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Fraud Targets Business... Law Firm

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That firm is mine, Minor & Brown, and I'm not talking the spammy stuff everyone gets. This was sophisticated, carefully planned, big bucks ($250,000) crime. It didn't work, and the story of what happened and why it didn't work could be helpful to your business, and certainly should be helpful to other law firms, as this scam was designed to take advantage of the way law firms handle dispute resolutions and debt collections.

Business law firms are often asked to help resolve disputes between companies. Sometimes a contract is in dispute; sometimes the only dispute is that one company is too slow to pay the other. Often the final settlement involves the debtor company sending its payment to the lawyer for the creditor company, who then forwards it on to her client. Why? Because it allows the creditor lawyer to take her fee out of the funds. We like to be paid, too.

Today's lawyers have learned to quickly recognize and ignore junk requests -- impersonal, typo-ridden and grammatically challenged -- but legitimate business disputes need attention, and, especially in this economy, lawyers are eager to establish new client relationships. So, when the first well-written, professional correspondence from a British business having trouble collecting an account from a Colorado customer hit the desk of my litigation partner, it seemed worth checking out.

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Are you sure you know it?

Both companies, debtor and creditor, had detailed, up-to-date websites describing businesses of substance. A telephone call to the British firm requesting our services was made, the facts of the case confirmed, and the underlying contact between the Colorado and British companies obtained. We sent the British firm our engagement letter, which they promptly signed and returned. Hurray, we had a new client who likely would need more legal help over time. Actually, it is our firm that would have needed legal help, if our procedures had not prevented us from falling completely for the scam.

This is where the fraud ratchets up. Our client contacts us with news that the threat of litigation has worked, their customer has agreed to send a settlement payment to our firm. Sure, enough, in a few days a cashier's check payable to Minor & Brown for the requested amount -- $250,220 -- arrives. We deposit the check in our trust account (where lawyers park money that doesn't belong to the firm) and email the news to our client. Their response is that they are pleased, but a recent development had created a cash-flow crunch for them; instead of mailing them a check for the amount less our fee, could we wire it to them? Some firms might; in fact, a number of law firms apparently have done just that. You want to be helpful to your new client; you've got a cashier's check -- a check guaranteed by a known bank -- in hand, what's the risk?

We did not wire the funds, and it was a good thing, too, because the cashier's check was phony. The bank was real, the Colorado company was real (though its identity was hijacked in this scheme), but our "client" and the cashier's check sent to us purportedly by the Colorado company were both fakes. If we had sent our "client" the money, my firm would have lost about $250,000.

I always say that a business deal can never close before the guest of honor arrives. The guest of honor is the money. Only when the money is collected and in the account, is the deal done. Given the many permutations this and other scams can take, the best defense of honest business is to wait for the money. You want a wire out? I need a wire in. You want a check? I need the incoming check to be collected first.

At some point, when you know and trust the other party so well that you are certain that there is no fraud, then what? Since I've also written (and stand by), "Why You Should Do Business on a Handshake" you may be surprised by my advice, and the policy of our firm. When your company is being asked to send a material sum in reliance on the receipt of other money, it is simply good, smart business to make sure there is no room for surprises -- fraudulent, accidental or otherwise.

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Have the whole picture first.