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Recent Court Cases Involving Wire Fraud Losses

Tom Cronkright, Published on September 12, 2019

The litigation landscape is heating up over wire fraud losses. As buyers are tricked into wiring funds for a real estate closing to fraudulent accounts, they are seeking to recover their loss from those involved in the transaction. Title companies, financial institutions, attorneys and real estate agents are being named in lawsuits around the country. This session will highlight the top cases from around the country including the most commonly plead theories of liability and what to prepare for if there is a wire fraud loss. We will end the session with the top risk mitigation tools to lower the instances of wire fraud in your transactions.

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Full webinar transcript:

Good morning, everyone. Thanks for attending. Looking forward to today’s session on our monthly fraud briefing around recent cases that had been filed, and some of them decided regarding wire fraud losses. This continues to be a very challenging landscape to navigate, and I want to help you through and just kind of understanding how these cases are being pled in the courts.

Some of the resolutions that we’re starting to see, it takes a while for things to get fully resolved in the court system. And at the end, make sure you stay for the end because I’m going to have a slide where we go through the 10 questions and a bonus question about how to lower your litigation risk profile. So a real roadmap from everything that we’ve seen across the country and analyzed, we’re going to focus in on five cases that really stand out to create those common denominators.

I’ve got my team with me, and I asked them to time check me so that we have time to go through some risk mitigation procedures and questions near the end. If you do have questions, please put them in the questions panel of the GoToWebinar. So as you logged in, you should have a panel there. I think near the bottom, there are questions. We have everyone muted just for the courtesy of other folks that are attending, but I’m going to jump in.

Over 83 million cases are filed in state and federal courts each year. That was a statistic from 2018. The challenge is that almost all of them settle before you get to a final judgment. Not that I want things to go to final judgment or that’s a good thing. But it does leave us in a lot of these kinds of new trending vectors legally, not sure where the liability would have been cast from a legal standpoint. We’re missing out on a lot of precedents that could be more of a directional beacon for us in the industry.

The average hourly rate for an attorney was under $300. If you look at what I call NFL towns, your main metro markets, well above 300. And the cost to defend these lawsuits is very, very high. I say, and in a lot of sense, I think it’s true. It’s about as expensive to be wrong and about as expensive to be right as it is to be wrong in the court system because it’s really the legal fees and getting through the process that mount in a big way. And those fees don’t account for the opportunity cost, the damage to reputation, the distraction, the emotional taxing that a lawsuit can take.

Today’s exercise, today’s time together really is meant to cast an understanding of what’s happening in this landscape. And as always, how do we help you mitigate that risk within your own organization as you’re representing consumers or referral partners in transactions?

For those of you that I have not met, I’m Tom Cronkright. I’m one of the co-founders and CEO of CertifID. CertifID is a risk mitigation tool to help you secure wire transfers. We do that through identity verification. We’ll get to that about three-quarters of the way through. I’m also a licensed attorney, and a large title agency owner, Sun Title in Michigan. So as these struggles kind of hit the deck month over month, we’re sharing that with you. So we have a real-time pulse of what’s taking place. Also wire fraud victims, unfortunately.

So we’ve been through the whole dynamic of losing, litigating civilly to get our money back, and then learning from that experience, ultimately created the CertifID platform.

Today, a lot of things that I want to go through. This is not meant to be some type of law class. But I do want to layer in a little bit of understanding about theories of cases, and then dive and profile into five cases in particular, like I said, that are standouts.

First off, we’re going to talk about transactional dynamics, really focusing in on the fact that because there are so many parties in a transaction, each party could actually have some form of liability in connection with the transaction. Because it’s contractual based, someone has to discharge, either a direct contractual duty, or some standard of care within the transaction depending on who the party is. And course has defined this fairly well.

So I won’t go through all of these, but let me pick on a couple. If you think about an attorney, you have attorney-client obligations, you have contractual obligations that they would have in what’s called the engagement letter. Then you have fiduciary obligations under either the occupational code or just professional standards that attorneys must adhere to when they’re representing a customer. And I’m going to stay in the kind of the real estate transaction, but it’s similar across any other transaction profile.

You have a real estate agent, so you have an agency agreement, not as strong as attorney-client. But very strong in the eyes of law, in the sense that, by definition, an agency is you’re acting on my behalf, you’re representing my interests. They have a contractual obligation because they sign a listing agreement, or they sign… I’m sorry, a buyer representation agreement or a listing agreement, but they also have fiduciary duties under certain occupational code [inaudible 00:05:56] standards, local board standards, things like that. Let’s talk about the consumer.

The seller has a contractual duty if they agree to sell the home, and the financial obligation to make sure that those funds that they receive are used to pass clear title, and pay off any liens and obligations. And those are dealt with in the title commitment. Just know that if it looks dynamic, it’s very dynamic depending on who’s injured in the transaction, and then who was representing that injured party, and what they could have done that could have avoided the loss.

What leads to a lawsuit? Why are they suing? Boiled down is two very simple principles to keep in mind, I either lost some money, or I can’t perform on my contract because this event took place. Those are the two main theories of liability that are driving lawsuits from the plaintiff’s bar.

Financial loss.

