September 01, 2015

When the Client Is a Fraud: Defending Professionals and Firms Following a Client’s Misconduct

Strategies for defending professionals and firms following a client’s misconduct.

Craig D. Singer

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Suppose you are the general counsel of a law firm. One morning, you open your newspaper and read shocking revelations about a long-standing client of the firm. The client, it turns out, was much less than it appeared. All or much of the client’s business was a fiction, existing only in a false trail of paper or electronic book entries. The clients’ executives cleverly concealed this state of affairs from the world.

Business lawyers at your firm have represented the client for years, including in connection with its securities offerings and significant transactions. You believe those lawyers had no idea that the client was engaged in fraud; they too were fooled by the client’s executives. Nonetheless, you should prepare for your firm to be sued—indeed, you may be in for an onslaught of lawsuits and investigations. This article describes some of the types of claims that commonly arise in this situation, along with several key defenses. The subject is treated at greater length in my book, Professionals, Firms, and Fraud: Defending Professionals Against Client Fraud (ABA 2015).

Not much imagination is necessary to construct the frightening scenario described above because it happens with some frequency—not just to lawyers but also accountants, bankers, and other professionals surprised to learn that a client they believed was running a legitimate business was actually engaged in massive fraud. Maybe there was no real business at all, as in the case of a pure Ponzi scheme, which takes in cash from investors only to pay it to prior investors as fake “returns.” Or maybe the client had a real business but a far less successful one than its managers represented. In either case, the fraudsters deceived those who invested, lent, or did business with the company in order to obtain cash—whether to line their own pockets, live high on the hog for as long as the scheme lasted, or to prop up their failing company in an effort to save it.

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