Two prominent Canadian banks agreed to pay $36 million to settle independent lawsuits alleging the banks aided massive Ponzi schemes that bilked victims out of a total of nearly $4 billion. TD Bank, part of Canada's Toronto-Dominion Bank, and BMO Harris, also known as Bank of Montreal, disclosed the settlements last week that represented the culmination of years of contentious litigation. TD Bank agreed to pay $20 million to resolve a class action suit brought by European victims of a $223 million Ponzi scheme peddling purported interests in life settlements, while BMO Harris will pay $16 million to two Florida funds that suffered losses in Thomas Petters' massive $3.65 billion Ponzi scheme. The settlements, which require court approval, represent two of the largest settlements against financial institutions implicated in Ponzi schemes.
TD Bank provided banking services to participants in a massive Dutch-based Ponzi scheme that duped victims worldwide out of at least $223 million. The scheme, operating as Quality Investments, promised investors lucrative returns from the sale of fractionalized interests in life insurance policies. The company used some of the funds it raised from investors to purchase these life insurance policies, for which it orchestrated the creation of dozens of Florida entities to maintain and hold the policies. Investors were instructed to wire funds to the account maintained by a "trustee" at TD Bank, where it was promised that the funds would stay until they were used to purchase life insurance policies.
However, according to the class action plaintiffs, TD Bank failed to properly monitor the trust accounts purportedly holding investor monies, and ignored the transfer of tens of millions of dollars to recipients in high-risk countries such as Cyprus and Turkey known for money-laundering. Under U.S. anti-money laundering laws, such as the Bank Secrecy Act, TD Bank was required to investigate such suspicious activities and to file reports known as suspicious activity reports ("SARs") with authorities upon the occurrence of such actions. TD Bank denied liability for losses suffered by Quality Investments victims, and maintained that it provided routine banking services which did not result in the alleged losses.
BMO Harris is the successor by merger to M&I Marshall & Ilsley Bank ("M&I Bank"). The lawsuit against BMO Harris stemmed from the involvement of a now-bankrupt pair of Palm Beach "feeder funds" that collectively invested more than $1 billion in the massive $3.65 billion Ponzi scheme masterminded by Minnesota businessman Thomas Petters. When the scheme collapsed in late 2009, Palm Beach Finance Partners LP and Palm Beach Finance II (collectively, "Palm Beach Funds") filed bankruptcy shortly thereafter and cited their Petters' exposure as the reason. The Securities and Exchange Commission subsequently levied civil fraud charges against two investment management and advisory firms, along with their principals, that controlled the Palm Beach Funds, on accusations the firms and principals facilitated Petters' scheme and later took steps to conceal mounting losses.
According to Petters, the investment of the Palm Beach Funds and others would be used to finance consumer merchandise transactions from suppliers to big box retailers such as Costco and Sam's Club. Investors were instructed to wire funds directly to two purported suppliers, which would then upon receiving the funds send payment for the merchandise to one of several depository accounts maintained by Petters at M&I Bank. According to Petters, these funds would be used first to repay investors and second to pay a commission to Petters. For the assurance of certain investors, including the Palm Beach Funds and associated entities, Petters and M&I executed a Deposit Asset Management Agreement ("DAMA"), that assured third parties that deposits into one of Petters' M&I Bank accounts would be properly transferred to the appropriate parties - including the Palm Beach Funds.
However, Petters was not operating a legitimate business venture, as there were no purchase orders, sales, or contracted suppliers or retailers. Instead, Petters was operating a classic Ponzi scheme by using new investor funds to make payments to existing investors. Petters did so by transferring funds from the bank accounts purportedly maintained by the "suppliers" and remitting those funds to the accounts he maintained at M&I Bank. There, funds were used to make payments to existing investors as well as to support Petters' lavish lifestyle.
A liquidating trustee appointed for the Palm Beach Funds, Barry Mukamal, sued BMO Harris, as successor to M&I Bank, in 2011 and asserted multiple claims including fraudulent transfer claims under Florida law and the U.S. Bankruptcy Code seeking recovery of transfers made to BMO Harris during the six-month period preceding the collapse of Petters' scheme. A federal bankruptcy judge dismissed that complaint, and the trustee subsequently filed an amended complaint. The court dismissed the tort claims in the amended complaint, but denied the motion to dismiss the fraudulent transfer claims. After conducting discovery, the trustee filed an amended complaint in June 2014.
The Palm Beach Funds trustee also used some legal maneuvering to increase his claims against BMO Harris. In November 2011, the Palm Beach Funds filed avoidance actions against the purported entities serving as Petters' suppliers, Nationwide International Resources, Inc. and Enchanted Family Buying Companies (the "Petters Suppliers"). In that suit, the trustee sought to recover all transfers made from the Palm Beach Funds to the Petters Suppliers from November 2005 to September 2008, which totaled over $1 billion. The Petters Suppliers had been placed in receivership in 2008 shortly after the scheme's collapse, but the trustee was permitted to file the suits to preserve applicable statutes of limitation. It was not until February 2014 that he was granted permission to prosecute the suits by the U.S. District Court for the District of Minnesota. After he secured judgments against the Petters Suppliers in July 2014, the trustee filed another suit against BMO Harris asserting claims as a subsequent transferee pursuant to 11 U.S.C. 550. That suit also sought the avoidance and recovery of all transfers from the Petters Suppliers to BMO Harris for the six-year period preceding the scheme's collapse pursuant to Minnesota state fraudulent transfer laws. That suit sought more than $24 billion from BMO Harris.
After a two-day mediation and several months of continued negotiations, the trustee and BMO Harris agreed to settle for $16 million.
These two settlements are notable not only for their high value, but also because of the rarity of such outcomes. Recoveries against financial institutions by court-appointed receivers and trustees have historically been difficult in the current legal environment. The TD Bank settlement is yet the latest in a series of high-profile cases tied to the bank's involvement in several Ponzi schemes, including the massive $1.2 billion Ponzi scheme carried out by Scott Rothstein that ultimately saw the bank pay hundreds of millions of dollars to resolve claims. The BMO Harris outcome demonstrates the success of a legal strategy that sought not only to recover payments made to M&I Bank from Petters, but also payments made by the Petters Suppliers to M&I Bank, which ultimately significantly reduced the bank's settlement exposure.
The Motion to Approve Compromise filed in the Palm Beach Funds case is below: