A group of investors that lost millions of dollars in what authorities alleged was a $60 million Ponzi scheme filed a lawsuit against the alleged Ponzi schemers and the community bank listed on their marketing materials as a reference. The lawsuit named Santa Cruz County Bank (the "Bank") as a co-defendant, along with John A. Geringer, Christopher Luck and Keith Rode, who operated the GLR Growth Fund. The lawsuit asserted claims of conspiracy and violations of federal securities laws against all defendants, as well as claims of aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and negligent misrepresentations against the Bank.
Geringer, Luck and Rode formed the GLR Growth Fund, L.P. (the "Fund") in 2003. Geringer, who managed the Fund's trading accounts and made investing decisions, told potential investors that the Fund consistently achieved annual returns ranging from 17% to 25%, including a return of 24% in 2008 (when the S&P 500 lost 38.5%.). In marketing materials distributed to investors, the Fund purported to invest 75% of its assets in publicly traded securities, options, and commodities. Investors were also told that the Fund used the services of an independent accountant, and account statements regularly included the caption "MEMBER NASD AND SEC APPROVED". Based on these representations, the Fund raised at least $60 million from hundreds of investors.
However, the Fund did not consistently earn double-digit returns, but in reality experienced trading losses every year from 2005 to 2009, including a 33% loss in 2008 and a 92% decline in 2009. Additionally, rather than invest in publicly traded securities, the Fund instead invested nearly $30 million, or half of the total funds raised from investors, in two private startup technology companies that were highly illiquid. By mid-2009, the Fund had stopped trading entirely after suffering massive losses. With no trading returns to pay to investors, Geringer instead used funds contributed by existing investors to create the false appearance of profitability - a classic hallmark of a Ponzi scheme. The SEC filed a civil enforcement action in May 2012, and Geringer, Luck, and Rode were indicted in December 2012.
According to the lawsuit, the Fund's marketing materials listed the Bank and Chuck Maffia - then a vice-president at the Bank - as a "Banking Reference". Investors that contacted Maffia were told that the Fund was a safe, conservative investment option, with Maffia disclosing that his own retirement funds were invested in the Fund. Additionally,
Maffia emphasized that the Fund’s clients had never sustained any losses; Geringer was an excellent investment manager; and the Bank handled and oversaw all the funds in the Fund Account. Finally, Maffia told Mr. Elliot that Maffia would not have invested his own retirement money in the Fund but for the confidence both the Bank and he had in Geringer.
Some investors also allegedly were provided with tax returns and other documents that supposedly verified the Fund's consistent returns. As the Complaint makes clear, investors were assured by Maffia's statements regarding the safety and legitimacy of the Fund, and would not have invested absent these assurances.
While asserting claims against financial institutions for their role in facilitating Ponzi schemes has been historically difficult due to the high standard of proof required to show liability, the case evokes multiple similarities to the circumstances surrounding TD Bank's role in the massive Ponzi scheme by Florida lawyer Scott Rothstein. There, TD Bank was ultimately forced to pay out hundreds of millions of dollars in settlements and adverse verdicts from investors who alleged that Rothstein was assisted by a TD Bank vice-president who lent the scheme an aura of legitimacy.
A copy of the complaint is below.