SRA issues a further warning on investment schemes
We have issued a further Warning Notice about solicitor involvement in fraudulent investment schemes.
The increase in these scams has already prompted warning notices to the profession and the public, most recently in September 2016, as well as the December 2016 Risk Outlook report. We have received 12 reports about potential investment scams in the nine months since the last warning notice, an increase on the 18 reports in the preceding 18 months.
There has also been increased enforcement action.
Recent cases include Sanders and Co, where many investors have lost money in a Brazilian Ecohouses scheme, and Naresh Chopra, where he was found to be acting for investment companies offering opportunities in diamond and fine art trading (see case study below).
The number of solicitors involved is very small, but the impact is very significant both in terms of damage done to the reputation of the profession and the losses sustained by what are often vulnerable members of the public. People have already lost substantial amounts, potentially totalling hundreds of millions.
As a consequence, we are forecasting a rise in high value claims on the Compensation Fund that will require settlement in the next 18 months. Not every case will result in successful claims, but it is important that sufficient funding is available.
So, in further action, contributions for solicitors in 2017/18 will be increased by £8 – from £32 to £40. Firm contributions will increase by £230 from £548 to £778.
Paul Philip, SRA Chief Executive, said: “We know that the vast majority of solicitors and law firms would not knowingly become involved in fraudulent schemes.
“But those who do engage in these schemes undermine the reputation of the profession and cause very real harm to the public. We have issued a series of warnings to the profession and today sees us do so yet again. And we will take robust action where we find solicitors have indeed participated in schemes designed to defraud the public.
“Solicitors and law firms are rightly respected and their involvement in fraudulent investment schemes can give the impression of credibility or security. So their involvement in such schemes entices people to invest, which is leading to many individuals losing significant sums of money.”
Case study: Naresh Chopra
This solicitor was struck off and ordered to pay £67,000 costs after, among other allegations of misconduct, he was found acting for investment companies offering opportunities in diamond and fine art trading.
Twenty four different investors paid money into the client account totalling more than £400,000.
One investor said he “took reassurance from the fact that my monies were paid into a solicitor’s client account and would be dealt with in an ethical fashion. In fact it was explained to me..that by paying the monies into a solicitor’s client account, this would be afforded the same safeguards as buying a house and using a solicitor.”
However, some investors did not receive the goods that they had paid for and it was unclear where other funds paid into the account by some of the companies involved had come from. The solicitor also deducted fees from the investors’ funds, even though there was no agreement in place between the firm and the investors for them to be clients, and the investors were unaware that any payments would be deducted.
The Solicitors Disciplinary Tribunal said that it had no doubt that his involvement in these transactions lent a veneer of respectability to them. A number of witness statements from various investors made it clear it had been explained to them that the monies would be paid into a solicitor’s client account and they were of the view that this would afford them safeguards.
The Tribunal said he had not read the warning notices issued by the SRA when he should have done. Had he done so, he would have realised these transactions were dubious.
We issued warning notices to the profession and the public in September 2016.
It also issued a Risk Outlook report on investment fraud in December 2016.
This followed a series of warnings since the mid 1990s.
The Law Society Group launched a consultation on practising fees for 2017/2018.