Protect Client Funds, and your Law License, by Learning to Identify Trust Account Scams

Re-posted on May 24, 2017 to reinforce the message and because I inadvertently posted a draft version last night.

I am scheduled to present several CLE programs on various topics between now and the end of June.  At each, no matter my assigned topic, I will use some of the time to warn about trust account scams.

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.

By way of analogy, I’ve used this blog to stress the duty to safeguard client information.

With respect to client information:

  • Rule 1.1’s duty of competence includes a duty to act competently to protect client communications.
  • Rule 1.6 prohibits a lawyer from disclosing “information relating to the representation” absent client consent.
  • Rules 1.1 and 1.6 operate to impose a duty to take reasonable precautions to ensure that client information is not disclosed to or accessed by people who shouldn’t receive or access it.
  • The duty necessarily includes taking reasonable precautions to safeguard client information that is transmitted and stored electronically.

I feel the same about client funds.

  • Rule 1.1 requires lawyers to provide competent representation.
  • Rule 1.15 is entitled “safekeeping property.”
  • I construe the two rules as operating to impose a duty to act competently to safeguard client funds.
  • The duty necessarily includes a duty to take reasonable precautions to ensure that client funds are not disbursed to or accessed by people who shouldn’t receive or access them.

In order to take reasonable precautions to safeguard client funds, it’s crucial to understand the various threats to client funds.  Here are 3 common trust account scams and their telltale signs.

  1. Client Outside Vermont is Owed a Debt by a Vermonter
  2. Compromised E-Mail/Wire Instructions
  3. Recipient of Trust Account Check Asks for Wire Instead

Client Outside Vermont is Owed a Debt by a Vermonter.  Client, who is outside of Vermont, contacts Lawyer by e-mail and asks Lawyer for help collecting a debt from someone in Vermont. This version of the scam can take various forms, including:

  •  Client recently divorced and moved away (or was deployed).  The marital property was in Vermont.  Ex-spouse sold the property and has refused to send Client’s share of the proceeds.
  • Client manufactures & sells goods.  Client shipped goods to Purchaser in Vermont.  Purchaser has refused to pay.

Typically, within a very short time of Lawyer agreeing to represent Client, UPS or FedEx delivers a check from “debtor” to Lawyer.  Client is thrilled at how quickly Lawyer convinced debtor to pay! Client directs Lawyer to deposit the check, keep a chunk, and wire the remainder to Client.  Lawyer deposits the check into trust & disburses Client’s share.

A few weeks later, Lawyer’s bank informs Lawyer that the check from “debtor” was fraudulent.  Money that belonged to other clients is no longer in trust, having vanished with the wire to Client.  Trust me, we ain’t in Kansas anymore.  The odds of contacting “Client” and having him or her return the money are not good.

This has happened MULTIPLE times in Vermont over the past year.  Last year, disciplinary counsel recommended that a hearing panel of the Professional Responsibility Board admonish a lawyer who had fallen for this precise scam and improperly disbursed over $400,000 from trust.  The panel rejected the request, concluding that falling for the scam did not rise to the level of an ethics violation.

It’s inconceivable to me that this version of the scam isn’t a violation.  It’s not the equivalent of a football team scoring a touchdown by surprising the defense with a trick play.  It’s Tom Brady throwing a pass to Rob Gronkowski running uncovered down the middle of the field – – with the defenders claiming in the post-game press conference that they didn’t know the Patriots might do that.

To be clear, if Gronkowski is double-teamed but makes an incredible catch of an even more incredible pass, that’s one thing.  On the other hand, the failure to cover Gronkowski as he runs down the middle of the field amounts to a failure to take reasonable precautions against a touchdown pass byTom Brady.

Compromised E-Mail/Wire Instructions.  This version scam typically targets real estate closings.  Attorney holds, or soon will hold, Seller’s proceeds. Attorney receives an e-mail instructing Attorney to wire the proceeds to an account that is different from any account Seller may have previously provided to Attorney.

In one version of this scam, the e-mail account is fake.  For example, let’s pretend I am the Seller.

My e-mail address is michael.kennedy@vermont.gov.  Attorney holds the proceeds of the sale of my house.  Attorney receives an e-mail from micheal.kennedy@vermont.gov instructing Attorney to wire the proceeds to an account that is not the same account that I previously provided to Attorney.

Do you see the scam? If not, here’s a hint.  My name is Michael.  Look closely at how I spelled my first name in the 2nd email address.

This happened in northern Vermont last year.  Seller’s attorney wired the funds after receiving an e-mail that appeared to be from Seller, but was from Seler.  In a stroke of incredible good fortune, Seller happened to walk into Attorney’s office within minutes of Attorney wiring the funds.  They quickly figured out what had happened, contacted Attorney’s bank, and stopped the wire.

