While perceptions and descriptions may vary, the term “unworthy client” generally includes dishonest clients whose lawyers get entangled in their client’s web of deceit. Even reputable law firms can easily become entangled with dubious clients if they aren’t paying close enough attention. Not surprisingly, lawyers and firms caught up in these situations are at risk of getting brought down—and hard. A recent example comes from reports of a case settled in the Southern District of Florida which gives attorneys 38 million reasons to be more careful about taking on questionable clients.

The Client

The firm’s client was an individual financial advisor associated with an investment company. The individual client had initially asked the firm to conduct due diligence on the investment company. After spending 20k in legal fees, the client told the attorney he did not wish to pay for any additional investigation—and so the attorney stopped its due diligence investigation. Had the lawyer continued to investigate—he might not be entangled in the mess that still remains today.

The client later became heavily involved with the investment company, including raising $100,000,000 from investors. The client advertised to investors pointing to how reputable the attorney and law firm were—effectively using the firm to vouch for the integrity of their investment. More details emerged as the representation continued, and they weren’t good. The Company’s founder had been released from prison right before he started the company. He had served time for money-laundering. He apparently had created several fake names for himself, and hired a “reputation manager” to obfuscate his criminal convictions online.

But information about the founder’s past criminal history, his role in the company, and the company’s default rate, profitability and underwriting process wasn’t disclosed to the investors. Investments continued to be solicited until the company was placed in receivership. The resulting fraud loss was over $400,000,000. The founder eventually pleaded guilty to a RICO charge, securities fraud, tax crimes, and perjury and was sentenced to serve many years in prison.

Allegations

Unsurprisingly, a class action was filed against the Firm for its alleged role in the underlying scheme. The Plaintiffs claim the Firm aided and abetted the Company’s fraud by advising agent funds used to solicit investors in the company’s merchant cash advance loans, creating false and misleading offering documents that were disseminated to investors, and effectively performing as investment underwriters. The law firm denied liability but agreed to pay 38 million dollars in potential damages to settle—avoiding additional and very complex litigation.

The lawyer against whom the allegations were targeted not only faced issues with the SEC but is also currently fighting disciplinary charges related to his entanglement with this client.  The disciplinary petition included violations of Rules 1.1 (competence), 1.3 (diligence), 1.7 (conflicts), 4.3 (dealing with unrepresented persons), and 8.4 (misconduct) of the Pennsylvania Rules of Professional Conduct. It did not mention but could have also included violation of Rule 1.16 (failing to withdraw from a representation that results in a violation of law).

Smoke and Mirrors

Unworthy clients often use others, including their law firms, as pawns in their schemes. And just like the others, the clients often need to deceive their lawyers as well as their victims to accomplish their fraudulent goals. And they’re good at what they do. That is why lawyers need an objective list of signs or “red flags” that will help them spot when a client is unworthy. Lawyers who ignore these signs in favor of the urge to take on another lucrative client are bound to get burnt. Law firms must implement “red flag” policies and put the processes in place to enforce them otherwise they will be on the hook too.  

The bottom line is that lawyers need to learn and pay attention to who they are working with. Do your own research on the client until you are satisfied one way or the other. If the representation feels wrong, it probably is. If there is any uncertainty, discuss the potential representation with those in charge at the firm. There will always be more clients, but you’re never guaranteed another law license (or job).

Not only should the red flag list be considered during the business intake process, but it should also be considered throughout the course of any representation as new facts or circumstances reveal themselves. But you must know what you’re looking for—which signs to spot.

Know the Flags

If a deal seems like it is simply too great to be true, it probably is. Some flags– like fraud or other criminal charges—are easy.  But there are many others.  Is this client experienced in what they want to do?  Properly capitalized?  Does it appear the client has a substantial and reliable plan to do anything besides raising money? Have they failed at these or other endeavors?

Financial red flags include: (1) prior business failures (2) unusual source of funds (3) no justifiable reason for using multiple or foreign bank accounts (4) valuable assets located in high-risk country (5) unusual growth in revenue with no explanation (6) client spends extravagantly on lavish items that appear to be beyond their financial means (7) client will not pay the retainer or has refused to pay past professionals (8) offshore companies and (9) avoidance of SEC registration without justification or reason.

History tends to repeat itself. Examine the client’s past interactions with others.  Past dealing red flags include: (1) client has been fired by past lawyers (2) client frequently changes retained professionals such as accountants or planners (3) overly litigious clients who have repeatedly sued past business partners, lawyers, or customers  (4) past firms have declined to give an opinion yet they are seeking an opinion from you and (5) past executive left suddenly company and without warning or explanation.

Research should be direct and indirect. Ask the client and do your own research. If the client refuses to provide documentation or continuously provide excuses for why they haven’t or can’t provide the requested information, be wary. And stay wary. If a client provides misinformation or inconsistent responses to informational requests, watch out. If a client outright lies to you: run!  Someday that client will expect you to lie for them and will blame you when they get caught lying.

Don’t overlook the client’s inconsistencies even if they seem small or insignificant. They just might add up to a disaster.

Remember Lawyers have a duty to provide competent representation and that is hard to do if you don’t really know who you are representing. Lawyers must inquire into the facts and circumstances of every representation to determine whether they can accept or continue a representation. Lawyers are prohibited from counseling or assisting clients in conduct they know to be criminal or fraudulent. It is misconduct to engage in conduct involving dishonesty, fraud, deceit or misrepresentation.