Several dozen victims of a massive Ponzi scheme masterminded by a Brooklyn man dubbed the "Bernie Madoff of Bay Ridge" have filed a lawsuit seeking over $36 million from several financial institutions that allegedly aided the decades-long Ponzi scheme. Over two dozen victims of Philip Barry, who is currently serving a 20-year prison sentence after a federal jury convicted him of 34 fraud counts, filed suit against banking behemoths JP Morgan, TD Bank, HSBC, and M&T Bank, seeking $11.1 million in compensatory damages and an additional $25 million in punitive damages for the banks' failure to detect Barry's fraud despite purported red flags that included over 1,000 bounced checks and large repetitive transactions. A federal judge previously dismissed a similar suit brought by Barry victims, concluding that the claims were precluded by the Securities Litigation Uniform Standards Act ("SLUSA").
Barry was convicted of running one of the longest Ponzi schemes in history, ultimately defrauding hundreds of victims out of approximately $40 million. Beginning in 1978, Barry used his firms, Leverage Group, Leverage Option Management Co., Inc, and North American Financial Services, to solicit investors based on promises of consistent and risk-free returns of up to 21% annually through trading in options and other securities. Barry not only guaranteed returns to investors, but also claimed to some that their investment would be protected from loss from either privately-obtained insurance or his firms' membership in the Securities Investor Protection Corporation ("SIPC") - the same industry group that is funding recovery efforts on behalf of Bernard Madoff victims.
However, according to authorities, Barry ceased making investments on his victims' behalf as early as 1999, instead diverting funds for his own personal use and also using new investor funds to make fictitious interest payments to existing investors. Barry purchased dozens of parcels of real estate, supported a lavish lifestyle, and even propped up a mail-order pornography business he owned. After the financial downturn wreaked havoc on his real estate holdings, Barry filed bankruptcy in 2008 and later turned himself in to authorities. He was convicted by a federal jury of 34 fraud counts in 2010 and later sentenced to a 20-year term in 2011. Given his bankruptcy filing, it is unlikely that his remaining assets will ever yield any meaningful recovery for victims.
According to the investors, Barry through his company Leverage Group, used accounts at the accused financial institutions to carry out the fraud, and that the financial institutions shirked their regulatory obligations in favor of reaping profits from Barry's frequent and significant banking activity. For example, Barry is accused of bouncing more than 1,000 checks from 2004 to 2009, resulting in nearly $50,000 in overdraft fees that somehow did not result in further investigation. The banks are further accused of failing to follow "know your customer" rules that, if heeded, might have prompted further investigation of Barry's activities that could have unearthed the fraud.
Barry's fraud was chronicled in an episode of CNBC's "American Greed," which featured participation by Barry. The video is below: