US firm Locke Lord and its insurer have already paid out millions of pounds to settle claims brought by investors who lost money in the dubious investment schemes a former partner ran through the firm, it has emerged.
Some £21m passed through the client account of its London office as part of the schemes, for which Locke Lord was last week fined a record £500,000  after agreeing an outcome with the Solicitors Regulation Authority.
According to the newly published ruling  of the Solicitors Disciplinary Tribunal, which approved the outcome, the firm has settled “a number of claims” but others are outstanding – although exactly how much investors lost has proven hard to ascertain.
The firm has paid the $2.5m (£1.9m) excess on its insurance policy and the balance of claims has been met by its insurer.
The investment schemes were run by Jonathan Denton, a partner and later ‘of counsel’ before his dismissal in 2015, who is also facing disciplinary proceedings.
The tribunal said expressly that its decision to approve the agreed outcome did not prejudice Mr Denton’s right to show before a differently constituted the tribunal that the transactions were not actually fraudulent, even if they had “the hallmarks of fraud”.
The agreed facts of the case showed that, around August 2012, the firm began to act on a series of transactions for corporate clients called Ikaya and Slonne. Mr Denton was the sole director of the former, with his wife the company secretary.
“Ikaya/Slonne purported to operate, via various trading companies, an investment scheme offering very high yields. Investment funds were received into the firm’s client account from individual and corporate investors, which were placed into one of seven separate trusts, with the joint trustees being… Ikaya and Slonne…
“Approximately £21m was paid by investors into the firm’s client account between September 2012 and April 2015; however, there did not appear to be any verifiable returns to investors, and those investors who did receive a ‘return’ received only a fraction of the contracted amount, which in a number of cases had been paid out of sums received into the firm’s client account from other investors.”
The agreed facts said Mr Denton promoted the investment scheme to potential investors in his capacity as a director of Ikaya and lent comfort to at least one of them by meeting him at Locke Lord’s offices.
At this meeting, Mr Denton said the investments purportedly provided security against which a line of credit could be obtained to acquire bank-issued debt instruments, the resale of which would generate substantial profits.
He also became involved in purported ‘bullet trades’, when returns of 10 times the capital investment over a six-week period were promised.
There were several occasions where Locke Lord was put on notice of a potential problem but “failed to make adequate enquiries”.
In 2013, it was approached separately by the FBI and the Metropolitan Police about a payment from client account, while a partner in the firm’s California office who had been contacted by Mr Denton about another transaction outlined his concern that the firm was “unwittingly stepping into a potential fraudulent scheme”.
At the end of 2013, investors started raising concerns and in July 2014, Locke Lord’s COLP expressed concern to its general counsel that there had been “a certain mixing” of Mr Denton’s roles as a lawyer of the firm and a director of Ikaya. In May 2015, the firm was contacted by North Yorkshire Police.
Two months later, Mr Denton was given notice but during his three-month ‘gardening leave’ was allowed to use his firm email account to correspond with investors; indeed, the COLP forwarded enquiries from investors on to him.
In October 2015, Mr Denton was arrested at Birmingham airport.
Locke Lord accepted that a proper investigation would have led to establishing that the transactions were, at best, “dubious”.
Further, a “straightforward review of the ledgers recording the transactions” would show that investors’ monies were being use to make payments to other investors.
The firm acknowledged that the use of its letter-headed paper, email accounts and offices gave the impression to investors that “this was a Locke Lord-backed investment”.
That it allowed Mr Denton to continue to act even after being contacted by the FBI and UK police was an aggravating factor. Further, the firm received more than £1.25m in fees during the course of the retainer.
Locke Lord’s multiple failures were found to demonstrate a lack of integrity, the first time a firm has been found guilty of this charge.
It also failed to act in the best interests of clients, failed to act in a manner which maintained public trust in the firm or the provision of legal services, and failed to run its business in accordance with proper governance and sound financial and risk management principles.
In mitigation, the firm stressed that it acted in good faith and noted that every time it raised questions with Mr Denton, “he was able to provide answers or explanations in response to what appeared to those dealing with them at the time to be isolated issues as opposed to anything more sinister”.
They were issues too which, on their own, did not appear to raise any questions about Mr Denton’s honesty or integrity, it continued.
It was also noted that Locke Lord’s auditors did not raise any concerns either.
The firm detailed changes to its systems and controls made as a result of these events. Earlier this year, a senior member of the wider firm was appointed as regulatory and compliance counsel (RCC), part of whose responsibilities is to authorise all payments in and out of client accounts irrespective of amount.
Any payments of more than £250,000 have also to be approved by Locke Lord’s general counsel and, in the UK, its compliance officer for finance and administration (COFA) or, in the US and Hong Kong, the firm’s chief operating officer.
Additionally in the UK, the compliance officer for legal practice (COLP) must approve the transaction before submitting it to the COFA.
The RCC is further required to carry out enhanced due diligence on the sources of funds and payees before funds are received or paid out. Once these procedures have been carried out, in the UK any payment must be approved by a partner and reviewed by a second partner.
Breach logs are monitored daily, while all members of staff in London have received anti-money laundering refresher training.
Changes to supervision have seen the London managing partner taking on the role of risk partner and meeting with each partner twice a year to identify the sources and nature of the partner’s work.
The managing partner also conducts personal interviews with each associate to discuss development and identify any concerns they may have about their work. Associates cannot conduct any work without the direct supervision of a partner.
The managing partner reviews hours worked, work in progress and bills at least twice a week.