SRA Warning to the Profession – Disciplinary risk to solicitors acting in high-yield investment schemes

The SRA has today issued a repeat warning about solicitors acting in high-yield investment schemes. http://www.sra.org.uk/sra/news/press/investment-schemes-warning-notice-2016.page?src=rss

That the SRA have today felt it necessary to repeat a warning given in 2013 is indicative that law firms’ involvement in such schemes remains problematic, and that more than just a handful of firms are involved. Of course not every high-yield investment scheme is suspicious, but with the warnings given, solicitors and other legal professionals need to be extremely cautious when instructed to act.

The SRA is usually made aware of suspicious schemes following a complaint from an investor who has lost money. Typically the solicitor won’t have acted for the investor but the promoter of the scheme. As the SRA notice indicates, warning investors that you don’t act for them won’t be sufficient to protect your regulatory position. From a regulatory and disciplinary perspective, the solicitor will be expected to ensure :-

1 That they are acting within their specialist field of practice. Fraudsters may target their existing network of solicitors, and ease them into involvement in such schemes, on the back of legitimate instructions;

2 That they fully understand the investment scheme. Fraudulent schemes often make no sense, use jargon and are unnecessarily complex – sometimes solicitors convince themselves that as their involvement is minimal they need not understand it fully; and

3 That the returns are realistic. The old adage ‘if it looks too good to be true it probably is’ is a good indicator.

Solicitors involvement in such schemes gives assurance to investors, and fraudsters know this. We’ve seen cases where fraudsters have provided legitimate instructions to a solicitor over many years before being asked, unwittingly, to assist with a fraudulent investment scheme. The solicitor thinks he can trust his longstanding client, perhaps agreeing a limited retainer to ‘facilitate’ a deal. Often the promoter client then indicates that certain investors will only invest if they can pay the investment into a solicitors client account. Tight timeframes may add to the pressure on the solicitor to agree, ‘we need the money today or the deal could collapse’. Aside from direct involvement in the scheme, by allowing client account to be used, the solicitor may have breached rule 14.5 of the SRA Accounts Rules 2011 which prohibits the use of client account for banking facilities.

It is a real concern that solicitors continue to involve themselves in such schemes. Such involvement undermines the reputation of the profession and therefore our role as administrators of the rule of law. Your involvement runs a number of risks :-

1 It may result in you being financially liable to the investors and to HM Treasury/the SRA for regulatory/disciplinary fines and costs. Any financial exposure to investors may not be covered by professional indemnity insurance; disciplinary fines and costs certainly won’t be.

2 You may expose your firm to catastrophic failure, either by intervention or a failure to obtain insurance in the next indemnity round.

3 You may expose your firm to a full Forensic Investigation.

4 You could be expelled from partnership/have your employment terminated.

5 You could be suspended or struck off from the roll of solicitors for your involvement.

If you are asked to act in any investment scheme, ask yourself why me? Make sure you fully understand the scheme and your expected role and then discuss them with a colleague and perhaps your COLP. If you’re currently involved and need to review your position it’s important to seek advice from a professional discipline solicitor at an early stage.

Robert Forman is a Senior Consultant Solicitor at Murdochs Solicitors, specialising in solicitors professional discipline and regulation. He can be contacted on 020 8852 3412.

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