The author, an English solicitor, was once in partnership with a man who turned out to be a fraudster. He describes the experience, which forms the basis of his novel, and the lessons to be learned
“What do you do if you suspect that your partner is misappropriating clients’ monies?” It is not a question that most solicitors think about or have need to think about during their professional career. But for a few it is an agonising question. There are no guidebooks, so far as I know, that tell you how to proceed. Certainly, in my case in 1987 there were none. You are very much on your own. Indeed, as I write this I remember having a heated discussion over the telephone with the then chief executive of the Law Society of England & Wales when I demanded that I got a definitive ruling to two contradictory answers that the Society’s Ethics & Guidance department and the Solicitors’ Complaints Bureau had given me to a question that I had asked.
I am sure that my senior partner never foresaw that his career as a solicitor would end in disgrace in prison. Some 20 years older than me, he was a dignified, kind, well-respected, hardworking solicitor. Together, through hard work and commitment, we had revived an old established firm which had been in serious decline under the previous partners. I always understood that my partner had private means, and he was content to leave some £50,000 (then a large sum of money) in his capital account. I had no reason not to trust him. I did trust him. Every year a large London firm of accountants audited our accounts. There were no problems.
My partner did not take many holidays, perhaps two or three a year, and then only for a week at a time. He liked to keep on top of his work. And he was always in the office by 8am to open the post, whereas my routine was to arrive at 8.45am.
So, it was a considerable surprise for me when, on the second day of his holiday, his secretary reported to me that clients of his had telephoned her to enquire about when they were going to receive the sale proceeds of their house. The file could not be found, and there was no money in client account. This set off a rollercoaster of events, which form the core story in my novel entitled Trust Betrayed – events which were exciting, bewildering, horrifying and humiliating all at the same time.
I was fortunate. On principle, we had always paid the extra premium to eliminate the excess on our professional indemnity policy. Although for some weeks I had to wait to learn whether insurers would meet all the claims, they did so. Until then I was uncertain whether I faced bankruptcy. But not everything was covered by the policy, and I suffered a net loss of £72,000. My firm lost a lot of probate work. It took some four years of hard work for the firm to recover its balance. It took longer than that for the humiliation that I felt to burn itself out.
During that recovery period I received a writ seeking £1,000,000 of damages for loss sustained by the final fraud outlined in my novel. Our limit of indemnity was £500,000. Again, I went through the trauma of facing bankruptcy. Fortunately, the case collapsed and was settled for £70,000-odd.
Although I was the protagonist in discovering and exposing the frauds, it took a long time for me to accept that the man who had been my partner and a friend could perpetrate the frauds that he did. It was entirely out of character. The frauds required a cold devious cunning, and sheer audacious nerve, all of which was outside his character as I knew it
What had he been doing? He ran from home a second set of accounts through his own private bank account. So, when he decided to defraud a client, he transferred the sum from our firm client account to his private bank with a handwritten note directing the bank to pay the money into his private bank account. The firm’s client account balanced. The accountants did not pick it up. He then repaid with interest the client who was pressing him most. Teeming and lading: robbing Peter to pay Paul. But the Ponzi effect of what he was doing meant that his operation was spiralling out of control. It was only a matter of time before the whole edifice came tumbling down. My intervention merely expedited it.
The details of the exposure of his frauds are to be found in the novel. What surprised me was that no client approached me to complain that they had not received their money.
Were there lessons to be learned? The most important one, I think, is the opening of the post. There should be a rota between partners on who opens the post. We did not have one. All this, of course, happened before the age of the internet. There should be a system for inspecting emails.
Second, the accountants should demand to see all files, and do a spot check on a lot of them. Half a dozen files per fee earner is not enough.
Third, the payment out of client account must have the name or account number of the client or proper recipient on it. The discipline here is that it puts the firm’s accounts office on notice.
Fourth, the firm must as a matter of policy require every fee earner, including all partners, to take a minimum holiday period of 10 consecutive working days at least once a year. (A longer period is safer.) A problem is likely to raise its ugly head in that period.
Fifth, ensure that your client care letter makes it clear to clients that if they have a problem they must raise it with another partner in the firm, not with the offending partner.
Sixth, train every member of the staff, secretaries, receptionists, accounts clerks as well as fee earners, to report any activity which seems suspicious to them to another partner on a “non-attributable” basis. The culture should be that no one should take offence at being investigated, but accept that the practice protects everyone.
Seventh, act fast and decisively on any suspicion.
Eighth, do not delay in reporting any misappropriation of client monies or other serious breach of solicitors’ accounts rules or false undertakings to the professional regulator and the insurers, and if appropriate to the police. Delay can have very serious consequences for you and your firm.
Finally, remember Ronald Reagan’s maxim: “Trust but verify”.
You may have to act.
Richard Wrenn is a retired English solicitor. His novel Trust Betrayed is reviewed here.