Off the leash – as regulators target City leaders, is more to come?

It was a prized scalp. In December, Clifford Chance (CC) became the first Magic Circle player to fall foul of the Solicitors Regulation Authority (SRA), when the firm and its disputes partner Alex Panayides were each fined £50,000 for their role in the well-documented Excalibur professional negligence saga.

It was a highly-symbolic move. But the £50,000 penalty is small beer relative to CC’s global revenues, and to the fines received by White & Case and Locke Lord in 2017. US firm Locke Lord, with a small City operation, was ordered to pay a record £500,000.

At face value, it seems the SRA has been particularly proactive of late. The Solicitors Disciplinary Tribunal (SDT) broke its record for highest fine administered more than once in 2017, suggesting a fresh prosecution drive on the SRA’s part.

As one City professional negligence specialist comments: ‘I have seen the SRA get more aggressive over standard professional misconduct issues. I read this as laying down a marker with bigger law firms. It’s flexing its muscles. There’s not much we can really do about that.’

But were these rare examples of the SRA getting a result against Global 100 firms in an unusually successful spell? Is it really an indication that the regulator has the desire and the resources to move away from pursuing high-street firms with dubious client account practices and, like the Financial Conduct Authority, hold the City elite accountable for misconduct? Or is it just a statistical blip?

‘Striking similarity’

If the SDT’s analysis of the CC investigation is anything to go by, the SRA is not doing enough. Beyond the headlines, the SDT chastised the regulator in its judgment for not broadening the scope of its scrutiny.

The dispute dates back to 2013, when CC represented Excalibur Ventures in an unsuccessful $1.6bn Kurdistan oil deal damages claim against Gulf Keystone Petroleum and Texas Keystone.

London’s Commercial Court ruled in 2014 against Excalibur and ordered the Lemos family, which funded its claim, to pay the defendants’ indemnity costs of £13.75m on top of the original funding advance.

CC was then on the end of a professional negligence claim from the Lemos family after Panayides gave a positive assessment of the litigation throughout, which the funders based their lending evaluation on. CC settled the claim for an undisclosed sum in December 2015, but a November 2016 Court of Appeal hearing of the decision saw CC criticised for having an ‘acute’ conflict of interest in the case, as Panayides’ father was a chairman of one of the ship companies owned by the Lemos family.

The SRA began its probe in March 2015 and, despite the SDT not identifying any conflict of interest in its ruling, both CC and Panayides admitted to three separate allegations. Among other things, they conceded that they had sent a preliminary evaluation of the case to one of their funders without informing them that an Excalibur director had prepared the first draft.

The firm argued that Panayides had reviewed the first draft so that he ‘was satisfied that it fairly and accurately reflected the views of himself and Client A’s (Excalibur) legal team’.

Not only was the tribunal critical of the scope of the investigation, but it also noted the ‘striking’ similarity between the SRA’s charge sheet and the agreed outcome.

However, the SDT said it was ‘concerned that the charges brought against each respondent provided no scope to examine whether it was proper for a solicitor to allow his/her client to write an assessment of the merits of the client’s case for the purpose of obtaining third-party funding at all, irrespective of the amount of such funding and whether the solicitor agreed with the assessment or not’.

The tribunal added: ‘There were, surprisingly, no allegations of lack of integrity, recklessness, nor acting contrary to Principle 6 of the SRA Principles 2011 (behaving in a way that maintains the trust the public places in you and in the provision of legal services), which the tribunal would normally expect to see in cases of this nature.’

Not only was the tribunal critical of the scope of the investigation, but it also noted the ‘striking’ similarity between the SRA’s charge sheet and the agreed outcome decided upon by all parties. Agreed outcomes, described by Richard Harrison who heads up Clyde & Co’s lawyers’ professional liability sub-group as ‘an expedited procedure’, are a recently-introduced type of plea bargain designed to accelerate and cut the cost of prosecutions.

