Originally Published May 19, 2017
In our last article on fraud, we brought you an overview of five types of fraud most commonly seen in the legal funding industry. Now we introduce a number of tools and ideas you can use to catch fraud early or prevent it all together.
Of course, there is no simple, magical solution to stop fraudsters from swindling. Even those most-prepared are caught flat-footed at some point, but through critical thinking, caution, foresight and even moderate effort, you can drastically reduce the chance of suffering needless losses.
Here are 6 of the best and most accessible tools and methods you can use to foil legal funding fraud.
After reading this list I recommend you audit your funding process and determine where and how you can add any of these methods in -- even just one could have an outsized effect on saving you from bad investments.
Attorney Bar Websites
In many cases, attorneys are the gatekeepers to your successful business. Whether they are the primary source of originations or act as "partners" in a plaintiff's legal claim you've funded who you must rely on to uphold their fiduciary duty to honor your lien, checking their bar status is a must.
First, when dealing with a new attorney, always check the relevant state bar website where have been barred/licensed. Most official state bar websites have a search function-here is New York state's attorney search page, for example, which, upon entering his or her name, will quickly tell you your attorney's current standing and disciplinary history. If an attorney has had trouble in the past, it's worth knowing about beforehand!
There are two important caveats to keep in the back of your mind. First, attorneys who are disbarred may (in rare cases) get reinstated. Just because someone is reported to be in "Good Standing," or there are no results currently visible, doesn't mean they have a spotless record.
Second, ongoing disciplinary cases that haven't been finalized yet will probably not appear during a search, so it never hurts to ask questions (and/or make attorneys represent and warrant, in your contract, that they have never been and are not currently in trouble). We're not saying every issue is a deal-breaker, but even minor offenses should be considered.
In many cases, you are quite familiar with your attorneys, and you've known them for years. Even in these relationships, checking their status every year or so is a prudent move. Things happen, and it would be seemingly difficult for an attorney friend to admit to you that they are having professional issues.
Bankruptcy - PACER & CourtLink
To be even more thorough, check each plaintiff's bankruptcy history - attorneys, too, if deemed necessary.
On the surface level, bankruptcy may indicate the person in question has a problem holding onto money or running a business, but it can also mean he or she has previously been brought to court for fraud.
Bankruptcy can also negatively affect your investment if it proceeds from an open case and/or other future funds are already involved in a bankruptcy claim by the time you fund. As we mentioned in our prior article, if the "date of loss" on a personal injury claim ostensibly occurred before the bankruptcy is filed, then the personal injury case may be considered part of bankruptcy proceedings. And, while legal funding should generally not be part of the bankruptcy, many bankruptcy courts are unsure how to handle legal funding, and sometimes misclassify legal funders as "creditors."
To search for bankruptcy issues, you should use "PACER" (Public Access to Court Electronic Records). For various fees, you can dig up just about any legal case around the country, including U.S. district, bankruptcy, and appellate courts. Alternatively, LexisNexis Courtlink is a one-stop-shop for this info.
Background checks - Transunion TLOxp
Transunion TLOxp, deliver a comprehensive profile of people or businesses within seconds and you can use it to scour the billions of public and proprietary records out there anywhere in your funding process.
For example, it can be useful to gain a better understanding of your client or attorney partner prior to funding whatever may constitute a major investment for your firm. Say, by implementing a process that if the funding is approved for more than $10,000 you pay the nominal fee needed to have as full an understanding of the various parties as possible.
In your collections process, this may be more of a last resort to be used when an attorney's story or record seems spotty, but it can be helpful even to track down plaintiffs.
With just an I.D. or driver's license information, you can look up detailed information on any attorney, including his or her criminal record, civil record, certain assets, licenses, past residencies, cars, boats, and other vehicles.
Keep in mind, however, the results may only confirm your fears, revealing that the person in question has a history of mismanaging their money or has defrauded people before. The chance of acquiring or recovering assets from such people is nearly nil (which is why you want to avoid working with them in the first place).
Google is more powerful than you think
Sometimes it's best to keep things simple, and, every so often, a thorough Google search during your underwriting process will uncover more than enough to help you initially differentiate good clients from bad.
These searches should provide relevant news, social media accounts, court cases and more. If the search delivers alarming findings, you can use the other methods (such as PACER or TLOxp) to dig even deeper.
For example, Google can help expose plaintiffs who secretly withhold or embellish their stories. Your underwriter, who is always working hard to find deviations or contradictions in a plaintiff's paperwork, may find out via a simple Google search that the plaintiff has a history of bogus lawsuits, or has even been reported for exaggerating or fabricating elements of their claim. This type of preliminary analysis should probably be part of every funding process. It's cheap, easy, and can be done quickly by your underwriters, or whoever generates contracts on your team. For plaintiffs, search their names to try to uncover histories of fraud or other financial crimes. Search attorneys to potentially reveal histories of fraud or sanctions against them.
This type of preliminary analysis should probably be part of every funding process. It's cheap, easy, and can be done quickly by your underwriters, or whoever generates contracts on your team. For plaintiffs, search their names to try to uncover histories of fraud or other financial crimes. Search attorneys to potentially reveal histories of fraud or sanctions against them.
Sample search queries:
- 'Plaintiff name' fraud
- 'Plaintiff name' lawsuit
- 'Attorney name' sanctions
- 'Attorney name' history
Build a Story
Each of these tools that can help you identify fraudulent players contributes to the core methodology of identifying fraud: building a coherent story.
The goal is to know the story of every plaintiff and attorney you work with. The (nearly) complete picture you piece together should preempt most common attempts of fraud, including the very dangerous case of "true fraud," wherein plaintiffs fabricate entire claims.
It starts with the most simple measure you can imagine: collecting a driver's license or government-issued I.D. (by photocopy, ideally, but even a photo of it works) each and every time you consider a client.
This is helpful for running those deep TLO and other searches, and ensures a plaintiff is a resident of a jurisdiction that allows legal funding in the first place! If a plaintiff is hesitant to give you his or her I.D., that's a major red flag.
Next, your underwriters should be searching and building up coherent, consistent stories using data - case documents, accident reports, verbal and written communication, online search results and all other cues, court dockets, attorney bar searches - to back it up. Every discrepancy is worth noting.
People are generally honest, and not everyone is trying to pull a fast one on you. It's an unfortunate reality, though, that legal funders see a lot of unscrupulous behavior, which hurts the industry as a whole, driving prices up and profits down. Use the tools and tips in this series of articles to help your business steer clear of fraudulent activity and the fraudsters behind it.
You'd be amazed by how, with just a little scrutiny, you can come across enough information to discredit a plaintiff's or attorney's claim, or even catch a client or attorney in an outright lie.
Now that you have this list, the next step is for you to determine how, and in what circumstances, these tools should be used.
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