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 Answers #215

December 7, 2020December 7, 2020Michael

For the wonderful duration of the first 2 or 3 seconds that I was awake this morning, I thought it was Sunday.

Reality bites.

Friday’s questions are here. The answers follow today’s Honor Roll.

Honor Roll

Karen Allen, Esq
Matthew Anderson, Pratt Vreeland Kennelly & White
Penny Benelli, Dakin & Benelli
Geoffrey Bok, Stoneman, Chandler & Miller
Beth DeBernardi, Administrative Law Judge, VT. Dept. of Labor
Alberto Bernabe, Professor, John Marshall Law School
Erin Gilmore, Ryan Smith & Carbine
Benjamin Gould, Paul Frank + Collins
Glenn Jarrett, Jarrett & Lutjens
Elizabeth Kruska, President, VBA Board of Managers
John Leddy, McNeil, Leddy & Sheahan
Pam Marsh, Marsh and Wagner
Jack McCullough, Project Director, Vermont Legal Aid Mental Health Law Project
Jeffrey Messina, Bergeron Paradis Fitzpatrick
Herb Ogden, Esq.
Jay Spitzen, Esq.
Jonathan Teller-Elsberg, Hershenson, Carter, Scott & McGee
Thomas Wilkinson, Cozen O’Connor
Peter Zuk, Gale & McAllister

Answers

Question 1

It happened again. So, fill in the blank.

A change to wiring instructions should put a lawyer on alert to a potential _________:

A. conflict of interest.
B situation in which the client is not competent to make informed decisions about the representation.
C. violation of the rule that prohibits unreasonable fees.
D. trust account scam.

I’ve blogged often on this. Indeed, it’s been more than two years since this post in which I quoted several industry experts warning lawyers to confirm changes to wire instructions. The post included a quote from Vermont’s own Andy Mikell:

“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.”

Question 2

Lawyer called with an inquiry. I answered, “you need to make sure to avoid noisy ______________.”

Given my answer, it’s most likely that Lawyer called to discuss:

A. withdrawal.
B. clients.
C. judges.
D. technology

Last week, I blogged about “noisy withdrawal” here. Note: several readers mentioned that there’d been a problem with noisy technology. That’s not something I knew about.

Question 3

I often refer to the 7 Cs of Legal Ethics. A rule involving one of the Cs includes a comment that reads:

“A lawyer should adopt reasonable procedures, appropriate for the size and type of firm and practice, to determine in both litigation and non-litigation matters the persons and issues involved. Ignorance caused by a failure to institute such procedures will not excuse a lawyer’s violation of this rule.”

Which C?

Conflicts. This language appears in Comment [3] to V.R.Pr.C. 1.7.

Question 4

When a lawyer holds funds in trust and in which two or more persons claim interests, a rule specifically requires the lawyer:

A. to resolve the dispute.
B. to keep the funds separate until the dispute is resolved.
C. to promptly distribute all portions that are not in dispute.
D. B & C. V.R.Pr.C. 1.15(d) and (e).

Question 5 & Bonus

There’s a lawyer who has been in the news a lot lately. The news has included reports that disciplinary complaints have been filed against the lawyer in at least five jurisdictions.

A few weeks ago, the lawyer held a press conference in which the lawyer analogized a client’s claims to a famous scene in this blog’s favorite legal movie, My Cousin Vinny.

Name the lawyer.

Bonus: identify the specific issue that both the lawyer and Vinny argued rendered witnesses unreliable.

Rudy Giuliani. The common issue was the witness’s ability to see from distance. The Hill has the story here.

mycousinvinny2

Twofer

July 23, 2020July 23, 2020Michael 1 Comment

Two days late, but a two-fer nonetheless.

Beware Changes to Wiring Instructions!

Here’s a post in today’s ABA Journal: BigLaw firm sued over $3M wire transfer to fraudster’s account. But for involving $3 million and a so-called “Big Law” firm, the scam was garden variety. No different than one that often targets Vermont lawyers, especially real estate practitioners, it was predicated on a change in wiring instructions.

