Client Fraud and the Lawyer

Posted on Categories Criminal Law & Process, Legal Ethics, Legal Practice, Uncategorized, Wisconsin Law & Legal System

 

As the disaster in the financial markets continues to unfold, greed and avarice – the usual suspects – are being overshadowed by pervasive fraud as a prime mover.  We have, of course, the infamous Bernie Madoff and now the “mini-Madoffs” upon whom we can heap large helpings of blame, but deceit, misrepresentations, and fraud seemingly resonate throughout the markets, as illustrated by the subprime scandal, the mortgage mess, and the flood of worthless consumer debt.  And what was the role of lawyers in all this?  Financial transactions of this sort inevitably involve lawyers at some stage.  Investigations and lawsuits may soon give us a clearer picture of the role lawyers may have played in exacerbating the nightmare, but the question for today is whether lawyers could have, or should have, acted to prevent any of this.  And my focus is not Sarbanes-Oxley or securities regulations, but on the fundamentals of lawyers’ professional responsibility.

Lawyers are not permitted to “assist” or “further” crimes or frauds committed by their clients.  To do so – provided anyone finds out – eviscerates the venerable lawyer-client privilege and exposes both lawyer and client to civil and criminal remedies. This is comfortably familiar and uncontroversial.  But what of the lawyer who is aware of a client’s fraud but who arguably has done nothing to assist or further it?  Assume further that the fraud is on-going and not a past act.  What is the lawyer’s duty or professional responsibility, especially considering that lawyers are enjoined not to disclose client confidences or privileged communications without client consent (and the reality is that few clients will approve of their lawyer’s whistle-blowing)?

Wisconsin is one of just two states (New Jersey is the other) that impose a mandatory duty on lawyers to prevent continuing fraud by a client.   Specifically, SCR 20:1.6(b) provides as follows: “A lawyer shall reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary to prevent the client from committing a criminal or fraudulent act that the lawyer reasonably believes is likely to result in death or substantial bodily harm or in substantial injury to the financial interest or property of another” (emphasis added).     One authoritative legal source that discriminates between “criminal” and “noncriminal” fraud (an interesting distinction itself), reports the following: only 2 jurisdictions (Wis and NJ) require mandatory reports, 24 leave it to counsel’s discretion, 23 forbid disclosures, and 2 require the lawyer resign!  (The tally for “criminal fraud” is equally enlightening: only 4 require disclosure, 40 permit it at counsel’s discretion, and 7 forbid it.)

The scope of the Wisconsin lawyer’s mandatory duty to prevent client fraud is uncharted.  The rule has been part of Wisconsin law since the adoption of the present rules.  Several years ago the supreme court and a distinguished committee implemented a number of significant revisions but left SCR 20:1.6(b) untouched.  Unclear is when the duty is triggered.  When does a “risky investment” become a fraud?  What exactly must the lawyer know, or be aware of, before she is required to act?  How much monetary damage constitutes a “substantial injury” to a “financial interest”?  Does a violation expose the lawyer only to professional discipline, or might it open the way to a tort claim against both the lawyer and the law firm?

Case law is sparse, which may be a good or bad thing.  SCR 20:16(b) reared its head – sort of – several years ago in a case out of LaCrosse.  Lawyer K represented “Randy,” a tavern owner, on several ordinance violations involving Randy’s bar.  One day Randy’s bar burned down.  When Lawyer K commiserated with Randy about this misfortune, Randy disclosed that he had intentionally set the fire in order to collect on the insurance policy.  Lawyer K promptly told Randy that he could not collect the insurance because this would constitute still another crime – past arson + future insurance fraud = big trouble for Randy.  Shortly thereafter, Lawyer K memorialized this same information in his “Dear Randy” letter, which also warned Randy that SCR 20:1.6(b) obligated Lawyer K to notify others to prevent any future fraud from occurring.  The letter ended by terminating Lawyer K’s representation of Randy.  Sometime later, Lawyer K learned that Randy had disregarded his advice and collected part of the insurance proceeds.  To protect against further fraud, Lawyer K notified the police and prosecutors of Randy’s crimes.  The disclosure included the “Dear Randy” letter which recounted Randy’s confessions.  Randy moved to suppress the evidence on grounds that (former) Lawyer K had breached Randy’s privilege and disclosed confidences without Randy’s consent.  The trial court disagreed and refused to suppress the evidence.  In a terse, poorly crafted, one page unpublished per curiam opinion, the court of appeals affirmed.  Without analyzing (or citing) SCR 20:1.6(b), the court validated the disclosure instead under the crime-fraud exception to the lawyer-client privilege, which is silent as to disclosure.   For the curious reader, the opinion appears here.   

