Law offices should learn to identify wire fraud scams and discuss those scams with clients.

August 23, 2022August 23, 2022Michael Leave a comment

In February, I blogged about an advisory opinion in which the North Carolina State Bar addressed a lawyer’s professional responsibility to learn to identify a common trust account scam.[i] The opinion concluded that failing to recognize the scam violated the duties of competence and diligence. In doing so, the opinion cited to “the vast notice and information directed to lawyers” about the scam, as well as to the scenario’s “number of red flags that should alert a lawyer practicing today to the potential for fraud.” My post is here, the opinion here.

I presented many CLEs in May and June. I discussed the North Carolina advisory opinion at most of them. When I did, I often stated something like this:

“If the standard is ‘we’ve been warning about this scam for years,’ well, there are other scams we’ve been warning about too. For instance, we’ve been warning about wire scams for almost as long as we’ve been warning about the scam that’s the subject of the North Carolina opinion. Will failing to identify potential wire fraud soon be a violation of the rules?”

Maybe. So, today, I’m here to remind readers of an “old” wire fraud scam and to call attention to another that is “new” to me.

The “old” scam involves last-minute changes to wire instructions. I first cautioned lawyers about the scam in 2018, stressing the importance of employing a 2^nd factor authentication system to confirm changes to wire instructions. The post included a tip from Andy Mikell, State Manager & Title Counsel at Vermont Attorneys Title Corporation (CATIC/VATC):

“We are telling folks that the ONLY appropriate 2^nd factor authentication method is for the ‘Wiring Firm’: (a) to initiate the verification call; (b) to a phone number that they independently obtained/verified. In other words, it is NOT acceptable: (a) to receive a confirmatory phone call or (b) to call a phone number in the email which contains the requested wire change.”

Apparently, we need to continue to spread the word.

Last week I learned of a situation in which a Vermont lawyer disbursed over $250,000 from trust after receiving an email that included a change to previously agreed upon wiring instructions. The email was not from the lawyer’s client and included tell-tale signs that it was fraudulent. Yesterday I learned of a similar incident in which a lawyer disbursed over $150,000 from trust in response to a fraudulent email that included “new” wiring instructions.

The scam that’s “new” to me is essentially the reverse: a client receives an email that appears to be from their lawyer. The email instructs the client to wire funds. In fact, the email is from someone pretending to be the lawyer and the funds, if sent, will soon be long gone. You can read more about the scam in this post from Money.

Yesterday, Andy Mikell informed me that a Vermont lawyer’s client recently fell victim to the “new” version of the scam. The client, a purchaser in a real estate transaction, wired $175,000 in response to an email that the client thought was from their lawyer. It was not.

Having spoken at several CATIC/VATC seminars over the years, I have first-hand knowledge that Andy and Liz Smith preach that law firms should adopt a standing policy of informing clients in-person and at intake that the firm will never send an email asking the client to wire funds. Indeed, yesterday Andy emailed me that CATIC/VATC

“suggests that the time to inform buyer clients about the risks of wire fraud is at file intake. Clear oral communication between firm and client is imperative. Depending on the firm’s wire policies, oral communication might look like: ‘Wire fraud is rampant. We will NEVER EVER send you an email or a fax asking you to wire money to anyone or, if we do, we will NEVER EVER send you an email or a fax asking you to wire money to anyone without speaking with you directly on the telephone’. That same communication should also be set forth in the firm’s engagement letter and signed by the client. Clients should be told that if they receive an email or a fax asking them to wire money, to call the firm’s known phone number for confirmation, and not the phone number in the email or fax.”

Good tips. And remember: these scams are not limited to firms that represent buyers & sellers in real estate transactions. They’ll target anyone who might wire funds for whatever reason.

As always, let’s be careful out there.

[i] Lawyer is contacted by a client who is owed a debt. Client only deals with Lawyer by email. Client reports that Debtor will not pay. Lawyer agrees to represent Client. Debtor (suddenly) can’t send a check to Lawyer fast enough. Client instructs Lawyer to deposit the check, keep Lawyer’s fee, and wire the balance. Lawyer follows Client’s instructions. Later, it becomes apparent that Debtor’s check was fraudulent.