As I’ve blogged here, here, here, here, and here, a change in wiring instructions should set off alarm bells. Further, if the change in wiring instructions comes by email, I suggest confirming the change by some other method than responding to the email.

Andy Mikell is State Manager & Title Counsel at Vermont Attorneys Title Corporation. In a prior blog, I used this quote from Andy to highlight the importance of using two-factor authentication to confirm changes to wiring instructions:

- “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.”

Big Law should follow this blog.

File Retention & Delivery

Over the past few weeks, I’ve heard from a few lawyers on the issue of file retention. Each started by saying “I have to keep the file for 6 years, right?”

Wrong.

The Vermont Rules of Professional Conduct do not specify a file retention period and never have. Rather, V.R.Pr.C. 1.16(d) states that “upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests, such as . . . surrendering papers and property to which the client is entitled.” In my opinion, the file is among “the papers and property to which the client is entitled.” So, as I’ve stated at CLEs and in this space, Deliver The File.

Nothing in Vermont’s rules affords a lawyer a 6-year window to deliver the file. Nothing in Vermont’s rules conditions file delivery upon the client’s request. Nothing in Vermont’s rules authorizes a lawyer to destroy an undelivered file 6 years after the representation ends.

Indeed, in 1997, the VBA’s Professional Responsibility Committee issued Advisory Ethics Opinion 97-08. While issued under the old Code of Professional Responsibility, the opinion remains helpful. The Committee’s conclusion is almost exactly what I might say at a seminar:

“We cannot state that there is a specific time during which a lawyer must preserve files and, beyond which, he or she is free to destroy them. The sound exercise of good professional and business judgment should provide answers to most storage and/or retention questions that may arise.”

From there, the Committee listed factors a lawyer should consider prior to destroying a file. Again, many remain relevant today. In no particular order, here are thoughts & tips I’ve shared with lawyers:

it’s okay to go paperless. But don’t destroy any important originals.
once delivered, there’s no requirement to keep a copy of the file. But your liability policy might require you to, and it might be helpful to have a copy if a disciplinary complaint or malpractice claim is ever filed. Also, title insurers sometimes require agents to maintain copies of files.
cull files for important originals before destroying. Especially if even one file might contain a will.
Absent a client’s consent, anything that the client gives to the lawyer must be returned.
give notice before destroying files. If not in the representation agreement itself, then again – even by publication – years later.
Different types of cases require different retention periods. For more, see this opinion from the Kentucky Bar Association.
A lawyer MUST keep records of client funds & property for 6 years after the termination of the representation. So, keeping a log of client files is a good idea.

For more, in 2018, I posted File Retention: How Long? Let’s see if anyone is still reading. In the 2018 blog, I wrote:

“To paraphrase another Irish guy, it’s not uncommon for me to hear a frustrated lawyer say something like:
- ‘I can’t believe the files in here. I can’t close my eyes and make them disappear! How long? How long must I sing this song?’”

Who is the “Irish guy” to whom I referred in the 2018 post?

And with that, I’m calling it a Thursday. Have a great night!

Screenshot 2020-07-23 at 6.30.56 PM

Trust Account Tuesday: 2 new CLE videos

April 7, 2020April 10, 2020Michael

Originally posted on April 7. Updated on April 10 to add third video: Contingent Fees, Referral Fees, and Fee Sharing

*********

CLEs on the trust accounting rules are not my favorite. Yet, they’re critical. Recording them in my garage makes it seem easier to present an otherwise dry topic. So, given the topic’s importance, that’s what I’ve done.

Today, I recorded the final installments of the Garage Series on Trust Accounting:

Part 3 (33 minutes) focuses on Rule 1.15 and the general prohibition against disbursing from trust without collected funds. Meanwhile, part 4 (35 minutes) addresses how to handle fees paid in advance, cautions against even thinking about “borrowing” from trust, and shares tips on how to identify common trust account scams. Each includes a screen share of my notes and an interactive quiz.

I have not reviewed or edited the videos. Watching will be as if you showed up to hear me speak. You get what you get.

Enjoy.

Prior videos in the Garage Series on Trust Accounting:

Dollar Sign

Trust Accounting Tips

September 24, 2019September 24, 2019Michael

My drumbeat continues! In my defense, it’s been 15 whole days. Plus, back then, most of you probably still had too much summer on your mind to click on a trust accounting blog. So, here we go again.

Over the years, more than one lawyer has told me the trust accounting rules are “too complicated.” Hence, my first post of 2018: Don’t Overcomplicate Trust Accounting.

A few moments ago, I came across a post on the Attorney at Work blog: Avoiding Common Trust Accounting Errors for Well-Intentioned Lawyers. The post does a nice job uncomplicating trust accounting with five simple tips:

reconcile monthly
keep clients informed
set up appropriate credit card processing system
be the only signatory
reduce personal funds in trust

Great tips. With the respect to the final, remember, under Vermont’s rules, a lawyer may keep the lawyer’s own money in a client trust account, “for the sole purpose of paying service charges or fees on that account [and] only in an amount necessary for that purpose.” V.R.Pr.C. 1.15(b). As I blogged here:

“Don’t guess. Figure out what the normal charges and fees are or are likely to be and deposit that amount. Randomly tossing in $500 or $1000 could lead to discipline.”

Anyhow, it’s never a bad idea for a quick refresher on the trust accounting rules. The Attorney at Work post above is a good start. Also, last spring, I embarked upon a Trust Account Tuesday quest in which I posted tips on trust accounting every – you guessed it – Tuesday. I hoped the posts would serve as a companion to the Professional Responsibility Program’s Guide to Managing Client Trust Accounts. The entries:

And, some posts that weren’t part of last spring’s Trust Account Tuesday trope:

Finally, my posts on scams:

Maybe the rules are complicated. But the general notion isn’t:

know whose money you have;
how much; and,
keep it separate from yours.

Dollar Sign

Trust Account Scams Continue

September 10, 2019September 10, 2019Michael 2 Comments

Since last Wednesday, three different firms from three different parts of the state have contacted me to report having been targeted by trust account scams. I don’t have much to say that I’ve not already shared. But I’m posting again, hopefully to plant a kernel of recognition that will pop if you’re ever targeted.

First, I’ll share my prior posts. Then, I’ll share the scenarios lawyers reported to me over the past week. Finally, I’ll conclude by sharing a suggestion that I made to one of the lawyers who reported a scam to me. It’s a suggestion that makes me feel paranoid.

My prior posts:

The scenarios:

Scenario 1

Firm agreed to represent an out-of-state purchaser (“OOSP”). OOSP sent Firm a check for the purchase price. It was a significant amount. Firm deposited the check into its pooled interest-bearing trust account (“IOLTA”). By definition, Firm’s IOLTA contains funds that belong to other clients.

OOSP assured Firm that the purchase & sale agreement would soon follow. All communication was by email

Last Wednesday, OOSP emailed Firm. OOSP reported a “family emergency” that required cash to address. OOSP asked Firm to wire $40,000 of the funds Firm was holding for the purchase.

Firm had still not received the purchase & sale agreement. The check had only been deposited the day before. OOSP refused to communicate with Firm in any manner other than email or to provide any detail beyond “family emergency.”

Yes, there’s a rule that requires a lawyer promptly to disburse from trust funds to which a client is entitled. There’s also a rule that requires Firm to safeguard the funds Firm is holding for other clients. Here, then, the circumstances strike me as such that Firm must wait for confirmation that the funds have been finally credited to the IOLTA. It will not surprise me if Firm eventually learns that the check it received from OOSP was a fraudulent check and that there is no P&S agreement to buy a Vermont property.

Scenario 2

Today, a lawyer reported this.

For a while now, an out-of-state client (OOSC) has been emailing Lawyer asking Lawyer to represent OOSC on a contingent fee basis. OOSC’s emails include several typographical errors.

Today, and without Lawyer even yet having agreed to represent OOSC, OOSC’s Adversary emailed Lawyer. Adversary informed Lawyer that Adversary was ready to settle and wanted to send a check. Adversary’s email included the same typographical errors as OOSC’s.

