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Beware of rogue clients

A recent incident involving Bay Street titan Goodmans LLP has shone a light on the issue of rogue clients and the potential damage they can inflict on a law firm’s brand.

According to the Globe and Mail, Goodmans was acting for Michael Wilfred Beattie, who claimed to be a construction executive who opposed the $1.5-billion sale of Canada’s Aecon Group to a Chinese state-owned enterprise. At press time, the deal was facing a national security review by the federal Cabinet. 

Beattie had hired Goodmans, as well as noted public relations firm Navigator and government relations firm Ensight Canada, according to the Globe, to undertake a media campaign and lobby the government to block the deal.

The Globe, however, outed Beattie, questioned his story and revealed his past run-ins with the law, including convictions for fraud and perjury. Soon after that, Goodmans stepped aside from the file.

The incident highlights the growing risk that law firms face to their reputation when clients go rogue. However, it’s not just reputation at stake.

Rogue clients — or what the insurance industry calls “unworthy clients” — rank as the third leading cause for notification to insurers of a possible claim, notes Doug Richmond, managing director and loss prevention leader at AON professional services group, which insures almost 300 law firms with more than 68,000 lawyers.

Bill Freivogel, a lawyer who consults on legal ethics, conflicts and liability, notes that rogue clients “are not the most frequent cause of loss for law firms, but they are some of the biggest. There are some very good business lawyers out there who can’t get it in their heads that this can be a problem.”

Mistakes and negligence remain the number one claim, while fraud and misrepresentation are second, followed by unworthy clients and conflicts.

However, in terms of severity, rogue clients rank among the top two categories for payouts.

Of the 72 public verdicts or settlements against law firms that that exceed US$20 million, 45 are attributable to an “unworthy client,” accounting for almost two-thirds of major losses, AON’s Richmond says.

So, how far should know-your-client rules go? Should law firms be doing criminal and credit checks of potential clients?

Litigator Gavin MacKenzie notes that “there is no foolproof way of avoiding taking on rogue clients.”

He says that professional obligations require lawyers to gather information about clients and companies, as well as comply with laws regarding money laundering. Rules of conduct, MacKenzie says, also “require lawyers to be alert to and avoid unwittingly becoming involved with a client or any other person who is engaged in unlawful conduct.”

However, Richmond says “dishonest clients are often as good at deceiving lawyers as they are at deceiving other people.”

Interestingly, law firms seem to be all over the map when it comes to client intake and policing against rogue clients. One noted Bay Street firm has a policy that it won’t act for individuals, only corporations, where others aren’t that discerning.

Brian Gover, a litigator at Stockwoods LLP who deals with lawyer liability issues, says that when it comes to client intake, the legal business is “unstructured. I don’t think there is a comprehensive approach that applies across the board.”

The good news, Richmond says, is that the problem isn’t necessarily increasing and law firms are getting better at qualifying clients at the intake stage. However, as business becomes more global, it can be difficult to verify a foreign client’s story.

Gover stresses the need to do as much due diligence as you can on a client, regardless of whether or not they are being referred from a trusted source. Don’t simply trust that an accounting or other professional services firm has done the necessary legwork on a potential client.

Probe deeply. There are many sources from rating agencies to government and securities regulators, trade and professional associations and legal case law databases that lawyers should check to see if anything odd turns up. Even a Google search can be revealing.

Robert Denby, senior vice president, loss prevention at ALAS, which insures about 214 law firms in the U.S., says to watch for the telltale signals. He lists seven.

First, has the client ever been prosecuted for securities fraud? “You’d be surprised how many folks have done this before and been caught.”

Second, have they changed lawyers recently or frequently? If so, probe deeper.

Third, look at client characteristics. Do they drive a flashy car and talk a big story?

Fourth, what is the nature of the client and their track record?

Fifth, what is the nature of the representation? If they want to use your boardroom and have a parade of people coming and going, look closer.

Sixth, where is the money coming from to make things happen? Is it the client’s money or is it from third parties?

Seventh, what is the nature of the business transaction? If there is no obvious purpose, Denby says, ask yourself, “What the heck is going on?”

Denby notes that the “natural inclination” once a law firm takes on a client and aligns itself with the client’s cause is to “circle the wagons” if something starts to unravel. “That’s where we see lawyers lose their objectivity. You need to be open to the possibility that something untoward is going on.”

Jim Middlemiss is a principal at WebNewsManagement.com.