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Don’t Fear, Simplify. (25 minutes)
Basic Requirements(41 minutes)
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Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
Collecting & Disbursing Funds(33 minutes)

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Timely Reconciliation Continues To Protect Vermont Law Firms Against Trust Account Fraud

August 2, 2022August 2, 2022Michael 1 Comment

Hello. Long time no blogging. I’d write that I’m glad to be back, but this isn’t one of the posts. Rather, I’m here to warn about trust account fraud and emphasize the role that timely reconciliation plays in protecting against it.

Last winter, I posted about two instances in which timely reconciliation had alerted firms to trust account fraud. The first involved fraudulent checks. The second involved unauthorized ACH disbursements made from a trust account.

The former has resurfaced. If it ever left.

A Chittenden County lawyer contacted me this morning. Reconciling the firm’s pooled interest-bearing trust account (IOLTA), the bookkeeper noticed multiple checks that looked exactly like the firm’s trust account checks, bore the proper account and routing numbers, and even included the bookkeeper’s signature. However, the bookkeeper knew that she had not issued checks to the named payees. The checks were fraudulent. Somehow and somewhere, someone accessed one of the firm’s actual checks, generated fraudulent facsimiles thereof, and expertly changed the payee. Upon being alerted to the fraud, the firm’s bank made good on the funds.

How the fraud occurred remains unclear. Here’s what’s clear.

Yes, trust account fraud is unrelenting and increasingly sophisticated. But regular and timely reconciliation can reveal fraud and help lawyers to safeguard funds that would otherwise be gone from trust.

In February’s post about the firm that discovered unauthorized ACH disbursements, I noted that the firm had “moved to a version of ‘positive pay.’” I encouraged others to consider doing the same. On the CLE circuit this spring, I learned that many have. You can read more about “positive pay” here. (Note: my sense is that most Vermont firms use “reverse positive pay.”) Anyhow, here’s an excerpt from February’s post that bears repeating:

“Nothing in this post should be read as me stating that the Vermont Rules of Professional Conduct require lawyers and law firms to enroll in a “positive pay” program. However, it’s worth considering. As I mentioned in A Lawyer’s Professional Responsibility to Learn to Identify Common Trust Account Scams, if trust funds go missing, the question will be whether the lawyer took reasonable steps to safeguard them. I could envision a disciplinary prosecutor asking, “did you ever check whether your bank offers a ‘positive pay’ or a similar service?”

As always, let’s be careful out there.

fraud

Trust Accounting Resources

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Don’t Fear, Simplify. (25 minutes)
Basic Requirements(41 minutes)
Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
Collecting & Disbursing Funds(33 minutes)

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A lawyer’s duties when a third party asserts an interest in funds that the lawyer is holding in trust for a client.

May 31, 2022Michael

As we know from a prior blog in which I paraphrased Teddy KGB, upon receiving funds in which a client or third person has an interest, a Vermont lawyer has a duty to promptly notify the client or third person. Then, the lawyer has a duty to deliver funds to which the client or third person is entitled.

When there is no dispute that a specific client or third person is entitled to the funds, compliance with the duties isn’t difficult. However, confusion can arise when more than one person asserts an interest in the funds that the lawyer is holding.

Let’s start with the rule that governs: Rule 1.15 – Safekeeping Property. Specifically, paragraphs (d) and (e).

The relevant section of paragraph (d):

(d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person.

The entirety of paragraph (e) is relevant:

“(e) When in the course of a representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be held separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

When does a third party have an interest in funds that a lawyer is holding in trust for a client? In other words, (1) when must a lawyer notify someone other than the client that the lawyer received funds; and (2) when would a dispute over funds prohibit disbursement?

Often, the comments to the rules are helpful. Comment [4] to Rule 1.15 says:

“Paragraph (e) recognizes that third parties may have lawful claimsagainst specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds collected. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.”

Ummm, ok. But again: what are the “interests” and “claims” that trigger the rule?

In 2012, the Virginia State Bar issued this advisory opinion. I find pages 1-4 particularly helpful.

Aside: here in Vermont, I do not know how disciplinary counsel, a hearing panel, or the Supreme Court would approach or resolve the issue. However, I think the opinion from the Virginia State Bar is useful in formulating the appropriate thought process.

Some key quotes from the Virginia opinion:

“In the absence of a valid third-party interest in the funds, the lawyer owes no duty to a creditor of the client and must act in the best interests of the client.”

This is important. In other words, when it comes to funds, a lawyer’s primary loyalty remains to the client and the conflict rules continue apply.

“The mere assertion of an unsecured claim by a creditor does not create an ‘interest’ in the funds held by the lawyer. Therefore, claims unrelated to the subject matter of the representation, though just, are not sufficient to trigger duties to the creditor without a valid assignment or perfected lien.”

This is consistent with how I’ve approached the issue. Standing alone, “Hey, your client owes me money” isn’t enough. Even if it’s true. For example:

Lawyer’s Client was injured skiing.
The ski area’s insurer settled for $100,000 that’s in Lawyer’s trust account.
Client’s injuries resulted in treatment from, among others, Physical Therapist.
Lawyer and Client know that Physical Therapist has a lien on any recovery.
Meanwhile, shortly before Client was injured in the skiing accident, Painter painted Client’s house. Client disputed the bill and has yet to pay it in full. Painter has never sued Client or obtained a judgment against Client. Somehow, Painter found out about the ski injury settlement. Painter called Lawyer and directed Lawyer to hold in trust the amount that Painter contends is owed by Client.

To me, Physical Therapist has “an interest” that triggers the rule, Painter does not.

The Virginia opinion lists things that trigger a lawyer’s duties to a third-party creditor:

statutory liens
judgment liens
court order or judgments that affect the funds.

Then, the opinion says:

“Likewise, agreements, assignments, lien protection letters, or other similar documents in which the client has given a third party an interest in specific funds trigger a duty under [the rules]even though the lawyer is not a party to such agreement or has not signed any document, if the lawyer is aware that the client has signed a document.” (emphasis in the original).

And, to me, here’s the key statement:

“In other words, a third party’s interests in specific funds held by the lawyer is created by some source of obligation other than Rule 1.15 itself.”

This makes perfect sense to me. The mere fact that Lawyer is holding the money is not enough to give a third party “an interest” in or “claim” to the funds. That’s the “Painter” example from above.

A few years ago, Professor Bernabe blogged about an advisory opinion from Texas that reaches conclusions like those reached by the Virginia State Bar. Professor Bernabe’s post is here and the Texas opinion here.

With all of this said, the Virginia opinion makes a critical point that cannot be ignored. While the general rule is that a lawyer must have “actual knowledge” of a third party’s interest or claim to trigger the duties under the rule:

“In some situations, under federal and state law, the lawyer need only be aware that the client received medical treatment from a particular provider or pursuant to a health care plan. In those instances, notice of lien or lien letter may not be required in order for that third party to claim entitlement to funds held by [the] lawyer.”

In other words, the duty of competence includes knowing whether, by law, a treatment provider has a valid interest, claim, or entitlement that may not need to be formally asserted.

Finally, remember, a lawyer’s duty is to recognize the existence of valid claims and interests to funds in connection with a representation. Rule 1.15 does not require a lawyer to resolve the claims and, in fact, prohibits a lawyer from doing so unilaterally.

Where’s that leave us? I’m not sure. It’s an issue rarely brought to my attention. If you’re ever unclear, contact me and we’ll work through it.

As always, let’s be careful out there.

legal ethics Related Videos & Posts

Start with this post: Don’t Overcomplicate Trust Accounting

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Don’t Fear, Simplify. (25 minutes)
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Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
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Collecting & Disbursing Funds(33 minutes)

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With trust accounts and client funds, beware of taking the easy way out. It could cost your law license.

April 19, 2022Michael 1 Comment

The following inquiry is not uncommon:

“Mike – I owe Former Client a small amount of money. Between the time it’ll take me to prepare and send a check, and the time and hassle of Former Client having to go to the bank, it won’t be worth it for either of us. What should I do?”

My response is always the same: “I can’t tell you what to do or not to do. But if it were me, I’d send my former client what I owe them.”

As of today, I have a case to cite with my response. Granted, it’s an extreme example, but in that it resulted in a recommendation to suspend a lawyer’s law license, it might serve as helpful guidance. Especially considering that the lawyer had never been disciplined in his previous 51 years of practice.

legal ethics

Last week, a hearing committee of the Louisiana Attorney Disciplinary Board recommended a 2-year suspension, all suspended but 6 months, after concluding that a lawyer violated the rules by failing to properly handle client funds. The Legal Profession Blog reported the recommendation. Here’s what happened.

The lawyer’s bank notified Louisiana’s Office of Disciplinary Counsel (ODC) that checks drawn on the lawyer’s trust account had been presented against insufficient funds. The ensuing investigation grew beyond the overdraft notice and revealed that, for years, the lawyer had converted client funds.