If you’ve not yet recognized the scam, here’s what likely would’ve happened had Lawyer not recognized it:

Lawyer would’ve communicated Adversary’s settlement offer to OOSC;
OOSC would’ve accepted;
Lawyer would’ve received a check from Adversary and deposited it into Lawyer’s IOLTA;
Lawyer would’ve sent OOSC a trust account check for OOSC’s share;
Lawyer’s Bank would’ve notified Lawyer that Adversary’s check was fraudulent;
By then, OOSC would’ve deposited the trust account check and funds belonging to other clients would be gone.

Scenario 3

This one, also reported today, might be the most concerning.

Firm represents Buyer in the purchase of property that is in Vermont. Buyer is out-of-state but is known to Firm. Firm has confirmed the transaction, worked with Seller’s attorney (an attorney the Firm knows well), and worked with a local realtor. The plan was that Buyer would wire funds to Firm later this week.

Today, Buyer called Firm. Buyer asked why Firm had sent an email with new wire instructions. Firm replied that it had not. Firm asked Buyer to forward the email. Buyer did.

Before today, Buyer and the Firm lawyer handling the transaction had communicated by email. Firm lawyer had used a firm account: lawyer@firm.com The email to Buyer that purported to include new wire instructions was from lawyer@gmail.com Fortunately, Buyer’s antennae went up upon receiving a last-minute change in wiring instructions from an unfamiliar email address.

The concern here is that there’s been a breach. There’s no bank involved. But for a small down payment from Buyer, Seller is financing the sale. So, it appears that either the realtor, Firm, or Seller’s attorney has been breached.

Finally, I know this will sound paranoid, but I’m compelled to include it. In this last scenario the lawyer who reported it told me that Buyer now intends to send a check. That’s fine, but given that Buyer is out-of-state, it will likely result in the bank putting a hold on the check, which might impact the closing. That’s for all involved to work out. What’s for me to add is this:

The lawyer also told me that Firm informed Buyer that if wire instructions change, Firm will not notify Buyer by email, but will call. Again, I know this will seem paranoid, but I suggested to the lawyer that Firm and Buyer arrange a code word that will be included if such a call is made.

Why?

It wasn’t too long ago that this happened.

Lawyer represented Buyer at a closing. At the closing, Buyer’s Lawyer gave a trust account check to Seller. On the way home from the closing, Buyer’s Lawyer received a phone call that his Caller ID showed as “Seller’s Attorney.” Buyer’s Lawyer answered the call.

The caller said that she worked in Seller’s Attorney’s office, that their client couldn’t make it to the bank to cash the check, and that their client would prefer a wire. The caller promised that they would rip up the check if Buyer’s Lawyer wired the funds. Buyer’s Lawyer agreed. The caller provided wire instructions. Upon returning to the office, Buyer’s Lawyer wired the funds as instructed.

Days later, Buyer’s Lawyer noticed that the check had been cashed. Buyer’s Lawyer called Seller’s Attorney. Seller’s Attorney said something like “we never called you to ask for a wire.” Eventually, all involved realized that Buyer’s Lawyer had been scammed; a scam so sophisticated as to have included a phone call that, on Caller ID, appeared to have come from Seller’s Attorney.

That’s why I suggested the code word.

scam-alert

Learn to identify trust account scams

January 22, 2019January 23, 2019Michael

(Updated on January 23)

The annual Vermont Bar Association YLD Thaw Bowl was last Friday. Here’s a question that I used:

During a segment of a CLE, I shared my thoughts on two things:

last-minute changes to wire instructions; and,
a prospective out-of-state client who claims to be owed a debt by a Vermonter, and who only communicates with you by e-mail

What general topic was I discussing during that segment of the CLE?

It struck me that many were unfamiliar with the answer: trust account scams.

A lawyer has a duty to safeguard client property & funds. To me, the duty includes employing reasonable safeguards against trust account scams. Is falling for a scam an ethics violation? Not necessarily, but it might be.

I’ll share two scenarios.

