Sunday, June 12, 2016

Lawyer Falls Victim To Fake New Client, Counterfeit Check Scam That Commonly Targets Attorneys; Leaves Clients' Trust Account Short Nearly $300K; Court Kiboshes Attempt To Hold Banks Responsible For Negligence, Etc., Leaving Duped Victim Holding The Bag

In New York City, the New York Law Journal reports:
  • A small firm that fell victim to a counterfeit check scheme targeting attorneys lost its bid to sue two banks for negligence.

    In dismissing the firm's claim, Southern District Judge Edgardo Ramos found that the Law Offices of Oliver Zhou, which sued Citibank and PNC Bank over a counterfeit check by a purported client, failed to provide any authority for the proposition "that ordinary care" requires a collecting bank to identify false routing numbers, use fraudulent-check detection devices or investigate the source of counterfeit checks.

    The Zhou firm "appears to have been the victim of an unfortunately commonplace scheme targeting attorneys," Ramos said.(1)

    The scheme involves a fake new client who provides a counterfeit check for deposit and then requests an emergency wire of funds from the attorney's bank account before the check bounces.

    "The victim attorney is then both subject to his bank's right to charge back the funds from the check when it is eventually dishonored, and unable to reverse the wire of funds to the fake client," Ramos explained.

    Oliver Zhou, the firm's principal, told Ramos in a court conference last year that a woman from Japan called his office and asked for representation in a post-divorce action to get a payment from her ex-husband. He said the woman explained that her ex-husband agreed to transfer money for an emergency surgery for her child.

    Zhou, who said he represents a number of clients from Japan, told the court he believed the woman because she provided divorce documents, and he entered into a retainer agreement with her.

    On June 17, 2013, Zhou received a $297,500 cashier's check, purportedly from the ex-husband, that displayed PNC Bank's logo and a routing number, according to court papers.

    On June 18, Zhou deposited the check in his firm's IOLA attorney trust account at Citibank by giving it to a Citibank teller. According to Zhou's complaint, the teller reviewed the check, accepted it without using any counterfeit device to determine its validity or checking the routing number, and providing Zhou with a bank receipt stamped with notice of the money's availability. The notice stated that $297,750 was "available today."

    A day later, Zhou said he deducted a $10,000 retainer and, at the direction of his purported client, requested a wire transfer of $287,450 to an account in Japan.

    But on June 20, PNC Bank returned the check to Citibank as "altered/fictitious" and Citibank reversed the provisional credit in the account by $297,512, including a $12 service fee, according to court papers.

    On June 24, another firm client told Zhou that a check Zhou had issued to him had been dishonored due to insufficient funds in the trust account.

    The firm said it immediately contacted Citibank and was informed that PNC Bank had determined that the check deposited on June 17 was a "forged or counterfeit instrument" and would not be honored. Zhou asked Citibank to cancel the wire but it appears the transfer was never successfully recalled, Ramos said.

    Zhou sued Citibank and PNC Bank in June 2015, alleging negligence, breach of contract, misrepresentation, fraudulent concealment and aiding and abetting.
Source: Firm Victim of Check Scheme Loses Bid to Sue Banks (may require paid subscription; if no subscription, GO HERE, then click the appropriate link for the story).

For the court ruling, see Law Offices of Oliver Zhou v. Citibank N.A., 15 Civ. 5266 (S.D.N.Y. May 17, 2016).
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(1) In footnote 10 of the ruling, Judge Ramos describes the facts of a 2011 New York case with nearly identical facts that victimized another law firm:
  • The facts of Greenberg, Trager are practically identical to the facts in this case. The Greenberg, Trager plaintiff was also a law firm, which received an unsolicited email from a purported client seeking legal representation.

    The fake client agreed to pay the plaintiff a $10,000 retainer, and informed plaintiff that a customer of the client's would be sending the plaintiff a check for $197,750, which the customer supposedly owed to the client. The client instructed plaintiff to receive and deposit the check into the plaintiff's attorney trust account, and then wire $187,750 from that account to the client's account in Hong Kong, holding on to the $10,000 retainer.

    Plaintiff contacted the collecting bank three days after deposit to ask whether the check had "cleared," was told that "the funds were available," and wired the $187,750 to the fake client that same day. Days later, the payor bank informed the collecting bank that the check had been dishonored and was being returned as counterfeit. The collecting bank then charged back the $197,750 credit it had made provisionally available to the plaintiff, and the plaintiff was unable to cancel the wire to the Hong Kong account. The plaintiff then sued both the collecting bank and the payor bank on grounds of negligence and negligent misrepresentation. See Greenberg, Trager, 958 N.E.2d at 78-81. The New York Court of Appeals affirmed dismissal of the plaintiff's claims on summary judgment. Id. at 87.

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