In another version of this scam, the e-mail is actually from Seller or Seller’s attorney, but the account has been hacked/compromised.  The e-mail includes new wiring instructions and is often followed-up by a phone call from a number that’s been hacked to appear as if it’s from Seller or Seller’s attorney.  Like the others, this version of the scam recently caught a Vermont lawyer.

When wiring instructions are changed by e-mail or phone call, take the time to confirm the change by speaking with someone who you know (a) is who they say they are; and, (b) has the authority to make the change.

The North Carolina State Bar issued a warning about this version of the scam.   Please read the warning.  In my view, the duties that it highlights are as applicable in Vermont as they are in North Carolina.

Recipient of Trust Account Check Asks for Wire Instead.  This has been going on for years.  Attorney delivers a trust account check.  The recipient asks Attorney for a wire instead.

Alarm bells should go off whenever you deliver a check and the recipient asks that you disburse by wire instead.

Even if this happens at the closing table, and the request for a wire comes 3 seconds after you handed a trust account check to Seller, beware!  Without you noticing, Seller might have used a mobile device to scan and “deposit” the check.  When you take it back and send a wire instead, the money could be gone TWICE from your trust account. Money that belongs to other clients.

This too happened many years ago in Vermont.  Client arrived at Lawyer’s office to pick up a check.  Lawyer handed the check to Client.  Client left the office, but came back in about a minute later.  Client gave the check back to Lawyer and asked for a wire.  Lawyer took back the check, ripped it up, and wired the funds.

In the parking lot, Client had used an app to “cash” the check.

Key takeaway: your antennae should be tuned into any situation in which you deliver funds by trust account check & the payee later asks for them by wire instead.

Again, I do not think we’re far from the day when a lawyer who falls for a scam will be disciplined.  My thinking mirrors the conclusion reached by the North Carolina State Bar in Inquiries #4 & #5 of 2015 Formal Opinion 6.  As the NC Bar stated:

  • a lawyer has a duty to implement reasonable security measures to protect client funds;
  • a lawyer has a duty to stay abreast of the risks associated with online banking and to actively maintain end-user security at the law firm, including by non-legal staff; and,
  • the failure to verify a disbursement change constitutes a failure to use to reasonable precautions to protect client funds.

I understand that scams are sophisticated and ever-evolving.  But most scams share telltale signs.  At some point, we’re going to have accept the old adage: fool us once, shame on you.  Fool us twice, shame on us.

scam-alert

Trust Account Scams: they won’t be an excuse for long.

Re-posted on May 24, 2017 to reinforce the message and because I inadvertently posted a draft version last night.

I am scheduled to present several CLE programs on various topics between now and the end of June.  At each, no matter my assigned topic, I will use some of the time to warn about trust account scams.

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.

By way of analogy, I’ve used this blog to stress the duty to safeguard client information.

With respect to client information:

  • Rule 1.1’s duty of competence includes a duty to act competently to protect client communications.
  • Rule 1.6 prohibits a lawyer from disclosing “information relating to the representation” absent client consent.
  • Rules 1.1 and 1.6 operate to impose a duty to take reasonable precautions to ensure that client information is not disclosed to or accessed by people who shouldn’t receive or access it.
  • The duty necessarily includes taking reasonable precautions to safeguard client information that is transmitted and stored electronically.

I feel the same about client funds.

  • Rule 1.1 requires lawyers to provide competent representation.
  • Rule 1.15 is entitled “safekeeping property.”
  • I construe the two rules as operating to impose a duty to act competently to safeguard client funds.
  • The duty necessarily includes a duty to take reasonable precautions to ensure that client funds are not disbursed to or accessed by people who shouldn’t receive or access them.

In order to take reasonable precautions to safeguard client funds, it’s crucial to understand the various threats to client funds.  Here are 3 common trust account scams and their telltale signs.

  1. Client Outside Vermont is Owed a Debt by a Vermonter
  2. Compromised E-Mail/Wire Instructions
  3. Recipient of Trust Account Check Asks for Wire Instead

Client Outside Vermont is Owed a Debt by a Vermonter.  Client, who is outside of Vermont, contacts Lawyer by e-mail and asks Lawyer for help collecting a debt from someone in Vermont. This version of the scam can take various forms, including:

  •  Client recently divorced and moved away (or was deployed).  The marital property was in Vermont.  Ex-spouse sold the property and has refused to send Client’s share of the proceeds.
  • Client manufactures & sells goods.  Client shipped goods to Purchaser in Vermont.  Purchaser has refused to pay.

Typically, within a very short time of Lawyer agreeing to represent Client, UPS or FedEx delivers a check from “debtor” to Lawyer.  Client is thrilled at how quickly Lawyer convinced debtor to pay! Client directs Lawyer to deposit the check, keep a chunk, and wire the remainder to Client.  Lawyer deposits the check into trust & disburses Client’s share.

