A federal appellate court revived a lawsuit brought by the court-appointed receiver in Trevor Cook's $190 million Ponzi scheme against Associated Bank (the ""Bank"), ruling that the Receiver had stated a "plausible claim" that the bank had actual knowledge that it was providing "substantial assistance" to Cook's massive fraud. The Eighth Circuit Court of Appeals reversed a lower court's order granting the Bank's motion to dismiss after finding that the Receiver had failed to adequately allege the Bank's actual knowledge of the fraud. The decision will return the suit to the lower court for further proceedings.
Cook's scheme, only second in Minnesota history to Thomas Petters' $3.65 billion Ponzi scheme, purported to achieve above-average returns through trading in commodities and futures. Partnering with two firms, Crown Forex SA and JDFX Technologies, Cook pitched risk-free returns to potential investors, attempting to allay any concerns by explaining that Crown Forex was operated by Jordanians that complied with Islamic sharia law and thus could not charge him interest on the loans he took out. Additionally, investors were told that transactions closed daily and thus were not subject to risk from being held overnight. In total, Cook and his associates raised nearly $200 million from over 700 investors. Yet, only $104 million of that amount was used to trade currency, of which $68 million was lost. The remaining amounts were used to pay investor returns and fund the personal and business expenses of the schemers.
The Bank Lawsuit
The Receiver sued the Bank back in early 2013, asserting claims of aiding and abetting fraud, aiding and abetting breach of fiduciary duty, aiding and abetting conversion, and aiding and abetting false representations and omissions. According to the Receiver, the Bank's substantial assistance allowed Cook's scheme to take in over $79 million. The Complaint alleged, among other things, that Cook contacted Bank officials to discuss opening an account in the name of Crown Forex in order to receive investor funds. Following this, the Complaint described a pattern of "atypical banking activities" that, combined with other circumstantial evidence, represented actual knowledge by the Bank of Cook's scheme that was ignored in favor of the lucrative business brought in by Cook's scheme. This included:
- Servicing of the Crown Forex account despite lacking the required Secretary of State documents;
- Transferring funds between the Crown Forex account and Cook's personal account, and in one instance allowing Cook to stuff $600,000 in cash in a box to allegedly go buy a yacht,
- Not a single penny being transferred from the Crown Forex account held in Switzerland, as originally promised, and instead only the repeated transfer of millions of dollars between Cook's personal account and other co-conspirator accounts; and
- Numerous suspicious transfers that should have triggered the Bank's obligations under anti-money laundering policies or the Bank Secrecy Act.
The Complaint also disclosed that the Bank recently entered into a Consent Order with the Comptroller of the Currency of the United States of America stemming from its failure to comply with Bank Secrecy Act requirements and anti-money laundering procedures.
However, a Minnesota federal court later dismissed the action, agreeing with the Bank that the complaint failed to adequately plead both that the Bank had actual knowledge of Cook's fraud and that the Bank rendered substantial assistance to the scheme.
On appeal to the Eighth Circuit Court of Appeals, a three-judge panel heard the Receiver's claims that the lower court's dismissal was in error. The court first addressed the aiding and abetting claim, acknowledging that "an aider and abettor’s knowledge of the wrongful purpose is a ‘crucial element in aiding or abetting’ cases." The court reviewed the numerous allegations set forth in the complaint, which included particular emphasis on the actions of a vice-president at the Bank named Lien Sarles. Among these allegations were claims that (i) Sarles knowingly permitted the opening of Crown Forex accounts despite lacking proper documentation, (ii) Sarles knew that none of the nearly-$80 million deposited into the Crown Forex account by investors was ever transferred to the entity supposedly engaged in trading but rather to other accounts, (iii) Sarles personally approved several transfers requested by Cook - including transfers to Cook's personal account - even though Cook was not a signatory on the account, (iv) Sarles continued to approve transfers out of Crown Forex's account even after a Swiss financial regulator announced it had frozen Crown Forex's accounts and was investigating the company.
Based on these facts, the 8th Circuit remarked that
The receiver’s “complaint details the Ponzi transactions, including dates and amounts of deposits and withdrawals, spanning over a period of several years. Given [Associated Bank’s] vigorous denial of having known of the Ponzi scheme, it is hard to envision how knowledge might be pleaded with any more particularity than [the receiver] has pleaded it.
Next, the court addressed whether the Bank provided "substantial assistance" in furthering the fraud - which it recognized must be "something more than the provision of routine professional services." Again, the court cited Sarles' presence and participation in the scheme's interactions with the Bank, including the acts of knowingly allowing Crown Forex to open an account despite not being registered with the state of Minnesota and later approving Cook's transfers out of the account despite his status as a non-signatory. As the court concluded,
We cannot predict whether a jury, surveying the evidence supplemented by discovery, will find Associated Bank either had actual knowledge of or substantially assisted in the asserted torts. But the facts alleged in the complaint give the receiver’s claims “facial plausibility”—the receiver has pled “factual content that allows the court [and a jury] to draw the reasonable inference that the defendant is liable for the misconduct alleged.
Of note, the court declined to address the Bank's defense that the Receiver was barred from asserting the claims based on the in pari delicto doctrine - a defense often invoked in bankruptcy proceedings which operates to prevent wrongdoers at equal fault to recover from one another. That issue, the court decided, was more appropriately decided by the lower court.
The 8th Circuit's Order is below: