A little sunday morning governance nightmare. Over in Canada, a media entrepreneur sued his ex-law firm:
Mr. Cheikes says that in 1997 [his lawyer] Mr. Strother advised him he could not legally operate his tax-shelter business because of tax rule changes. Mr. Cheikes shut operations down that fall and asked Mr. Strother to find ways to make Monarch compliant so that the company could re-open.A year later, he found out that Mr. Strother had become a 50% partner in a movie tax shelter business called Sentinel Hill, and that [law firm] Davis & Co. were its attorneys. Mr. Cheikes says that from 1998 to 2002, Sentinel Hill made $140-million in total profits, that Mr. Strother made $32-million for himself and that Davis & Co. had been paid $9-million in fees.
Now, as written, this is a slam dunk, and in absence of a defence, we should be looking at what amounts to fraud here - breach of fiduciary trust, theft of trade secrets and business processes, etc etc.
A few words on where this all comes from. Why do we regularly question audits in the governance department of financial cryptography? Partly it is because the auditor's actual product is so disconnected from what people need. But the big underlying concern - the thing that makes people weak at the news - is the potential for abuse.
And this is much the same for your lawyer. They both get deep into your business. They are your totally trusted parties - TTPs in security lingo. This doesn't mean you trust them because you think they are trustworthy sorts, they speak with a silver toungue and you'd be happy to wave your daughter off with one of them.
No, quite the reverse: it means you have no choice but to trust them. The correct word is vulnerability, not trust. You are totally vulnerable to your lawyer and your auditor, more so than your spouse, and if they wish to rape your business, the only thing that will stop them is if you manage to get out of there with your assets firmly buttoned up. The odds are firmly against that - you are quite seriously relying almost completely on convention, reputation and the strength of the courts here, not on your ability to detect and protect the fraud as you are with almost all other attackers.
Which is why over time institutions have arisen to help you with your vulnerability. One of those institutions is the courts themselves, which is why this is such a shocker:
For example, the B.C. Supreme court agreed with Mr. Strother's argument that he had no obligation to correct his mistaken legal advice even though that advice had led to the closure of Monarch.The lower court also agreed with Davis & Co.'s contention that it should be able to represent two competitors in a business without being obliged to tell one what the other is doing.
What the hell are they smoking in B.C.? The Supreme Court is effectively instructing the vulnerable client to lie back and enjoy it. There is no obligation in words, and it's not because it would be silly to write down "thou shalt not rape your client," but simply because if we write it down, enterprising legal arbitrageurs will realise it's ok to rape as long as they do it using different words. It's for reasons like this that you have "reasonable man" tests - as when your Supreme Court judges are stoked up on the finest that B.C. can offer, we need something to bring them back to reality. It's for reasons like this we also have appeals courts.
In 2003, the B.C. Supreme Court heard the case but found no wrongdoing. Two years later, however, the B.C. Court of Appeal overturned that ruling, finding the lawyer and firm guilty.Mr. Strother was ordered to pay back the $32-million he had made and Davis & Co. was ordered to return $7-million of the $9-million in fees to Mr. Cheikes and his partners.
The high-stakes case was appealed again and the Supreme Court of Canada has granted leave to appeal, probably in October.
To be fair, this article was written from one side. I'd love to hear the case for the law firm! I'd also love to hear what people in BC think about that - is that a law firm you'd go to? What does a client of that law firm think when she reads about the case over his sunday morning coffee?
Posted by iang at May 28, 2006 06:50 AM | TrackBackThe fiduciary details must be established and confirmed via a entrance agreement and a closing agreement. If the Law Firm had continued to advise the tax shelter business ( Monarch) of if the company being terminated concluded that relationship. So the law firm says close and they do then the law firm finds out it made a mistake. So is the law firm required to take the damage for the bad advice? Well probably not since you are nor required to place your self in harms way, even if it is fair play. So the law firm stuck with this contingent liability allows the attorney that provided the bad information to establish a firm replicating the same business the damaged client had. So the law firm not being required to place itself in harms way did not participate directly in the ceasing of opportunity presented by their bad advice but rather acted as attorney to the new firm. The damaged corporation now has to sue the law firm for bad advise and sue the attorney personally and his corporate entity. If it where the US this could be considered work product by Monarch and potentially a copyrighted activity that could assert the rights based on the value the attorney robbed.
Posted by: Jimbo at May 28, 2006 09:17 AM