Bressler Risk Blog

Hat tip to the GC at a prominent Canadian firm for pointing me to this one (and a reminder to readers that pointers and links are always welcome!): “Tax reporting law faces opposition from B.C. lawyers” —

• “The Law Society of BC is part of a pending constitutional challenge against amendments to the Income Tax Act; lawyers charge that new reporting requirements infringe on charter rights of solicitor-client privilege.”
• “Lawyers in B.C. and across Canada are challenging a new law that will cause them to report more instances of client transactions where abusive and aggressive tax avoidance is suspected and introduce penalties, including jail, for not doing so.”
• “Late last month, the Federation of Law Societies of Canada was granted an injunction against the federal government to delay the implementation of new laws under the Income Tax Act (Bill C-47) designed to further compel lawyers to report such transactions to the Canada Revenue Agency (CRA).”
• “Supreme Court of B.C. Justice Lisa Warren granted the injunction on Nov. 24 ahead of a constitutional challenge by the federation, which represents 14 laws societies and more than 141,000 lawyers across the country.”
• “At issue is alleged state overreach by the attorney general of Canada into the affairs of individuals. Lawyers contest new reporting requirements infringe on the constitutional right of solicitor-client privilege.”
• “‘Lawyers and other members of the legal profession, owe a duty of commitment to their client’s cause and are also bound by rules of professional conduct to maintain the confidentiality of information received from their clients,’ the federation has stated in an online backgrounder.”
• “Warren’s judgment found an injunction was warranted as it was apparent there was a serious issue to be tried in court. And before the challenge is heard, implementing the law would do irreparable harm should it be found to be unconstitutional, ruled Warren.”
• “Warren noted mandatory disclosures of reportable transactions have existed since 2013 but Bill C-47 lowered the reporting threshold and also implemented a punishment for lawyers and other professionals who do not comply — a fine of up to $25,000 and imprisonment for a term of up to 12 months.”
• “Warren also noted that the new law provides that ‘disclosure is not required ‘if it is reasonable to believe that the information is subject to solicitor-client privilege.’'”
• “Parliament enacted the amendments to improve the gathering of relevant information to assist the CRA to respond to tax risks. The lack of timely, comprehensive and relevant information on aggressive tax planning strategies is one of the main challenges faced by tax authorities worldwide, including the CRA, the government stated in its response to the injunction application.”

“Lawyers temporarily exempted from CRA’s mandatory disclosure requirements” —

• “Critically for lawyers, the new rules place the onus on every advisor or promoter involved in a reportable or notifiable transaction to make their own separate disclosure to the CRA, rather than relying on a single report from the taxpayer.”
• “During the parliamentary review process, an exemption was added to the law confirming that disclosure requirements do not apply where it is ‘reasonable to believe that the information is subject to solicitor-client privilege.'”
• “However, Roy Millen, the FLSC’s lead lawyer, explained that the law forces legal counsel to choose between their own and their clients’ interests. Penalties for non-compliance by advisors could rise to as high as $110,000 plus the value of all fees charged.”
• “‘The end result is still a requirement for lawyers to report, and the concept of a lawyer reporting on their client is, in our view, in conflict with a lawyer’s duty of loyalty to their client,’ said Millen, a partner with the Vancouver office of Blake Cassels and Graydon LLP.”

“SRA imposes near maximum fine for breaching AML rules” —

• “A firm which failed to check any of the sources of funds for three property transactions has been fined £23,216 – almost the maximum the Solicitors Regulation Authority can impose.”
• “The sanction was made against Ilford firm TTS Legal Ltd after an investigation into the transactions between 2018 and 2020. The three deals were all financed through mortgages and the clients’ own funds. In the third matter, the firm was instructed by a financial adviser to the client whose identity was not verified by lawyers.”
• “The SRA found ‘areas of concern’ over the firm’s compliance with money laundering regulations and its code of conduct. TTS Legal had no firm-wide risk assessment in place until January 2020 and no policies, controls and procedures to mitigate the risks of money laundering.”
• “In one of the property matters, information received from the client was inconsistent with how they were funding the purchase. The firm recorded that a deposit of £185,000 had purportedly been paid to the seller’s solicitor by a previous firm but TTS Legal failed to make any enquiries to verify this payment.”
• “The SRA said: ‘The firm failed to undertake, evidence or scrutinise source of funds, of significant amounts of money. The firm’s enquiries were limited to the location of the funds, as opposed to identifying how and from where the client got the money for the transaction. This meant the firm was unable to satisfy itself that the funds were not the proceeds of crime.’”
• “The firm was fined 2% of its annual turnover, reduced by 20% to take account of mitigating factors. TTS Legal must also pay £1,350 costs.”

“Hefty fine for law firm owner who relied on 2003 AML manual” —

• “A former law firm owner who failed to update its anti-money laundering manual since 2003 has been handed a five-figure fine. The Solicitors Regulation Authority said Richard Lionel Jones had breached regulations for ‘longer than was reasonable’ and demonstrated a pattern of non-compliance.”
• “In January 2020 he completed a declaration on behalf of the firm in response to a request from the SRA, stating that it had a fully compliant risk assessment which took account of information and updates published by the regulator. The form included references to the firm’s customers, the areas it operated in, its products and services and transactions.”
• “Five months later, the SRA began a forensic investigation and found that the firm had not verified the source of client funds in conveyancing matters.”
• “There was no firm-wide risk assessment as required by regulations updated in 2017 and the firm’s office manual referred only to 2003 money laundering regulations. No separate money laundering policies were in place, the SRA confirmed.”