More specifically, ODC learned that, from 2012 thru 2018, the lawyer had received over $17,000 in refunds from various courts. (It’s not clear to me why the lawyer frequently received refunds from courts.) Anyhow, the refunds represented amounts that clients had paid to the lawyer. Nevertheless, the lawyer did not inform the clients or send them their refunds. Rather, the lawyer kept the funds in trust and tracked them in their own sub-account. Intending to regularly maintain $100 in the sub-account, each month, the lawyer paid himself the balance that exceeded $100.

Before we continue, think back to the inquiry I described at the beginning of this post. Got it in mind?

Okay.

Now, consider a statement from the hearing panel’s recommendation. The lawyer claimed that

“the fees associated with reviewing the client file and writing letters to return the checks would have exceeded the amounts received.”

The hearing committee wasn’t moved. It concluded that the lawyer violated the trust accounting rules and, by not informing clients of their refunds, the rule that prohibits dishonest conduct. Then, the committee discussed the appropriate sanction.

As outlined by the committee, the ultimate sanction turned on the lawyer’s state of mind. The lawyer argued that his conduct was negligent. ODC argued that it was knowing or intentional.

In the end, the committee concluded that the lawyer’s conduct fell into “a grey area between negligent and knowing, and . . . was akin to gross negligence.” Nevertheless, while concluding that the conduct was “more knowing than negligent,” the committee found that the lawyer did not have a “conscious desire to deprive clients or others of funds.” Still, the committee recommended a significant suspension.

In so doing, the committee made two observations that made me want to share its decision.

First, the committee criticized the fact that the lawyer “perceived the funds and having to deal with them as a nuisance or inconvenience.” The committee wrote:

“In the regular course of practicing law, many Louisiana practitioners encounter the inconvenient experience of receiving a refund from a clerk of court related to legal matter concluded years ago, sometime more than a decade. Most lawyers would agree that long delayed refunds to clients or third parties creates an unwelcome inconvenience. Even so, inconvenience does not excuse returning funds or property to persons to whom they belong, or at least making a diligent effort to do so.”

Second, while noting again that it did not believe that the lawyer was motived by “greed or a conscious, dishonest desire,” the committee remarked that, due to his own “laziness,” the lawyer “chose an easier, softer way than is required by the Rules of Professional Conduct and it was a violation of [the rules] to do so.”

The upshot: if you’re ever tempted to get lazy with your trust account or client funds, consider whether 6-months without practicing is worth the few minutes and dollars you’ll save.

As always, let’s be careful out there.

Trust Accounting Resources

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Don’t Fear, Simplify. (25 minutes)
Basic Requirements(41 minutes)
Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
Collecting & Disbursing Funds(33 minutes)

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Happy 1-day Birthday to the Trust Accounting & Fees Tab!

March 31, 2022Michael

Later this morning Eileen Blackwood and I are presenting at a CLE for lawyers who are new to practicing in Vermont. The seminar is “Basic Skills in Vermont – Professionalism” and is a component of the CLE requirement that lawyers must complete within a year of admission to the Vermont bar. Eileen and I will focus on the expectations of a Vermont lawyer, areas in which Vermont’s Rules of Professional Conduct differ from other jurisdictions’ rules, and the many low and pro bono opportunities that are available within the state.

Eileen and I have been presenting versions of today’s seminar for a long time. In the early days, my task was to outline Vermont’s attorney-discipline process and to walk new lawyers through the trust accounting rules. As the program has evolved, trust accounting is no longer the primary focus.

Nevertheless, on the occasion of the seminar and with its roots in mind, I thought it appropriate to share with everyone – not only the new attorneys – a reminder on the trust accounting rules. Don’t worry, it won’t take long or hurt too much.

For starters, yesterday I created a new tab on this blog: Trust Accounting & Fees. It aggregates my videos and posts on, you guessed it, Trust Accounting Fees.

On the tab, I suggest starting with Don’t Overcomplicate Trust Accounting. It’s a post in which I argued that law offices can go a long way towards compliance by keeping in mind four simple thoughts:

If it’s not yours, it goes in trust.
If it is yours, get it out of trust.
Know how much you have and to whom it belongs.
Promptly pay yourself, promptly pay clients and third persons.

I stand by my suggestion. The tab includes posts and videos that go into each thought in more detail. Also, I’m well aware that there are wrinkles, exceptions, and nuances. The tab includes resources that adress those as well. Still, at a macro level, there’s a strong argument that the four thoughts capture the critical points of the trust accounting rules.

Anyhow, this is all but a long-winded way of me saying that I’m pleased to introduce our newest tab, Trust Accounting and Fees.

As always, be careful out there.

one day birthday

Vermont’s rules on fees that are labeled “nonrefundable” or “earned upon receipt.”

March 9, 2022Michael 3 Comments

Last week’s #fiveforfriday legal ethics quiz included a question on “flat” and “nonrefundable” fees. Today’s post responds to what I perceive to be a common misconception about how the Vermont Rules of Professional Conduct require lawyers to handle fees that are paid in advance of legal services being rendered.

Our approach has changed over time. A few years ago, I blogged about its evolution. Caught up in the history, I didn’t do a great job explaining the current rules. They are Rule 1.5(f), Rule 1.5(g), and Rule 1.15(c). I’ll address each in order.

Rule 1.5(f) begins:

“A lawyer may enter into an agreement for a client to pay a nonrefundable fee that is earned before any legal services are rendered. The amount of such an earned fee must be reasonable, like any fee, in light of all relevant circumstances. A lawyer cannot accept a nonrefundable fee, or characterize a fee as nonrefundable, unless the lawyer complies with the following conditions

(1) The lawyer confirms to the client in writing before or within a reasonable time after commencing representation:

(i) that the funds will not be refundable, and

(ii) the scope of availability and/or services the client is entitled to receive in exchange for the nonrefundable fee.”

I emphasized the last sentence of the first paragraph for a reason. It is only if the conditions that follow that sentence are met that a lawyer may characterize a fee as nonrefundable or accept a fee so characterized.

So far, so good. Right? If a lawyer provides the client with a writing that confirms that the fee is nonrefundable and that defines the scope of availability and services that the client will receive, the lawyer may characterize the fee as nonrefundable.

Of course, that’s not the end of the story. And here’s where I sense that confusion exists.

The fact that the lawyer and client have agreed to a fee that complies with paragraph (f)(1) is not tantamount to the client’s agreement to an unreasonable fee. Indeed, here’s paragraph (f)(2):

“A lawyer shall not solicit or make any agreement with a client that prospectively waives the client’s right to challenge the reasonableness of a nonrefundable fee, except that a lawyer can enter into an agreement with a client that resolves an existing dispute over the reasonableness of a nonrefundable fee, if the client is separately represented or if the lawyer advises the client in writing of the desirability of seeking independent counsel and the client is given a reasonable opportunity to seek such independent counsel.”

In other words, while paragraph (f) allows a lawyer to accept nonrefundable fees, it does not override paragraph (a)’s requirement that a lawyer refrain from agreeing to, charging, or collecting an unreasonable fee. On this point, Vermont’s approach is not novel. Among others, the New York State Bar Association has opined that “flat” and “nonrefundable” fees paid in advance remain subject to the reasonableness requirement.

Next, paragraph (f)(3) reinforces the fact that it is only when a lawyer complies with paragraphs (f)(1) and (f)(2) that a lawyer may describe a fee as “nonrefundable” or “earned upon receipt” or the like. It says:

“Where it accurately reflects the terms of the parties’ agreement, and where such an arrangement is reasonable under all of the relevant circumstances and otherwise complies with this rule, a fee agreement may describe a fee as “nonrefundable,” “earned on receipt,” a “guaranteed minimum,” “payable in guaranteed installments,” or other similar description indicating that the funds will be deemed earned regardless of whether the client terminates the representation.”

Finally, and perhaps most critical given the gravity of improperly handling client funds, the rules are very clear that it is only after a lawyer has complied with paragraph (f) that the lawyer may treat a fee that is paid in advance of services being rendered as the lawyer’s own.

First, paragraph (g) states:

“A nonrefundable fee that complies with the requirements of (f)(l)-(2) above constitutes property of the lawyer that should not be commingled with client funds in the lawyer’s trust account. Any funds received in advance of rendering services that do not meet the requirements of (f)(1)-(3) constitute an advance that must be deposited in the lawyer’s trust account in accordance with Rule 1.15(c) until such funds are earned by rendering services.”

Rule 1.15 is entitled “Safekeeping Property.” Paragraph (c) says:

“Unless a lawyer has entered into a nonrefundable fee agreement that complies with Rule 1.5(f), a lawyer shall deposit legal fees and expenses that have been paid in advance into an account in which funds are held that are in the lawyer’s possession as a result of a representation in a lawyer-client relationship. Such funds are to be withdrawn by the lawyer only as fees are earned or expenses incurred.”

In conclusion, the key takeaways are:

If a lawyer complies with Rule 1.5(f), the lawyer may characterize a fee as nonrefundable, accept the fee an advance of services being rendered, and treat the fee as the lawyer’s own upon receipt. This necessarily means that a fee that complies with Rule 1.5(f) must not be deposited into trust.
Even if eligible to be characterized as “nonrefundable” or “earned upon receipt” by virtue of a lawyer’s compliance with Rule 1.5(f), a fee paid in advance of services being rendered remains subject to the reasonableness requirement of Rule 1.5(a) and must be refunded if not earned.
If a lawyer does not enter into an agreement that complies with Rule 1.5(f), a fee that is paid in advance of services being rendered remains the property of the client until earned, must be deposited into trust, and shall only be withdrawn as earned.

As always, be careful out there.

Dollar Sign

Trust Accounting Resources

Videos

Don’t Fear, Simplify. (25 minutes)
Basic Requirements(41 minutes)
Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
Collecting & Disbursing Funds(33 minutes)

Blog Posts

Beware the “severance payment” trust account scam.

March 2, 2022March 2, 2022Michael 3 Comments

Today I learned that a Vermont law firm was targeted this week in the so-called “severance agreement scam.” It was the first I’d heard of the scam happening here. Fortunately, a non-attorney employee was suspicious of the transaction. As a result, before disbursing, the firm was able to verify that a check that had been deposited to the trust account was fraudulent. Crisis averted.

Here’s how the scam works.

Someone contacts a lawyer claiming to be owed a severance payment by a former employer. Once the lawyer is involved, the “former employer” sends a check. The check is fraudulent. Alas, by the time the unsuspecting lawyer’s bank notifies the lawyer that the check was fraudulent, the lawyer has already disbursed funds that belong to other (and actual) clients.

Stewart Sutton practices law in Maryland.[1] In 2019, Attorney Sutton outlined the scam. The Virginia State Bar issued this warning the same year.

While relatively new, the “severance payment scam” is but a variation on an old theme.

A few weeks ago I posted A Lawyer’s Professional Responsibility to Identify Common Trust Account Scams. In it, I referred to North Carolina State Bar 2021 Formal Ethics Opinion 2. The advisory opinion addresses a common scam:

Lawyer is contacted by client who is owed a debt.
Client reports that debtor will not pay.
Lawyer agrees to represent Client.
Debtor (suddenly) can’t send a check to Lawyer fast enough.
Client instructs Lawyer to deposit the check, keep Lawyer’s fee, and wire the balance.
Lawyer follows Client’s instructions.
Later, it becomes apparent that Debtor’s check was fraudulent.
Often, Lawyer has now wired to Client funds that belong to other clients.

Scams of this nature most often involve an out-of-state client who (a) claims to be owed money by a person or business located in Vermont; and (b) only communicates with the Vermont lawyer by e-mail . I’m aware of it playing out in different contexts, including:

Person or business claims to have delivered goods to a person or company that won’t pay.
Deployed member of the military claims that ex-spouse sold the marital home and refuses to share the proceeds.

We can now add:

Person claims to be owed “severance payment” by former employer who won’t pay.

As always, be careful out there.

scam

[1] I don’t know Attorney Sutton and have never communicated with him. But I’m happy to learn from his profile that he’s a member of Red Sox Nation.

Related Videos & Posts

Videos

Don’t Fear, Simplify. (25 minutes)
Basic Requirements(41 minutes)
Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
Collecting & Disbursing Funds(33 minutes)

Blog Posts

Again, reconciliation is a good thing! (And a tip to protect against check fraud.)

February 18, 2022Michael 4 Comments

A few weeks ago I posted Timely Reconciliation Alerts Firm To Trust Account Fraud.

Well, it has happened again.

