Petters Trustee Sues BMO Bank For "Aiding and Abetting" $3.5 Billion Ponzi Scheme

The court-appointed trustee tasked with recovering assets for victims of Thomas Petters' $3.5 billion Ponzi scheme is taking aim at Petters' former bank, alleging that it ignored numerous red flags that should have alerted it to Petters' fraud, including over $35 billion in deposits.  BMO Bank, the current owner of M&I Bank ("M&I"), was accused of multiple charges, including aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and conspiring to commit fraud. Doug Kelley, the court-appointed bankruptcy trustee, is seeking unspecified damages in excess of $50,000. 

The lawsuit centers on the "astronomical" sum of $35 billion in deposits that flowed into a Petters Companies Inc. account from 2003 until the fraud was uncovered in September 2008.  Petters raised funds from investors by promising lucrative returns from the purchase and resale of consumer electronics to big-box retail stores.  Despite the staggering amount of deposits made, Kelley alleges that none of the deposits originated from the retail stores that were supposedly the focal point of Petters' operation. 

Additionally, nearly $70 million was siphoned off into various personal accounts controlled by Petters, including at least seventeen transfers exceeding $1 million.  Despite M&I's apparent knowledge of the "frenzied activity" taking place in the account, Kelley argues that bank executives turned a blind eye to the possibility of wrongdoing to preserve the steady generation of fees from their business relationship with Petters. 

Mixed Success In Similar Lawsuits

Lawsuits against financial institutions by those tasked to recover assets in the wake of failed Ponzi schemes have met with mixed success, in part due to the heightened legal standard required to succeed on claims such as aiding and abetting fraud and/or breach of fiduciary duty.  Rather than a simple preponderance of the evidence, a bank must either have actual knowledge of the fraud, or knowledge and/or deliberate ignorance of certain "badges of fraud" that would put a reasonable person on notice.  Additionally, some courts have found that bankruptcy trustees or equity receivers do not have "standing" to bring the suits. 

For example, as part of his quest to recover assets for victims of Bernard Madoff's infamous Ponzi scheme, court-appointed trustee Irving Picard filed suit against several financial behemoths, including JP Morgan Chase and HSBC Bank, seeking not only the return of fraudulent transfers received from Madoff, but also billions of dollars in damages under various common law theories including aiding and abetting fraud and aiding and abetting breach of fiduciary duty that centered on the alleged ignorance of "myriad red flags and indicia of fraud."

After successfully winning the transfer of the suits from Bankruptcy Court (thought to be favorable to Picard) to a New York federal court, the financial defendants argued that Picard did not have legal "standing" to bring the claims.  Standing, as defined by United States District Court Judge Jed S. Rakoff, requires a would-be litigant to demonstrate "the existence of a case or controversy and a personal stake in the outcome of the case." 

Not only did Picard lack standing to bring claims on behalf of the bankruptcy estate against third-parties like HSBC, ruled Judge Rakoff, but under the doctrine of in pari delicto, Picard was barred from suing to recover for a wrong that the bankruptcy entities essentially took part in.  Additionally, United States District Court Judge Colleen McMahon likened Picard's plight to that of a parking garage owner attempting to assert claims on behalf of a car that suffered damage while in traffic and before it entered the garage.  Picard has since appealed those rulings.

However, a recent win by victims of Scott Rothstein's $12 billion Ponzi scheme against TD Bank has some questioning whether the tides have turned.  In January 2012, a group of investors won a $65 million jury verdict against TD Bank in a Miami federal court after alleging that the bank and at least one of its executives had taken actions to further Rothstein's fraud in order to boost bank profits.  Besides the favorable verdict, the case was also notable in that it featured a TD Bank executive asserting his fifth amendment rights on the witness stand and the post-trial discovery that critical documents had been altered and/or withheld by the bank.  Following that verdict, TD Bank settled with another investor group led by the same attorney that had asserted similar claims.

While the prospect of holding a financial institution liable for investor losses from a massive Ponzi scheme such as Petters certainly is alluring, Mr. Kelley's likelihood of success is far from guaranteed.  Much will depend on the discovery as to whether M&I executives truly suspected Petters of fraud.  Additionally, internal risk documents such as Suspicious Activity Reports ("SAR's") a by-product of Patriot Act legislation requiring banks to report suspicious activity to the government, could also potentially be useful to gauge the bank's level of knowledge.  One could also speculate that Petters himself could be a favorable witness for Kelley - should he choose to cooperate.  

BNY Mellon Subsidiary Pays $210 Million to Settle Lawsuit Over Madoff Losses

An asset management subsidiary of BNY Mellon has agreed to pay $210 million to settle claims that it advised clients to invest in Bernard Madoff's massive Ponzi scheme despite suspecting Madoff of fraud.  Over the course of a ten-year period, Ivy Asset Management, LLC ("Ivy") received nearly $40 million in fees in return for conducting due diligence on Madoff.  The settlement with IAM represents the conclusion of multiple lawsuits brought by the New York Attorney General (the "NYAG"), the U.S. Department of Labor, and private plaintiffs.  Despite IAM employees voicing "deep" reservations about Madoff's operations, investors were given positive recommendations, with the only concern voiced relating to the difficulty of managing the enormous asset pool purportedly managed by Madoff.  Per its terms, the settlement applies only those investors who invested in "feeder funds" that funneled investor monies into Madoff's scheme.

In 2010, the New York Attorney General filed a lawsuit charging IAM with violations of the Martin Act for fraudulent conduct in connection with the sale of securities, as well as fraud in the conduct of business and breach of fiduciary duty.  The suit sought damages, payment of restitution, and disgorgement of all fees received by Ivy.  Private investors also filed suit against IAM alleging similar claims.  

The charges focused on the level of due diligence IAM purported to conduct on behalf of its clients.  During the course of this due diligence, authorities alleged that Ivy discovered Madoff was not investing funds as promised.  While Madoff's advertised trading strategy featured the purchase and sale of enormous amounts of options, Ivy's investigation revealed that the actual option trading volume fell far short of what would be required. When Madoff was pressed as to this discrepancy, he provided IAM executives with "three vastly different explanations" that failed to allay concerns.  Indeed, according to internal IAM documents, one executive piped:

 Ah, Madoff, you omitted one possibility – he’s a fraud!

Yet, despite the inconsistent explanations given by Madoff and misgivings by executives, IAM failed to disclose any of these suspicions to investors in an effort to prevent the steady stream of lucrative fees.  As a result, IAM's clients, which included individual investors as well as New York union pension and welfare plans, ultimately lost approximately $236 million when Madoff's fraud was uncovered in December 2008.  

The settlement sheds light on the "feeder fund" investors, who to date have not been recognized as victims entitled to participate in the Madoff claims process.  Irving Picard, the bankruptcy trustee appointed to liquidate Bernard L. Madoff Investment Securities, has made significant strides in marshaling assets and to date has made two distributions to victims.  However, Picard's determination that only those who directly invested with Madoff were victims meant that thousands of investors whose Madoff investment was via a feeder fund were not considered victims - and thus not entitled to participate in the claims process.  

Indeed, while Picard received 16,519 customer claims, only 2,436 of those claims were "allowed" - with many being denied due to their status as "feeder fund" investors.  Under Picard's reasoning, only the feeder fund itself was a victim, with the "loss" suffered by that feeder fund consisting of the cumulative value of investments that fund had with Madoff.  Any distributions would thus be made to the feeder fund itself, which would then have the option of making distributions to its investors.

The IAM settlement is welcome news for those investors, which will provide a near-total recovery of their losses.  Ironically, while shut out of the Madoff distribution process, these investors now stand to recover nearly triple the amount distributed to Madoff victims.  In the press release put out by the New York Attorney General's office,  it was estimated that investors were also "expected to receive substantial additional payments at a future date from" Picard.  However, any future distribution by Picard would likely not occur until other similar situated victims have received equal distributions.  

The settlement also marks the second significant recovery in recent efforts by the office of the New York Attorney General to prosecute those who were involved in the Madoff scandal.  Earlier this summer, the NYAG announced that it had reached an agreement with prominent hedge fund manager J. Ezra Merkin to return approximately $400 million to investors in four Merkin funds that lost over $1 billion with Madoff. Picard later objected to that settlement, claiming that it encroached on his exclusive authority to recovery assets for Madoff's victims.  According to Picard, if the settlement was approved, it would deprive Merkin of sufficient funds to satsify Picard's pending claims totaling $500 million and leave nothing for the majority of Madoff victims.  

Victims Cheer As Judge Hands Down 19-Year Sentence For $60 Million Silver Ponzi Scheme

A federal courtroom erupted in cheers as a South Carolina man learned he will spend the next nineteen years in prison for operating a massive Ponzi scheme that duped investors out of $60 million. Ronnie Wilson, 65, had pled guilty to two counts of mail fraud earlier this summer, and had faced a statutory maximum sentence of twenty years in prison. Wilson received a 235-month sentence - five months short of the maximum 20-year sentence - for what authorities called one of the worst financial frauds in state history.  Along with the sentence, Wilson was also ordered to pay $57,401,009 in restitution and serve three years of probation upon release. 

As detailed in an earlier Ponzitracker article leading up to the sentencing, Wilson operated Atlantic Bullion & Coin, Inc. since at least 2001, promising investors lucrative gains by profiting off the appreciation of silver without having to actually physically acquire the precious metal.  Investors were told that Wilson would purchase the silver and arrange for safekeeping at a Delaware depository.  Ultimately, over $90 million was raised from investors.  However, Wilson purchased very little actual silver, and instead used investor funds to make principal and profit distributions to existing investors - the classic hallmark of a Ponzi scheme.  

At the sentencing hearing, Wilson recounted that while the fraud began on a small scale, it soon spiraled out of control to the point where Wilson began stealing from his daughter and brother.  The court-appointed receiver, Beattie Ashmore, has indicated that his investigation thus far "would paint a very dim picture" of a meaningful recovery of assets for distribution to victims.  

The Receiver's website is here. 

Ponzi Schemer Receives 27-Year Sentence for $12.3 Million Scheme

A Georgia federal judge handed down a 27-year sentence - the longest of its its kind in Atlanta for a fraudulent investment scheme - to a New York man convicted of operating a Ponzi scheme that duped investors out of more than $12 million.  Andrew Mackey, 62, received the sentence from United States District Judge Bill Duffey, who noted that Mackey's case was the worst of all the Ponzi scheme cases he had presided over.  Earlier this summer, a federal jury had convicted Mackey and his common-law wife, Inger Jensen, on 15 counts of wire fraud, mail fraud, and conspiracy to commit wire fraud and mail fraud.  For her role, Jensen received a fourteen-year sentence.

According to authorities, Mackey and Jensen were the owners of ASM Financial Funding Corporation, which was marketed to potential investors as a "wealth enhancement club."  Holding themselves out to investors as experienced investment professionals, Mackey and Jensen promised investors lucrative returns of up to 20% per month by investing in several different ventures, including private and confidential offshore business deals and mortgage financing.  Per the terms of the mortgage financing investment, investors were told that they could pay off a 30-year mortgage in less than five years if they paid 17%-25% of the mortgage up front. Investors were told that these ventures were guaranteed, and lured by advertisements touting the lucrative terms:

"Please note the true beauty of this program: Your total out of pocket expenses after 5 years is only $109,960 and you now own a $200,000 home. That's right! YOU FINANCED $200,000, BUT ONLY PAID BACK $109,960!"

In total, Mackey raised more than $12 million from investors.  As is now known, the promised returns that seemed too good to be true were, in fact, too good to be true.  Instead, the returns were the classic hallmark of a Ponzi scheme - unsustainable returns made possible not through legitimate investments, but by making Ponzi-style payments consisting of redistributed investor principal.  

At his sentencing, Mackey refused to take responsibility for his crimes, instead noting that he "did not intend to steal" and that it was "hard to hear that people feel bitter."  While this likely played a role in the severity of the sentence handed down by Judge Duffey, Mackey was also a convicted felon due to a prostitution-related 1987 arrest for his role as one of the "biggest pimps" in New York.  

Mastermind of $60 Million Silver Ponzi Scheme Faces Sentencing

A South Carolina man accused of masterminding a $60 million Ponzi scheme, one of the largest schemes in state history, is scheduled to be sentenced Tuesday.  Ronnie Wilson, of Anderson County, South Carolina, was arrested in early April and charged with mail fraud in an alleged Ponzi scheme that held itself out as a silver investment company.  Wilson later pled guilty to two counts of mail fraud in July.  Mail fraud carries a maximum statutory sentence of twenty years per count, as well as a $250,000 criminal fine.  Typically, the US Probation Office prepares a sentencing report providing details on the calculation of a sentencing range, as well as estimated investor losses.  This recommendation is advisory, not binding, on the federal judge tasked with delivering the sentence.

Wilson operated Atlantic Bullion & Coin, Inc., ("ABC") for at least a decade, representing to potential investors that they could realize profits from ownership of silver without having to actually physically possess the silver.  To accomplish this, Wilson purported to purchase and warehouse silver on behalf of investors. Investors were told that their silver would be held in safe-keeping at a Delaware depository, and were provided with regular account statements allegedly showing regular appreciation in their holdings.   In total, Wilson raised approximately $90 million from over 1000 investors in 25 states.  

However, in reality, Wilson used the majority of investor funds not for the purchase of silver, but to perpetrate a massive Ponzi scheme in which "profits" paid to existing investors were simply the re-distribution of incoming investor funds.  While investors were told that Wilson kept nearly $17 million of silver at a Delaware depository, they later discovered that the depository had never heard of Wilson.  Of the $90 million raised from investors, authorities and the court-appointed receiver have since pegged investor losses at approximately $60 million.  The outlook for recovery of those funds remains dim; court-appointed receiver Beattie B. Ashmore, has indicated that he "would paint a very dim picture" of the chance of a large-scale recovery.

In a related development, a recent filing by the Receiver illustrates the possible location of some scheme proceeds.  In early October, the receiver sought to expand the scope of the receivership to include Wallace Lindsey Howell and Tracy Neily.  While Howell was recently charged by authorities, the emergence of Neily's name in the case is new.  In the filing, Ashmore explained that his investigation has revealed that

Tracy Neily, individually and through companies already subject to the Court Order, operated as an alter-ego of Wilson and/or AB&C and thus should be added to the Court Order. The Receiver is in possession of data showing that Neily, directly or indirectly, profited substantially from the Ponzi scheme and, in concert with Wilson, diverted funds directly to her and her family members.

Several days later, United States District Judge J. Michelle Childs granted the receiver's request, issuing an order granting Ashmore authority to, among other things, take immediate possession of all assets and property traceable to Wilson's fraud currently in possession of Wilson, Howell, and/or Neily's family members and acquaintances.