Reports double of investment scams using law firms, as public lose “at least” £100m, warns solicitors watchdog

Nov 3rd '16

The Solicitors Regulation Authority (SRA) have warned the public to be wary of the growing problem of investment scams using law firms, as they deal with cases where people have lost at least £100m.

The “investment schemes”, which frequently turn out to be scams, appear more legitimate by using regulated law firms as middlemen. This is often highlighted in promotional materials to make the schemes seem trustworthy and safe.

Although only a tiny minority of solicitors will be involved in such schemes, the impact on the public is large. The SRA are currently dealing with cases in which consumers have lost at least £100m.

These scams were a particular issue in the late 1990s to early 2000s and are now again becoming increasingly common. The SRA have seen an increase in reports of such scams, with initial analysis showing reports having approximately doubled in the last eighteen months.

In the last fortnight, they have successfully prosecuted two solicitors involved in dubious investment schemes at the Solicitors Disciplinary Tribunal (SDT):

  • Mandeep Dhariwal, of Lawcomm Solicitors, was fined £40,000 and ordered to pay costs of £20,000 after acting for six different companies offering investments in graphene, diamonds, oil contracts and films. Nearly £9.5m passed through the client account in relation to these investments.
  • Mel Goldberg, of Mel Goldberg Law, was struck off the solicitors roll for a range of breaches. This included being involved in a suspected investment scam where he took millions of pounds from investors looking to make money from water purification technology and paid it to other people without the investors’ knowledge. As well as being struck off, he was ordered to pay £40,000 costs.

The solicitors involved will have the right to appeal these decisions within 21 days of the SDT publishing its judgments.

The SRA have now published advice for the public on investing in schemes where solicitors may be used to make the scheme seem attractive. Examples of such schemes – where there often is no real investment – include trading in carbon credits, agricultural rights, “rare earth minerals” or diamonds, as well as holiday homes not yet built and leases of individual hotel rooms. These are just examples and fraudsters continually change products to one that they claim is the latest opportunity to make high profits.

People are often told that their money is covered by the law firm’s insurance. Solicitors must have insurance, but if the solicitor is helping a scam, the insurance company may refuse to pay out.

SRA have also warned solicitors about getting involved in such work and disciplinary action continues to be taken against anyone in the profession found to have helped dubious schemes in any way. Many schemes involve the money being moved through client accounts before being transferred to the operators.

Genuine financial services companies do not need to have money coming to them for investment passed through a law firm first. Solicitors have been warned about becoming involved in this way as they could be laundering the proceeds of fraud.

Paul Philip, SRA Chief Executive, said:

“The vast majority of solicitors act with honesty and integrity. Unfortunately a small number abuse their position of trust and use their credibility to promote fraudulent investment schemes.

“The evidence suggests this is a growing problem which can cause real misery for people looking to invest their savings. If you are in any doubt, you should get advice from your own solicitor or other trusted adviser. “We have a strong record of taking action against law firms involved in schemes that set out to dupe investors. But people should be vigilant, and, as ever, the golden rule is that if something sounds too good to be true, it probably is.”

Advice to the public includes:

  • If the proposed investment is in something unusual, ask yourself why. Unusual assets are often very high risk.
  • Always get your own, independent advice from your own solicitor, a law firm or other trusted professional.
  • Always choose your own adviser. Do not use the adviser the investment company “recommends” or “requires”.
  • Do your homework. Research the scheme and look at official sources. Look for warnings or decisions from financial regulators.
  • Do not be pushed to get involved quickly – it is very common for the fraudsters to say you have to act urgently. If they say that, you should be suspicious.

The notice to the public can be found here:

Go to the notice

Background on regulatory action on these schemes

This problem of law firms becoming involved in investment scams was first tackled in the mid-90s and a warning notice to the profession was first published in 1997. By 2002, 50 firms had been investigated 29 of these were closed down. Twenty four solicitors were struck off, seven were suspended and 11 received notable fines.

Perhaps as a result of this work, the problem dropped off, with only a handful of cases reported. By the 2010s, the problem was emerging again, with one solicitor sentenced to more than five years in prison for his part in a scheme in 2012. Another was imprisoned for 17 months in 2011.

After delivering a number of strike-offs and suspensions through the Solicitors Disciplinary Tribunal, we put out another warning

However, there is increasing concern about these schemes and the losses being suffered, with initial analysis showing that reports have approximately doubled over the last 18 months (comparing the period March 2015 to August 2016 with September 2013 to February 2015). Low interest rates available on savings may be contributing to the increase in such scams, as investors become more willing to take risks to make a better return.

In the recent cases that have been verified and dealt with, there are losses of more than £100 million. We sent out a warning notice to solicitors on involvement in high-yield investment schemes last month.

It can be seen here:

Go to the warning

A warning notice on allowing the client account to be used as a bank account can be seen here

Go to the client account warning

Source: Solicitors Regulation Authority