CC also admitted it had entered into an unlawful conditional fee arrangement (CFA) with Excalibur in 2010. The CFA included a 40% discount on standard hourly rates, with the discounted fees invoiced monthly. There was also a success fee that amounted to whichever was greater: the aggregate discount previously applied plus four times that amount, or 10% of the client’s winnings capped at $15m. Such an arrangement was ‘unlawful and unenforceable’, so far as High Court litigation was concerned.

They also admitted making payments with monies supplied to them by litigation funders. Despite the SDT determining that their conduct was ‘very serious’, the respondents were aided by substantial mitigating factors. These included CC’s decision to self report and Panayides’ ‘very significant personal difficulties’, which he was struggling with at the time.

As such, many City partners have been quick to downplay the seriousness of CC’s conduct in this case, with one insisting: ‘Where a firm has been faced with criticism by a judge, then it’s inevitable that the SRA is going to look at it. The fines related to relatively minor matters compared to the press speculation.’

Others have chalked it up to the law of averages – CC is a large firm doing a lot of work, so things like this are bound to happen. RPC partner Graham Reid says: ‘The bigger you are, the bigger problems you have.’

Stewarts partner Clive Zietman concedes that ‘there’s bad apples in every firm’, but warns against firms becoming too lax about regulation. ‘Firms have got to take regulation more seriously. Not least because we get the insurers demanding practical standards of things. Nobody wants to claim against them. There have been enough decisions for lawyers to think: “I need to be careful.” It’s clearly the direction of travel.’

‘Dubious financial arrangements’

There was no leniency nor understanding for Locke Lord, with the firm hit with a record £500,000 fine in November after one its former UK lawyers, Jonathan Denton, used the firm’s client account for transactions ‘that bore the hallmarks of dubious financial arrangements or investment schemes’.

However, the SDT again found the SRA to have been too soft, rejecting the £250,000 penalty agreed between the firm and the regulator and doubling it.

The matter dates back to August 2012, when Locke Lord began acting for clients Ikaya and Sionne, which claimed to operate high-yield investment schemes. Subsequently, an estimated £21m of investment funds went into the firm’s client account between September 2012 and April 2015, from both individual and corporate investors.

‘There have been enough decisions for lawyers to think: “I need to be careful.” It’s clearly the direction of travel.’
Clive Zietman, Stewarts

Denton had appointed himself as the sole director and shareholder of Ikaya, with his wife acting as company secretary. But there were very few verifiable returns to investors and any returns received were a fraction of the contracted amount. Over the period of the retainer, Locke Lord billed a total of 1,424.9 hours and delivered invoices from the firm to Ikaya totalling £532,044.79, £657,194.37 and €286,902.52.

The firm was contacted by the Federal Bureau of Investigation (FBI) in 2013 after £7m was paid to a US-based investment vehicle called Dynasty. The FBI was concerned that an individual involved in the transactions with ‘some history of prior investment fraud or irregularities’ may be trying to divert £2m for his own personal use.

Locke Lord’s chief financial officer intervened at this stage, and received assurances from Denton that the UK lawyer was going to abort the transaction and return funds to investors. However, senior officers at the firm did not take any steps to ensure that Denton had returned the relevant funds. Despite all of this, the firm continued to receive what the SDT described as ‘substantial payments’ into its client account.

Unsurprisingly, the SDT considered Locke Lord’s failure to prevent such actions as ‘a very serious set of circumstances’. The tribunal compared the Locke Lord case to the White & Case matter (see below), where the firm was fined £250,000: ‘Whilst that firm’s turnover was significantly greater, there was no allegation of lack of integrity.’ It concluded that the proposed £250,000 fine for Locke Lord was inadequate and offered the parties two options: proceed towards a substantive hearing, or accept a revised penalty of £500,000.

