Scary fraud targeting attorneys

Lawyers are being victimized with common schemes that recall the e-mail fraud schemes from years past.  It is very important for attorneys to be aware of this scam.  It often appears to be legitimate and profitable relationship.

Basics of the fraud:

The schemes are relatively simple check frauds.  Typically, the attorney is contacted by someone purportedly acting on behalf of a foreign corporation that is owed money in a relatively simple collection matter by an American debtor.  The attorney is contacted almost always by e-mail.  The attorney is hired, often with the promise of an easy and large contingency fee recovery.  The purported client will execute a retainer agreement if asked.  Either at the beginning of the representation or shortly thereafter, the attorney is told that the debtor will pay the debt and issue a cashier’s check to the attorney.

Variations of the scheme include acting as local counsel in a divorce settlement where the “debtor” is a rich spouse that needs to make certain scheduled debts, or reminiscent of the Nigerian scams of days past, the client claims to be a wealthy dignitary or royalty who needs help getting money out of a foreign country.  In all cases, the attorney must simply receive the funds and then wire them to a designated account. 

In all cases, an attorney will receive a forged cashier’s check purportedly drawn on a familiar bank.  The attorney is instructed to deposit the check in the lawyer’s bank account and wire the funds to the designated account, minus of the course the generous contingency or other fee.   

Typically, the attorney’s bank will make the funds “available” to the attorney prior to the time the Bank confirms that the check is legitimate and the funds collected.  The fact that the Bank makes the funds available is for the depositor’s convenience and consistent with the deposit contract.  Consequently, when the fraud is discovered and the cashier’s check rejected, the Bank is permitted to reverse the transaction and credit given to the law firm.  Confirming the funds are collectible can take a week, whereas the wire from the attorney’s trust account happens nearly immediately.   By the time the fraud is discovered, the money and client are gone.

If a common trust account was used, the Bank will recover the wire transfer from other, innocent client’s funds.  The attorney must make good on the removed money or be in violation of bar rules and face liability to clients.  If a specific account were created, the Bank will demand repayment from the attorney.  The attorney is legally obligated in most cases to repay the overdraft under the depositor agreement.  Most cases involved hundreds of thousands of dollars of exposure.

To add insult to this injury, the claim may not be covered by E&O insurance.  Several opinions throughout the country have litigated the issue of coverage in these cases.  The argument is typically over the issue of whether the check funding process is providing “professional services” and “ministerial duties that occur in all types of business.”  In other words, is the deposit of funds in a trust account and the payment of those funds from a forged check a liability arising out of “professional services.” 

The decisions are now mixed.  A discussion of these important coverage decisions will follow next week.

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