Friday, September 28, 2018

Wire Transfer Fraud V2

In February 2016 Jerry Bain was looking to purchase investment real estate. Kathryn Sylvia Coleman and her broker, Platinum Realty, LLC, represented the seller. When the deal was ready to close, Jerry alleges that Coleman instructed him to wire almost $200,000 in closing proceeds.

Jerry followed the instructions furnished to him.

Unfortunately, however, the amount wired was sent to the wrong account, with the result that Jerry lost it all. It appears that a hacker gained knowledge of the pending transaction, and inserted wire transfer account data that dumped the funds directly into the control of the hacker instead of the title company.

Jerry sued Coleman and Platinum Realty to recover the amounts lost, claiming that they were negligent in their misrepresentation of the bank account data to him. The jury agreed, and found that Coleman and Platinum were 85% responsible for Jerry’s loss. Jerry was responsible for the balance.

Accordingly, the Court entered Judgment against Coleman and Platinum for $167,000. Defendants then filed a Motion with the Court claiming that the evidence is insufficient to support the jury’s finding of negligent misrepresentation.

The first test of negligent misrepresentation is a failure to exercise reasonable care or competence in obtaining or communicating the false information. Platinum and Coleman responded by claiming that Coleman did not send the email with the false data, inducing Jerry to wire funds to a third-party criminal’s account.

Coleman admitted that she had received the fake wiring instructions and attempted to forward them to Jerry. That email from Coleman to Jerry, however, was sent not to Jerry’s correct email address, but instead was sent to a very similar address from which Coleman had received a prior communication.

Presumably the hacker had created the similar address. And regardless, Jerry received the email with the hacker’s account number a few minutes after Coleman sent it.

To be sure he was wiring funds properly, Jerry then called Coleman, who confirmed by phone that the funds must be wired prior to closing. And so the funds were wired . . . to the hacker.

Once Coleman conceded that she did not confirm that she had sent correct wire instructions or that she had the responsibility to make sure the instructions were correct, the jury could safely conclude that Coleman failed to act with reasonable care.

And from there it was no stretch to impose liability upon Coleman and Platinum Realty for innocently participating in wire transfer fraud. See Jerry Bain v. Platinum Realty, LLC and Kathryn Sylvia Coleman; US District Court; District of Kansas; Case 16-2326-JWL; June 25, 2018;

Lessons Learned / Questions Asked:

1.      Neither Coleman nor Platinum Realty represented Jerry Bain. And yet the Court still imposed liability on both without a fiduciary duty analysis.

2.      This Court is telegraphing the message that brokers and agents must exercise extreme caution not only with their principals, but also with other parties in their transactions.

3.      There’s at least one more point worthy of mention (besides the obvious which is that every email from a broker or agent to every party in every deal should state “We don’t send wire transfer information; contact the wire recipient to verify data before you send funds” or similar) – note that the jury found Jerry only 15% responsible for wiring funds to the wrong party. And this is after testimony that Jerry was an experienced commercial real estate investor. And that evidently Jerry never called the title agent to verify.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888

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