And, this time, the firm that shared its story also shared a tip to prevent check fraud.

fraud

A lawyer called yesterday to discuss a trust account issue. In the process of a daily reconciliation, the firm noticed an unauthorized ACH disbursement from trust. Someone had accessed the trust account to pay their credit card. The firm is working with law enforcement to identify the culprit and has confirmed that it was not an employee, client, former client, or anyone to whom the firm delivered funds on behalf of a client. The most likely explanation is the simplest: someone came across one of the firm’s trust account checks and wrote down or took a picture of the account and routing numbers. Fortunately, the daily reconciliation alerted the firm to the problem. The bank refunded the money, and the firm has taken additional steps to safeguard client funds and to protect against check fraud.

Among other things, the firm has moved to a version of “positive pay.” Every day, the bank sends the firm a list of checks that have been presented against the trust account. The firm approves or disapproves each. You can read more about “positive pay” in this post from Investopedia. Note: the firm uses “reverse positive pay.”

Nothing in this post should be read as me stating that the Vermont Rules of Professional Conduct require lawyers and law firms to enroll in a “positive pay” program. However, it’s worth considering. As I mentioned in A Lawyer’s Professional Responsibility to Learn to Identify Common Trust Account Scams, if trust funds go missing, the question will be whether the lawyer took reasonable steps to safeguard them. I could envision a disciplinary prosecutor asking, “did you ever check whether your bank offers a ‘positive pay’ or a similar service?”

Personally, I’d not want my answer to be “a what?”

As always, let’s be careful out there.

A Lawyer’s Professional Responsibility to Identify Common Trust Account Scams

February 9, 2022February 9, 2022Michael 4 Comments

Judging from the feedback, not many people enjoy my posts and seminars on trust accounting. It’s not uncommon for someone to express that the experience leaves them worried for their license, or to remark that I “tried to scare the crap out of” the audience.

Honestly, that’s not my goal. Indeed, the first in my series of trust accounting videos is Don’t Fear, Simplify. Similarly, I kicked off 2018 by asking lawyers not to overcomplicate trust accounting.

I stand by the message in each.

So, it’s with my own trepidation that I share today’s. Alas, to protect client funds, and lawyer licenses, I’m sharing it anyway.

Scams are at the top of the list of things that make lawyers fear trust accounting. That said, I’ve often heard “But Mike, we can’t stop scams. Falling for one is a problem, but it’s not unethical.”

I’m not so certain.

In 2017, almost FIVE YEARS AGO, I posted Trust Account Scams – they won’t be an excuse for long. Referring to CLEs I was scheduled to present, I wrote:

“At the seminars, I will be very clear: in my opinion, we’re not far from the day when ‘but I was scammed!’ will not excuse a violation of the rules. It might mitigate the ultimate sanction, but it will not excuse the failure to safeguard client funds.

Then, I outlined several of the more common scams that target lawyers and their trust accounts.

My opinion hasn’t changed. And, last year, the North Carolina State Bar joined me when it issued 2021 Formal Ethics Opinion 2.

The NC opinion addresses a common trust account scam:

Lawyer is contacted by client who is owed a debt.
Client reports that debtor will not pay.
Lawyer agrees to represent Client.
Debtor (suddenly) can’t send a check to Lawyer fast enough.
Client instructs Lawyer to deposit the check, keep Lawyer’s fee, and wire the balance.
Lawyer follows Client’s instructions.
Later, it becomes apparent that Debtor’s check was fraudulent.
Often, Lawyer has now wired to Client funds that belong to other clients.

I’ve warned about this scam for years. It usually involves an out-of-state client who (a) is owed money by a person or business located in Vermont; and (b) only communicates with the Vermont lawyer by e-mail. After surveying the wealth of material warning lawyers of this common scam, the NC Bar concluded:

“Lawyer’s mistaken reliance on the counterfeit check is unexcused. Given the breadth of notice provided to the legal profession on this common scam, Lawyer should have realized that the circumstances surrounding this purported representation required additional investigation. For at least ten years, lawyers have been warned about being targets of scams such as the one at issue in this inquiry.”

The opinion goes on:

“Lawyer should have been alerted to the suspicious nature of this transaction based upon the circumstances in this scenario, including the unsolicited request for the representation; the willingness of the purported defendant to quickly resolve the dispute without much effort from Lawyer; the cashier’s check drawn on an out-of-country bank; and the cashier check being dated prior to Lawyer’s conversation with the purported defendant. Although one of these circumstances standing alone may not give cause for suspicion, the totality of the circumstances should have alerted Lawyer to the suspicious nature of the representation and the transaction.”

