Law Firm considers action against SRA for failure to act over bogus law firm

Legal Futures has reported that a Birmingham law firm is considering whether to take legal action against the SRA after being tricked by a bogus practice as part of a mortgage fraud.  
Davisons claims that the failure of the SRA to act promptly over a warning that a bogus practice was operating led to it falling victim to part of a mortgage fraud.  Davisons is now facing a court order to pay £184,500 to Nationwide.
The High Court found that:
In October 2008, a fraudster pretending to be the owner of legitimate law firm Rothschild notified the SRA of an intention to open a branch office in the Small Heath area of Birmingham.  The email address used was different to those previously used by the firm, but this was not picked up on by the SRA.  The office of Rothschild Small Heath was included in SRA records and on the Law Society ‘Find a Solicitor’ website from October 2008.
The legitimate Rothschild firm became aware of the fraudulent office in December 2008, and notified the SRA immediately.  However, the fake branch was not removed from the records until April 2009.  
The legitimate Rothschild firm was not involved in the fraud.
In the period between the SRA being notified of the bogus office, and the details being removed from the records and website Davisons fell victim to a mortgage fraud.
Davisons was acting for a buyer and Nationwide Building Society, purchasing a £250,000 property in Sutton Coldfield using a £184,500 mortgage.  Davisons followed the Law Society mortgage fraud green card and the Lenders Handbook by using the ‘Find a Solicitor’ website to check the details of both the firm Rothschild Small Heath, and the individual solicitor.
The transaction was reported to SOCA, and Davisons received the go-ahead to proceed.  Unfortunately the money was lost once it was released to the bogus firm.  
The High Court found that Davisons had not acted unreasonably when it failed to notice allegedly suspicious aspects of the correspondence with the bogus firm.  However, it was found that Davisons was in breach of its contract of retainer with Nationwide, and acted in breach of trust when it failed to obtain a legally enforceable charge.  
The firm was also held to be in breach of trust as it parted with the mortgage advance without an express undertaking by Rothschild Small Heath to discharge the existing mortgage on completion.  As Davisons was held to be in breach of its contract and in breach of trust, it was not entitled to relief under section 61 of the Trustee Act 1925.
Managing Director at Davisons, Gary Davison has said that firm is preparing to apply for leave to appeal.  The appeal will focus on the interpretation of the Law Society code, which the firm argues implies an undertaking.  
Mr Davison stated that he was “astounded and appalled” by the SRA failure to act quickly over the warnings about the bogus firm.  He argues that had the SRA removed the details of Rothschild Small Heath from its records in December, the checks by Davisons would have stopped them from continuing the transaction.  
The results of the bogus transaction have hit Davisons more than solely in the claim made against the firm.  It has also affected the firm’s indemnity insurance.  As the court action had to be disclosed to its insurers, the premium paid by Davisons has more than doubled.  
Mr Davison has said that he is taking legal advice as to whether the firm could take action against the SRA to recoup their losses.
The SRA issued guidance to solicitors on bogus law firms on 26 March 2012.  This states that fraudsters may use misstatement to register with the SRA, and that an entry on the Law Society ‘Find a Solicitor’ website should not be used as verification that the firm is genuine.  
An SRA spokesman told Legal Futures:
“ It is cases such as this, and persistent further frauds or attempted frauds, which prompted the SRA to issue its warning to help the profession reduce its vulnerability to such behaviour. This case occurred in 2008-9, since when the SRA has carried out a substantial tightening of authorisation processes and trained staff in the risks arising from bogus firms or branch offices.
“The case also confirms the risk of firms being held liable by the courts even though they may be characterised as victims of the fraud, as the SRA has warned. In terms of the judgment, the SRA was not a party to the proceedings and it would be inappropriate to comment on the facts.”
This case acts as a further warning for the need of solicitors to be careful that they check carefully the firms they are dealing with.  The possible effects reach wider than a possible court action, including increases in indemnity insurance premiums.  
Today’s Conveyancer, bringing you the latest conveyancing news and updates.
Today's Conveyancer