Lawyers are often targeted by scammers because they often carry large balances in their trust accounts, so the checks they send to scammers go through even if the instruments initially deposited were fraudulent. But any business handling large sums, or whose bank accounts have substantial float, may see similar scams target them as well.

What made the Lexington case stand out was the extent to which the law firm there had actually investigated the scammers before taking on the tasks requested. The e-mail correspondence there was well written, devoid of the “pidgin English” that is often a dead giveaway. Web sites for the “client” and its purchaser were also reviewed — but in today’s world, unfortunately it is all too easy to construct phony web sites to support scams.

While law firms have been the favorite target of these types of scammers, all businesses would be well advised to keep their guards up at all times, especially when dealing for the first time with international customers. Indeed, international transactions carry risks not present with U.S.-based customers, even when the companies are legitimate. There truly is no time when anyone can afford to let their guard down.