One professional negligence partner notes the ‘sheer speed’ with which Locke Lord and the SDT agreed to the doubling of its fine, saying they ‘got the impression the SRA came back the next day to agree’, inferring the regulator was quick to bend to the demands of the tribunal. While displaying the eagerness to secure a prosecution, it does not help the SRA’s soft image as portrayed by the SDT.

Kingsley Napley negligence partner Iain Miller observes the ‘interesting’ tendency for American firms to quickly agree to higher fines ‘when you’ve got English firms haggling for £50,000’. However, he adds: ‘America is not known for its legal services regulation.’

‘Ample resources to protect clients’

The record for highest fine given to a firm stood for only four months in 2017 until Locke Lord fell foul of the SDT. The previous record was the £250,000 penalty handed down to White & Case in July for failing to identify a conflict of interest during a $2bn commercial dispute.

David Goldberg, a solicitor-advocate specialising in arbitration, joined White & Case in 2009. Goldberg began advising a client (referred to in the judgment as ‘Client A’) the following year in high-value financial claims against two individuals. The matter went on to include claims against two individuals (referred to as ‘persons C and D’ in the judgment). Persons C and D were indirect ultimate-majority beneficial owners of various companies in the US that were, as of June 2011, clients of White & Case in a corporate mandate being handled by the firm’s New York office.

Before the New York corporate matter began, White & Case undertook a conflict check where it was decided that no conflict of interest would arise. According to the judgment, this was due to Goldberg’s mistaken belief that the dispute had settled.

In November 2012, the decision was taken by White & Case’s New York-based general counsel (GC) that there was no conflict of interest. This decision came after the GC discussed the issue with the partners working on both the corporate and dispute matter, including Goldberg. During the discussions, Goldberg acknowledged that if the client knew the firm was acting on both matters, they would not allow it.

‘The SDT’s fining guidance has some strange choices of words. It’s supposed to give you an understanding of how they will assess matters, but it’s not clear.’
Graham Reid, RPC

The client eventually raised the issue with White & Case in October 2013, expressing concerns about the protection of confidential information. White & Case responded, dismissing the concerns as ‘frivolous’. In 2014, the client was granted an injunction restraining White & Case from continuing to act in the dispute matter. That same year, the matter was reported to the SRA, who then referred the case to the SDT.

Goldberg received a smaller £50,000 fine, thanks in part to what the SDT describes as his ‘candid’ nature throughout. White & Case was less fortunate, being hit with a £250,000 fine as the firm had ‘ample resources to protect its clients and to prevent the occurrence of issues such as had arisen in this case’.

However, this case differs from the others presented, as the SDT and the SRA were broadly in accordance. The agreed outcome, crafted by the SRA, Goldberg and White & Case, was deemed acceptable by the tribunal, which held that the conduct ‘was significantly serious and agreed that it came within Level 5 of its indicative fine bands’. It described the proposed £250,000 sanction as ‘reasonable and proportionate’.

Not taken seriously

It is clear from the cases above that the SDT has not been wholly impressed with the SRA. Resorting to agreed outcomes and taking a conservative approach to the scope of an investigation did not inspire confidence from the tribunal. City professional negligence partners counter that softening the relationship between firm and regulator has helped the SRA improve the volume and significance of its prosecutions.

Reid says: ‘The SRA has spent more time paying attention to big law firms over the last three to five years. They’ve employed relationship managers to be in a consistent dialogue with law firms and over the last two years in particular they’ve really engaged with such firms. It’s very likely that, as a result of these steps, the SRA has a better understanding of what big law firms are up to.’

In spite of this apparent increase in attention on bigger firms, the SRA failed to prosecute Magic Circle outfit Allen & Overy (A&O) and two of its partners for their alleged conduct while representing billionaire Victor Dahdaleh in 2013. The partners, David Esseks and Peter Watson, along with Dahdaleh, allegedly met with a witness for the prosecution just before the trial was about to begin, despite Dahdaleh’s bail conditions prohibiting him from contacting any prosecution witness. The SRA’s case against A&O and the two partners was resolved in August 2017, after the regulator failed to find any evidence of misconduct. A&O has declined to comment on the case.