A few weeks later, Lawyer’s bank informs Lawyer that the check from “debtor” was fraudulent.  Money that belonged to other clients is no longer in trust, having vanished with the wire to Client.  Trust me, we ain’t in Kansas anymore.  The odds of contacting “Client” and having him or her return the money are not good.

This has happened MULTIPLE times in Vermont over the past year.  Last year, disciplinary counsel recommended that a hearing panel of the Professional Responsibility Board admonish a lawyer who had fallen for this precise scam and improperly disbursed over $400,000 from trust.  The panel rejected the request, concluding that falling for the scam did not rise to the level of an ethics violation.

It’s inconceivable to me that this version of the scam isn’t a violation.  It’s not the equivalent of a football team scoring a touchdown by surprising the defense with a trick play.  It’s Tom Brady throwing a pass to Rob Gronkowski running uncovered down the middle of the field – – with the defenders claiming in the post-game press conference that they didn’t know the Patriots might do that.

To be clear, if Gronkowski is double-teamed but makes an incredible catch of an even more incredible pass, that’s one thing.  On the other hand, the failure to cover Gronkowski as he runs down the middle of the field amounts to a failure to take reasonable precautions against a touchdown pass byTom Brady.

Compromised E-Mail/Wire Instructions.  This version scam typically targets real estate closings.  Attorney holds, or soon will hold, Seller’s proceeds. Attorney receives an e-mail instructing Attorney to wire the proceeds to an account that is different from any account Seller may have previously provided to Attorney.

In one version of this scam, the e-mail account is fake.  For example, let’s pretend I am the Seller.

My e-mail address is michael.kennedy@vermont.gov.  Attorney holds the proceeds of the sale of my house.  Attorney receives an e-mail from micheal.kennedy@vermont.gov instructing Attorney to wire the proceeds to an account that is not the same account that I previously provided to Attorney.

Do you see the scam? If not, here’s a hint.  My name is Michael.  Look closely at how I spelled my first name in the 2nd email address.

This happened in northern Vermont last year.  Seller’s attorney wired the funds after receiving an e-mail that appeared to be from Seller, but was from Seler.  In a stroke of incredible good fortune, Seller happened to walk into Attorney’s office within minutes of Attorney wiring the funds.  They quickly figured out what had happened, contacted Attorney’s bank, and stopped the wire.

In another version of this scam, the e-mail is actually from Seller or Seller’s attorney, but the account has been hacked/compromised.  The e-mail includes new wiring instructions and is often followed-up by a phone call from a number that’s been hacked to appear as if it’s from Seller or Seller’s attorney.  Like the others, this version of the scam recently caught a Vermont lawyer.

When wiring instructions are changed by e-mail or phone call, take the time to confirm the change by speaking with someone who you know (a) is who they say they are; and, (b) has the authority to make the change.

The North Carolina State Bar issued a warning about this version of the scam.   Please read the warning.  In my view, the duties that it highlights are as applicable in Vermont as they are in North Carolina.

Recipient of Trust Account Check Asks for Wire Instead.  This has been going on for years.  Attorney delivers a trust account check.  The recipient asks Attorney for a wire instead.

Alarm bells should go off whenever you deliver a check and the recipient asks that you disburse by wire instead.

Even if this happens at the closing table, and the request for a wire comes 3 seconds after you handed a trust account check to Seller, beware!  Without you noticing, Seller might have used a mobile device to scan and “deposit” the check.  When you take it back and send a wire instead, the money could be gone TWICE from your trust account. Money that belongs to other clients.

This too happened many years ago in Vermont.  Client arrived at Lawyer’s office to pick up a check.  Lawyer handed the check to Client.  Client left the office, but came back in about a minute later.  Client gave the check back to Lawyer and asked for a wire.  Lawyer took back the check, ripped it up, and wired the funds.

In the parking lot, Client had used an app to “cash” the check.

Key takeaway: your antennae should be tuned into any situation in which you deliver funds by trust account check & the payee later asks for them by wire instead.

Again, I do not think we’re far from the day when a lawyer who falls for a scam will be disciplined.  My thinking mirrors the conclusion reached by the North Carolina State Bar in Inquiries #4 & #5 of 2015 Formal Opinion 6.  As the NC Bar stated:

  • a lawyer has a duty to implement reasonable security measures to protect client funds;
  • a lawyer has a duty to stay abreast of the risks associated with online banking and to actively maintain end-user security at the law firm, including by non-legal staff; and,
  • the failure to verify a disbursement change constitutes a failure to use to reasonable precautions to protect client funds.

