SDT: Solicitor drifted into the work
A veteran solicitor who provided banking facilities through his client account for a scheme promising investors a 1,000% return has been fined.
The Solicitors Disciplinary Tribunal (SDT) found that Michael Vaughan, a partner at Kingswell Berney in Gosport, also acted recklessly and with a lack of integrity by “becoming involved in financial arrangements despite clear warning signs they may be dubious (even where the arrangements were not in fact fraudulent)”.
Together this was “very serious misconduct which offended a cornerstone of legal practice”.
Mr Vaughan, admitted in 1975, was the firm’s COLP, COFA and money laundering reporting officer at the time of the misconduct in 2012/13, which only came to the attention of the Solicitors Regulation Authority (SRA) in 2018 following a referral from the Legal Ombudsman (which did not find against the firm).
Mr Vaughan was instructed by ‘IM’, an existing financial adviser client, “in respect of various corporate loans which he was arranging for his own clients” to invest in a scheme that IM expected to generate as much as a 10x return.
IM’s clients paid a ‘deposit’ on their loans to be held in escrow by the law firm; Mr Vaughan opened a high-interest client account instead, telling the SRA that he had not known that escrow accounts existed.
Between June 2012 and July 2013, Kingswell Berney received £711,000 from borrowers, £578,000 of which was sent to be invested in a trading programme run by Jonathan Denton, then a partner in US law firm Locke Lord.
The trading programme was not successful and the investors lost their money, although Mr Vaughan later helped two of them recover their funds in full. No claims were made on either his firm or the SRA Compensation Fund.
In 2018, Mr Denton was struck off for what the SRA described as his “dishonest participation” in the programme. Locke Lord, meanwhile, accepted a record £500,000 fine over its failure to stop him.
The SRA stressed that it made “no allegation” that Mr Vaughan “knew of or participated in that potential fraud”.
The SDT ruled that his involvement in the various transaction “did not begin to approach the provision of legal services and there was no underlying transaction in respect of which he was advising”.
Mr Vaughan admitted breaching the accounts rules and failing to behave in a way that maintained public trust in the profession by providing banking facilities.
He also admitted becoming involving in dubious financial arrangements but denied acting with a lack of integrity or recklessly.
The SDT said the promised rate of return and the use of ‘buzzwords’ were warning signs of a potentially dubious investment scheme.
“The tribunal considered the promised rate of return was quite extraordinary and to be something which by itself required additional scrutiny and caution to be exercised.”
The SDT said the warning signs were “numerous and stark”, including the “seemingly unnecessary routing” of loan monies through a Cypriot company, the degree to which confidentiality was emphasised and “the absence of any clear reason why the firm needed to be involved at all”.
That it turned out the arrangements were not fraudulent did not affect the solicitor’s obligation to act with integrity “given the hallmarks of potentially dubious or fraudulent arrangements”.
Further, the work was outside Mr Vaughan’s area of expertise and the SDT said he must have been aware of the potential risks in becoming involved. It was “reckless” to act and pay away client money without making further enquiries about the legitimacy of the scheme.
In mitigation, it was argued that, “had a rogue solicitor not acted as he did”, the proceedings would not have happened. Mr Vaughan had “trusted those at Locke Lord, with good reason”.
The SDT concluded that Mr Vaughan’s motivation for becoming involved was “to take advantage of an opportunity to generate business and fees”.
However, the tribunal did not consider the misconduct was “planned”.
It was “more apt to say the respondent had drifted into it without knowledge and expertise of this type of work”, having been “influenced by someone he trusted who introduced the work to him and upon whom he relied far too much”.
The SDT said that while it “seemed that the client money had been recovered in full, the fact that it had required proceedings to recover it in some cases involved harm in terms of delay, inconvenience, potentially some costs and distress”.
In terms of mitigating factors, the solicitor had help to recover the money and “displayed insight into the shortcomings of his actions and had made significant admissions at an early stage”.
The tribunal decided that Mr Vaughan should pay a fine of £15,000, reduced to £3,000 for lack of means.
The SRA applied for costs of over £42,800, which were reduced to £30,800 after assessment and then to £6,160 for lack of means.
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