Solo attorneys and small law firms are routinely victimized by perpetrators of attorney trust account scams, don’t be one of them.
Lawyers are conditioned not to ask questions when new clients fall in our lap.
The perpetrators of these scams have figured out that solo and small firm attorneys are under intense pressure to produce new business. Without it, we go broke.
For many of us, it’s not uncommon for a paying client to land in our lap. Inexplicably, sometimes the phone just rings or a client finds you through your website.
So, when we receive an unsolicited email that promises significant compensation for a relatively basic matter, why question your good fortune? For many of us, we see a few legitimate cases like this every year.
Solos and small law firms have little or no financial controls.
The scammers seem to have figured out that solo attorneys and small law firms have very few financial controls, putting them at greater risk to be victimized.
At a bigger law firm, when an attorney needs client funds disbursed from IOLA, the attorney would first have to submit a check request to accounting. The accounting department then verifies the availability of funds with the bank. Typically, an experienced legal accounting staffer would not permit funds to be transferred until all the funds from a check have cleared. Once funds are confirmed as available with the bank, only then will accounting send the check request to a partner or finance committee for final review, approval and signature.
This process can sometimes take days, increasing the likelihood that someone from the firm or the bank discovers the scam. By comparison, the solo attorney merely has to make one call to the bank and the funds are gone.
One of the perks of solo law practice is the lack of bureaucracy, but the downside is greater exposure to the risk of bad financial decisions.
Solos and small firms can be isolated from legal peers and may not be “in the loop” about industry developments like IOLA scams.
Finally, small firm attorneys can be easy targets because they are frequently “out of the loop” on industry developments. At bigger firms, by virtue of having so many attorneys and many layers of management and staff, attorneys are better equipped to stay on top of legal industry news like these IOLA scams.
For the self-employed small firm attorney, it’s hard enough to keep up with changes in the law, marketing their practice, writing briefs, preparing for trial and making court appearances (sometimes all at the same time). Industry developments are sometimes overlooked.
The solo attorney who is not active in his or her bar association, or does not otherwise have a network of attorneys through their office arrangement like you would find in shared law office space like Law firm Suites, may not get timely access to legal industry developments like these scams.
All of these factors combined make small firm attorneys and solos easy targets.
Consequences of being victimized by a trust account scam.
There are two very significant consequences for lawyers who become victims of the IOLA scam:
1. Disciplinary Liability
Distributing the “client’s funds” may result in your trust account being overdrawn. As you know, banks are required to automatically report to the Bar any attorney with an overdrawn trust account.
Even if the wire does not result in the account being overdrawn, that just means that you will have sent another client’s funds to the perpetrators; an act that you must report to disciplinary authorities or risk losing your license to practice.
Either result will trigger a disciplinary investigation and audit of your trust account records. It may also result in disciplinary action for this incident, and for any other deficiencies the auditors find in your trust account record keeping.
2. Financial loss may not be covered by your professional liability insurance.
Even though you were the victim of a fraud, your bank will likely demand the return of funds wired to the “client.” Because the amounts can be in the hundreds of thousands of dollars, you may not have the means to do so.
To add insult to injury, your malpractice insurer will not likely cover the loss.
In the case of Bank of California, N.A. v. Opie, 663 F.2d 977,988 (9th Cir. 1981), the Ninth Circuit held the status of a person as a “professional” within a particular field does not mean that any activity by that person constitutes the performance of “professional services” subject to coverage under a malpractice policy. According to the court, “to be covered, the liability must arise out of the special risks inherent in the practice of the profession.”
In the case of the IOLA scam, in many states, endorsing, depositing and disbursing checks does not constitute “special risks inherent in the practice of the profession.” See, for example, Fleet Nat’l Bank v. Wolsky, Civil Docket CV2004-05075 (Mass. Superior Ct. 2006).
Therefore, your malpractice insurance will not likely cover the loss, and you will be responsible for repayment.
IOLA scams play off the solo and small firm attorney’s need to keep a full pipeline of cases.
The scams have consequences that go far beyond hurt pride. If you do not perform your due diligence, you could end up appearing before your Bar’s disciplinary committee, in civil litigation with your bank, or in bankruptcy court.
The easiest thing to do is to proceed with caution with every easy money case, and never wire money from your attorney escrow account without written acknowledgement from the bank that all funds from a check are clear and that there will be no issues with the deposited check (or the funds it represents).