Buyers share multiple vectors of financial loss. “Hey, I just wired my life savings to the bank of Nigeria, because I got tricked because I received fraudulent wiring information in an email. Okay, that’s my life savings. I can’t close on this property now, so I have an increase in costs. I was getting a great deal on property A. Because of fraud, I can close on that. Now I have to find property B, the replacement property. And I’ve got to step up in cost there because I wasn’t able to negotiate as good of a deal.” Then obviously, the cost, and I can’t underscore this enough. The cost just to enter into that conversation with legal counsel starts to ramp up really quickly.

For sellers, the seller says, “Hey, this my life savings, I have this house paid off. And that net proceeds wire got diverted, and now I can’t do that next thing in life.” So, they have a risk there. They’re not able to pay and meet the full conditions of the purchase agreement, because they can’t pay off the mortgage, if you will, because the mortgage wire got diverted. They have to relist or resell the property. So let’s say the buyer can’t close, now they have to relist and resell the property. Are we in an increasing or decreasing market from an evaluation perspective? Then you have, again, the cost of counsel involved in that as well.

Breach of contract is even more significant because there’s just multiple different theories or claims under breach of contract. Breach by the buyer or seller on the terms. On a lot of states, a buyer can actually seek what’s called specific performance. They can actually force the seller to sell them that house, rather than forcing them to buy a similar house and then get the difference in the funds. Sellers have typically only a damage claim.

Contingent liability, this is another big one, if you think about it. I’m contracting to sell my house, and then I have a contingent offer on my replacement property. So if I can’t sell this house, I could be in breach of contract for the house that I’m trying to purchase. Then over and over, this is a daisy chain effect of these contingent transactions that are stitched together. And it can get complex very quickly.

Breach of agency agreement or professional representation. This is, hey, what duties do I have in a listing agreement to buy sell, or the buyer agency and the attorney-client engagement letter? Then professional duties, and this gets very broad. Many professions, if you’re not aware of it, are regulated under state occupational codes. And there’s also self-governing professional standards, [inaudible 00:09:45] the best practices, nor has its own red book and rules of professional standards, the American Bar Associates. So those types of things are looked too as well in courts on whether, or not they did or did not meet the obligations.

Then the courts are stepping in, in this area to say, “Okay, notwithstanding all this, what should you have done? I mean, in a reasonable standard perspective.”

So why they sue and how they sue, we talked about this. I lost money, I can’t close on the property, and I have an obligation that now I can’t perform because something happened in the transaction. And a lot of times if the plaintiff, the plaintiff is the one that initiates the lawsuit through what are called pleadings that are filed in courts, either state district court or federal court. In pleadings, they will say, “Hey, because of this loss, now I’m injured.” And that injury could stem from multiple different theories of cases. To set this up a little bit, what we did is over the last several months, we went and we looked for all cases around the US that we could find that involved wire fraud in connection with the real estate transaction.

We weren’t looking for just decisions, because those are really light. We’re trying to find the actual pleadings. Today, I’m going to talk about two of these that were fully decided, three of these that have been pled. But I think it’s important for us to understand that there is a formula, if you will, developing on how this liability is being cast into the courts by way of the pleadings. The first and primary is a negligence claim, and we’re going to get into this in a second. Then you have breach of contract. The third most prevalent claim across all these cases was breach of fiduciary duty, and then breach of consumer protection laws.

So most, almost every state has a consumer protection law that is a sheet of glass wide. I mean it’s a very, very easy to include in a lawsuit. Let me unpack just some of the standards, so you can see what the plane of has to plead to meet its kind of thresholds of holding someone liable for any one of these claims.

The elements of negligence quickly, and this will build. I’d like to say, I’m not trying to make this a tour for those of you on the call that are attorneys. I’m taking you back to tort law, that last year in law school. I apologize for ripping the band aid off that, but mentioned just cash quickly that the plaintiff does have to plead certain things. And if they can, the elements of these different, what are called causes of action, or claims in a lawsuit can be fully developed. Then as a defendant if I’m named, I have to respond. I have to answer to those claims, and try to defend my way that somehow these elements were not satisfied. So think about elements met, defending that the elements that they’re claiming are not satisfied because it’s simply not true, or whatever it is

Now within four clear elements; a duty to somebody, breach of that duty, because of the breach, it caused damage, and there is actual damage. So duty, breach, causation, damages.

Breach of contract: We have a contract. I as the plaintiff did everything I could, so I’m not in breach. That guy over there called the defendant breached. And because of that, again, I’m harmed.

Breach of fiduciary: Breach of fiduciary is a heightened sense. It’s a heightened standard meant for professionals in a lot of cases that have some special relationship, attorney-client, the agent to a consumer on the real estate side. That’s the type of fiduciary. And it feels very much like a tort claim, but held to a higher standard against the professional, if you will. So, hey, there was a fiduciary duty, it was a breach. Because of that, I was harmed, and I can point to the number or how I was harmed.

Then consumer protection law, and this is why this is so broad. I’m going to go through all these in the cases. Defendant engage, so hey, I’m the consumer and that company engaged in some unfair or deceptive act. And it sounds really bad in the statutes, it even make it sound worse. But I’ll show you how these are cast into the courts in very simple ways. So, the defendant did something unfair or deceptive. It occurred in connection with commerce, in connection with a business transaction, if you will. It affects the public interest. Meaning, if this continues, not only is the plaintiff as a consumer in this state affected. This could affect a ton of different people in the state.

So now it’s a public, it rises to the level of a public interest issue. Then the two elements that follow, because of that, I was harmed as a plaintiff and I can point the damages. Those are the four, they aren’t exclusive. I mean, there’s everything from fraud, and concealment, and bailment. I mean, we could go on for all afternoon about all the different case, or all the different theories. These four in particular, are the ones that are coming up most often by a wide margin.

I want to go through five cases. I’m probably not going to be able to get through all of them, but I want to highlight the first one that kind of kick things off here in the US. Because my eyes are failing me, I’m going to… And I have the cases here, so I’m actually going to be reading from some of these pleadings.

What’s interesting about the Butcher case originating out of Colorado, is just how it was pled. I’m going to spend a little time on this, because I want you to feel how attorneys are trying to personalize the loss in the event of a wire fraud. So we can say, oh, I got sued, or I was named in an action and this and that. But if you’re asking for a jury trial, it’s all about storytelling. And this is a story that we don’t want to be named in. And if we are, we don’t want to quickly get out of.

Because all this information is public, I am giving you the title company names. If some of you are on the call, I’m not [inaudible 00:16:27] to disparage the brand in any way. Just trying to dissect so we can all learn from what happened in the courts. I’m going to read to you just what’s called a background section, and you can feel how the kind of emotion gets built and how the attorney pled this case.

Imagine working your whole life to raise a family, build a successful career and save for retirement. Decades of labor, rising each morning thousands of times and accumulation of effort, hopes and dreams beyond description. All focused towards a place in time off in the future when you can finally settle down, breathe, and leave the slings and arrows of the work day behind. These are the core pleadings.

Now, imagine you made it. Looking back on your life, you feel gratitude and accomplishment. The next step in the journey is to purchase your final home, the place where you’ll grow old with your spouse and lifelong partner. Everything’s going smoothly, you have hired large corporations with expertise to handle everything, from negotiations to the closing.

You’re instructed by employees of the large corporations, with whom you have a repost trust to wire nearly $300,000 to pay for a home. You follow these instructions, making payment to one of the largest banks in the world. Yet a few hours later, you realize you’ve been swindled by somebody employed by or who hacked into the very corporations you’ve relied upon. Once the gravity of the situation becomes clear, everyone responsible refuses to do anything to help. In fact, the bank repeatedly refuses the FBI agents valid request for information that could have saved the wired funds without explanation.

The foregoing is not a dream, nor is it a fiction. It is the waking nightmare visited upon Candace and James, who now live in their son’s basement by the careless, if not reckless acts of the defendant by virtue of the scam known to the real estate industry for over a year to the events alleged here in. James and Candace, therefore bring and they bring all these claims. So you get a sense there that, they’re drawing out that this has real impact. From a legal perspective, thrillingly pled frankly.

Claims for relief.

Let’s go into this, and everyone will receive a copy of this presentation. What happened was, these buyers were purchasing a home. And they receive fraudulent wiring instructions through what they thought was a legitimate title company representative, and it ended up being false. And they walked into their bank, and then they ultimately wired funds out of their Wells Fargo account to a fraudulent account. If you read the whole case, it is just, it’s significant in how this thing unfolded with regard to the recovery. But they had four theories that kind of set up the rest of the litigation profile around the country. So everything I’m about to explain in the other four cases, really is cast on the foundation of the Butcher case out of Colorado.

Negligence: Defendants owed a duty to the Butcher, so think about who the defendants are. It was everybody, that was what was significant as well. It was the title company, it was their bank that just was holding the savings account over the Butchers. It was the mortgage company that didn’t even represent the Butchers, they represented the buyer. Then, it was the real estate agents involved. So everyone got cast into this bucket saying, “Look, I don’t know exactly who’s responsible, but somebody has to be under these situations.”

So negligence, let’s see how this is pled. Defendants owed a duty of reasonable care with respect to safeguarding all information regarding the purchase of the property that might enable or facilitate fraudulent or criminal activity against the plaintiffs. The defendant owed the duty, so what was the duty? That’s what they just described.

They owed the duty in warning the Butchers regarding wire fraud known across the country. They failed, they breached the duty by failing to safeguard all information relative to the purchase of the property, or the Butcher’s, which enabled a third party to send the Butchers fraudulent wiring information. And they breached that duty by failing to warn regarding the wire fraud scam. That’s simple negligence. Now, let’s get into fiduciary.

In agreeing to act as the buyer’s agent, defendant agreed to act on Butchers’ behalf therefore, creating the fiduciary duty. Defendants breach their fiduciary duty by not including… So this is the list of how they’re setting up the fiduciary duty breach. And if you have real estate agents or brokers that are referral partners for you, I think this would be a great educational session that you could give them. Because again, it’s not, it’s shared equally across the ecosystem.

They’ve breached it by failing to take reasonable precautions to safeguard information, failing to warn the Butcher’s of wire fraud in engaging in conduct that allowed a third party to send Butcher’s fraudulent wiring instructions that appear to be authentic, legitimate and appropriate given the transaction.

The next theory is the Consumer Protection Act. Let me explain to you how this is cast. So defendants engaged in a deceptive trade practice by making widespread advertisements to the public, including but not limited to their websites, that they had expertise, security procedures, training, skill and safety to provide goods and services in connection with real estate transactions, when in fact, they lacked such things. I’m summarizing a little bit. What they’re saying is he went out and he said, “Okay, I’m going to look at the website of the title company, and the real estate agent, and the broker, and the lender and the bank.” And everyone says, all these marketing pros and how great and secure they are, and that’s how we got to the Consumer Protection Act piece.

Defendant’s deceptive trade practices significantly impacted the public as actual or potential consumers of defendants for goods and services. The defendant’s deceptive trade practices occurred in the course of business, so that was the other element. The Butcher’s were actual consumers, and it caused the harm. So you can see where those elements under the Consumer Protection Act are easily pled outside of contract or negligence. But more, hey, you held yourself out of this, the public trusted you, it actually looked like that.

Now, again, this isn’t a decision. This is a pleading, so I want to make sure you understand. I’m not indicting these companies that are on here, but we have to be able to defend against claims like this as they come in.

Butcher case.

Next case. As [inaudible 00:23:51] Butcher, Butcher happened to be a state case. The Bane case was a federal case. So the Bane case, many of you are aware of this case or should be. We wrote a white paper on it. We’ve been talking very publicly, and also in other events about this case, because there’s a lot of learnings here.

What happened in the Bane case is, the buyer contracted with a seller for a property, and the buyer was not represented. So, the seller chose the title company. And through a series of emails, the title company sent, I think closing instructions. Never sent the wiring instructions directly to the agents, but the fraudster impersonating them, impersonating the agent did. And ultimately the buyer receives fraudulent wiring information, and they wire just under 300,000 or $270,000 out of their account. And then gets with a lawyer, and again names everybody in the transaction. Names the title company, names the bank and names a person in the real estate agent and the brokerage.

The theories of that case are very similar in the sense that, there was this duty of care in evaluating, sending, disclosing information, what’s called non-public information. And they were careless in how that information was disseminated. Specifically, and this is a major theme. Whether or not we all agree on the phone of secure email, the courts are very, very clear. They have their hooks into this idea that if you’re sending personal or non public information through unsecure email, it’s almost a de facto liability point right now from what we’re reading.

So using an unsecured email address to send and receive confidential information, banking information, and forwarding it without encrypting it, and ensuring the wiring instructions were accurate and truthful. So what happened was, and the real estate agent received from the fraudster mimicking the title company fraudulent wiring information, pushed that on to the buyer. And then ultimately, the buyer acted out.

Breach of fiduciary, you can see this. Defendant breached [inaudible 00:26:13] by failing to establish and maintain the commercially acceptable security protocols and procedures to prevent it. So now they’re saying, hey, systematically, you had nothing that would have prevented this, and you should have. And refusing to reimburse plans for the amount that was fraudulently taken, so you’ve you failed to make them whole.

Then again, Consumer Protection Act gets kicked in here, where, we’re providing outstanding search, examination, closing. Did something very similar. The plaintiff’s attorney in this did something very similar to what was done in Colorado, in the sense that they went out and looked at kind of the marketing pros and collateral that was online to get to the Kansas CPA, the Consumer Protection Act.

Defendant violated, because of the following; Failure to inform and keep confidential information, representing that all information would be kept confidential, misleading about the practices and abilities, failing to disclose material facts and information without encrypting from a security perspective. Then because of that, the last two there are because of that somebody was harmed.

What’s significant about Bane is this, title company and the bank settled out, the agent and the broker decided not to and took the thing to a full jury trial, where they were held individually, each of them individually. It’s called joint and several liability, a judgment for $167,129.27. So until that full amount is paid, each of them are personally liable up to that full amount. The first case that we’ve seen… Excuse me, where an individual professional was held personally liable for this type of a wire fraud.

The other thing that’s interesting about this case is simply the question about privity, the question about, what was that relationship? And why would the agent be responsible for the buyer who seemed like he was unrepresented? So in jury deliberation, so think about this. They heard all the evidence, they’re trying to figure out liability that the jury asked the question. I think this is the most telling piece of the entire court pleading docket. They asked a question to the judge that basically said, “Hey, the agent wasn’t the plaintiff’s agent. Doesn’t that absolve her of responsibility?” And the answer from the judge was just simply no. It doesn’t absolve that liability, because we can find so many things that could or should have been done that would prevented the loss. So, Bane case.

Now let’s get to some on more of a pleading basis, the white case. White case originates out of Illinois, another federal district court case. And why that’s significant, again, these aren’t Supreme Court cases or US Court of Appeal’s cases. But just know that, they don’t have to be to give that directional light to other attorneys on how things are being set up and pled in the courts. Similar situation here, where you had the plaintiff was contracting to purchase property, and Citywide was chosen as the title company. The wiring instruction was sent via email.

