Solicitors who misused £1m raised from loan notes struck off

SDT: Actions were dishonest

Two solicitors who issued £1m in loan notes to prop up their firm have been struck off for misusing the money and leaving their investors nursing huge losses.

Two clients who provided unsecured loans of £370,000 without the Malletts having insisted or ensured that he take independent legal advice also lost their money.

Richard Mallet, a criminal law specialist who qualified in 2000, was chief executive of Norfolk firm Malletts, which he co-owned with family lawyer Sharon Mallett, admitted in 1993 and the firm’s chief operating officer and compliance officer.

The firm was placed into creditors’ voluntary liquidation in November 2016, with over £3.1m owing to creditors.

This included over £1m owing to 27 parties that subscribed for three tranches of loan notes – at interest rates of 8%, 10% and 20%.

The interest payments were due six monthly but only a few of the subscribers received any and none had their capital repaid.

Clause 4 of the loan note instruments said the proceeds were to be used for “business development generally” and for investment into a legal expenses insurance product the firm had developed, called 247businesshub, which was intended to be a 24-hour telephone advice service to members of national organisations with associated benefits.

Instead, the Solicitors Disciplinary Tribunal (SDT) heard, the loan note monies were utilised to service the firm’s overdraft, as well as tax bills, wages, rent and payments to the respondents.

Mr Mallett said his understanding was that the firm could use the money for any purpose, as it would be able to with regular business borrowing, and that this had been made clear to all brokers.

Even if this was the intention, the tribunal said, the wording of clause 4 was clear – it would not have been necessary had the pair been able to use the money for any purpose.

It was not “credible” that solicitors with their experience would not have understood this.

While both solicitors expected the new venture to deliver substantial income that would pay off the loans, after this did not materialise, the firm’s finances were “ruinous”, the SDT said.

It noted that Mr Mallett had acknowledged in interview with the Solicitors Regulation Authority “the inherent unlikelihood of the investors investing had they known that their monies were to be used simply to meet the firm’s liabilities, or that the firm was in financial peril”.

The solicitors acted without integrity and dishonestly, the tribunal concluded.

The two individual lenders were tapped after the loan note money had been spent. The solicitors admitted not advising them to take independent legal advice.

Mr Mallet said he had not considered there was a conflict between his and their interests, which he described as an error of judgment.

The tribunal said it was more than that – it was “a deliberate and conscious decision so as to avoid any due diligence being undertaken by his clients prior to them lending substantial amounts of money to the firm”. It lacked integrity and was dishonest.

Though Ms Mallett had not been involved in the negotiations with the lenders, her failure to make “satisfactory enquiries so as to ensure that all regulatory obligations had been complied with” lacked integrity.

Mr Mallett was also found to have presented the firm’s professional indemnity insurance cover to potential lenders as if it offered security in respect of their loans. This too lacked integrity and was dishonest.

He was further found to have failed to remedy the ongoing breach of an undertaking he had given to remove the charge on a property, again showing a lack of integrity.

Other findings against Ms Mallett were that she recklessly made false and misleading statements in a defence to an action brought against the firm over an unpaid invoice – she failed to check before stating that it had not been received – and failed to perform an undertaking to pay a costs draftsman and did not respond to SRA enquiries about it.

They both also breached multiple rules in relation to unpresented cheques sent to counsel.

Mr Mallett accepted that he would be struck off. The SDT said he caused “immense harm” to the investors and lenders, all of whom had lost significant amounts of money – for one of the lenders, it was his life savings.

Ms Mallett submitted that exceptional circumstances meant a strike-off would be disproportionate. Hers was a secondary role and she cited “the stress and turmoil suffered… as a result of her health and the pressures of the firm” as well as unspecified personal circumstances.

“In that very dark period, [she] had cracked under the pressure,” her counsel argued.

Like Mr Mallett, the SDT said, she was “motivated by her desire to keep the firm running until such time as the projects were providing the firm with the anticipated high levels of income”.

She was not the driving force behind the negotiations but authorised the expenditure of the money raised “in circumstances where she knew that she should not have”.

The medical evidence did not suggest that her circumstances at the time were such as to cause her to act in the way that she did.

Notwithstanding her “extremely difficult personal circumstances”, her conduct was dishonest, the tribunal concluded and she should be struck off.

It ordered Mr Mallett to pay costs of £84,000 and Ms Mallett £56,000.

The solicitors were also made subject to lengthy director disqualification orders in recent months.

In 2019, James Macwhirter, who was a partner and non-executive director of Malletts, accepted a fine of £2,000, costs of £7,500 and conditions on his practising certificate that prevent him from being a manager, owner or compliance officer of an SRA-regulated firm.

He was sanctioned as a partner at a firm where accounts rules breaches were found, even though in mitigation he said he had no involvement in the day-to-day management of the business, and took “no positive action” that caused the breaches – indeed, he did not know about them until the SRA’s investigation.

However, he accepted liability as he was in a managerial position at the firm at the time.

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