Is there an Enron in Legal's Future?

Stupid Greg has the irritating habit of making me think. Recently he asked if I thought there might be an ‘Enron’ incident on the horizon of the legal market. We were discussing the rise of the non-law firm. I was blabbering on about how non-law firms continue to take market share, when Greg posited the question about whether that would lead to an Enron-like fraud and deception incident, since regulatory eyes are apparently not watching non-law firms (yet).

Based in part on a recent article, I said I didn’t think so. Of course, making statements makes me think about defending them.

So here was my thought process:

LPOs and others encroaching on the law firm market are very vested in quality. They realize that for them to take market share they have to present credible alternatives to law firms. So quality is an over-riding theme for them. If clients are going to take risks with a non-law firm (LPO or otherwise) they will want reasonable assurances that the level of service will be ‘good enough.’

My thinking is that this drive for quality reduces the risk of an Enron-like fraud event. Instead, I think the risk for clients comes in another dimension of quality. Many lawyers, especially those at BigLaw, like to pontificate about how clients will suffer the consequences of moving down market for services. My thought on risk is similar but different to this critique. I don’t think LPOs or even 2nd and 3rd tier firms will have lower quality. Instead, I think they will not appreciate the bounds of their knowledge.

By this I mean they will not appreciate when they have moved past their level of expertise. It’s not that they don’t care or are not focused on quality; it will be a circumstance when they do not realize a decision made was beyond their level of expertise. They will have filed a motion on an issue that would be reasonable in the average situation, but fails in a more complex one. And they will miss a key issue that won’t materialize in to a problem until a few months down the road. Then the client will be forced to move up-market and hire a 1st tier firm to fix the problem.

So instead of fraud, I think the problems that will arise will be knowledge boundary crossing situations. And these will become significant problems for clients, since no one will actually know when they occur.

Bottom-line: Enron = No. Major Screw-ups = Likely. And these screw-ups may be very problematic, especially when non-law firms are involved. The non-law firms will not have traditional malpractice insurance, but the law firms involved will. So law suits may have an apple / pineapple challenge for how they determine negligence and failure of ethical duty.

There’s an opportunity in there somewhere …  :-)

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Carolyn Elefant said...

Enron, perhaps no. But what about all of those hybrid "debt settlement" or "foreclosure defense" companies that got clients into more trouble than they'd have had if they'd been pro se. Like debt settlement firms that tell clients not to challenge a debt but let it go into default so that they can renegotiate. Or the foreclosure defense firms that hired lawyers to file papers to stall a foreclosure while the company collected hundreds of dollars a month. Some of those loans could have been re-negotiated, or clients did not have to have their credit ruined. Maybe that's not the scale of Enron but it's widespread damage and there's the potential for it to continue unless there's some regulatory oversight. Not saying that the work has to be done by lawyers or regulated by the bar, but evenABS structures in the UK are subject to regulatory oversight.


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