It appears or it’s alleged, I will say that the title company’s email may have been compromised. And somebody impersonating the closing agent inserted, the fraudster inserted fraudulent wiring information, $75,000 was lost. The legal theories here, again, are very well, I would say organized. That’s why I was interested in the White case. But let me speak to US title companies on the phone, and we run through some of the things, some of the call outs in this case.

As the title company and acting escrow agents, the title company controlled the process by which the transfer of funds and subsequent transfer of title would occur to facilitate the purchase. What they’re saying is you set up the rules of the game, my client had no ability to change that. Title company informed plaintiffs that it would provide exact instructions regarding the funds transfer, and it did not provide an opportunity to receive instructions in a secure manner. That’s really interesting in the fact section, because what it’s saying is, again, you set up this framework. Defending title company, my client didn’t have the ability to do something that would have been more secure.

As a result of the information acquired from the title company, the failure of data in the breach, the unknown third party was able to pose as the agent of the title company and sent the plaintiff an email containing plaintiffs private information, because they’re using transaction level information now, as well as pertinent retail… As well as information pertinent to the real estate transaction. And the plaintiff believes it was true. That’s the challenge.

If they have compromised someone’s email address and you have transaction level information flowing, that layers in the credibility that the fraudster needs to then when the ask gets the asked, meaning the wiring instruction request gets inserted into the threat of communication, it’s just believable, because there’s no way a third party would know these transaction details. This is a trusted party.

Then the title company did not make point of aware of the risks associated with that type of email exchange. This is interesting on fiduciary duty, that acting as an escrow agent for the plaintiff, they had a duty of care in conducting the closing, including dispersing funds to the proper parties, and notifying the parties to the escrow of a potential fraud. This duty of reasonable care included taking reasonable steps to protect private information of the plaintiff.

I mean, I’m summarizing and bouncing around a little bit. But here’s breach of fiduciary duty as to the title company. So this one is really interesting, how can we be in a fiduciary, if a lot of times we don’t have a direct contract, explicit contract with the buyer or seller until the closing? That’s the closing agreement. And typically, that’s not signed until the closing takes place, like in real time. So, here’s the setup there. Title company acting as escrow agents for the transaction, owed a fiduciary duty. [inaudible 00:33:23] they breached the fiduciary duty by disclosing private information to a third party, by failing to properly warn of the risks that his data and private information could have been compromised. And by encouraging this… This is the other thing… And by encouraging the process of sharing this information through email.

So, here’s the setup. And what what’s interesting about this case is, representing and failing to implement, fail to properly identify, fail to secure funds, fail to ensure… This case really does provide a great summary or roadmap of how these claims are cast on kind of a line item by line item basis. And we’ll get to more of that in just a few minutes. That’s the White case.

The violation of consumer protection law, again, this one was pointed to choosing email as the communication media that this information was exchanged. So by choosing electronic email… Excuse me… Citywide engaged in unfair methods of competition or unfair, deceptive acts of practice, which you’d think, well, how could you possibly make that argument? That doesn’t even make sense.

So they layer in and say, by initiating, encouraging and requiring, I think that’s how they got there. In requiring email communication, they engaged in this violation of the Act, because it was done in a non secure way. Again, these are pleadings, these are case decisions, but going to have to respond to these. Because of that, they’re committing willful and wanton disregard for the plaintiff’s private information and the security of that. And as a result, they were harmed.

The Geils case, another case that is just set up from an element standpoint. This is a circuit court case in the state of Wisconsin, and this was filed last year. Geils is actually a investment company. It’s actually, Geils Home Wisconsin, LLC, and they invest in property. And they put a deal together, they were the buyer. They put a deal together to buy a property, and Merritt happened to be selected as the title company. And you guys can probably guess the theme of the story, again.

They used an email to wire the instructions. The Geils received a substantial, a very similar email. And this was a cash to close wire fraud where they thought they were dealing with someone from the title company, and the money got re-diverted. And prior to closing, one of the main theories was, hey, we had this notice but it was not disclosed.

The theories involved… I want to go through this quickly, just in the interest of time… Not taking reasonable steps. The word reasonable is probably one of the most prevalently used words in court litigation, because we’re going to be held to what’s called the reasonable person, and the reasonable professional, or the reasonable standard given the time that this event took place. And the challenge with that is, it’s broad, and a lot of times it’s fact specific. So, it gets a little fuzzy.

Failure to notify, failure to communicate what the process was going to be. Informing how and when to wire funds, informing when the closing would take place. Sending public information other than through [inaudible 00:37:13] media, and you guys are starting to see the theme here. Instituting 2FA or multi-layer security, verification and delivering instructions.

Then the breach of contract. Failing to notify, again. Failing to communicate, failing to inform. Failing, failing, failing all of these things, they’re stacking on. And said had that been done, the standard of care and of negligence would have been satisfied, and we wouldn’t had a breach of contract if you look it the other way.

This case is fascinating, and I learned something reading this case. I actually had to read it twice. I read it last weekend, because I didn’t think I had my hands on it. And I didn’t, but I do now. So what happened in this case, again, this is a district court case, federal the Ninth Circuit, [inaudible 00:37:58] Minnesota.

