A couple days ago, a lawyer in the San Francisco area that I know wrote a blog post on why they stopped taking blockchain clients in 2017. Kyle Mitchell's blog post is noteworthy because it's written by a smart lawyer (who is also a programmer) who raises client management issues that are relevant to any lawyer who works in tech. These issues are even relevant to people who don't work as lawyers, because Kyle's thoughts are really about how to deal with aggressive businesspeople, some of whom may be breaching contracts or even breaking laws.
How, as a professional, can bad people - bad clients - be avoided? Kyle's answer is to cut off a field that he considers too risky. The rest of this blog post explains why I haven't followed in his footsteps. The end of this blog post contains some practical tips for lawyers to help avoid bad clients.
The Right To Choose Clients
Firstly, no one can or should be telling any lawyer who their clients should be. That's one of the joys of independent law practice. Whether because of concerns about competence to serve an industry, fear of the people in it, or a lack of interest in the work - there are many reasons to turn down entire sectors of the economy. This is entirely legitimate. For example, not every lawyer feels comfortable serving violent criminals (like criminal lawyers do). A vegan would probably not be interested in helping fur farms stave off regulatory action. In almost every case, lawyers get to choose, and they can turn down clients for just about any reason of personal conscience or preference (provided that doing so doesn't break laws like anti-discrimination statutes). This is a great freedom to have. No one should be telling Kyle Mitchell, or any other lawyer, who their clients ought to be.
What To Avoid
Kyle's concerns with the clients he was seeing in the blockchain space back in 2018 were several: bad contracts, a fear of his photo being used in promoting scams (that he wasn't working for and had no knowledge of), limited technological progress despite billions in investment, emphasis on promoters (not coders), bad funding methods, "money, not technical achievement, represents the whole goal", securities fraud, use by scammers, and lobbying to legalize activities that should remain unlawful. There's a lot to his blog post, and it's worth reading in full. But it's not so important what his individual concerns are, as the issues can be found in working for many clients. There are many areas someone might want to avoid, and lawyers should always be on the lookout for illegal schemes or potential frauds that they may unwittingly play a role in. I assume that never happened to Kyle, but his post raises the concern that it could happen. How can lawyers steer clear of these problematic areas? And more particularly, how can someone do it while serving novel, rapidly growing businesses?
Helping To Steer Away From Danger
Obviously working for a business is different than working for a fraudulent scheme. But the borders between fraud and normal business conduct may be surprisingly blurry. At what point is a startup too optimistic? At what point should concerns and risks be disclosed, what's the tipping point in terms of magnitude and probability? These are tricky questions to answer, and the Rules of Professional Conduct (and equivalents in other jurisdictions) don't provide a firm guide to this problem. It's one that has vexed securities regulators (and shareholder litigants) for years as they attempt to determine whether a public company should have disclosed a risk or not.
A lawyer may be essential for a startup to steer away from the danger area. This is a positive role for lawyers, and one that most lawyers perform admirably. Most businesspeople (who aren't criminals) don't have much experience with laws concerning fraud, misrepresentations, etc. The tech industry often promotes aggressive behaviour, sometimes even downright illegal behaviour, and it's hard for startup founders to know what unlawful activities that big companies do are not the sort of things they should do.
A lawyer's job is to help them understand that all unlawful actions should be avoided, not just the kind that result in serious consequences. But in a world where crimes are committed by large businesses (and governments) on an everyday basis, this can be advice that's hard to hear. Below are a few examples picked at random from the litany of corporate crimes committed in recent years by well-known companies, none of whom have any issue hiring lawyers because of their status as large businesses. Reviewing these crimes puts the role of lawyers for smaller businesses in context because, despite popular ideas to the contrary, it's often small businesses that are run ethically and the large ones that lawyers should be extra careful about.
Lawyers At Large Law Firms Regularly Work For Corporate Criminals
Large companies never have an issue getting legal advice on the grounds that they've committed crimes. Small ones and individuals do. For example, most of the large grocery stores in Canada are alleged to have engaged in a 14 year price-fixing conspiracy to increase the price of bread (and perhaps other foods). Loblaw claimed that they were a part of this conspiracy for 14 years and named other grocery stores like Walmart as being a part of it. Four years later, none of the companies have been convicted, but the allegations are strong ones. But there are many other examples of this sort of behaviour in Canada. Should the companies be able to get lawyers? No one would say that lawyers should avoid the grocery industry.
SNC-Lavalin, a publicly traded company, has been convicted of many crimes in Canada. In 2008 the company allegedly paid tens of thousands of dollars for prostitutes for the son of the dictator of Libya. The company paid $280m in fines for defrauding the Libyan government by bribing the family of the dictator. Less outrageous bid rigging convictions are regularly published by the Competition Bureau.
Canadian banks are routinely convicted of offences under financial laws. TD was fined in the United States in 2020 for ~$125m USD. HSBC paid $2 billion for their role in laundering money for Mexico's international drug cartels.
