Mortal dangers, moral hazard and mortgage lending by solicitors: an international perspective

DOIhttps://doi.org/10.1108/13590790310808835
Pages255-268
Publication Date01 Jul 2003
AuthorDavid J. Middleton
SubjectAccounting & finance
Mortal Dangers, Moral Hazard and Mortgage
Lending by Solicitors: An International Perspective
David J. Middleton
INTRODUCTION
Crime is increasingly globalised. Fraudsters develop
or observe new methodologies and, after a clamp-
down in one country, implement them in unsuspect-
ing jurisdictions. In The Globalisation of Crime,Mark
Findlay refers to the `transference of crime schemes
and crime ``ideas'' ' and notes that:
`Many of the fraud and corruption scams which
travel the world rely for their marketability on
the fact that they have been previously successful
in particular market contexts.'
1
An investigation by the Law Society of England and
Wales into a mortgage investment scheme initiated
and managed by a solicitor, Mr E, eventually dis-
closed that what had seemed like a novel case was
actually a local manifestation of serious problems
which had engulfed the legal profession in Australia.
Further research suggested parallels with the Savings
and Loan (S&L) scandal in the USA. These connec-
tions were, unfortunately, a great deal more evident
at the end rather than the beginning of a dicult
case. Law enforcement agencies and regulators have
a duty to share their knowledge of new or mutating
forms of wrongdoing. This paper is a modest attempt
to raise awareness and draw together common
issues from the experiences of the three dierent
jurisdictions.
The case of Mr E is presented as white-collar crime.
This is not to suggest that Mr E committed any
speci®c prosecutable oence. The behaviours identi-
®ed by the Solicitors' Disciplinary Tribunal (SDT)
and categorised by it as systematically dishonest are
discussed in the context of the wide conception of
white-collar crime as `abuse of a legitimate occupa-
tional role which is regulated by law'.
2
E SOLICITORS PLC
3
In February 2002 the SDT handed down ®ndings
regarding Mr E, thus concluding
4
a disciplinary
investigation which was a major stage in the transfor-
mation of the regulatory approach of the Law
Society of England and Wales. In 1988, Cordery on
Solicitors could justi®ably describe the Society's role
as `like that of an auditor . . . a watchdog and not a
bloodhound',
5
but by 2001, it had, by necessity,
become an active investigator.
Mr E practised through E Solicitors plc, an incor-
porated solicitors' practice. By March 2000 the com-
pany was managing over £15m of clients' money
which had been lent out to commercial borrowers.
6
Mr E had set up and advertised the `First Mortgage
Debenture Monthly Income Plan' to persuade mem-
bers of the public (treated as clients of his legal prac-
tice) to provide money to his ®rm to be lent out. On
the basis of security over land, companies received
loans of these client monies, in return for which the
investor-clients were paid rates of interest which
marketing literature described as `far better than
any High Street Bank or Building Society'.
7
The
rates paid or advertised were around 11± 14 per
cent.
8
The scheme was highly successful in attracting
investment funds. The pace of expansion was such
that it involved £11.1m in October 1999, rising to
£14.8m in January 2000 Ð an increase of £1m per
month.
9
The impression was given that the scheme
was `low risk', but defaults were concealed from the
lending clients, supposedly stringent credit checks
were nothing of the sort, and the security provided,
such as personal guarantees from the directors of
borrowing companies, was sometimes worthless.
10
Clients were also unaware of substantial pro®ts
which Mr E was receiving from the scheme in a
number of ways.
These and other issues led to an investigation into
Mr E's practice by the Law Society's regulatory
arm, the Oce for the Supervision of Solicitors
(OSS), resulting in a decision that there was reason
to suspect dishonesty on his part.
11
The Society sus-
pended Mr E's practising certi®cate, took possession
of all practice papers and monies, and obtained an
order from the High Court replacing him as trustee
of the scheme.
12
He was struck o by the SDT in
December 2001.
The case raises a number of issues which will be
discussed fully below but which may be summarised
Page 255
Journal of Financial Crime Ð Vol. 10 No. 3
Journal of Financial Crime
Vol.10,No. 3,2003, pp. 255± 268
#HenryStewart Publications
ISSN 1359-0790

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