And, despite the SDT’s concern over the similarities between the SRA’s charge sheet and the agreed outcome in the CC case, the tribunal only rejected five out of 27 of the proposed plea bargains in 2017. Harrison says: ‘It’s always good to see if you can explore a compromise. The practice is now developing around that procedure. The SRA has been more than prepared to consider agreed outcomes.’

Aside from agreed outcomes and the proactive nature of the SRA to engage with firms, a key factor in the rising severity of prosecutions is the 2011 tightening of guidelines. In that year, the SRA revised its Code of Conduct, giving firms a greater obligation to self-report misconduct through the introduction of principles-based regulation.

Harrison goes as far as to say: ‘I don’t think large firms took the regulator particularly seriously before 2011.’ This opens the possibility of the high frequency of recent prosecutions being the result of a lag effect from the 2011 rule changes.

When surveying professional negligence specialists for this piece, a common issue raised was the resources available to the SRA. For some, the number of large, high-profile prosecutions that took place in 2017 was a result of choosing the best cases based on its limited means. Miller estimates that the regulator’s legal budget is around £4m to £5m. ‘For the last three or four years, it has become conscious of managing its resources. But it is not the Financial Conduct Authority; it doesn’t have a huge budget, it has to pick and choose.’

However, he notes that the ‘greater threat’ to clients, and what still swallows an ample amount of the SRA’s resources, are the smaller high-street outfits. ‘Big firms are not taking client money,’ Miller asserts.

‘The SRA has become conscious of managing its resources. But it is not the FCA; it doesn’t have a huge budget, it has to pick and choose.’
Iain Miller, Kingsley Napley

Clydes partner Fergal Cathie, who represented CC in the Panayides matter, adds: ‘The SRA is like any publicly-funded organisation. Clearly it doesn’t have unlimited resources. If you were going to pursue a career as a regulatory lawyer, would you do it as a lawyer in the City or as a lawyer at the SRA in Birmingham?’

One City regulatory partner is not impressed. ‘When we make a complaint to the SRA, I am staggered by how long it takes for it to come up with a decision. If we took that long for our clients, we would lose the job. I don’t know if they are under-resourced, but it can be shocking how long it takes for pretty straightforward matters.’

Although not a grievance with the SRA itself, partners have criticised the SDT’s fining guidelines extensively. The tribunal determines the level of fine a firm should receive by comparing the misconduct against a five-tiered seriousness test. The most grave, Level 5, is defined by the SDT as ‘significantly serious but not so serious as to result in an order for suspension or strike off’.

Reid argues: ‘It’s very difficult to understand what’s going on with those fines. The SDT’s fining guidance has some strange choices of words, making distinctions between conduct that is “more serious”, “very serious” and “significantly serious”. It’s supposed to give you an understanding of how they will assess matters, but it’s not clear. By those standards, lots of firm misconduct is going to head to Level 5 very fast, but where are the rules that tell you the reasoned approach to calculating the number?’

Ultimately, it is clear that the SRA is now more proactive in policing large firms. For its part, the regulator issued this statement in response to the piece: ‘We consider each case on its merits and take action where there is proven misconduct, regardless of the size of the firm involved.’

But the reality is that the SRA’s limited resources mean it has a tendency to concentrate on securing high-profile scalps. Despite the SDT’s apparent concern in the CC/Panayides case, the advent of agreed outcomes has eased this, resembling the success the Serious Fraud Office has had with deferred prosecution agreements.

And with regulatory partners reporting an uptick in instructions across the board, it is unlikely to be too long before another record fine materialises. Concludes Harrison: ‘There has been a great deal of pressure on the regulator to be seen to be holding the large firms to account, because there was a perception that it didn’t have the appetite to take on the large firms. It’s become a significant part of our practice now and we’ve had a number of substantial instructions.’ LB

tom.baker@legalease.co.uk