Trust Account Scams: Disciplinary Prosecutions Possible?

I’ve been warning about trust account scams – one in particular – for years.  Unfortunately, lawyers continue to fall victim to the scam.

The most common trust account scam is the one in which a potential client from out of state (and often out of the country) contacts a Vermont lawyer by email and claims to be owed money by an individual or business in Vermont.  The lawyer takes the case.  Within days of the lawyer’s involvement, the opposing party is suddenly willing to pay up.  A check arrives at the lawyer’s office.  Lawyer deposits the check into trust and notifies the client.  Client instructs lawyer to wire the funds.  Lawyer does.  Weeks later, lawyer’s bank notifies lawyer that the check was counterfeit and demands repayment of funds wired out.

Best case: the lawyer was not holding any funds belonging to other clients and only has to deal with the bank. Worst case: funds that belonged to other clients were in trust and were sent to the scammer.

A Vermont lawyer fell for the scam last week.  It’s the second time this year (that I’m aware of) a lawyer has done so.

Please be diligent.  Along with the @VTBAR , I’ve been warning about this scam for so long that there’s really no excuse not to know about it. My friends at the Arizona bar have written about the scam.  The New Hampshire bar has issued a warning.  Last spring, I posted a warning about a different scam.  The New York State Bar Association has issued an advisory opinion that outlines the duties of a lawyer targeted by a scam.

At various seminars where I’ve issued warnings, I’ve noticed that there seems to be a perception that lawyers who fall victim to trust account scams will not face disciplinary prosecutions.  As Lee Corso would say, not so fast my friends.

Rule 1.1 requires a lawyer to act competently.  Rule 1.3 requires a lawyer to act with reasonable diligence. Rule 1.15 requires a lawyer to safeguard client property. Rule 1.15(f)(2) states that a lawyer “shall not use, endanger, or encumber money held in trust for a client or third person for the purposes of carrying out the business of another client or person without the permission of the owner give after full disclosure of the circumstances.”

If you are holding funds for me in trust, and you disburse those funds to a scammer, it strikes me (1) that you may not have acted competently to safeguard my property; (2) that you may not have acted with reasonable diligence to safeguard my property; and (3) that you may have impermissibly used, endangered, and encumbered my money for the purpose of carrying out your scammer client’s business.

Disciplinary authorities are starting to prosecute lawyers who fail to detect trust account scams.  In November of 2014, Ohio’s disciplinary board recommended a 6-month suspension for a lawyer who fell for a scam remarkably similar to the one outlined above.  The attorney resigned his license before the Ohio Supreme Court could rule on the recommendation.

In Minnesota, lawyers who fall for trust account scams are routinely admonished for violating the trust accounting rules, as well as for failing to act with reasonable diligence and competence to ascertain a client’s true identity.  Recently, a Minnesota lawyer agreed to a 12 month suspension of his law license after being charged with a host of violations related to a trust account scam.  (the case also involved misappropriation of some of the funds that were to be sent to the scammer!)  The Minnesota Supreme Court ordered the parties to file briefs on why the lawyer should not be disbarred.

In 2013, the Iowa Supreme Court suspended a lawyer who fell for a scam.

Be careful! In my view, we are at the point where lawyers should know about trust account scams. If so, “but it was a scam” might not be a defense to a disciplinary prosecution.  Finally, if you fall victim to a trust account scam, even if no action is taken against your license, you likely will have to make good on the money that is no longer in your trust account.