In some respects, Randy’s case was an easy one.  Randy clearly intended to commit insurance fraud; this was not just a risky or murky transaction.  But remember that Lawyer K “fired” Randy at the end of the “Dear Randy” letter.  Does SCR 20:1.6(b) apply to former clients?  (Here it should be mentioned that lawyers have “discretion” to disclose client misconduct, but that’s a different story.)   And even where disclosure is mandatory, how precisely does the rule regulate the scope of disclosure?  What is “too much”?  Should it monitored by a court?  As the far more complex tale of financial misconduct unfolds, there may be provocative issues of what lawyers may have known of their clients’ actions and whether they should have acted to protect investors or third parties under SCR 20:1.6(b).  One suspects that there may be other, far more mendacious “Randys” out there.  

 

3 thoughts on “Client Fraud and the Lawyer”

  1. My lawyer conned me out of a settlement under the guise of joining a case with the other kid who was in the car and lying to me about how much coverage the driver had. I was heavily medicated. I came across the agreement and looked it over, they took a pre-settlement loan for over $12,000.00 and basically lied and conned me out of my money. I lost everything while these jerks conned me; I almost lost my leg and that’s why they wanted me to settle and lied to me also.

  2. Thankfully I was able to find an excellent lawyer who is proficient in fraud cases — in my matter a “non-judicial foreclosure.”

    The “NJ” foreclosure was brought after a client in their role as “Board of Director” and their attorney commenced a landlord-tenant matter with claims I owed thousands in back maintenance payments for shares in a cooperative. The issue was that the attorney never served me on behalf of his client and sought a judgement and warrant of eviction.

    The problem was, I did not owe what was claimed and the only amount owed was the monies sent, which were then refused with the claim that I was in “legal.”

    I retained an attorney who submitted an accounting to show I owed an amount just under $1k, and again the reason being they refused my payment(s).

    The judge agreed with the accounting and ordered that I post the amount with the court in the name of the corporation that we as shareholders paid our maintenance.

    Just prior to our return to court where a date was set for the attorney to present his affidavit of service, the co-op via their attorney withdrew the case without prejudice.

    It doesn’t end there, although I posted the monies with the court actually owed and the judge ordered I be permitted to pay my maintenance without interruption, I of course paid additional months, 5 payments over the next 3 months.

    2 months credit, right? Wrong. Suddenly I owed close to $2,500.00 and a demand was made that a non-judicial foreclosure would be commenced (co-op not real property).

    I paid that under protest and in part this money was not applied to my shareholder account and an additional payment made was neither credited nor returned (I paid electronically direct into the co-op account with the management company).

    The co-op fought my RJI/TRO in court for years with a faulty accounting and accumulating charges to my account for legal charges the attorney charged the co-operative.

    Currently and thanks to retaining a competent attorney who again specializes in fraud as part of his practice who became the attorney on record with the court, the attorney for the co-op (who foreclosed on our unit and evicted us illegally during the Covid moratorium) immediately submitted a change of attorney form and the cooperative suddenly had new representation.

    Needless to say, there are issues with providing records, but that is being ironed out as discovery deadlines have come and gone.

    All because I owned my shares in the co-operative without a mortgage so it was viewed as a bag of money where my payments withheld was more than even their false foreclosure amount claimed.

    The harassment and newsletters distributed for 5 years to create a lynch-mob mentality, but that did not deter me as I always had the truth on my side.

    So we await some 5 years later discovery documents where the initial attorney filed claims in the original matter that the client was never served to prevent the matter from going to preliminary conference.

    Thankfully I was able to retain the attorney I have now, and it’s beyond belief the effort set forth to steal payments in order to deprive myself and my family our home.

    My understanding is a party cannot assert and reassert a position to prevail in a decision, including a judgement from the court. I maintained detailed records and my understanding is the replacement firm for the defense are dodging but are providing discovery documents requested very soon.

    My attorney’s approach, no speculation and once the records are obtained his firm will assure what records and history support fraudulent activities but the records set the direction and potential amendments to the complaint.

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