Last fall, a Texas attorney was contacted through Martindale-Hubbard to assist in potential bankruptcy representation for a Nova Scotia, Canada-based company, which was seeking funds owed from a Houston-based firm.
It was a sophisticated scam—and quite different from usual ones in the following ways: (1) the first check the scammer sent was a valid check and was collected by the bank; (2) the attorney was careful to ensure the check was collected before wiring the funds; (3) there was a second check involved instead of just one; and (4) the scammer used a legitimate legal website to contact the attorney.
This new scam targeting lawyers is described as extremely complex in nature and also has the implication to land those it is defrauding in legal trouble. Here’s what transpired.
The scam began when a representative for the Canadian company communicated to the attorney that it was owed a substantial amount of money and feared the Houston firm would go bankrupt in the wake of Hurricane Harvey.
The attorney researched both firms and found both to have working websites. He also read a media release indicating the Houston firm had suffered a significant disruption in its Houston operations due to Harvey.
At this point, the attorney sent a representation and retainer agreement to the Canadian firm. The issuance of the required retainer amount was delayed, but the attorney was assured verbally and in an email that it had been sent. Additionally, flooding in Houston had just subsided, and Hurricane Irma was affecting postal service in Florida. The attorney also considered the possibility that the letter was delayed in shipping through the Canadian postal system, and checked to see how long a letter from the zip code in Nova Scotia would take to be delivered to Texas. A search of the lawyer’s rural Texas zip code on the Canadian postal website turned up no result.
In the coming weeks, the Houston firm reached out the attorney and indicated it would immediately be paying its debt to the Canadian firm. On September 25, 2017, the attorney received a $357,000 check (the amount owed) from a personal bank account of a senior representative of the Houston firm. The attorney deposited the check in an Interest on Lawyer Trust Accounts, or IOLTA, under a restrictive “Deposit Only” endorsement including his IOLTA account number. The check was placed under the standard seven-day business hold and no action was taken at that time. The attorney performed substantial services in advising the client of perfecting secured creditor status and undertook to engage both local counsel and a listing broker to evaluate the purchase or lease of moorage space on the Houston Ship Channel.
Once the check cleared, the attorney was instructed to make three wire transfers of $67,350, $176,350, and $96,200 from the account and to take his retainer sum and legal fees of $11,720 out of the available funds. Wiring instructions were delivered on company letterhead and contained one incorrect wiring code, which was corrected by the corresponding bank.
On October 16, 2017, the attorney received a second, this time, cashier’s, check purportedly drawn on Comerica Bank sent by overnight mail in the amount of $295,720. The attorney deposited the cashier’s check that day, and received instructions from the Canadian firm to immediately wire $147,000 to a party in Georgia. The attorney made no attempt to complete the wire transaction at that time because the check had yet to clear and no funds were paid to the bank. The cashier’s check was immediately spotted during the bank to bank clearinghouse process and returned as a forgery.
A call to the accounting department of the Houston-based firm to confirm the check, resulted in the attorney being informed that no such check had been issued, and the company did not bank with the associated institution.
At this time, the attorney contacted another attorney to discuss the irregularities and was advised to proceed with extreme caution as this was likely a fraudulent scheme, identity theft, or both.
The attorney then emailed his Canadian contact to request financial backup and invoices for the cashier’s check in order to verify it as a genuine transaction. The contact provided the attorney with a supporting invoice to backup the transaction.
Out of curiosity, the attorney searched the address for the recipient of the fourth, unsent wire transfer, and found it to be a home improvement store Home Depot in Duluth, Georgia. Upon review of the tracking numbers attached to original letter, check express mail envelope, and subsequent certified mail envelope revealed the origin of shipping as Mississauga, Ontario, Canada, according to the Canadian postal service. All the communications purported to be from locations in Texas and the United States.
The attorney then did a BeenVerified search for his contact, and found two telephone numbers listed for the personal check payor. Attempts to contact were unsuccessful. During the corresponding time period, the website the attorney had used to verify the Canadian company was taken down. A link to the website, which the attorney had first used to verify the company, still remained in place.
On October 19, 2017, the attorney contacted the ethics department of the State Bar of Texas to determine whether there was a safe harbor provision to allow for disclosure of client communications to third parties when the attorney reasonably believed their services had or may be used in the furtherance of fraud or illegal activity. That same day, the attorney contacted his own bank to discuss the matter with the bank’s senior local office counsel. The attorney agreed to provide documentation despite a potentially adverse legal position and the bank agreed to release any hold on the IOLTA account as to remaining funds as specifically approved by the attorney.
The original $357,000 personal check was paid and transaction finalized per the UCC and the attorney’s bank received good funds. Since the date of deposit through this publication , the check has not been returned timely or late pursuant to UCC articles 3 and 4, nor has any communication of any kind been received from the personal check account holder despite the attorney being the named payee on the instrument.
The attorney terminated his representation of the Canadian company on October 20, 2017.
Multiple new defenses to any potential unjust enrichment claim by the account holder are propounded in the Restatement (Third) of Restitution and Unjust Enrichment under “innocent payee” or “forced payee” theories. These defenses are grounded in the Holder in Due Course and Bona Fide Purchaser defensive theories, and require only subjective good faith and objective commercial reasonableness as to the conduct of an attorney involved. They are certainly worth and look and retention for any truly rainy day.