“SRA writes to over 1,000 firms about poor sanctions compliance” —

• “The Solicitors Regulation Authority (SRA) has written to give guidance to more than 1,000 law firms that admit they do not have basic controls in place to mitigate sanctions risk.”
• “More than 3,000 firms completed the survey, of which nearly 1,700 did not do, or were unsure if they did, one or more of the following: identify their clients, verify their clients’ identities, check source of funds and check if a client was subject to sanctions.”
• “The SRA found that more than 1,000 firms had a greater risk of having a client who was a designated person for sanctions purposes because of their areas of work or because they (or their clients) had a connection to a sanctioned country.”
• “Twenty-six firms had dealt with a matter involving a designated person.”
• “Juliet Oliver, SRA deputy chief executive, said: ‘Strengthening the financial sanctions regime is an important part of the government’s response to war in Europe, and law firms have to a key role to play.”

“Sublime band sues attorneys over business deal losses” —

• “Members of the band Sublime accused their former attorneys with King, Holmes, Paterno & Soriano LLP of legal malpractice for allegedly playing both sides in business deals and pushing the musicians into merchandising deals they claim led to losses of several millions of dollars.”
• “Sublime’s complaint says King, Holmes, Paterno & Soriano breached its duty to Sublime with ‘conflicts galore.'”
• “It alleges that the firm did not disclose a conflict before representing the band and their one-time manager in the same transactions, in which the firm is accused of favoring the manager in the negotiations.”
• “It says that they directed the band toward a merchandising deal with another KHPS client without disclosing the conflict or taking Sublime’s merchandise out for bid.”
• “And it calls out the firm’s Peter T. Paterno, claiming he obtained a producer credit and $30,000 producer fee on a Sublime documentary. ‘To add insult to injury, Paterno felt entitled enough to bill Sublime for negotiating his own ego trip — that is — the time he spent negotiating his own producer credit and producer fee. Thus, KHPS charged Sublime tens of thousands of dollars for legal fees so that Paterno could collect a producer fee, and satiate his ego and need for Hollywood "street cred" with a production credit,’ reads the complaint.”
• “Managing partner and named defendant Howard E. King responded to an emailed request for comment with a brief statement: ‘Welcome to Fantasyland. Please enjoy the ride.'”

“Contract requiring exiting lawyer to pay fee for every client he takes can’t be enforced, top state court says” —

• “The Colorado Supreme Court ruled Tuesday [Jan 16] that a law firm can’t enforce a contract provision that required departing lawyers to pay $1,052 for each client they take with them when leaving.”
• “The state supreme court ruled for Grant Bursek, a former Denver associate at Johnson Family Law, which did business as Modern Family Law, Law360 reports. The firm told Bursek that he was required to pay $18,936 when he left the firm with 18 clients.”
• “The Colorado Supreme Court said the contract provision violated a Colorado ethics rule banning employment and partnership agreements that restrict the right of a lawyer to practice when leaving.”
• “‘There may be circumstances in which a firm can seek reimbursement of specific client costs when the client leaves a firm to follow a lawyer,’ the Colorado Supreme Court said in its Jan. 16 opinion. ‘But a firm may not require a departing attorney to pay an undifferentiated fee in order to continue representing clients who wish to maintain their relationship with that attorney.'”
• “The firm had characterized the fee as reimbursement for marketing expenses that were difficult to determine for clients. Bursek signed the agreement in April 2019 and left Modern Family Law in September 2019. Reimbursement applied only to clients gained while Bursek was working with the firm. If he did not pay within 30 days of leaving, the contract said, he would be assessed 1.5% in monthly interest on unpaid amounts.”
• “States that have adopted ethics rules similar to the one cited by the Colorado Supreme Court have adopted differing approaches to agreements that impose financial costs on lawyers leaving firms.”
• “The majority view is that any financial burden imposed on departing lawyers is a violation of the ethics rule, the Colorado Supreme Court said.”
• “The minority view is that financial disincentives to departure are not per se violations of the ethics rule. Instead, disincentive agreements are reviewed based on a balance of interests. On one side are the interests of client choice and attorney autonomy. On the other are a firm’s interest in financial and practice stability.”
• “The Colorado Supreme Court also endorsed the minority view requiring a balancing approach with a reasonableness inquiry. But in Bursek’s case, the ‘undifferentiated fee’ assessed for clients following the departing lawyer is a violation of the ethics rule, the state supreme court said.”

