Honest rogues: The 'mainly honest' lawyers who put your firm at risk

This article is not about the all-too-familiar cases of rogue lawyers who steal from clients and their firms. Instead, it is about the mainly honest lawyers who break their firms’ rules (which were put in place to protect them from themselves and each other) and take risks that their firms would regard
as unacceptable.

This is not just about the partners who refuse to comply with procedures (and against whom they are not enforced). It is also about the top rainmakers who find ways around the rules and who are granted general dispensations from them.

Matter inception

Lawyers are trained, in part, to find their way around the rules – and therein lies the problem. It starts at the client and matter inception stage. Some firms have new client procedures that require an answer to a risk assessment question – high, medium or low risk – but no one has ever seen a file opened with the ‘high risk’ label. Or, if they have, the matter proceeds with no additional controls, checks or balances in place.

Conflict checks are usually in place when opening new matters. But, does your firm monitor which checks are carried out? In one instance, a corporate partner’s files showed that the only check carried out was on the client, not on any other parties. But, who is the client? Some corporate lawyers have said they cannot identify the client until the end of the transaction: they are acting for ‘the deal’.

The excuses for not using standard engagement letters are legendary – one example is that they are existing clients (when they are, in fact, different entities). The misuse of general files is also fairly common. Other variants arise when instructions come from overseas law firms – is the client the law firm or its client?

Anti-money laundering and sanctions issues are a well-known source of friction to partners who display antagonism to compliance procedures. But they are not just a legal requirement, as they can make a valuable contribution to the assessment of client and matter risk, both at inception and as part of the monitoring and management of compliance.

Of course, client and matter risk is not only an issue at inception. Lawyers may, out of a desire to please a client, take on work that is outside their own and their firm’s experience. There have been examples of City firms whose partners indulged in areas of practice unfamiliar to them, such as personal injury or residential conveyancing, perhaps ‘smuggled in’ on a general file or on another matter. There was also a general practice firm that engaged in admiralty work despite lacking expertise in that area, with disastrous consequences.

Matter progress

Clearly, not all work is billable, but problems with fee earners who fail to record their time may be the clue to a larger problem; some firms record time even for work charged via alternative fee arrangements for management purposes.

One recent example is a lateral hire partner being exempted from time-recording rules applied to the rest of the firm. The firm now faces a multi-million-pound problem as a result of systematic overbilling of key clients over many years. Resolution of this issue requires a review of every file, contacting every client and many refunds of fees which have, in part, been shared by partners
long gone.

Overdependence on a particular client can increase pressure on a lawyer to please and compromise the duty of independence (as outlined for UK lawyers in Principle 3 of the SRA Handbook). This is not just a question of the firm’s overdependence on certain clients, but the lawyer’s own. It may be hard to avoid overdependence in practice but, because it results in elevated risk, checks and balances should be put in place, such as increased monitoring and file audits.

How can compliance officers supervise work that they do not understand? It may be difficult and the partners may be willing to take their chances, but the difficulty in supervising the work should not be regarded as a reason for taking no steps to monitor it at all. If a partner cannot explain the work to his compliance officer, how would he explain it to a judge, who may have no relevant expertise or, worse still, to a jury? A good lawyer undertaking a file review should be able to ask the right questions to identify whether a transaction ‘stacks up’ and makes sense, even if he does not know the intricacies of, for example, a tax statute.

Consider the recent American case of a tax lawyer who was sentenced to eight years’ imprisonment and fined US$190m
for tax scheme work. She was a partner in Jenkens & Gilchrist, a firm which rose to national status, almost entirely due to tax shelter work, which grew to constitute almost a third of the
firm’s revenue. The firm collapsed following action by the
Internal Revenue Service.

Some of the complex transactions tied to Enron’s demise included those which had only an accounting not a business purpose. In one case, a $500m project was designed to straddle a financial year-end to produce additional cashflow.

In the UK, the Solicitors Regulation Authority is raising its game in identifying the role of lawyers as gatekeepers of their clients’ behaviour, relying in particular on Principle 6, which requires lawyers to “behave in a way that maintains the trust the public places in you and in the provision of legal service”.

