Richard C. Gibbs, Q.C.
Once more unto the breach, dear friends, once more
As I've met and talked with lawyers this past month, Martin Wirick is top of the mind for many. BC lawyers are upset. They are concerned about their reputations and about their financial health in light of the Wirick revelations. It is vital that the profession stays informed on the Law Society's audit and investigation of Mr. Wirick's practice, the impact of claims on our
Special Compensation Fund and options the Benchers will consider to manage future risks. We can't expect your support if you don't know what is afoot.
Martin Wirick resigned as a member of the Law Society by letter of May 20, 2002 and received by the Law Society May 22, flagging "serious errors" in his practice and breaches of undertakings to pay out funds on about 80 properties.
The Law Society had a custodian of Mr. Wirick's practice judicially appointed on May 24. Over the next two months, the Law Society copied all of Mr. Wirick's files and accounting records - the photocopy paper cost alone exceeded $11,000. We had to create duplicates of all files and accounting records as the originals could be seized by search warrant or under orders for the production of documents and records in civil actions.
Mr. Wirick declared bankruptcy in June, listing contingent liabilities of about $50 million. Mr. Wirick's client, for whom all Mr. Wirick's actions were apparently carried out, is a Mr. Tarsem Gill. Mr. Gill was petitioned into bankruptcy.
At this stage, the Law Society has a team of five forensic accountants, an investigator, a staff lawyer and a legal assistant working on the audit and investigation of Mr. Wirick's practice. The audit will take about five more months to complete.
Tracing the flow of funds is necessary to quantify the loss. Our investigators are conducting witness interviews, obtaining documents and other evidence and searching some 250 land titles. We have requested the cooperation of the major mortgage lenders and private lenders and have met with them several times. Some have indicated they will cooperate completely; others are playing things a bit closer to the vest.
Vancouver City Police have opened a file on this case. Head of the commercial crime unit, Inspector Ken Hutchinson, has publicly stated that two detectives and a senior sergeant have been assigned to the matter, a forensic accounting firm has been retained and further assistance may be sought from the RCMP commercial crime section.
How did it all happen?
Mr. Wirick began practice in May, 1979. He seems to have been an ordinary lawyer who operated properly for 20 years. His misdirection of funds began in 1999 while he was acting for Tarsem Gill. In Gill-related real estate transactions, Mr. Wirick received money as solicitor for the vendor (Mr. Gill or nominees) from solicitors and notaries acting for purchasers and subsequent mortgagees. Instead of paying off the prior encumbrances, as he undertook to do, Mr. Wirick misdirected the down payment and mortgage funds to Mr. Gill or one of his companies. Mr. Gill then used some of that money to service mortgage debts that should have been discharged, thereby preventing those mortgages from going into default.
As those prior mortgages had not been paid out, no discharges were forthcoming. But, because the prior mortgages were being serviced, those lenders did not become concerned. Mr. Wirick exploited the lag time for the issuance of discharges (of up to six months, and even longer for some institutions) to create a plausible story as to why he was not supplying the discharges of the prior encumbrances in a timely way.
As a result, Mr. Wirick was able to string things out. Eventually, he came up with discharges either by paying out the prior encumbrance with other misdirected funds, or possibly by forging discharges in some cases.
Mr. Wirick's actions on behalf of his client Gill remained undetected for three years. In September, the Discipline Committee cited Mr. Wirick respecting two transactions. A hearing date has been set for December 3. Further citations may be issued depending on the evidence and the judgement of the Discipline Committee.
What is the impact on our Compensation Fund?
Claims expected against the Special Compensation Fund relating to Mr. Wirick could range from $34.6 to $46.8 million, but these are ballpark guesses only, not estimates. We have to determine the value of some claims, identify overlapping claims and repayments, and ascertain the potential for recoveries. As a result, the net losses are likely to be less than the claims received.
We are encouraging claimants to the Fund to come forward promptly. The Law Society is doing triage on the claims, trying to ensure that hardship cases receive immediate attention. The Special Compensation Fund Committee will deal with some urgent cases at a meeting on October 28. We are proceeding as quickly as possible to relieve the plight of innocent victims, but at the same time we cannot act precipitously - we must make decisions based on the verified facts of the individual cases.
