He couldn’t help himself. Is that a cop out, or is it in the nature of things? Adrian Powles, respectable lawyer of the respectable and distinguished Sydney law firm, Allen, Allen and Hemsley, was jailed in January for defrauding his clients of nearly a million dollars. He was also engaged in organising an investment plan for Nauru Government bodies which at one stage stood to lose $40 million.
This week, three men pleaded guilty in New York to their part in the Nauru scam which involved banks in Antigua, Singapore and Switzerland. Next week sees the publication of The Allens Affair, by Valerie Lawson, which traces Powles’s life from womb to jail.
On the public plane, the affair resulted in some questioning about the way law is practised in Australia. While looking at that, Lawson’s book engages in the deeper question that has engaged writers for millennia … what causes those deep flaws in human nature that cause such destruction to self, family and friends, bringing shame and ignominy when only a modicum of self-restraint and self-discipline would have resulted in respect and applause.
There are two critical elements to the proper practice of law: trust and accountability. Lawyers have to be trusted by their clients and the courts and they are accountable to their clients and the courts as well. Without this trust and accountability the practice of law would become even more difficult than it is now. But another layer of trust and accountability is also imposed on lawyers … to each other. This is what the Allens-Powles story is about.
A few lawyers practise on their own, but most practice in partnership. In a partnership, the partners must engage in utmost good faith with each other. It is a fairly common form of business arrangement, but legal partnerships are slightly different. They can only include lawyers; non-lawyers are not permitted in a partnership that practises law. Further, the practice of law requires personal accountability. Because of this, the law does not permit the practice of law to done by companies. Companies have limited liability. If they go bust, the shareholders do not have to dip into their personal wealth to pay off the debt. With partnership, however, each of the partners is liable for the whole debt until it is paid or all the partners are personally bankrupt.
Now, a partnership of a few lawyers is fine. Each can know and trust the others. As the partnership gets bigger, however, this is much more difficult. In business, the law recognises this. It says that if more than 20 people jointly engage in a venture for profit, they must form a company.
There is a trade-off, here. In exchange for the limited liability, the company is obliged to make public disclosure of company details, including details of accounts and mortgages and charges over company property. The theory is that the public can find out things about the company before entrusting is money with it … whether in the form of loans or deposits for goods. In contrast the partnership can conduct its affairs in secret.
However, the personal accountability required by the courts and society has meant that lawyers cannot form companies to practise law. They must be partnerships. For a long time this did not present a difficult. But as society and commerce became more complex, more lawyers were required to satisfy a single client’s needs. Moreover, competitive pressures … mainly from accountants giving de-facto legal advice … meant that firms had to be larger than 20 to get economies of scale.
Lawyers became the exception to the rule forbidding more than 20 partners to engage in a venture for profit. You could have up to 150 partners. The large law firms expanded, including firms like Allens.
There was a concurrent trend. Before about 1970, the profits of the partnership were distributed to the partners and taxed in their hands. This was unlike a company or a trust where spouses and children could be shareholders and the income effectively split, lowering tax. Further in ordinary businesses, spouses and children could become partners, allowing for income splitting and lower tax. But the law says that only lawyers can practise law, so spouses and children could not join unless they were qualified lawyers.
So while others were forming companies and trusts and engaging in income-splitting, the lawyers were forced to stay in lawyer-only partnerships copping a slugging from the Tax Office. Then a smart tax lawyer thought that the practice of law could be divided into the strict legal work of advice, on one hand, and the rest of the support and infrastructure of the law firm on the other. Legal-services companies were formed to provide law firms with offices, secretaries, stationery and so on. Profits could be channelled through those companies, helping tax minimisation.
The practice of law was changing. The small firm of family solicitors was declining. In its place was a larger, more commercially sharp business enterprise. It mixed legal, commercial, investment and accounting advice. This enterprise was profit-motivated and performance-driven. Who could bring in the dollars, became a far more important question for these conglomerates when choosing a partner than the far more important question, is this the sort of person I can trust as a partner? Into this world came Adrian Ronald Powles.
Before the late sixties, Allens was a conservative firm of Anglicans. It was a “”his father, and his father before him” type of firm. Few were admitted as partners. Only those you could trust. Only those whose family background was solid and known. Money was not an obsession. Bills went out in a leisurely way and were not followed through. There was intimate trust between partners. The total profit was divided equally among partners … as gentlemen … no-one questioned or worried about what percentage was pulled in by each partner.
Powles, admitted as a partner in 1967 aged 29, changed that. As managing partner later he published to the other partners the percentage of profit each partner was responsible for. There was an obsession with money, rather than service.
The Allens partners did not know what they had let themselves in for. How could they. In the old days of only a few partners each could know and trust the others. In a larger partnership they could not know, but were none the less forced to trust.
They did not know Powles’s background, other than it was vaguely from the poor end of town. Lawson starts her story with details of a bizarre incident involving Powles’s father, while Adrian was in the womb. Ronnie Powles kidnapped his own son (Adrian’s older brother) and sent a ransom note. He intended to get his relatives to come good with the ransom money so he could pocket it. Fortunately the boy was discovered and returned before anything happened. No charges were laid.
Adrian’s father was a manic depressive, alcoholic and gambler. Adrian was a manic depressive, alcoholic and gambler. And Adrian was welcomed into a “”his father and his father before him” type law firm.
The partners did not know of Ronnie Powles’s instability, gambling and suicide threats. They could not and did not visit the sins of the father on the son. They treated him as himself. What percentage of human character is nature, what percentage nurture?
Adrian Powles enjoyed the trust and respectability of a partnership in one the nation’s leading law firms. He took his clients’ money, entrusted to him to invest in mortgages. He gambled the money away, but paid them interest so it seemed as if all was well. He was sent to Allens’ office in London. There he engaged in huge investments in bank notes and securities. Money came in from Nauru and he helped invest it through various banks. Powles was always in search of the big international paper investment windfall so he could retire mega-rich. But it never came off. Powles was driven. He was a manic worker. He had the drive and obsession that could lead to success or spectacular failure.
When Nauru demanded its money back and notified Allens’ Sydney office, the curtain came down. Apparently Powles did not use any of the Nauru money for his own purposes, but when the other partners started chasing it, they found the shortfalls in other clients’ monies.
The partners did not know that much of the Nauru money could be rounded up. They thought there was about $40 million missing. And under partnership law, each of the partners was jointly and severally liable for the whole debt. The personal assets of all the partners could be attached to pay the debt off.
Further, a default of this nature usually required the Law Society to appoint a receiver into the firm’s affairs to safeguard the assets for the clients.
The Allens partners resisted furiously. They argued the default was in London, so none of the NSW Law Society’s business. Besides, it was with respect to investment, not legal practice. At the same time there were other major calls on the Law Society’s fidelity fund coming from elsewhere. Meanwhile, Powles did a runner back to Australia. The practice and practitioners of law in Australia had changed.
The Allens partners learned that trust, accountability and stability were as important as the almighty dollar.
There is some move by high-end corporate legal advisers to go it alone with smaller boutique firms, but the amalgamations and expansion of legal firms (especially internationally) continues unabated. And they are engaging in a wider range of work. They are also chasing the dollar with more success, according to the Australian Bureau of Statistics.
Meanwhile, the lower trust and accountability in the newer ways of legal practice have seen defaults continue to grow.
Perhaps the partnership … based as it is on utmost good faith and trust … is no longer the best form for legal practice and some sort of corporate structure with more public accounting would be more suitable. Then again, no structure or system can give immunity from those deep flaws in human nature that cause such destruction to self, family and friends, bringing shame and ignominy.