Locke Lord failed to prevent a London partner from using the firm’s client account to run a “dubious” £21 million ($27.5 million) investment scheme for two and a half years, despite inquiries from the FBI and the Metropolitan Police, a Solicitors Disciplinary Tribunal (SDT) judgment shows.
The judgment, published Nov. 10, contains full details of the background to the U.S. firm’s record £500,000 ($656,000) SDT fine, which it received last week after admitting a number of failings regarding its supervision of former banking and finance partner Jonathan Denton, who was arrested at Birmingham Airport in late 2015 after being fired from the firm that summer.
Denton, also a former partner at Mishcon de Reya, Salans and Wragge & Co, joined Locke Lord in March 2012, shortly after it launched a London office at the start of that year.
The judgment sets out how in July 2012, a company named Ikaya was incorporated with Denton as sole director and his wife as company secretary, along with a second company, Slonne, which “purported to operate … an investment scheme offering very high yields.”
A client engagement letter was subsequently sent from the firm to Ikaya and Slonne, addressed to Denton on behalf of Ikaya, setting out a retainer and confirming that Denton would be the client partner—an issue the firm later noted as having created “a certain mixing” of his roles as Ikaya director and Locke Lord lawyer.
The judgment states that Denton and Locke Lord advised Ikaya “in relation to seven investment trusts during the retainer” between September 2012 and June 2015, during which time Denton billed a total of 1,424.9 hours, delivering invoices from the firm to Ikaya totaling £532,045 ($697,298), $657,194 and €286,902 ($334,628). Approximately £21 million ($27.5 million) was paid into the firm’s client account by investors during that period.
Despite Denton’s efforts to assure those putting money into the scheme that their capital would be safe, and that he could achieve monthly returns of 6 percent, the judgment states that “there did not appear to be any verifiable returns to investors.”
It adds that Denton used his status as a qualified lawyer to “promote the investment scheme to potential investors” and attempted to “lend credibility to the investment schemes” by meeting at least one potential investor at the firm’s offices.
Questions began to be raised in 2013 when Locke Lord was contacted by the FBI over fears that $2 million of an investor’s money was at risk. The FBI was concerned that an individual involved in the transactions with “some history of prior investment fraud or irregularities” may have been trying to divert the funds for his personal use.
Later that year, the firm was contacted by the Metropolitan Police Service regarding “the veracity” of £7 million ($9.18 million) remitted from its Dallas office into the firm’s client account—an inquiry which was fielded by Denton.
In 2014, after receiving more questions from investors, Locke Lord’s compliance officer for legal practice (COLP) expressed concerns to the firm’s general counsel that there had been “a certain mixing” of Denton’s roles as a lawyer of the firm and a director of Ikaya.
After an April 2015 call from North Yorkshire Police regarding another investor complaint, Denton, who had already stepped down to an of counsel role, was fired and given three months’ notice as of July 23 of that year.
However, the COLP continued to forward inquiries from investors to Denton during his paid leave, and he was permitted to continue using his firm email account.
On Oct. 10, 2015, Denton was arrested at Birmingham Airport—five days before a telephone meeting took place between Locke Lord’s COLP, general counsel, and several investors who wanted to know where their money was being held. Denton was invited to attend the meeting but ignored calls, emails and text messages.
The tribunal was told that the firm has settled a number of claims with investors, but that it has been difficult to ascertain the sums involved. The firm’s insurance has an excess of $2.5 million, which has been paid.
Denton did not attend the tribunal and has been referred to the SDT after denying the allegations. The Solicitors Regulatory Authority (SRA) also claims that he misled third parties by producing false invoices and knowingly made statements that he knew to be untrue. The allegations are subject to a hearing before the SDT.
Herbert Smith Freehills represented Locke Lord at the tribunal hearing, with litigation partners Tom Leech and David Reston leading the firm’s team, while Capsticks partner Daniel Purcell acted for the Solicitors Regulation Authority.
Locke Lord’s £500,000 penalty is double the previous record SDT fine of £250,000 handed out to White & Case earlier this year for conflict and confidentiality failures.
While the firm admitted it failed to have effective systems and controls in place to identify and assess potential conflicts of interest, it said it had taken steps to review existing practices and procedure and has made a number of “changes and improvements.”