The Solicitors Regulation Authority (SRA) yesterday issued its first detailed statement on the Axiom Ince scandal, saying the suspected dishonesty was “sophisticated” and had been missed by everyone else.
It also revealed that it has put other consolidator law firms – or what the SRA calls ‘accumulator’ firms – under increased scrutiny.
The statement followed the Serious Fraud Office’s announcement that it had begun a criminal investigation into the firm, arresting seven people in dawn raids on nine locations, more than two months after the SRA first notified it.
The regulator, which is under scrutiny for how it has dealt with Axiom Ince, said it was limited in what it could say but revealed that it discovered the “significant shortage” in client account – put by the SFO at £66m – in late July in the wake of what was then Axiom DWFM’s acquisition in April of listed law firm Ince.
“Firms must notify us if a takeover has happened. We then assess on a case-by-case basis the risks of that takeover, what assurances we might need and actions we may need to take to protect the public…
“In this case, it was unusual that Axiom was taking over a larger firm, Ince Gordon Dadds, which was also doing specialist work, shipping law, which Axiom was not experienced in.
“Therefore, we visited the firm to check all was in order and assess whether we needed to take further steps to manage risks. This is when we identified the issue of the significant shortage in the client account.”
This led to the intervention on 10 August into the individual practices of group chief executive and sole shareholder Pragnesh Modhwadia and two other directors.
The SRA said its forensic investigation team had dug behind “what on the face of it looked like well-ordered accounts. The nature of the suspected dishonesty was sophisticated and included falsified bank statements and letters”.
It stressed that – apart from those who may have been complicit – no one was aware of or identified issues with the client account, including the other partners, accountants or banks; nothing was raised in any of the firm’s accountant’s reports. The accountants were North-West London firm Adrian C Mansbridge & Co.
The statement said: “Like any firm of a reasonable size, we have had a number of complaints about Axiom over the years. Yet nothing out of the ordinary.
“We visited the firm last year to investigate a self-report by the firm about another solicitor in relation to immigration work, but neither this complaint – or any others – were linked to the issues we uncovered with the client account or the suspected dishonesty that led to the intervention.”
The SRA went on to say that, although the missing money meant Axiom Ince could not carry on operating in the long term, “it was not in the interests of clients to close the whole firm down immediately”.
This was because it was still able to deal with many clients’ matters and could also move some to other firms with client consent.
“We liaised with the remaining directors to make sure they were working in the best interest of their clients and to achieve as orderly a closure as possible in the circumstances.
“The firm announced its intention to call in the administrators on 1 October. The firm would no longer be able to deliver legal services effectively to its clients, so we stepped in to protect them, intervening into the rest of the firm on 2 October.”
The regulator said it was too early to say how many Axiom Ince-related claims its Compensation Fund would have to meet: “A key reason for this is it that we need to confirm how much might be covered by the firm’s insurance.”
But it went on to warn again that the levy on the profession to pay for the fund – against the background of the other interventions into ‘accumulator’ firms Metamorph and Kingly, and a broader pattern of increased claims – would have to go up.
Last month, SRA chief executive Paul Philip said a “radical” increase in the fund’s reserves would be needed.
“We recognise that firms are already expressing concerns about potential increases, particularly smaller firms.
“In the longer term our overall policy towards consumer protection will need a wider discussion once the immediate priorities have been resolved. Developing the right approach is an absolute priority for our board and leadership.”
The SRA board will review the risks of accumulator firms at its meeting next month. “We need to understand whether there is now a new systemic risk which would mean we need to adapt our regulatory approach and how we can best proactively identify early warning indicators.
“In the meantime, we have increased our scrutiny of firms we have classified as accumulators and will commence inspections of a number of such firms.”