Fraud and using others to earn financial gain through crime dates back to the 15th century case of Perkin Warbeck. Warbeck preyed on those who despised Richard III of York through a well-planned (for its time) identity scheme. Warbeck became Richard, Duke of York, under the guise of the true heir apparent in an attempt to overtake the throne from Tudor King Henry VII. The plan ultimately failed, but not before he raised an army of 6,000 men and gathered the support of many European royals.
Fast forward to the 1830s, when Francois and Joseph Blanc committed the first known telecommunications fraud. The Blancs were traders in France’s Bordeaux stock exchange who focused on government bonds. In France at that time, one way of transmitting information was through an optical telegraph, which used a series of towers outfitted with adjustable wooden signal arms. The arms would be moved to send trade-related messages to the next tower. The Blancs hacked the network, bribing signalers to send secret messages about stock market changes in Paris. The brothers profited from their scheme but were caught and jailed; they were later released from prison because, at the time, France had no laws against that type of crime.
Any discussion of fraud would not be complete without mentioning the birth of the Ponzi scheme in the 1920s. Charles Ponzi was the architect of the scheme, which promised investors a return on their money; however, Ponzi paid earlier investors with the funds of later investors. Essentially, Ponzi’s scheme involved buying international postal coupons.1
Lawyers are increasingly used in furthering scams. Typically, these scams involve moving money through IOLTA by fraudulent wire transfers or fraudulent bearer paper.
FRAUD IN REAL LIFE
What follows is one example of a story that we’re sharing strictly for educational purposes to help other attorneys identify possible scams and the subsequent steps to take once the scam has been revealed.
Recently, a $5 million fraud scheme was foiled by the diligence and quick action of a Michigan attorney.
An individual reached out to the attorney via LinkedIn asking if the attorney could help a business associate in need of legal assistance. This was not unusual; the attorney had received similar requests through social media platforms. Normally, the attorney provided contact information to share with the potential client.
The potential client sent an email directly to the attorney explaining the legal matter and requested a meeting to discuss the situation. The potential client was from Mexico and the adverse party was a well-known Michigan-based corporation.
The attorney and potential client connected via telephone, and the attorney determined they could provide legal services. After a conflict check and research on both companies, the parties were determined to be legitimate corporations.
The attorney sent a client engagement letter specifically describing the scope of representation, which included drafting and issuing a demand letter. The fee agreement provided for a flat fee to send the demand letter plus a percentage of any amount collected as a result of the lawyer’s representation. The attorney provided his operating account routing and transit numbers to the client for deposit of the earned flat fee for the demand letter. The potential client transferred the flat fee into the lawyer’s operating account. In preparation for drafting the letter and as an exercise of due diligence, the attorney requested the contract and all communication between the client and the adverse party. The attorney received an executed contract and nearly two years of emails where the adverse party acknowledged the company owed $5 million based on a breach of the contract. The attorney reviewed the contract and found it contained specific clauses addressing any breach. Upon conducting an audit of the adverse party, the client discovered the adverse party had breached the terms of the contract, triggering the clause for damages. The parties entered into a settlement agreement which was drafted and signed by both parties.
The attorney reviewed all documents and information supplied to him by the client and found that payment on the contract continued to be delayed due to a downturn in business resulting from the COVID-19 pandemic. The parties agreed to a payment plan. Through the attorney’s research, the adverse party was acquired by a buyer shortly after the terms of the repayment plan agreement were set to begin. The delay appeared to coincide with the adverse party being acquired by another entity.
The attorney sent the demand letter. The adverse party emailed the lawyer requesting a phone meeting to discuss the matter. During the conversation, the adverse party asked for another extension and advised that it would propose a new payment plan. The attorney requested the adverse party pay $1 million as a matter of assurance, which the adverse party agreed to do.
Unexpectedly, the attorney received two payments: the first installment of $335,000 and a second in the amount of $35,000, which were woefully below the agreed-upon amount of $1 million. Thinking the wire transfers were odd, the attorney contacted the bank. The bank confirmed that the transfers came from two different company accounts on a Friday.
Knowing the deposits had been made, the client asked when the funds would be received. The attorney contacted the adverse party asking why they did not make the $1 million assurance payment. The adverse party indicated that their accountant made an error and additional assets needed to be liquidated.
The following Monday morning, the attorney received a call from his bank regarding the wire transfers. The FBI had notified the bank that the $335,000 transfer was fraudulent; the account did not belong to the remitter.