On this one, Brian Faughnan comments: “Another failed effort to pretend Rule 5.6(a) has no teeth” —

• “The courts ultimately determined that such a “per client” charge in a set amount was incompatible with the prohibition in the ethics rules on restrictions on lawyer’s ability to practice.”
• “This outcome is not at all surprising. After all, even though the Colorado Supreme Court decided to align itself with a minority of jurisdictions and conclude that a ‘reasonableness’ analysis rather than a per se prohibition was the right standard, it was easily able to brush aside the notion that such a per client fee could ever be reasonable:”
• “The fact that the firm in question put such a provision into their contract with the attorney also, sadly, isn’t surprising. The economic issues in law firms and the viewpoint that prevails often that firms should be able to protect themselves from having lawyers leave and take clients with them often pushes lawyers to tread up as close to the line as possible to try to disincentivize something that the rules say is fair game.”
• “But the fact that the firm decided to file a lawsuit over $18,000 and put their partners at substantial risk of discipline when the associate refused to pay is quite surprising.”
• “It appears clear from the opinion that they had able counsel to represent them in the litigation, but I am highly curious about whether those lawyers ever got the opportunity to try to talk the firm out of filing such a suit or not.”

“Associate Finally Joins Abraham Watkins, 5 Years After His Move Was Blocked by a Client” —

• “Trial lawyer Efrain Gonzalez Jr. has joined Abraham, Watkins, Nichols, Agosto, Aziz & Stogner as an associate in Houston, nearly five years after USA Gymnastics, a client of his former firm, blocked his move by refusing to waive a conflict of interest.”
• “Gonzalez’s unusual career progression began in September 2018 when Abraham Watkins offered him a position as an associate, and the young lawyer put in his notice at MehaffeyWeber, where he had practiced for about a year and a half. However, USA Gymnastics refused to grant a waiver for Gonzalez, so he could not join the firm.”
• “Gonzalez filed a petition in 2018 state district court in Harris County, seeking a declaratory judgment that there is ‘no actual or imputed’ conflict of interest based on his previous employment as an associate at MehaffyWeber and potential future employment at Abraham Watkins, which then represented individuals who sued USA Gymnastics.”
• “Gonzalez sought a court order to restrain USA Gymnastics from impeding his ability to work at Abraham Watkins, including the filing of any motion to disqualify him or the firm in litigation against USA Gymnastics. He alleged in the petition that he attested in an affidavit that he never worked on USA Gymnastics matters.”
• “However, less than two weeks later, on Dec. 5, 2018, USA Gymnastics filed for Chapter 11 protection from creditors and all proceedings in Gonzalez’s litigation were stayed. That lawsuit was dismissed for want of prosecution in 2021. Meanwhile, in 2021, USA Gymnastics agreed to a global settlement in litigation filed on behalf of U.S. gymnasts who were abused by a former doctor. USA Gymnastics’ final plan of reorganization was approved by a federal bankruptcy judge in 2022.”
• “Gonzalez said he joined Abraham Watkins, because the firm he formed in 2018 had become so busy that he had to hire more lawyers or move to another firm.”

“Trump lawyer Alina Habba makes, then backs off, ‘conflict’ allegation against E. Jean Carroll judge” —

• “Former President Donald Trump’s attorney Alina Habba on Tuesday backed off of a conflict of interest claim against the judge who presided over the E. Jean Carroll defamation trial after Carroll’s lawyer threatened to pursue sanctions.”
• “Habba on Monday filed a letter with the court citing a New York Post story that said U.S. District Judge Lewis Kaplan and Carroll attorney Roberta Kaplan, who are not related, had worked at the major law firm Paul, Weiss, Rifkind, Wharton & Garrison in the 1990s.”
• “An unidentified former partner at the firm, which employs around 1,000 lawyers, told the Post that Lewis Kaplan had been ‘like her mentor.'”
• “Habba told the New York Post that the situation was ‘insane and so incestuous.'”
• “The article included a quote from Roberta Kaplan’s spokesman Zak Sawyer, who said while they’d worked at the same large law firm, they ‘overlapped for less than two years in the early 1990s.’ The now-judge ‘was a senior partner and she was a junior associate and she never worked for him,’ Sawyer said.”
• “In her letter on Monday, Habba said, ‘If Your Honor truly worked with Ms. Kaplan in any capacity—especially if there was a mentor/mentee relationship—that fact should have been disclosed before any case involving these parties was permitted to proceed forward.’ She suggested he had violated the judicial code of conduct and that she might use the allegation as ammunition in a request for a new trial.”
• “She noted she’d had ‘many clashes’ with the judge during the trial and another last year and said he’d been ‘overtly hostile towards defense counsel.’ Her letter suggested the ‘conflict’ might have something to do with his ‘rulings, tone, and demeanor.'”
• “Roberta Kaplan responded in a letter of her own to the judge Tuesday, saying the ‘allegations are utterly baseless.'”
• “Roberta Kaplan said the allegation was part of the Trump team’s scheme to discredit the judicial system and suggested that she might seek sanctions against Habba.”
• “Habba responded with another letter a short time later, saying she hadn’t made any ‘false allegations.'”
• “‘The purpose of the letter was simply to inquire as to whether there is any merit to a recently published New York Post story which reported on the alleged existence of such a relationship,’ she wrote. ‘Since Ms. Kaplan has now denied that there was ever a mentor-mentee relationship between herself and Your Honor, this issue has seemingly been resolved.'”