Lawyers’ representation of dishonest or unworthy clients also has significant professional responsibility implications. For example, Model Rule of Professional Conduct 1.1 mandates that a lawyer competently represent a client.4 Competent representation “presupposes that the lawyer is rendering assistance in carrying out a client’s lawful objectives.”5 A client’s planning of, or participation in, crimes, fraud, or other knowingly unlawful conduct is not a lawful objective.6 Generally speaking, a lawyer’s representation of a client in connection with a suspicious transaction or other legally dubious matter “is not competent where a reasonable lawyer prompted by serious doubts would have refrained from providing assistance or would have investigated to allay suspicions” before accepting or continuing the representation.7 What sort of activity or conduct creates suspicion sufficient to trigger inquiry by a lawyer depends on the circumstances.8
More pointedly, Model Rule 1.2(d) provides that a lawyer “shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”9 A lawyer’s knowledge of a client’s misconduct may be inferred from the circumstances.10 Furthermore, a lawyer may be deemed to know that a client is engaged in misconduct “if the lawyer is aware of serious questions about the legality of the transaction and renders assistance without considering readily available facts that would have confirmed the wrongfulness of the transaction.”11 In other words, lawyers cannot avoid discipline under Rule 1.2(d) through willful blindness.
The challenge for lawyers has always been recognizing dishonest or unworthy clients before their representation leads to harm, whether that be reputational, monetary, or disciplinary. By the time a red flag is waving, a law firm or lawyer may be so deep in the representation that correction is difficult. What follows, therefore, are pink flags that potentially signal client dishonesty or unworthiness. Although legitimate clients may display some of these pink flags from time to time, the characteristics listed below may nonetheless signal potential problems.
Many of these pink flags may be detected at the new client intake stage, while in other cases they are raised during a current client representation. Thus, the term “client” when used below should be understood to apply to prospective and existing clients alike.
B. Client Structure
When many lawyers think of dishonest clients, they remember the corporate scandals of the recent past and accordingly focus on public companies. In fact, public companies’ compliance programs and the enactment of the Sarbanes-Oxley Act have proven to be powerful checks on potentially dishonest behavior by public company executives. This does not mean that all public companies are pure and accordingly present no risks to law firms representing them, or that there are not corrupt insiders at public companies who might embarrass lawyers for the company or involve them in scandals, but the fact of the matter is that public companies have some features that serve to protect the lawyers who represent them (such as robust compliance programs and internal auditors).
In contrast, closely-held entities, limited liability companies, and partnerships tend not to have similar safeguards in place, and they are frequently more susceptible to improper influence by one or two leaders or managers. Many dishonest or unworthy client claims arise out of lawyers’ representations of closely-held or privately-held entities and partnerships.
Foreign companies can also pose significant potential risks for law firms for at least two reasons. First, their executives may be the product of business or political cultures that are very different from those in the United States. These differences may be manifested in conduct that, while accepted in the countries in which they regularly do business, is either unacceptable or unlawful in the United States. Second, it may be difficult for a firm to conduct satisfactory due diligence on foreign companies at the client intake stage.
C. Client Character
Historical analysis of dishonest client claims reveals several factors that are perhaps most easily described as client character issues that merit lawyers’ attention, including:
Changes in professional relationships. Lawyers should be wary of clients that have recently or frequently changed auditors, bankers, investment bankers, or lawyers. They should be especially cautious if the client (1) complains that its former professionals or financiers did not understand its business, were overly cautious, or the like; (2) wants the law firm to render an opinion where another firm has declined to do so; (3) is changing law firms and declines to allow successor counsel to speak with its former counsel in circumstances where successor counsel consider such communication to be advisable, necessary, or reasonable; or (4) asks the firm to accept a representation that another firm of similar capability or stature has declined.
Weak or non-existent professional relationships. Lawyers should scrutinize clients (1) that intend to make public offerings using the services of undistinguished underwriters; (2) who in the regular course of business rely upon undistinguished or seemingly unqualified accounting firms; or (3) who want to engage undistinguished or seemingly unqualified law firms to issue opinions relative to a transaction.
Unexplained departures. Lawyers should be cautious where an important client executive has resigned unexpectedly or has done so without an adequate or plausible explanation.
Questionable business plans or strategies. Law firms should be cautious if a client (1) has dramatically changed its business strategy or line of work; or (2) appears to be pursuing a business strategy or plan that calls for expertise, capital, or other resources beyond its reach.
Revenue engine. Lawyers should be skeptical if a client’s revenue growth is unusually rapid or seems to be inexplicable when viewed in context.
Conspicuity and extravagance. Law firms should beware of individual clients who are making conspicuous purchases such as extraordinarily large or multiple homes, airplanes, boats, luxury automobiles, etc., or who otherwise appear to be living beyond their means.
Lack of information. Lawyers should be careful with respect to organizational clients about which there is little available information. Off-shore entities may be a special concern.
Misinformation or misrepresentation. Lawyers should beware of clients who give inaccurate or misleading accounts of events or transactions, who offer unreliable explanations or rationales for events or incidents, or who decline to provide information necessary for the representation for whatever reason.
D. Client Characteristics
Clients often come to law firms because of troubling circumstances; for example, they may have been charged with crimes or alleged to have committed civil frauds. Such allegations do not make clients unworthy. Other clients are difficult in the sense that they are relentlessly demanding or unpleasant. Lawyers may opt not to represent these sorts of clients on the theory that life is too short. Still, aggravating behaviors do not necessarily render clients unworthy. Three categories of clients, however, should give careful lawyers pause.
