Legal Ethics Corner

Ethics Corner is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.  

Recent Internet Scams Implicate Broad Ethical Considerations

Attorneys have recently fallen prey to sophisticated, often international, Internet scams. Not only do the scams have severe financial consequences for practitioners, they also include risks of loss of money from client trust accounts, liability to banks, State Bar discipline, and even damage to a lawyer’s reputation and business.

The scams have the following common characteristics:

1.    Lawyer receives what appears to be a legitimate solicitation email from a prospective client, often based in another country or state;

2.    After checking the legitimacy of the company on the Internet, the lawyer responds and "relationship" terms are negotiated between the lawyer and the prospective client, including a written fee agreement, sometimes providing for a substantial advance fee deposit;

3.    Lawyer receives an email from the new client that the hiring of counsel and/or the threat of legal action has suddenly caused debtor to agree to pay outstanding debt;

4.    Lawyer quickly receives what seems to be a valid domestic cashier’s check from a reputable bank as a settlement payment, which is then deposited in the lawyer’s client trust account;

5.    Client requests an immediate wire distribution of the settlement funds to a foreign account and provides approval for the attorney’s retainer or fees to be deducted from the funds and paid from the trust account;

6.    Lawyer retains the fee and wires the balance to a foreign bank account.

What occurs next is the cashier’s check is discovered to be fraudulent and returned unpaid. By that time, unfortunately, the funds have already been wired to the foreign bank and the scammer has disappeared with the funds. The lawyer’s trust account is overdrawn by the amount of the counterfeit cashier’s check, which the lawyer’s bank is obligated to report to the State Bar.

The attorney may now be liable to the bank for the balance of the bad check and to clients whose funds may have been withdrawn. He/she might also be subject to an investigation by the State Bar that may lead to discipline. (See, Rule of Professional Conduct 4-100 [“Preserving Identity of Funds and Property of a Client”].)  Claims by a bank arising from the scam are generally denied by malpractice insurers based on the argument that the claim does not arise from "professional services" or because disgorgement or reimbursement claims do not represent "damages" as typically defined in the policies. (See, Nardella Chong, P.A. v. Medmac Cas. Ins. Co. (M.D. Fla. 2009) 2009 WL 4855737.)

Significantly, under the circumstances, the attorney may have been retained, legitimately or otherwise, by the scammer. A communication from a prospective client may be entitled to protection as confidential client information in certain circumstances. (Cal. State Formal Opn. No. 2003-161 [discussing factors in determining whether attorney-client relationship has formed].) The attorney is "[t]o maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client." (Bus. & Prof. Code § 6068(e).)

The second aspect of section 6068(e) covers criminal or fraudulent conduct as it is appropriately characterized as a "secret". (Cal. State Bar Formal Opn. No. 1988-96.)  If a true client relationship is determined to exist, the attorney has a duty to refrain from furthering a fraud and, at the same time, from disclosing confidential client information. (Cal. State Bar Formal Opn. No. 1996-146.)  This may not be the case when and if the Supreme Court approves the proposed new Rules of Professional Conduct. (Proposed Cal. Rules Prof. Conduct, rule 1.18, cmt. 2 ["[A] person who communicates information to a lawyer for purposes that do not include a good faith intention to retain the lawyer in the subject matter of the communication is not a prospective client with the meaning of this Rule."])

Nonetheless, before disclosing any communications with the scammer, an attorney must carefully consider the circumstances of the communications with the prospective client because California does not recognize a self-defense exception to the attorney client privilege. (See Qualcomm Inc. v. Broadcom Corp. (S.D. Cal. 2008) 2008 WL 638108 [application of federal self-defense exception to allow disclosure to privileged material the lawyer believes is reasonably necessary to vindicate himself]; In re Nat'l Mortgage Equity Corp. Mortgage Pool Certificates Sec. Litig. (C.D.Cal. 1998) 120 F.R.D. 687, 692 [same].)

Clearly, the best practice would be to simply ignore email solicitations and avoid the potential consequences set forth above. If the attorney does decide to explore retention, the attorney should thoroughly vet the accuracy and genuineness of information in the solicitation including phone numbers, addresses and websites. Attorneys should make clear to the prospective client that no attorney-client or other relationship has been created and no services shall be performed until (a) the lawyer has completed the engagement process in accordance with his/her firm’s policies; (b) the lawyer receives confirmation from his/her bank that the advance fee deposit check or wire transfer has cleared in accordance with bank policy; and (c) the lawyer has accepted the representation.  Finally, attorneys should insure any retainer agreement complies with Business & Professions Code sections 6147 and 6148 and that the retainer agreement includes valid billing address, phone, fax and an authorizing resolution of the shareholders or board of directors if the client is a corporation.

– Andrew A. Servais

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**