Scenario 1

Imagine this: you have a personal checking account at a local bank. The bank notifies you that your money is gone. You are shocked. You learn that someone contacted the bank and directed the funds in your account to be wired to a different account. Your initial reaction might be “and you didn’t check with me to confirm!?!?”

That’s the “last-minute changes to wiring instructions” scenario. Now, flip the scenario: the missing money is a client’s that you were holding.

Here are my posts on the topic:

Granted, the scammers are sophisticated. Often, the change in wiring instructions will appear to have come from the client or opposing counsel.

I can’t stress enough that you can’t be too safe. The 30 seconds you take to call to confirm might be well worth it. When you do, initiate the call to a number that you already have on file. Don’t call a new number that appears in the change to the wiring instructions. Don’t make the change based on a call to you.

Or, consider moving to client portals. To learn more about them, please read Nicole Black’s post at MyCase.

If you think I’m being too cautious, please read this. It’s a post in the ABA Journal about an associate who was scammed into authorizing a $2.5 million disbursement from trust by a last-minute change to wiring instructions. A court order in the ensuing insurance claim is here.

And it’s not just me who is urging caution. Andy Mikell is State Manger & Title Counsel for Vermont Attorneys Title Corporation. I sent him the story of the $2.5 million scam. Here’s part of his response:

“An even newer approach involves the bad guys intercepting communications and then sending FAKE payoff letters to the Closing Attorney so that when seller’s mortgage is paid from the closing, the payoff money goes immediately to the wrong place. Poof!
So, in addition to telling folks to ‘trust no email’, I’m instructing our members to essentially “trust no payoff letter” either. It’s nasty out there but the scheme you forwarded should be preventable. Also, yes, we are telling folks to pay serious attention to their PLI policies. More offices are getting social engineering policies which are designed to insure against the wire scam.”

Andy also sent this article, one that goes into more detail on fraudulent mortgage payoff letters.

Scenario 2

The second scenario involves a scam that has been around even longer. There are many twists, but a few core ingredients:

a prospective client contacts you electronically;
the prospective client claims to be owed money by someone who is in Vermont;
the prospective client wants to hire you to collect the debt;
the prospective client never meets with you or contacts you by telephone.

It’s happened numerous times in Vermont. Usually the prospective client claims to have sold a product to a Vermonter. I’m also familiar with a version in which the prospective client claimed to be a Vermont Guard member who had been deployed out of the country, and whose ex-spouse had failed to pay the appropriate share of the proceeds of the sale of the marital home following a divorce. The prospective client asked the lawyer to enforce the terms of the divorce order.

No matter the variation, the scammers are good. They’ll send you what appear to be legit court orders, contracts & bills of sale. They will have created fake websites, both for themselves and the debtors. So, when you do some cursory research, it will look as if the debtor actually exists and is located in Vermont. Not only that, when you contact the debtor, someone will respond and acknowledge the debt.

Here’s where the rubber meets the road.

Shortly after making contact with the debtor, FedEx or UPS will deliver a check to your office. You will deposit the check into trust, then wire the “client’s” share. Weeks, if not months later, your bank will inform you that the check from the debtor was a fraudulent check. Quite likely, money that belonged to other clients – who are real – will no longer in your trust account.

Magically, the long outstanding debt resolved as soon as you got involved. If it sounds too good to be true, it probably is.

As I argued in this post, it strikes me that this scam is so well-known that falling for it violates the duty to take reasonable safeguards to protect client funds.

Taking the time to learn to identify trust account scams is worth it.

scam-alert

	Monday Morning Honor… on Five for Friday #258
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	Monday Morning Honor… on Five for Friday #258
	Geoffrey Ransom on Virginia Lawyer Reprimanded fo…
	Virginia Lawyer Repr… on A quick recap of the 7 Cs of L…
	rgrunds on Monday Morning Honors #25…
	Monday Morning Honor… on Breaking News Alert!! In fact…

Ethical Grounds

The Unofficial Blog of Vermont's Bar Counsel

trust account scams

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

Monday Morning Answers #215

Twofer

Trust Account Tuesday: 2 new CLE videos

Trust Accounting Tips

Trust Account Scams Continue

Learn to identify trust account scams