Finally:

“Lawyer’s failure to recognize the scam given the vast notice and information directed to lawyers on the topic demonstrated his lack of competency in violation of Rule 1.1.”

In sum, the North Carolina opinion concludes that a lawyer has a professional responsibility to be aware of common trust account scams.

I urge lawyers to familiarize themselves with the most basic & common scams. To do so, I suggest starting with the NC opinion and my posts Learn to Identify Trust Account Scams and Protect Client Funds, and your law license, by Learning to Identify Trust Account Scams.

As always, let’s be careful out there.

scam-alert

Related Videos & Posts

The Professional Responsibility Program’s Guide to Managing Trust Accounts

Videos

Don’t Fear, Simplify. (25 minutes)
Basic Requirements(41 minutes)
Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
Collecting & Disbursing Funds(33 minutes)

Blog Posts

Timely Reconciliation Alerts Firm to Trust Account Fraud

January 11, 2022Michael 1 Comment

In Vermont, client trust accounts must be reconciled no less than monthly. In addition to being required by the rules, timely reconciliation can help to alert a lawyer or law firm to trust account fraud.

Fraud

Last Friday, an employee of a Vermont law firm reconciled recent trust account activity. Reviewing digital copies of checks presented against the account, the employee discovered three fraudulent checks.

I’ve seen images of the fraudulent checks. They look almost exactly like the firm’s real checks. Each includes the firm name, address, account number, routing number, and a forged signature of one of the firm’s partners.

The employee caught the fraud because two of the checks were duplicates. That is, each was the same number as a legitimate check that the firm had issued. The third bore a number that was well outside the range of the firm’s current checks.

Each fraudulent check had been negotiated using a mobile banking app. The mobile deposits were to accounts at a different bank than where the firm’s trust account is maintained. Many thousands of dollars were stolen. It seems that the fraud occurred outside the United States as two of the fraudulent checks were dated using the “dd/mm/yy” construct.

The law firm immediately notified its bank and law enforcement. Funds that remained in trust were transferred to another account. A few legitimate checks remain outstanding. The bank agreed not to honor them without contacting the firm for approval. As of last night, it appears that the banks are going to make good on the funds fraudulently obtained from the firm’s trust account. The firm and the bank are discussing whether the bank can make it so that the firm’s trust account checks cannot be negotiated electronically.

The situation shows the importance of timely reconciliation. The employee discovered the fraud within days of it happening. It’s also an example of the importance of “actual” reconciliation. Don’t just glance at the statement and conclude that the balance “looks about right.” That is not reconciling. An actual reconciliation includes reviewing each and every transaction on the account.

As always, be careful out there.

Related Material

Videos:

Don’t Fear, Simplify. (25 minutes)
Basic Requirements(41 minutes)
Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
Collecting & Disbursing Funds(33 minutes)

Blog posts:

Resources

The Professional Responsibility Program’s Guide to Managing Trust Accounts

	Monday Morning Honor… on Five for Friday #261
	G. L. Tirebiter on Supreme Court approves amendme…
	G. L. Tirebiter on Supreme Court approves amendme…
	Trust Accounting in… on Back to Basics: The 7Cs never…
	G. L. Tirebiter on Back to Basics: The 7Cs never…

	Monday Morning Honor… on Five for Friday #261
	G. L. Tirebiter on Supreme Court approves amendme…
	G. L. Tirebiter on Supreme Court approves amendme…
	Trust Accounting in… on Back to Basics: The 7Cs never…
	G. L. Tirebiter on Back to Basics: The 7Cs never…

Ethical Grounds

The Unofficial Blog of Vermont's Bar Counsel

Trust Account Management

Law offices should learn to identify wire fraud scams and discuss those scams with clients.

Timely Reconciliation Continues To Protect Vermont Law Firms Against Trust Account Fraud

A lawyer’s duties when a third party asserts an interest in funds that the lawyer is holding in trust for a client.

With trust accounts and client funds, beware of taking the easy way out. It could cost your law license.

Happy 1-day Birthday to the Trust Accounting & Fees Tab!

Vermont’s rules on fees that are labeled “nonrefundable” or “earned upon receipt.”

Beware the “severance payment” trust account scam.

Again, reconciliation is a good thing! (And a tip to protect against check fraud.)

A Lawyer’s Professional Responsibility to Identify Common Trust Account Scams

Timely Reconciliation Alerts Firm to Trust Account Fraud