I understand that scams are sophisticated and ever-evolving.  But most scams share telltale signs.  At some point, we’re going to have accept the old adage: fool me once, shame on you.  Fool me twice, shame on me.

scam-alert

Monday Morning Answers: #50

Kind of a lame quiz last week. I take the blame.  I was too busy relaxing at my Dad’s to fire up my brain.  So, I picked 4 numbers at random & (re) used one question from each corresponding week of the quiz.  Spoiler alert: the answers follow the honor roll.

Honor Roll

(perfect scores in red)

Permanent Honor Roll Status

  • Beth DeBernardi, Esq.
  • Patrick Kennedy, First Brother, Dealer.Com

Answers

Question 1

By rule “a lawyer shall not prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless ________

  • A.  The lawyer or other recipient is related to the client.   Rule 1.8(c)
  • B.  The client gives informed consent
  • C.  The client gives informed consent, confirmed in writing
  • D.  The client is advised of the benefit of seeking independent legal advice and given a reasonable opportunity to do so

Question 2

Attorney called me with an inquiry.  She expressed concern that the area of law in which she focuses is fraught with conflicts and that she often struggles to identify her client.  I shared some thoughts & referred her to material that discussed “The Tripartite Relationship.”

Identify the type of law upon which Attorney focuses.

INSURANCE DEFENSE.  For  more, go HERE.

Question 3

The Vermont Rules of Professional Conduct specifically require:

  • A.   Three way reconciliation
  • B.   An attorney’s signature
  • C.   Collected funds prior to disbursement.  Rule 1.15(f)
  • D.   All of the above

Question 4

Which is different than the others?

  • A.   A conflict of interest involving a former client
  • B.   A conflict of interest involving concurrent clients
  • C.   A conflict based on a personal interest of the lawyer.  (Unlike the conflicts in A & B, this type of conflict is not automatically imputed to other lawyers in the firm. See, Rule 1.10 (a)(1)).
  • D.  Trick question.  Each is treated the same as the others.

Question 5

Identify the document in which two groups of people who had originally intended to live in Virginia agreed to:

  • “convenant and combine ourselves together into a civil body politic, for our better ordering and preservation and furtherance of the ends aforesaid; and by virtue hereof do enact constitute and frame such just and equal laws, ordinances, acts and constitutions . . .”

THE MAYFLOWER COMPACT

Amendments to the Trust Accounting Rules

Earlier today, the Supreme Court approved a proposal from the Professional Responsibility Board to amend Rules 1.5, 1.15, 1.15A, and 8.3 of the Vermont Rules of Professional Conduct.  The amendments take effect on May 9, 2016.

The amendments are HERE.

Highlights:

  • the rules impose an affirmative requirement of monthly reconciliation of pooled-interest bearing trust accounts (aka – IOLTA accounts)
  • the rules authorize lawyers to enter into agreements for nonrefundable fee agreements provided that the lawyer complies with specific requirements on (a) notice to clients; and (b) reducing such fee agreements to writing.

Matters of Trust: do you trust your trust accounting system?

If you’ve been paying attention, you know that 11 of Vermont’s last 15 disciplinary decisions involve trust account violations.  The Professional Responsibility Board has directed Disciplinary Counsel to contract with accounting firms to conduct more audits of attorney trust accounts.  If selected, will your trust accounting system pass muster?

While the trust accounting rules aren’t exactly in plain English, here are the highlights:

  • If it’s your money, it can’t be in your trust account.  Rule 1.15(a)(1).  Exception: you may deposit your own funds into trust, but only in an amount necessary to pay service charges or fees on the account. Rule 1.15(c).
  • When you receive funds in which a client or third person has an interest, you must notify them.  Rule 1.15(d)
  • You must promptly deliver to clients & third persons funds that they are entitled to receive and, upon request, must render a full accounting of funds that you held in trust.  Rule 1.15(d).
  • If you are holding funds to which two or more people claim an interest, you must keep the funds separate until the dispute is resolved. This includes situations in which you are one of the people who claims an interest in the funds.  Do not resolve the dispute on your own.  Any portion that is not in dispute must be disbursed to the owner.  Rule 1.15(e).
  • You must not disburse funds from trust unless the funds are “collected funds.”  Rule 1.15(f)(1).  There are certain instruments that you may presume constitute “collected funds” upon deposit.  Rule 1.15(g).
  • You must instruct your bank that the interest generated on your trust account is to be paid to the Vermont Bar Foundation. Rule 1.15B(a)(1).
  • At a minimum, your trust accounting system must include:
    • a system that shows all receipts & disbursements, Rule 1.15A(a)(1),
    • a record for each client that shows all receipts, disbursements, and a running balance, Rule 1.15A(a)(2),
    • records documenting timely notice to clients of receipts & disbursements; Rule 1.15A(a)(3),
    • a single source that identifies each and every trust account that you maintain. Rule 1.15A(a)(4).

Don’t commingle.  Reconcile on a monthly basis.  And, at any given time, know how much money you have in trust and to whom every penny belongs.