Record fine in SDT landmark judgment

US firm Locke Lord has been fined a record sum of £500,000 by the Solicitors Disciplinary Tribunal (SDT) for gross misconduct.

US firm Locke Lord has been fined a record sum of £500,000 by the Solicitors Disciplinary Tribunal (SDT) for gross misconduct.

Background

In 2012, Jonathan Denton, a partner at Locke Lord’s London office, was appointed as sole director of two firms: Ikaya and Slonne. An engagement letter was sent from Locke Lord to Ikaya and to Slonne, addressed to Denton on behalf of Ikaya. The letter stated that Denton would be the client partner.

Between September 2012 and June 2015, Denton billed over 1,400 hours advising Ikaya on seven investment trusts, charging a total of £532,045, US$657,194 and €286,902 to the companies. He was also making statements to investors which he knew to be false and misleading third parties by producing false invoices. Further, during this period, the client account was being used to run a £21 million investment scheme. Denton’s roles as a lawyer at Locke Lord and a director at Ikaya were becoming increasingly blurred.

The first issues with Denton’s conduct arose in 2013 when the FBI contacted Locke Lord about £2 million of an investor’s money that seemed to be at risk, as the FBI thought someone might be diverting funds for personal use. A year later, the Metropolitan Police Service contacted the firm as it was concerned about ‘the veracity’ of £7 million transferred from the firm’s Dallas office to the client account in the UK.

In 2015, after North Yorkshire Police contacted the firm following another complaint by an investor, Denton was fired.

Despite this, Denton was still given access to his firm email address, with many emails regarding enquiries from investors being forwarded by the compliance officer for legal practice (“COLP”). In the meantime, Locke Lord’s COLP, general counsel, and several investors were all in the dark about where their money was being held and Denton was not assisting with enquiries.

Denton was arrested in Birmingham airport in October 2015 but denied the allegations made against him. He and Locke Lord were referred to the SDT.

The decision

Denton continues to deny any wrongdoing whilst Locke Lord cooperated with the investigation against it, admitting that they:

  • Failed to prevent one of their solicitors from going through with unlawful or suspicious transactions and using the client account for dubious financial activity and/or investment schemes.
  • Failed to prevent one of their solicitors from carrying out financial arrangements such as transfers from and payment into a client account which were ‘unrelated to legal transaction or a service forming part of the firm’s normal regulated activities’.
  • Failed to have effective systems that would stop or recognise this kind of activity.
  • Failed to supervise a solicitor even after they had been alerted that he may be breaching several Principles of SRA 2011.

In view of these failures, and despite cooperating, the firm was fined £500,000. The initial proposed fine of £250,000 was deemed by the SDT to ‘not reflect the seriousness of the matter’. Denton will himself appear before the SDT at a later date.

Comment

It is clear that Locke Lord’s failures were so serious that, in spite of their cooperation, the SDT was unwilling to show any leniency to the firm. This is in line with other recent decisions by the SDT; this year it has fined White & Case £250,000 and Clyde & CO £50,000 for various regulatory breaches. Evidently, the SDT is clamping down on regulatory breaches.

Firms should take note and ensure that they have robust systems and procedures in place to ensure that breaches do not occur and, when they do, that the breaches are identified, isolated and reported quickly. Firms should also review their professional indemnity cover as the solicitors’ Minimum Terms and Conditions (“MCT”) do not indemnify defence costs incurred in disciplinary proceedings. This may come as a surprise to many firms who would expect to be indemnified in such proceedings. However, this cover was removed from the MCT in 2011. To ensure that such costs are covered under a professional indemnity policy, firms will need to agree an extension to the policy or take out separate D&O cover.

Underwriters should also note the recent increase in SDT investigations and prosecutions as this will likely result in additional claims. Underwriters should therefore consider asking specific questions about a firm’s procedures when assessing the risk if an extension is being requested to a professional indemnity policy or if a firm is looking to take out D&O insurance to cover defence costs incurred in disciplinary proceedings.

Read other items in the Professions and Financial Lines Brief - December 2017