Deadbeats. Clients who avoid their financial obligations to others sometimes do so because they have exploited relationships. At the very least, lawyers should wonder whether clients or prospective clients who avoid paying others will avoid paying them.
Liars. Some clients lie to their lawyers about facts or issues relevant to the representation. Lawyers in these matters must ask whether they will be able to establish or maintain a relationship of trust and confidence with the client. If the answer to this question is no, there is no point in continuing an attorney-client relationship. Other clients expect their lawyers to lie for them. Clients in this latter category are enormously dangerous.
Hoarders. Some clients insist on maintaining total control over all information relating to a representation. For example, they will not allow their lawyers to speak with others within the organization with whom the lawyers wish or need to speak to effectively carry out the representation. Even if hoarders are merely emotionally disordered rather than dishonest, their unwillingness to share material information may expose lawyers to a host of negative consequences.
E. The Client’s Relationship with the Firm
Your money and your clients’ money. Lawyers should beware of clients that want to use their law firm’s trust account or other financial resources, rather than a bank, to hold or transfer funds.
Riding your coat tails. Lawyers should look askance at clients who want them to make representations to others about the client’s creditworthiness, financial wherewithal, reliability or trustworthiness, business acumen, or anything of the like. Lawyers should be similarly cautious with respect to clients who appear to want them to leverage the firm’s reputation by publicizing their relationship with the firm.
Deadbeats again. There are many reasons to terminate relationships with clients who do not pay their bills, but some dishonest clients do not pay their lawyers to coerce their continued representation and, in effect, extort the lawyers’ assistance in the client’s scheme. For example, a client may owe a firm so much money that the lawyers will continue to do the client’s bidding out of the belief that the firm will get paid only if a deal closes or some key transaction is concluded. Because of the large receivable, the lawyers hold their noses and perform tasks that they would otherwise decline to perform.
F. The Representation
Other people’s money. Many clients seek legal assistance in raising funds from third-parties for use in an existing or proposed business venture, and other clients of course do so because their business is the management of third-parties’ funds. These are common forms of representation for business-oriented law firms. Lawyers should be cautious, however, where (1) a client seeks their active assistance in identifying investors, particularly if they make the lawyer’s willingness to do so a significant criterion in their decision whether to retain the firm; (2) the proposed proceeds exceed the needs of the business plan or are otherwise inconsistent with it; (3) the client is prepared to used unregistered or under-credentialed advisors to obtain investors; (4) the client is reluctant or unwilling to obtain necessary regulatory approvals or clearances; or (5) the client’s education, background, or qualifications are unsuited to, or insufficient for, the business plan.
Questionable business purpose. Lawyers should be cautious if a client’s planned transaction has no apparent business purpose, or the client cannot adequately explain the business purpose.
Deals too good to be true. Lawyers should beware of clients who promote (1) exotic investments or transactions; (2) promote investments or transactions in general; or (3) transactions or investments with unusually high returns, little risk, or dubious tax advantages. Clients promoting or handling investments who claim never to have suffered bad years are particularly suspect (e.g., Bernie Madoff claimed consistent 10–12 percent returns for investors for decades).
Troubling transfers. Law firms should be wary of clients who seek their assistance to transfer funds or property between entities that the client controls outside the ordinary course of business. This is especially true if the client only partially owns any of the entities involved. Similarly, lawyers should be skeptical if a client asks them to assist in “protecting” or “safeguarding” its assets by transferring funds off-shore or by conveying property to various entities.
Dishonest clients pose a significant risk to even the very best lawyers and law firms. Avoiding problems attributable to dishonest clients requires constant vigilance on lawyers’ part. Although lawyers are generally entitled to assume that clients are behaving or operating lawfully, and lawyers are not required to constantly question clients’ motives or to distrust clients, there are times that lawyers must evaluate clients’ honesty or worthiness. Depending on the facts of the representation, the pink flags identified here potentially signal such times.
1. Lawyers’ representation of dishonest or unworthy clients exposes them to potential liability on several causes of action, but allegations that they aided and abetted the client’s tortious conduct predominate. See generally Douglas R. Richmond, A Primer on Lawyer Liability for Aiding and Abetting Clients’ Misconduct, Prof. Law., No. 25(2), at 20 (2018) (outlining critical contours of aiding and abetting liability); John K. Villa & John S. Williams, Collective Scienter: An Unrecognized Danger in Legal Malpractice Cases, ALAS Loss Prevention J. (Att’ys Liab. Assur. Soc’y, Inc., Chicago, Ill.), Summer 2015, at 11 (characterizing aiding and abetting claims as “by far the most dangerous claims that a law firm can face”).
2. These figures are taken from Aon data. They are current as of March 6, 2019.
3. Douglas R. Richmond et al., The Aon Claims Experience, Quality Assur. Rev. (Aon plc, Chicago, Ill.), Summer 2015, at 1, 6, 8–9.
4. Model Rules of Prof’l Conduct R. 1.1 (Am. Bar Ass’n 2018) (“A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”).
5. N.Y. State Bar Ass’n, Comm. on Prof’l Ethics Op. 2018-4, 2018 WL 4608936, at *2 (2018) [hereinafter N.Y. Ethics Op. 2018-4].
9. Model Rules of Prof’l Conduct R. 1.2(d) (2018).
10. Model Rules of Prof’l Conduct R. 1.0(f) (2018).
11. N.Y. Ethics Op. 2018-4, supra note 5, at *3.