However, cases such as the above example also carry a liability risk by assisting a breach of fiduciary duty by the client’s officers. Aggressive tax schemes involving transactions with no commercial purposes, such as some film financing, might also give rise to such problems.In his book Eat What You Kill: The Fall of a Wall Street Lawyer, Milton Regan provides an engaging account of John Gellene, a star partner in a leading Wall Street firm who committed perjury by failing to comply with his duty to disclose a conflict of interest to a US bankruptcy court in a major corporate insolvency. He was imprisoned and disbarred.

The case illustrates how a lawyer who would not dream of stealing can cross the threshold of criminal activity. Despite his success, Gellene had been afraid of failing to meet billing targets. He was known for non-compliance, generally being late at lodging his time records. Regan suggests that, by getting into bad habits on petty issues, Gellene may have started down an ‘ethical slippery slope’, increasing his wrongdoing incrementally, so that when he ended up lying to the court, it did not strike him as
a momentous step to take.

Identifying rogues

Rogue lawyers are often star rainmakers and high billers; they are perceived as epitomising success. They are often lateral hires, partners who have not grown up within the culture of the firm and who may also perhaps have outlived the willingness of their previous partners to tolerate their non-compliance. But, what else can compliance officers do to identify them?

First, review your firm’s client engagement process.
Risk is substantially reduced with the right lawyer doing the right
type of work for the right client and on terms which are agreed. Look closely at your firm’s supervision systems: are they proactive? While there may be no requirement in conduct to supervise equity partners, everyone should be accountable to someone.

A file review can deliver valuable results, despite the protestations of those who believe their files are too big or complex to review. It may not identify everything, but risk and compliance procedures are there to minimise risks, not eliminate them. Do not be put off by the complexity of your firm’s files – it may make the task more challenging, but a good file auditor will relish the challenge far more.

Cultural resistance to a review of partner files is not uncommon, despite the indication in guidance note (iii) to Rule 8 of the SRA Authorisation Rules that it should form part of the compliance process. If you encounter such resistance, ease your partners into the concept by allowing them to choose the files. That may seem counterintuitive for an audit process, but they may not realise that they are non-compliant. It raises the game for the file auditor substantially, but it is better to audit some files than none. You can always review some additional files electronically for additional assurance.

Checking for accounts compliance can help too. Pay attention to matters which are finished but still have small balances on account, possibly suggesting loose ends not tied up, and
perhaps meaning limitation periods have not started running.
Many lawyers lose interest when they near the end of a case; failure to finish things off completely is a frequent failing discovered during an audit. Rogue lawyers are particularly vulnerable to this as they are too busy, off doing the next deal.

Transfers between clients and matters may indicate areas ripe for examination. They may of course be perfectly normal, a common example being a sale and purchase of property. But, such transfers may also indicate something amiss – not necessarily dishonesty (though this have featured in most multiple dishonesty cases), but perhaps some other breach such as a conflict, or even the firm providing banking facilities to a client.

Unpaid bills and unbilled work-in-progress may also be worthy of investigation. Watch out particularly for unpaid bills around the year-end followed by credit notes, which may have been engineered to achieve targets. As Regan points out, consider whether your organisational goals are so unrealistic that they effectively encourage illegal behaviour in order to meet them.

Educating rogue lawyers and explaining why the rules are there – to help save them from something they may subsequently regret – may be part of the answer to this problem but, in many cases will, regrettably, fail. Rule breakers may be hard to control but, ultimately, they may have to go, however profitable they may appear to be.

Francis Dingwall, Frank Maher and
Sue Mawdsley are partners at Legal Risk
(www.legalrisk.co.uk). This article is
drawn from their Managing Partner report The Compliance Calendar Toolkit for Law Firms, published in May 2014. Pick up the report today for only £60 – email publishing@ark-group.com or call
+44(0) 207 566 5792 quoting code KF-2125-MP to place your order.