Pfizer, the international drug company and makers of the most popular Covid vaccine in Canada (mandated by the government for many people), has been routinely convicted of criminal offences in relation to the sale of pharmaceuticals. Between 2002 and 2010 they paid more than $3 billion USD in convictions, penalties, and settlements in the United States alone. In 2012 Pfizer agreed to pay millions in penalties for allegedly bribing doctors and regulators to approve products in a number of countries. In the same year, competitor GlaxoSmithKline paid $3 billion USD for not reporting drug safety data, illegally promoting adult drugs for use in children, and paying kickbacks to doctors for prescribing GSK medicines.
Major car company Volkswagen was convicted in several countries for their international fraud scheme where they secretly made cars that were much more polluting than laws require. The cars had special computer code written for them that would detect when a car was being emissions tested (because the tests aren't like real world driving), and only when tested would it operate as legally required. Under regular driving conditions the cars produced up to 40 times more NOx pollution. MIT researchers estimated that more than 1000 people per year died in Europe alone due to the extra air pollution because of this scheme to save money on pollution controls (mandated by law).
This blog post could go on for thousands of pages, listing the many crimes of major companies. Many of these crimes were orchestrated at the highest levels of management. Lawyers were likely involved at the time. What about after? Should they stop working for these companies once they're convicted? Most lawyers (and professional regulators) would say no, that past convictions are different than current ongoing illegal behaviour. Even patterns of behaviour wouldn't rule out taking on a company as a client. And yet, lawyers and the public often focus on small businesses as if they are especially risky and likely to undertake illegal activities.
Smaller Companies And Lawfulness
What of a small company that hasn't been convicted of any crimes? Surely that's a more favourable client than one that's been convicted. So far as I know, none of my business clients have ever been convicted of fraud, let alone killing thousands of people through pollution schemes. There is a reflexive response by many lawyers to take on large clients instead of small ones because of the fear of criminality, but many kinds of crimes are probably much more likely in large companies than small ones. There's a greater ability to cause damage, and diffuse command structures that make people less accountable.
A lawyer for a small business can be much more impactful in their efforts to ensure that no one commits legal wrongs. As a general practice, it may be more ethical to work for small companies. It may also be easier to rein in potential wrongdoing because fewer people are involved in making decisions.
I have never seen a client commit wrongs of the kinds I routinely see in the news involving large companies. None of the crimes listed above are the sorts of things I've come across in terms of clients in the blockchain industry. None of this is to say that frauds don't exist everywhere, but rather to point out that lawyers should carefully consider whether our own biases are at work when it comes to thinking about clients and lawfulness.
Small businesses are typically run by entrepreneurs who care about other people, and they seek to earn money lawfully. When they get advice that something may be wrong, I find it's far more likely that it's something they've never considered, rather than something they deliberately intended to do wrong. I suspect that actual criminals (of the type that Kyle Mitchell's blog post is worried about) don't use lawyers very much, because they have no need for the advice of people who tell them how to conduct their business legally.
Imagine if lawyers treated large businesses as they do small ones. If every lawyer withdrew from working for a company that was criminally convicted they would have a significant reason to follow the law. Although some corporate crimes are truly inadvertent (e.g. technically violating a law about disclosure), many large companies, like Volkswagen, commit massive crimes with intention at the highest levels of the company. And yes, many people focus on startups and individuals as if they're uniquely responsible for legal problems. This is a common fallacy.
Scams Are Out There
There are many scams in the cryptocurrency industry. Are there more scams than in other industries? That's hard to say. And many are really crossover scams from other industries, such as fake investment scams or fake forex trading scams. The cryptocurrency part of the scam is primarily in the means of payment rather than the scam itself. It is not sophistry to point out big companies and their role in crime, because that's true, but it's also true that smaller groups can and do commit crimes. But these are usually easy to spot as a lawyer, and in any event these sorts of people have little need for lawyers. I've rarely encountered them, and they probably don't generally seek out lawyers. So this isn't a concern that's as pressing as lawyers new to this area might think. But lawyers must always be judicious in who they agree to work for. How can you be judicious?
Tips For Client Selection & Management In The Crypto Industry
1. Try to engage comprehensively, rather than just on a requested transaction. Clients may not be aware of the issues that relate to the proposed transaction, and it might not be possible to advise properly on a specific transaction without the broader context. This also helps to reduce the potential for accidentally agreeing to work for a shady business (or criminals posing as a business).
2. Include in the retainer that a company cannot use your name in their promotional materials for at least the first 30 days of the engagement so you have time to learn about what they do.
3. Listen carefully to the client when first speaking with them. Tech founders are typically excited to share how their products work and what their plans are - if they don't, then they may not be a software company. But don't mistake reticience for shadiness, because some people are suspicious of lawyers or have had a bad experience with a practitioner.
4. Steer clients toward legal avenues for raising capital. This may involve referring them to a specialty lawyer who can assist with this. No legitimate business person wants to raise money illegally. They may not be happy about paying for the work, but they will be happy to know that their financing was done right.