The attorney immediately called the State Bar of Michigan Ethics Helpline for advice. The attorney noted that he had ethics defense insurance through his malpractice carrier. The Ethics Helpline advised that he contact his carrier. The advice given by the EthicsHelpline was consistent with what the malpractice carrier recommended. The IOLTA was frozen, and the wire transfer funds were returned to the owners.
STEPS TO PROTECT YOUR PRACTICE
Fraudulent actors often spoof actual email accounts. In the incident described above, the company’s legitimate email addresses ended in .com, and the email the attorney received was from a .org sender. The email appeared to have the proper client and adverse party names at first glance but clicking on the recipient’s name on the email showed that the actual email address did not end in .com, which was inconsistent with the company’s domain.
Verify principal parties
Fraudulent actors often impersonate an actual employee within a company. Verify that the person with whom you are communicating is who they purport to be. This can be as simple as looking someone up on LinkedIn and messaging them through their profile, calling them directly, or sending an email to an address the lawyer finds on the company’s website. Some sophisticated scammers impersonate representatives of the defendant who agree to remit funds, but it is all a fraud.
Be aware of common scams
We’ve all received emails from purported wealthy businesspeople and overseas royalty. Other scams are not as apparent, however. Proceed cautiously if a transaction involves barges, farm machinery, airplanes, construction equipment, large commercial loans, commercial real estate sales or lease payments, COVID-19 vaccine transactions, or dog bite or personal injury cases in which the client does not want to litigate.2
Establish a wire transfer policy
Wire transfers are one of the safest ways to send and receive funds. However, not everything is completely safe. Steps you can take to help prevent becoming a victim of fraud:
• Obtain and verify information from parties sending and receiving wire transfers. There are many news reports regarding hacking attorney emails with new, fraudulent routing and transit information so confirm your identity to your client and vice versa.3
• Be cautious about transfers coming from multiple accounts.
• Do not accept changes to wire transfer information at the last minute. If changes are necessary, double check with the parties that the change is correct. It may be appropriate to confirm the numbers verbally or via an alternate means of communication.
• Do not transfer money at a specific time requested by the party. You must verify that the funds have cleared (more on this below) and the transaction is not fraudulent and thereby cannot be reversed before remitting the client’s portion of the funds.
Verifying funds is not as simple as looking at your account online. Just because wire transfer funds appear in your account does not mean they have cleared. This is particularly important for any deposits made by cashier’s check, business check, or personal check. You can ask your bank to confirm the validity of a cashier’s check prior to its deposit; the bank can verify through a database shared by financial institutions. Fraudulent cashier’s checks can sometimes be indistinguishable from the real thing.4
Call your bank for the wire transfer information; it should provide you with the account name, its owner, and, in some cases, the owner’s phone number. Call the account owner to verify that the funds were authorized to be transferred and that they are aware of the transfer.
Legal engagement letter
The legal engagement letter should clearly describe the scope of representation. Include language confirming that all funds will be verified by the receiving banks and funds will not be disbursed until verified by financial institutions including, but not limited to, confirming with the owner of the account fund transfers. This puts fraudulent clients on notice and may deter them from further scams.
Terminate legal representation
Once it’s determined that there is a fraud, immediately send the client a letter terminating legal representation.
Memo to file
In situations of fraud, keep copious notes. Immediately create a memo for your file. There are numerous calls to make — your bank’s local and corporate branches, investigators, federal authorities, the SBM Ethics Helpline, malpractice carriers, and ethics defense insurance attorneys — and you don’t know when you may need to refer to your notes of the events that took place.
Freeze and close accounts
If your practice is the victim of fraud, immediately freeze all accounts. Open new accounts to prevent additional financial harm.
DUTIES OWED TO FRAUDULENT CLIENTS
There are competing arguments regarding a lawyer’s duty to a client who is a fraudulent actor but, either way, information may be shared with law enforcement. Under MRPC 1.6, the exception contained within MRPC 1.6(c)(3) allows an attorney discretion to disclose “confidences and secrets to the extent reasonably necessary to rectify the consequences of a client’s illegal or fraudulent act in the furtherance of which the lawyer’s services have been used[.]”
There is an argument that MRPC 1.6 requires a lawyer hold a client’s confidences and secrets. However, because the fraudulent actor is not a real client, the lawyer owes no duty of confidentiality under MRPC 1.6. Therefore, the lawyer should reveal all information to law enforcement.
Additional examples of scams and information regarding whom to contact in the event of a scam is on the SBM website at www.michbar.org/generalinfo/scamalerts.