Practice Watch

by Barbara Buchanan, Practice Advisor

Changes to cash transaction rule
Schemes and scams
Big changes to marketing rules
Duty to meet professional financial obligations

Changes to cash transaction rule

On November 13, 2009 the Benchers amended Rule 3-51.1, the cash transaction rule, to accomplish two things. First, to clarify that the refund-in-cash provision applies even if a cash retainer has been received incrementally. Second, to provide a procedure to follow if cash has been received by a lawyer in a situation beyond the lawyer’s control that is not permitted by Rule 3-51.1.

If a lawyer has accepted an aggregate amount in cash of $7,500 or more in circumstances permitted under subrule (3.1), the lawyer must make any refund greater than $1,000 out of such money in cash. For more information on handling cash refunds and handling aggregate amounts on cash, see the May and July 2008 Practice Watch columns in the Benchers’ Bulletin.

Lawyers are accountable for accepting cash beyond the permitted limit; however, the Benchers recognized that there are cases where a lawyer may receive cash in a circumstance beyond their control. For example, a client or other person could deliver a “personal and confidential” envelope containing cash to a lawyer’s office without the lawyer’s knowledge, or someone could make a cash deposit directly to a lawyer’s bank account simply by having the account information. New subrule (3.3) sets out the procedure for a lawyer to follow in such circumstances.

For the full text of amended Rule 3-51.1, see the December 2009 Member’s Manual amendment package, enclosed with this mailing.

Schemes and scams

On-line mortgage referral program

A BC lawyer received a telephone call from a person offering him the opportunity to participate in a new system to receive on-line mortgage referrals through a well known Canadian bank. The caller aggressively sought information from the lawyer about his practice. The lawyer was not a customer at that bank so thought it odd that he would receive this call. He contacted the Law Society about his suspicions. The bank informed the Law Society that it does not operate such an on-line referral service.

If you are contacted by a person purporting to represent a financial institution, check with the financial institution independently to find out if the person does represent the lender and that such an on-line mortgage referral system exists. We’re not certain a scam was contemplated, but if so, it’s probably safe to assume that the lawyer’s trust account was the target.

Matrimonial debt collection

The Law Society has learned about a new twist to the phony debt collection scam. Although the specifics may change, a lawyer is contacted (usually by email) by a potential new client from a foreign jurisdiction to collect the balance of money owed by a former spouse in relation to settlement of a family law matter. The lawyer asks for information including court documents and says she will do a conflicts check. The lawyer then quickly receives a large cheque or bank draft in the name of the ex-spouse (either before or after issuing a demand for payment). The client contacts the lawyer again by email and says she understands that the lawyer received the money that she is owed and asks for her money. The financial instruments look real but are either well-made fakes or a cheque has been stolen and the signature forged. If someone is pressuring you to pay out funds quickly, be cautious.

Fraudulent investments

Be on the look-out for a new client (sometimes associated with an existing client), who asks you to provide little in the way of legal services but who wants to pay you to receive money from investors. Some people want to be associated with a lawyer to provide an appearance of legitimacy to their fraudulent schemes, often promising unrealistic returns on investment to people who are invited to place money in trust with a lawyer. Lawyers have a duty to be on guard against becoming a tool to assist these people (Professional Conduct Handbook, Chapter 4, Rule 6, footnote 3). While there are many legitimate investment opportunities that do not require a prospectus to be issued or regulatory registration or filings, be mindful that these tools are intended to safeguard investors.

If you are approached by a client to receive money from investors, ask yourself the following:

  • Are you being asked to perform any actual legal services?
  • How well do you know your client, and how did the client happen to come to you?
  • Do you have the expertise to recognize an investment scam?
  • Is the client registered as a dealer in the appropriate category under securities legislation? Are there plans to do so?
  • Is there a prospectus, an offering memorandum or other disclosure document that explain the investment, its suitability for investors, its management and its risks? Are those documents available to potential investors?
  • Are financial statements available? Have they been audited?
  • If there is no prospectus, is it clear what exemptions are being relied upon?
  • Will investors be separately represented by counsel?
  • What will your involvement suggest to possible investors? Do you understand your professional obligations to them in this situation? Will you be able to properly discharge those obligations?
  • What kind of security will be issued to the investors?
  • What are the conditions on the investors getting their money back or reselling?
  • Do the investors pay a fee now or later?

