Risk Update

Money Matters (and Conflicts) — Lack of Firm Financial Controls “Not Unusual” & Wealth Management Services a Poor Practice

Clyde & Co have launched a new risk newsletter: “Lawyers’ Risk Management Newsletter, July 2020” —

  • “Mr. Wetterman cheated the firm out of USD 361,646.47 by submitting and obtaining reimbursement for 382 separate sham travel expense requests between 2015 and 2019. Unfortunately, this story is not unique or even particularly uncommon.”
  • “This story, and other incidents of similar ilk, demonstrate the importance of the adage ‘trust – but verify.’ The story exemplifies the fact that law firms often repose trust in their lawyers – and even in non-lawyer employees with roles involving access to the firm’s finances – without having in place the appropriate controls to fulfill the firms’ ethical and fiduciary obligations to “verify.” The ethical duties relating to managing client funds are found in Rule of Professional Conduct (“RPC”) 1.15, and the duty not to “engage in conduct involving dishonesty, fraud, deceit or misrepresentation” is found in RPC 8.4 (c). In addition, lawyers owe their firms, and their firms’ clients, fiduciary duties to the same effect. Also important are RPC 5.1 and 5.3 – the duty of supervision.”
  • “It is not sufficient for a firm to place trust in its attorneys and staff, and thereby possibly enable them to steal or embezzle the firm’s or its clients’ funds, without having appropriate oversight policies and procedures in place. Here, the scheme was possible because the firm permitted its lawyers to submit travel expense claims for reimbursement without requiring any appropriate proof of the validity of the claims.”
  • “Regrettably, Thomas Wettermann’s case is not unusual. A strong internal control environment is not just a best practice but a way to protect the law firm, its clients and its employees. Although no set of policies and procedures can prevent fraud completely, putting in place appropriate financial controls will significantly reduce the opportunities for wrongdoing and will help to protect the assets of the firm, not least its good name. The policies and procedures described above are not a comprehensive list. Rather, firms should consult with their outside accountants and advisors on the policies, procedures and controls best suited to their own particular needs.”

N.Y. Lawyer Can’t Also Provide Wealth Management Services” —

  • “A non-practicing New York lawyer who’s been working in wealth management for 20 years and now wants to open a law office and provide investment advisory services to law clients can’t ethically do so, the state bar said.”
  • “‘The conflict between the legal and non-legal services is so severe that informed consent cannot cure it,’ the bar’s ethics committee said in an opinion.”
  • “A state professional conduct rule ‘expressly allows’ lawyers to provide legal and non-legal services to the same client, like lawyer-accounting services, the opinion said. But some ‘dual practice conflicts’ can’t be remedied with informed client consent because of the conflict, it said. The opinion cited the example of lawyers acting as real estate brokers for the same transaction.”
  • “The lawyer could, however, provide wealth management services to non-legal clients if a disclaimer is provided that no lawyer-client relationship is being formed, the opinion said.”