The Newgrens were purchasing a property, or I’m sorry, they were selling a property. And the defendants or all the cast of characters that were helping them, and one of them is this bad guy right here that at some point they identified. So the Newgreens entered into a purchase agreement. The buyer had agreed to that, obviously. McGregor was selected as the closing agent, and an email purportedly from Haller, who was the selling agent was sent to the title company indicating that the plaintiff, the Newgreens, were changing how they wanted their net proceeds wire to be sent. So this was a net proceeds, so we’re getting a sampling of all these different trajectories of fraud as well.

In this case, the listing agent sends the title company, “Hey, my sellers reached out and said they want it sent here, rather than where they previously were going to check at closing or whatever.” The email was kind of a sloppy, not a great attempt from the fraudster. But it was followed. And of the sales proceeds, a large portion of those were actually diverted.

What the title company did, and I know this is possible. The title company said, “Hey, I think we’re insured for this, so we’re going to enter into a Miller-Shugart agreement, which basically says, I’ll agree to pay you what you lost, plus 35,000 in punitive, or what are called exemplary damages.” What that means is you acted really bad, so you need to pay more. It’s what it says in the courts.

What is a Miller-Shugart agreement? Well, what that is, is it says, it’s a settlement where if I’m an insured title company, I can settle my claim with a plaintiff. But as a condition of that settlement, I only have to pay as long as the insurance company pays the claim. So they basically shift this thing around and say, “Okay, I’m going to pass this on to the insurance company, and get the plaintiffs and their counsel to agree.”

The kicker in this whole thing is that a second lawsuit unfolds, where the insurance company sues the Newgreens back and says, “You know what? Based on the terms of the policy, we are not liable.” And specifically points out that we don’t have any obligation for punitive damages, because that’s not a defined term in the policy. Then as to what led to the loss, they’re saying, this exclusion, which I pulled out of their policy and put in here, didn’t base upon or arise out of the unauthorized access to the electronic system. Meaning, hey, the title company’s system wasn’t breached.

The seller’s agent was spoofed, the title company relied on a spoof, and therefore we don’t have any coverage at all. So I don’t know about you, but I think this is going to have a… This is going to result in a bad customer experience. From trying to settle, and push it to the insurance company, insurance company sues my customer back. I think that’s a really challenging position.

Those were five of several cases that rose to the top of our list. And just in the interest of time, I’m going to pivot now to how we prepare for defense based on what we’ve just learned. But you can see here, and I wanted to provide you, especially those of you that like to read pleadings, kind of like reading insurance policies. But some of these are fun to read from a fact perspective. I gave you what I could do my best. It’s been a little while since I was in law school. But my best to directionally give you the case citations, so you can pull them from your [inaudible 00:41:57] yourselves. And you can fact check us all the way along. But you can see here, no doubt negligence is going to show up in the pleadings, as well as some theory of breach of contract and likely Consumer Protection Act.

All right, risk mitigation strategies, quickly. For many of you that have been on previous webinars, the cases touch on multiple different things that I want to walk you through. I’m going to show you how CertifID can mitigate not only the notice, but a lot of that hand off in the transfer, how we can mitigate the risk. And then we’re getting into the 10 questions we’re going to answer on reducing litigation risk profiles.

Hardware going to be held to a standard right now on making sure this was wire fraud loss. Another 100, more than 100 cases on data theft, and even class action lawsuits around, that’s the personal information. Hardware is a biggy. We have to keep our data secure. Software can enable that. Software can enable encryption, software can enable detection, software can enable virus intrude and those types of things. So here, non negotiable.

But then we get into the harder side of it, and that’s the people, process and who we’re doing business with as partners. So, you need to really think about this. For those of you new to the webinar and haven’t seen this, you need to think in these types of layers of security, and how the combination of those end up lowering a high risk profile at the start down to something more of a manageable state. Education, you could see was one. Education and awareness was one of the common themes that came in, both the negligence and the breach of contract theories. So, I’ll get into that a little bit more on how we can do that in the workflow

CertifID has taken this issue on, so quickly, I want to run through what we do. A lot of you aren’t aware of what we do beyond education, and awareness and training. But we mitigate risk for underwriters, title agencies, customers. We actually guarantee each wire up to a million dollars. What we do is, we take a very kind of clunky process right now that isn’t working at scale. The call back, I don’t know if you guys saw Wall Street Journal article, where artificial intelligence was used to mimic the voice of a CEO of an energy company to one of the people in the finance group in the same company, and a series of wires went out just recently this summer, large wires using artificial intelligence. So they’re already seeing that, hey, call back. All right, I’ll take that on through computer programming.

We streamline that, because we tech enable through device analysis, knowledge-based authentication, and we automate the process of confirming that you’re dealing with who you think you’re dealing with. Quickly, we do it through a layered approach. We will analyze and make sure the device is trusted, and it hasn’t been compromised. We’ll confirm physical identity by presenting questions to the individual that only they would know and would be able to answer, and we also use multi-factor authentication.

Again, if you read those cases, it’s all about verifying identity, what safeguards? What steps were in place to confirm that you are dealing with the right person? Then again, the last kind of crescendo of that is, how do we make sure that we safely transmitted our wiring information to somebody that’s going to wire funds in, or we confirm the bank credentials of the proper account before we wire funds up. Easy to use platform, login. We’re integrated with most of the titled production platforms, or at least, we’ll be by the end of the year as we move through our integration schedule. But you don’t need to download any software. In less than 60 seconds, you can be sending what is a very easy to use, logical kind of flow to a consumer.