5. Ensure that the client understands that the role of lawyers is to advise on what laws require. Almost always, the purpose of hiring a lawyer is to help avoid unlawful activities, or reduce the risks involved in lawful ones, and that is what the client wants. It's very unusual that a person wants a lawyer to help with something unlawful.
6. Ask questions often. Many people don't know the law, that's what a lawyer is for. They need help in understanding because it's not possible for many untrained people to guess at what is legal and what is illegal. Laws are not "common sense" because if they were, it wouldn't take nearly a decade of school and training to become a lawyer who's just barely competent (then the real learning begins!). Don't expect clients to be able to identify what they're doing wrong without in-depth discussion.
7. Turn down clients that don't meet your risk profile. Everyone has their own idea of what this means, whether the risk of contributing to environmental disaster (e.g. Volkswagen), the risk of contributing to prostitution/bribery (e.g. SNC-Lavalin), causing drug addiction (e.g. Pfizer), or defrauding people of their hard-earned investments (e.g. Canadian banks).
8. Be mindful of the difference between being a lawyer and a promoter. Lawyers may sometimes need to play a role in dealing with suppliers, partners, or regulators, but they should be mindful of their role as conduits rather than primary actors. Lawyers must take care to ensure their role is that of a lawyer.
9. Consider whether your clients are helping or hurting their customers. A business that has lower fees than competitors is doing a service to its customers, who have more money in their pocket at the end of the day. Lawyers can play a role in helping to ensure honest disclosure, which tends to reduce legal risk and ensure that customers are treated well.
10. Is the business additive for customers? Is there a positive service that customers are paying for willingly? Frauds and scams are rarely about serving customers (or at least, not in a way that makes sense through a lens other than illegality).
11. Read the potential client's website and marketing materials. It can be difficult as a lawyer to know what's a viable business and what's not, and even harder to determine whether a business has a nefarious undisclosed purpose. Background reading can ensure that the client is a good fit for the lawyer, who should at least be able to understand the business at a high level before agreeing to take them on as a client. Understanding your clients helps ensure that you can spot warning signs, and you can help the client avoid the danger.
12. Perhaps the most important tip is to choose clients who have clear legal needs that can be met in a way that builds trust between the lawyer and client. Trusting relationships, and a history of giving good advice, ensure that clients will be comfortable raising potential issues. Many new entrepreneurs are not familiar with solicitor-client privilege and may not be aware that they have someone they can turn to for discussing sensitive situations. These moments are where lawyers can help ensure that mistakes aren't made and clients stay on the right side of the law.
13. Propose solutions, don't just say no. It's easy to say no, but it's often not good advice. Clients should be guided to an approximately similar result that can be done legally. This is usually (but not always) the case. And if it's not possible to get to a yes somehow, the client should be promptly told of that. Almost everyone who is investigating an idea will not proceed if it seems unlawful because Canadians are highly respectful of the law on the whole.
14. Be extra cautious about foreign businesses seeking local legal advice. Is the advice solicitor advice on how to follow the law, or does it seem like they are looking for a small amount of work in connection with something larger? Non-Canadian businesses located overseas, or scammers pretending to be a lawful business, are responsible for an incredibly high percentage of the unlawful conduct in the blockchain space.
In my work in the blockchain field I have seen many problems, but the problems have not been my clients acting unlawfully. With good legal advice, delivered proactively, most startups can operate their business in a lawful manner. On the very rare occasions where unlawfulness seems likely, it may be best to withdraw and steer the client toward other lawyers who may be able to rein in their behaviour (if it is as suspected). It may very well be the case that a business isn't doing something unlawful, but if it's not clear that's a sign that the lawyer-client relationship isn't strong enough to properly serve the client.
Not only is it possible to have clients in the blockchain industry follow the law, there's often a genuine interest in doing things at a higher standard than what the law requires because the companies are often trying to build a long-term business. These businesses include multi-billion ETFs in Canada, billions of dollars of cryptocurrency mining operations, wallet companies, virtual currency dealers, and so many other players who work hard to keep those who would abuse their services off their platforms, and follow the law as closely as they can.
Good businesspeople know that their long-term success is tied to treating customers well. The existence of scams or international frauds is not relevant to local companies that are building services that customers want. My inbox has a spam folder full of lies and scams, but this isn't a strike against email itself, or the work emails in my (non-spam) inbox.
Truthfully, most legal work in the blockchain space is routine technology industry work. If the work stops being routine that may itself be a red flag. Less boring work, such as launching a novel business model, may require the assistance of other expert legal counsel to ensure lawfulness. If a team of lawyers, from different firms, all agree that a path is legal or likely legal, that is a good sign for the client and for their lawyers. Clients that can't afford to do it right should be promptly advised of the difficulty so that they can reconsider their plans.
Legal work for new businesses is tough. It's not for everyone. It's even harder for companies that may not clearly fall into one bucket or another in terms of laws. Lawyers should not balk from this work because it's hard, or because scammers impersonate startups to steal money from unsuspecting people. But it is for each lawyer to choose their clients, and choose how they want to make the world a better place through the practice of advising people on how the apply applies to their situation.