PROVING THINGS 53: BECAUSE A SOLICITOR WAS DISHONEST SOME OF THE TIME IT DOESN’T MEAN THEY WERE DISHONEST ALL OF THE TIME

February 17, 2017 · by · in Civil evidence, Damages, Witness statements

The case of Pemberton Greenish LLP -v- Henry [2017] EWHC 246 (QB) provides an interesting assessment of witness evidence and demonstrates the difficulty in proving dishonesty. Mr Justice Jeremy Baker held that the fact that a solicitor was negligent, breached money laundering regulations, and was patently dishonest after a transaction did not lead to a finding that they had been dishonest during the transaction.

“…the defendant’s conduct, once the fraud had been uncovered, was, on any view, dishonest; a matter of which I am satisfied she was aware, but foolishly decided to pursue. However, despite these matters, I am not persuaded that the defendant’s actions and omissions leading up to the fraud being uncovered were dishonest.”

THE CASE

The claimant was a firm of solicitors. Its insurers brought a subrogated claim for money it had paid out as a result of the defendant’s conduct. The defendant was a consultant solicitor in the claimant firm.  She had acted in a property transaction that turned out to be a fraud. The insurers had paid money to the victims of that fraud.

THE NEED TO SHOW DISHONESTY

To succeed against the defendant the claimant had to show that she had acted fraudulently or dishonestly.

    1. Under the terms of the insurance policy, professional indemnity cover was provided to the claimant’s employees; a term which was defined as including the defendant, as one of the claimant’s consultants. Although, under clause 44 of the policy, the insurer was entitled to subrogation of the claimant’s rights to recover losses arising from claims which had been indemnified by them, this was limited by clause 45, which provided,
“The Insurer agrees not to exercise any such rights of recovery against any Employee, or former Employee, unless the claim is brought about or contributed to by the dishonest, fraudulent, intentional, criminal or malicious act or omission of such Employee……………”

THE EVIDENTIAL BURDEN IN ESTABLISHING DISHONESTY

The judge set out the nature of the evidential burden on the claimant.
    1. Therefore, the issue for determination in this case is whether the claimant is able to establish that its losses were caused as a result of the dishonest acts or omissions of the defendant. In this regard, the test for dishonesty is that set out by Lord Hutton in Twinsectra Limited v Yardley [2002] UKHL 12, namely,
“36……dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct.”
    1. Moreover, it is necessary to bear in mind that, although the applicable standard of proof is the balance of probabilities, sufficiently strong evidence is required to prove allegations of dishonesty. As Lord Nicholls stated in Re H and Others (Minors), [1996] AC 563,
“…the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence….”
Similarly, in Foodco UK LLP v Henry Boot Developments Limited, Lewison J. stated,
“…. where fraud is alleged, cogent evidence is needed to prove it, because the evidence must overcome the inherent improbability that people act dishonestly rather than carelessly.”

THE DEFENDANT HAD ACTED DISHONESTLY AFTER THE FRAUD

There was no doubt that the defendant had acted dishonestly after the fraud had taken place.  She forged documents in an attempt to cover up her omissions.

  1. On 12th January 2012 the defendant was contacted by the claimant’s senior partner, Robert Barham, who asked her to attend at their offices on the following day in order to prepare a written account of her dealings with Mr Kingston. She said that she spent most of Friday 13th January 2012 drafting her account, but had been unable to complete it. Therefore, she obtained Mr Barham’s permission to take the file home with her in order to complete her account over the weekend. She said that it was whilst she was looking through the file, that she realised that the written authorisation, permitting her to complete the transaction on behalf of the Kingstons, had not been returned by them. As a result of this, and fearing that she would be held responsible for having completed the transaction without written authority, she decided to forge the Kingstons’ signatures on the copy which she had retained on the file.

The SDT subsequently found  four allegations proved against the defendant and she was struck of the Roll of solicitors.

i. failing adequately, or at all, to carry out personal identity checks and the required anti-money laundering checks on a client(s) (Mr and Mrs K), in breach of Principles 6, 8 and 10 of the SRA Principles 2011 and/or Regulations 5, 7, 8 and 9 of The Money Laundering Regulations 2007;
ii. creating and improperly signing a false letter of authority dated 22nd December 2011, purporting the same to have been signed by Mr and Mrs K, in breach of Principles 2 and 6 of SRA Principles 2011;
iii. being cautioned for an offence contrary to the Forgery and Counterfeiting Act 1981, thereby breaching Principles 1, 2 and 6 of SRA Principles 2011;
iv. facilitating, permitting or acquiescing in money being paid into and out of the firm’s client account when there was no underlying legal transaction(s) in breach of note (ix) to Rule 15 of the Solicitors Accounts Rules 1998 and Rules 1.02 and 1.06 of the Solicitors Code of Conduct 2007.

THE CLAIMANT ‘S ARGUMENT: A STRONG INFERENCE OF DISHONESTY

The judge considered the matters that the claimant needed to establish.

  1. The claimant appreciates that it
    can only succeed against the defendant in the event that it not only establishes that one or more of these breaches was causative of its loss, but that when acting in this manner, the defendant did so dishonestly. However, the claimant submits that when considering the issue of dishonesty, the court is entitled to have regard, not only to the nature of the transaction itself, but to the defendant’s conduct after the fraud came to light. In that regard, the claimant submits that both the circumstances in which the transaction took place, and the defendant’s conduct after the fraud was detected, support its case that the defendant’s breaches of the Money Laundering Regulations 2007 were dishonest, in that they were designed to ensure that the fraudulent nature of the transaction would not be detected, prior to the money being paid out under it. Moreover, the claimant submits that further concerns arise from the defendant’s previous handling of Indonor’s affairs, in which Mr Lloyd-Cooper also appears to have had a close connection.

