Regulators seem to believe that lawyers and their law firms act like ostriches when it comes to their clients and Ponzi schemes. For example, a law firm paid $25 million to settle malpractice claims over legal services rendered to certain hedge funds and related entities controlled by a Ponzi Scheme artist, Arthur Nadel. See SEC v. Nadel, M.D. Fla., 09-00087, 8/28/12, and http://en.wikipedia.org/wiki/Arthur_Nadel.
Although the law firm continues to maintain its innocence, it settled with the Court appointed receiver over allegations that it failed to detect red flags from the fraudster’s activities during their representation of him between 2002 and 2009. See Scoop Real Estate LP v. Holland & Knight LLP, Fla. 12th Cir. Ct., 2009-CA-014877, 2009, and the settlement announcement. In his pleadings, the receiver argued that, if the firm acted sooner, things would have been different. For its part, the law firm merely said that it wanted to end the litigation.
In short, the lesson that lawyers and law firms must learn is that they have to implement systems to detect such potential frauds, or these law suits will undoubtedly become a terrible “cost of doing business.”