All claims arising from the practice of Martin Wirick will be attributed to the Special Compensation Fund 2002 claims year. At present, the Special Compensation Fund's reserves and the Fund's insurance are in excess of $20 million.
Some lawyers steal. We have to deal with lawyer theft every year. Looking at the last 15 years of the Fund, the best year we've had was 1999 when we paid out $22,031. The most we've paid in one year was $1,370,265.45. The average has been $348,161.27 - it would have been much lower but for two "big" years. The grand total paid over the past 15 years is $5,222,419.06. If the Wirick "ballpark guesses" are close to correct, they represent about a century's worth of claims.
Is Wirick a "one-off" or do his misappropriations tell us that we were gulled into thinking the base level of misappropriation was different from what it really is? Are there other defalcations out there as yet undetected? The last 15 years' experience tells us the answer is almost certainly "yes." We don't know what we will experience, but we do know there is a risk - and it is a bigger and different risk than we thought it was earlier this year.
In September the Benchers resolved to remove the annual aggregate cap on payments from the Special Compensation Fund, thereby authorizing the Special Compensation Fund Committee to approve payment of all legitimate claims should these total a higher amount. I am very proud of the Benchers for showing decisive leadership in a very difficult situation. Our Lay Benchers were extremely proud of how we behaved that day, and have said so.
We have options for funding the claims, which include increasing the Special Compensation Fund fee paid by lawyers. The Benchers have increased the fee from $250 in 2002 to $600 in 2003, which will cover the Wirick investigation and audit costs and increase Fund reserves in 2003. As we learn what the Wirick claims will cost, further decisions will be needed. Options include a special assessment on members or an increased Special Compensation Fund fee for one or more years.
The Law Society has options to finance the claims over time by way of inter-fund borrowing or borrowing against our building. The financial strength of the Law Society gives the Benchers great flexibility in that regard. The Benchers will be mindful of the impact of a large special assessment on our members - I think it unlikely that we will go that route.
Reviewing real estate practices
Our Conveyancing Practices Task Force, chaired by Victoria Bencher Ralston Alexander, QC, continues its study and consultation on conveyancing reforms to minimize the opportunity for abuse of funds, in absorbing the lessons of Wirick. For more on the Task Force's interim report, see the Law Society website. The Task Force will come forward with guidelines. The Benchers might ultimately prescribe conveyancing standards.
One option is to severely limit the time in which the vendor's solicitor must prove payment of the funds to the proper parties, such as by a receipt from a financial institution. Cheque particulars could be provided. Purchasers' lawyers and subsequent mortgagees' lawyers could follow up to ensure that the financial institution was paid.
A two-cheque system is also possible: one cheque payable to the mortgagee for the funds to clear the encumbrance; one cheque to the vendor's solicitor to pay the vendor's equity (in the simplest of situations).
Any system can be abused. The real lesson of Wirick is that it went on so long and involved so much money. Lawyer theft at historical levels we can absorb. The Wirick misappropriations challenge our ability and our willingness to save the public harmless. Another Wirick, or a "worse than Wirick" situation, must be prevented, not absorbed.
Future management of the risk
The Benchers are already considering alternatives to manage future risks. One option is insurance. Lenders may now see real estate transactions as requiring insurance to provide more certain protection against risks, in particular since payment from the Fund is discretionary under our statute. Without our own product in place, lenders may require title insurance, with all the unnecessary costs that would impose on consumers in BC.
Our Conveyancing Practices Task Force originally conceived a new form of insurance as being paid for through a real estate transaction fee levy. An alternative approach is to set a fee for each trust transaction above some threshold amount, regardless of the nature of the transaction. This recognizes that areas other than real estate, such as estate probate, are also areas of risk. The prospect of a transaction levy being paid directly by clients received some unfavourable media coverage over the past month, in particular as the levy might be used to fund past claims.
The Benchers have asked staff to work up an insurance option. I personally support this approach - there is a risk and a premium must be collected in respect of it. The door is not closed to other possibilities, however, and, as I write, I have only 77 days left in office.
I look forward, between now and the end of the year, to meeting with groups of lawyers at local bar associations and CBA sections - to keep all of you updated and to hear your views. Please feel free to write or to email me. I will answer each letter personally in as much detail as I feel I can reveal. This is no time to just grouse. Bang the table and the fork will answer.