We have 99 point, depends on, call it 99.5% identity match rate in the United States right now. Very, very high, and consumers are going through this. So I would love to show you more, regaining confidence, showing you how this could affect the workflow in a very positive way by saving time. But I mean, as important in that is making sure that we come alongside, and help you increase your standard of care. For those of you that are clients on the phone, thank you. I think you guys have felt the benefit, and we’re starting to hear more and more of that every month as we get feedback from consumers. The consumers have very positive impressions about this experience that we have with CertifID, because it makes them feel safe. It makes them feel like somebody’s doing something about this issue.

Early Education, we also train on this. We have a tremendous amount of collateral, and we can provide you with the notices to properly educate the consumer, or the someone on the other end of a wire about the risk of wire fraud. Another big element in the negligence and the contract claims.

In the workflow or a typical real estate transaction, I know we have others that are not in real estate on the call. So, think of it in terms of just an exploration of a workflow. There are hot spots, when the property goes pending on the MLS, and when we have kind of closing scheduled. So, we can’t wait anymore. I cannot emphasize this enough, fraudsters are starting to target buyers the first week of the transaction, period. If we’re not having the conversation about wiring funds until we get a final CD or close to a final closing statement, call it day 18 to 25, maybe later. And the fraudster is the first person to educate the buyer on when to wire funds, because they’re armed with transactional level information. The buyers don’t stand a chance unless they’re educated, they really don’t.

You can call the main field offices of the FBI, the Secret Service, the FTC. The single thing that keeps them up at right now… I mean, a lot of things do. But the biggest thing that is keeping them up at night is the pace and sophistication of social engineering upon the general public. Because as industry participants, we know a lot, we’re not sharing that, and they’re learning it for the first time from the fraudsters.

So what it should look like is going back to our partners, how can we kind of go upstream and say, look, at the time the buyer agency is forms the representative agreement, at the time the attorney-client relationship is formed through the engagement letter, at the time the listing agreement is signed, a lot of times they’re doing this electronically. Could we get something in front of the consumers that tees up this issue and puts them on notice of what to watch out for? What will never happen? I mean specifics, and who to call if something is suspicious? You got to give them a roadmap on this right now.

We provide these notices that you could literally cut and paste, and digitize into that Dotloop, or Dropbox or DocuSign, or whatever platform, the real estate board, or the attorneys are using to sign these documents. Then also when we start to see it, I’m talking about we as a title company. But for the lenders on the call, what if at the loan application we had a proper notice? Like we all just need to help each other, because we need to meet the standard of care. And that standard of care says at some point, the buyer was educated on the risk.

While I don’t have case precedent to say what I’m about to say, I would make the argument that if the real estate agent had a signed acknowledgement about wire fraud, that can only help the title company and the lender downstream if at the end of the day, they’re sitting in the bank parking lot ready to walk into the branch and wire their life savings away. They get tricked by a fraudster who calls them with all the information that we as transaction participants would be able to say, “Look, I know that stinks. Man, it’s really bad. But ultimately, that was exactly why we educated you on the front end about the risks. You should have called us,” and you point to those notices that went through and were communicated to them.

When we see it in title, we have to at order, entry or file opening provide a proper notice. Then I argue that when things calm down from a diligence perspective, this is a fire hose, especially for first time home buyers. You got diligence, you got inspections, you got a lender asking for whatever it is because it’s their first loan. Then, things start to kind of cool down a little bit. about halfway through the transaction, you hit him with another notice, “Hey, if you’re going to wire funds in…” and that’s the trick, right? You don’t know if they’re going to wire funds in. We don’t know that a lot of times till the end of the transaction, whether they intend to bring a CertifID check.

I know a lot of you are in good fund states where you have to, but you don’t know what the cash to close obligation even looks like yet. You don’t know if they’re going FHA, or they’re going to conventional or whatever happens to be. Again, that doesn’t matter. You got to back up the timeline and say, “Regardless of how this ends and you get your cash to close to us, we’re going to prime that education all the way throughout.” And like we you say, the CertifID team, our customer success team walks you through all these notices when you become a customer.

All right, what you’ve all been waiting for. And thanks for putting up with, this is like really heavy stuff. When we were preparing this presentation, I had a room in my house that was just full of cases, and my wife walked in like, “Are you going back to a law firm or legal practice and I don’t know about it?” I’m like, “No, I want to suck on my tailpipe, but I got a webinar on Wednesday that I’ve to prep for.” So here we go, lowering the litigation risk profile. How do we do that?

I would argue that these are not, I’m not giving you legal advice. I should have disclaimed that the first sentence here. But I’m saying that directionally, it’s almost irrefutable that these questions are likely going to come up if there is a loss, and how do we defend against it? Now defense is not just saying, “Oh, yeah, I did that.” How do you document that you did it? How do you show you have a standard in a practice that you did it? The worst thing that you could have in your company, or the best thing for a plaintiff’s lawyer is that you have a great policy and procedure, you’re hitting all these touch points and nobody’s following it.