THE JUDGE’S FINDINGS: DISHONESTY AFTER THE EVENT DID NOT PROVE DISHONESTY BEFORE THE EVENT

    1. As I have already observed, it is a feature of this case that it is not suggested by the claimant that there is sufficient evidence, upon which it could establish that the defendant was a knowing participant in the fraud perpetrated by those posing as Mr and Mrs Kingston. Indeed, had the claimant sought to do so, there would have been considerable merit in the submission made by the defendant that, had this been the case, then she would have ensured that her part in it would not be discovered by complying with all of the claimant’s AML and MRA systems. In this manner she could have entirely obviated the finger of suspicion pointing at her, which some of her acts and omissions, including those which I consider amount to breaches of the Money Laundering Regulations 2007, have done in the present case.
    2. I am of course aware that the claimant is under no duty to provide any motive for dishonesty, albeit its absence may make it more difficult to prove. Moreover, on a number of matters in issue in this case, the defendant’s explanations have been far from satisfactory. However, although my views are entitled to be informed by the patent dishonesty which the defendant has exhibited since the fraud has been detected, my task is to determine whether there is sufficiently cogent evidence arising from her conduct at the time, so as to satisfy me that the defendant’s breaches of the Money Laundering Regulations 2007 were of a dishonest nature, rather than merely exhibiting lack of appropriate professional care.
    3. As I have set out above, I consider that the defendant’s breaches of the Money Laundering Regulations 2007 comprise the lack of appropriate scrutiny of the Council Tax bill, and, in particular, the lack of reference to, and the identification of, Mr Kingston within the claimant’s systems, together with her omission to correct the entry in the claimant’s MRA system concerning the distribution of the funds. As I have already observed, when Mr Kingston first visited the claimant’s offices, I consider that the defendant was entitled to treat him as a legitimate client, who was apparently in need of a short term loan for business purposes. Furthermore, it is clear that from the outset, there was a considerable degree of urgency concerning the completion of the loan, and then sale agreement. Although, as I have already determined, this latter factor was not a sufficient excuse to avoid liability under the Money Laundering Regulations 2007, I do consider that it is of relevance when considering whether these were dishonest omissions by the defendant.
    4. I have of course taken into account the role played by Mr Lloyd-Cooper in this transaction which, in view of his recent history, may have caused an objective observer to scrutinise it with more care. However, I am very conscious that, due to her long standing and intimate relationship with Mr Lloyd-Cooper, the defendant was unlikely to have shared the same viewpoint. I have no doubt that in relation to the vast majority of her professional dealings, the defendant possessed the same rational powers of insight and analysis as anyone else in her profession. Indeed, it was no doubt those qualities which, amongst others, persuaded the claimant to offer her a consultancy in the first place. However, it became apparent, during the course of her evidence, that the defendant’s objectivity has become overborne by her sympathies for Mr Lloyd-Cooper’s predicament, and that she believed that he had been the victim of injustice. In these circumstances, I am satisfied that the defendant had genuinely convinced herself, not only of the lack of need to scrutinise Mr Lloyd-Cooper’s role with more care, but also that, on the contrary, his involvement provided considerable assurance to her about the probity of others involved in both the earlier transaction involving Indonor, and the later transaction involving the Kingstons.
    5. I am also satisfied that it was this lack of objectivity, coupled with a misguided wish to protect Mr Lloyd-Cooper from what she perceived as further unjustified investigations, which led the defendant, once the fraud had been uncovered, to expunge his role in the transaction, by deliberately failing to disclose his role, and deleting the email correspondence with him. Just as she sought to protect her own failure to obtain prior written authority for the transaction from the Kingstons, by forging their signatures on the blank copy of the document which she had retained, in the misguided belief, as it transpired, that their oral authorisation would be insufficient.
    6. I have no doubt that the various breaches of the Money Laundering Regulations 2007, are evidence of a serious lack of professional care by the defendant. Moreover, the defendant’s conduct, once the fraud had been uncovered, was, on any view, dishonest; a matter of which I am satisfied she was aware, but foolishly decided to pursue. However, despite these matters, I am not persuaded that the defendant’s actions and omissions leading up to the fraud being uncovered were dishonest. As I have already observed, I consider that at the outset the defendant was entitled to assume that the Kingstons were legitimate clients who required a short term loan for business purposes. Moreover, that in the defendant’s mind, the role played by Mr Lloyd-Cooper had the effect of enhancing, rather than detracting from the genuineness of the transaction. It was clear from the outset that there was a significant desire to complete the transaction as swiftly as possible, and I am satisfied that it was this imperative which caused the defendant to overlook the requirements of the Money Laundering Regulations 2007, and that the breaches are not evidence of any dishonesty on her part.
Conclusion
  1. In these circumstances, although the claimant has satisfied me that the defendant committed various breaches of the Money Laundering Regulations 2007, I am not satisfied that there is sufficiently cogent evidence that its losses were caused as a result of the dishonest acts or omissions of the defendant.”

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