The insurer of London law firm Jirehouse – whose founder was jailed last year for fraud – has failed its ongoing bid to exclude liability for £6m in losses suffered by a client.
The High Court yesterday rejected Axis Specialty Europe’s argument that partner Vieoence Prentice had condoned the actions of Stephen Jones, triggering an exception to its cover.
The Jirehouse entities – the term used for three connected law firms – acted for Discovery Land Company, an American property developer, on its planned acquisition of historic Taymouth Castle, where Queen Victoria and Prince Albert stayed on their honeymoon.
Mr Jones misused two payments into the firm’s client account of $14m (£11.3m at current exchange rates) in 2018 and £5m in early 2019, and the money has not been recovered.
Axis provided the primary layer of Jirehouse’s cover (£3m per claim), under which it would have to pay out unless it could show that Mr Prentice, as the firm’s other partner, condoned Mr Jones’s actions. There was no suggestion that he was involved in the fraud.
Mr Prentice worked in financial services regulation before qualifying as a solicitor in 2013 and becoming a partner at Jirehouse in 2017. He worked for the firm for more than a decade.
He resigned in 2019 and insisted to the court that, until then, he “had not seen anything which would indicate Mr Jones was behaving as anything other than an experienced, honest and reliable solicitor”.
Axis argued that Mr Prentice was aware of Jirehouse’s financial problems and, as a result, the temptation or need for Mr Jones “to help himself to client funds”. But it submitted that he turned a blind eye.
Mr Justice Robin Knowles ruled that Mr Prentice had lied to Jamie Smith KC – who interviewed the solicitor in 2019 at the request of Axis – and that “there were points when he did not tell the truth in his evidence to the court”.
But his motivation was “to try to distance himself from facts and circumstances that by then he realised presented or appeared to present personal risk to him”.
The ruling detailed various occasions over the years where Mr Prentice would have become aware of Jirehouse’s financial difficulties.
These included three investigations by the Solicitors Regulation Authority (SRA) – in 2010, 2012 and 2017 – but each time the regulator took no action, which the court acknowledged would have given him comfort.
The judge said while Mr Prentice knew that Jirehouse had faced “material financial problems” during his time at the firm, “I do not accept his awareness was such that he appreciated or should have appreciated that the financial problems were such that Mr Jones might steal client funds”.
Knowles J continued: “I accept that Mr Prentice realised Mr Jones was prepared to do things that he should not have been prepared to do. In fact Mr Prentice was the same…
“To that extent, he realised Mr Jones was ‘up to no good’, was prepared to go along with that, was compliant and prepared to turn a blind eye.
“However, I do not accept that, before the events of March 2019, Mr Prentice realised or should have realised that Mr Jones had stolen client monies, or was prepared to steal client monies.”
It was, the judge said, “an altogether separate question whether Mr Prentice was a suitable person to be made a director and member of a legal practice, or even to be involved in one. In my judgment, he plainly was not.
“Or whether, as a director or member or employee, he behaved as he should have behaved in those positions. In my judgment, he plainly did not.”
Knowles J held, had Mr Prentice believed or strongly suspected wrongdoing by Mr Jones, he would have left, rather than just turned a blind eye.
“Despite what had gone before, the nature and scale of that proposition would have shocked even Mr Prentice and his instinct for self-preservation, well demonstrated as he gave evidence, would have seen his departure.
“The reason he did not make enquiries and follow up was rather because he lacked the necessary sense of professional responsibility and an appreciation of the importance of the regulatory requirements of his profession.”
Knowles J said that, even if he was wrong to say that Mr Prentice failed to investigate what money was being used to meet Jirehouse’s liabilities, “the suspicion would have been a suspicion about the use of client monies to address temporary exigencies and pressures and not a fraud of the nature and scale of that involved in the [Taymouth matter]”.
The judge concluded: “In my judgment the true story of this case is that Mr Prentice’s standards fell well below those required in his profession. Indeed there are episodes that show he was untrustworthy and prepared to behave dishonestly.
“But these episodes were not such as to justify a conclusion that he in any way appreciated that Mr Jones could be embarked on multi-million pound fraud, extracting client monies in connection with the commercial entities with which he was involved.
“Mr Prentice did not condone, either generally or specifically in relation to the two claims, what Axis described in closing as a Ponzi scheme by Mr Jones the roof of which fell in in March 2019.”
Knowles J also rejected Axis’s argument that Mr Prentice’s appointment as a partner was a sham and that the two claims should be aggregated as one.
In the ruling, he noted: “A model that allowed a single, dominant individual (such as Mr Jones) to have the position and influence he did in both the legal practice and the commercial vehicles may have presented additional risk to clients of the legal practice, but on the face of things the model was permitted by the SRA as regulator.”
The judge ended the ruling with an observation that clients and the public may be surprised to learn that insurance “may protect them where one of two partners was dishonest but not where the insurers can show the second partner condoned the dishonesty of the first”.
He added: “I appreciate there are other parts of the overall framework that is in place for the protection of the clients of solicitors. However at least the question of sufficient transparency on the point just mentioned may be suitable for joint review by the Law Society and the SRA.”
The SRA Compensation Fund exists to handle claims arising from fraud and theft where cover from professional indemnity insurance is denied, although it is capped at £2m per claim, with a discretion to grant more.