That’s where you’re going to take a damage amount from here, and go to here in a millisecond. So, did you notify and warn your customer about wire fraud? And I put in another one, could we get that in a signed acknowledgement? That’s what we’ve prepared, could we just have that digitized way on the front end of the transaction as part of all the other notices and things that have to go out to create that first relationship to start a real estate transaction?

Notice number one; did you communicate and inform, “Hey, what are the rules of the game?” You have to understand that the general public, especially first time home buyers, they have no muscle memory in real estate transactions. There is none. There can’t be any. They’re only in the flow of this a few times in their life. And as fast as the industry is changing, we can’t expect that they’re reading things online, or they’re educating themselves on true risk. Was it confirmed? Did you set up the rules of the game, and that’s what the notices do that we prepare? This is what’s going to happen, this is what isn’t going to happen. So this shows up, then you got to… You’re out of band, and reach out to us.

Safeguards and delivering the wiring instructions. I still talk to title companies every single week. “Well, if I’m a buyer and I’m sending in cash to close, how do I get my wiring instructions?” “Oh, we email them to the agent. They don’t want us to have direct communication with the customer.” Guys, those days are over. You don’t have a choice now. You have to be able to prove. You got to step that relationship aside and say, “Yeah, I appreciate that. But they’re not wiring your escrow account, they’re wiring to mine.” And if I can’t prove that I’ve safeguarded that transmission, then the whole thing breaks down. And by the way, agent, by going direct, I’m lowering your risk as well. Because I am safeguarding them, and we’re all going to get [inaudible 00:54:56].

Did you properly identify the parties? This isn’t just, I’m wiring out during the disbursement, and I want to make sure the funds arrive safely to the proper account. You have to prove that you put it in the hands of the buyer, at least one time. Because if the buyer is being spoofed or your emails are being redirected out of their account because their email was hacked, and then the fraudster insert fraudulent wiring information, that’s not going to play well in court. Because you’re not going to be able to prove. It doesn’t matter if you sent it to their email account, you can’t prove they received it. They being the individual.

All right. Did you take the steps to secure your data in communication? Complex passwords, multi-factor authentication. I mean, are you just in the… At least you don’t have to be Uber secure, but you got to show that you’re in kind of that reasonable standard layer of identity or data protection.

Controlling, and dispersing and securing the clients’ funds. What are your disbursement authorization procedure? And what’s your wire transfer procedure? What are those things that you need to be aware of? Do you have an incident response policy? This is the other thing that came up in those courts, those decisions or those pleadings, I should say. Do you have a policy to identify, report and start the cheering process that complies with your obligations, and likely state law? A lot of states are passing these data privacy laws now. California, New York, Michigan starts next year.

Do you provide a commercially reasonable standard in executing the responsibilities that you have? So all of these duties that I outlined, can you check off that, yeah, I think I’m discharging those? Then, you really have to tie out. Go back and look at your social media and your websites, and look at the marketing pros that you might have on there.

Look, I’m the best, most secure, blah, blah, blah, title company. You just have to be able to back it up. And if you’re not, if you’ve made those claims and you don’t have again, looking kind of backward in priority here that you don’t have and check off all these boxes, this is what gets you into the Consumer Protection Act violations.

Then the bonus, I should add one more. Secure email is a non-negotiable. So when we talk about securing and distributing, I’m meaning that through secure data storage, limiting rights of users, but also secure email in that transition. Okay, I want to call that out.

Then the bonus is, are you insured for first and third party losses? You have to get with your carrier and say, “Okay, Tom just went on and on about all the stuff that’s happening in the courts. It just got a little freaked out. What would happen if there was a loss with this profile?” Both buyer wiring in, it gets diverted. That’s a third party loss, because it’s not your fund that you lost. Or a first-party loss is, I dispersed to a seller and those funds that seller net proceeds wire gets diverted. Am I covered? And I’m saying including cost of defense? Because, again, it’s going to be as expensive to be right as it is to be wrong if you’re rendered a judgment. And you got to make sure that you have your insurance carrier alongside of you.

Most of you that are purchasing cyber or cybercrime coverage, and you have to these days. If you don’t have it, you can message me, and I can get you in contact with an agent that really understands this space more than anybody in the country. You’re going to get a limit of $250,000. That’s the most you can buy right now with, typically a $25,000 deductible. So we as transaction participants, at least right now, something we’re working on. But right now we cannot even adequately ensure for the risk. And I say that because unlike a lot of other forms of risk, we don’t get to choose the size of the wire that they’re focused on defrauding or diverting. We can’t choose.

So with that, guys, I’m going to move to questions. Obviously, yes, the link will be distributed today. And we’ll do that in a few hours. In the interest of time, I’m going to cut this short. We are already over by one minute. But if I can help in any way, connect with me on LinkedIn, send me an email. That’s my direct dial. I want to thank all of you. We had over 600 registered for today, it’s our largest group yet. But thanks for the time.

Again, check us out. We are definitely here to help really mitigate this risk profile in your workflow, and also the ecosystem of the transaction. Until next month, stay safe and take care. Thank you.

AUTHOR

Tom Cronkright

CEO and Co-Founder @ CertifID

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