For more tips to help you recognize and manage the risk of becoming the tool or dupe of an unscrupulous client, see Practice Watch (May, July, October and December 2008, and April, Summer and Fall 2009) in the Benchers’ Bulletin; Notices to the Profession; and the Insurance/Risk Management section of the Society’s website. Useful information about investment scams, including affinity scams, is also available in Investment Scams: How to Protect Your Money, a new resource developed jointly by the BC and Alberta Securities Commissions (www.investright.org/protect_yourself.aspx).

Insurance risks with uncertified cheques

It has come to the Law Society’s attention that some conveyancing lawyers are accepting purchase funds by way of uncertified cheques payable to the lawyer in trust, and then routinely and deliberately paying out from trust before the cheque clears. This is not prudent practice.

Law Society Rule 3-55 requires that a lawyer must at all times maintain sufficient funds on deposit in each pooled or separate trust account to meet the lawyer’s obligations with respect to funds held in trust for clients.

Rule 3-56(1.2)(b) provides that no payment from trust funds may be made unless there are sufficient funds held to the credit of the client on whose behalf the funds are to be paid.

It is important to note that insurance will not assist a lawyer facing a trust fund shortfall in these circumstances.

Big changes to marketing rules

Chapter 14 (Marketing of Legal Services) of the Professional Conduct Handbook has been revised and reorganized to make the marketing rules more focused, easier to understand and less intrusive. Large parts of Chapter 14 were deleted altogether (e.g. the Short Form Services Description set out in Appendix 7), but some parts have been relocated elsewhere in the Handbook or, in two cases, in the Law Society Rules.

Businessperson looking at newspaper adsOverall, any “marketing activity” (a defined term now updated) undertaken or authorized by a lawyer must not be false, inaccurate, unverifiable, reasonably capable of misleading the recipient or intended recipient, or contrary to the best interests of the public (Rule 4). For example, a marketing activity violates Rule 4 if it is calculated or likely to take advantage of the vulnerability, either physical or emotional, of the recipient; is likely to create in the mind of the recipient or intended recipient an unjustified expectation about the results that the lawyer can achieve; or otherwise brings the administration of justice into disrepute (Rule 5).

A lawyer may state in any marketing activity a preference for practice in any one or more fields of law, if the lawyer regularly practises in each of those stated fields of law (Rule 16). The three-year, 20 per cent rule is gone.

Although Rule 18(a) still contains a prohibition against a lawyer’s use of the term “specialist” or any similar designation suggesting a special status or accreditation in any marketing activity, note the Ethics Committee’s opinion published on page 17 about permitted use of the terms “expert,” “expertise” or “specializing.” The article also addresses the use of testimonials in relation to the standards set out in Rule 4.

Lawyers are encouraged to read Chapter 14 in entirety regarding other changes.

Duty to meet financial obligations

Some lawyers are signing contracts in which the lawyer and the lawyer’s client are jointly and severally liable to a mediator for the mediator’s account for mediation services. If the client does not pay the mediator’s account, unless there is a bona fide legal dispute regarding payment, the lawyer may be personally liable to the mediator for the account. Also, apart from any legal liability, the lawyer has a professional duty to meet professional financial obligations incurred or assumed in the course of practice when called upon to do so (Chapter 2, Rule 2 of the Professional Conduct Handbook).

It is recommended that lawyers obtain retainers from their clients in advance of any mediation, and consider whether it is appropriate to enter into contracts in which they are jointly and severally liable with their clients.

Further information

Contact Practice Advisor Barbara Buchanan at 604-697-5816 or bbuchanan@lsbc.org for confidential advice or more information regarding any items in Practice Watch.