Months after an appeals court revived a lawsuit against Associated Bank for its alleged role in Trevor Cook's massive Ponzi scheme, a federal district denied the bank's subsequent attempt to dismiss the suit on in pari delicto and res judicata grounds. On Tuesday, U.S. District Judge David S. Doty issued an order denying Associated Bank's (the "Bank") motion to dismiss the complaint brought by R.J. Zayed in his capacity as receiver over several entities used by Trevor Cook to perpetrate a $194 million Ponzi scheme. The suit was originally filed in April 2013, dismissed by Judge Doty in September 2013 for failure to state a claim, and subsequently revived by the Eighth Circuit Court of Appeals in March 2015 on the basis that Zayed had, in fact, adequately stated claims against the Bank.
Cook's scheme, the second-largest in Minnesota history to only Thomas Petters' $3.65 billion Ponzi scheme, promised investors 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.
While Judge Doty dismissed the suit on the basis that Zayed had 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, the Eighth Circuit disagreed and remarked that "it is hard to envision how knowledge might be pleaded with any more particularity than [the receiver] has pleaded it."
The Motion to Dismiss
Following the Eighth Circuit's decision, Associated Bank again moved to dismiss the suit on the grounds that it was barred by the doctrine of both in pari delicto and res judicata. Each is discussed below.
In pari delicto
The doctrine of in pari delicto is an equitable defense standing for the principle that a plaintiff who has participated in wrongdoing is prohibited from later attempting to recover damages for that wrongdoing. While tracing its roots to judicial reluctance to become intertwined in disputes between wrongdoing parties, Judge Doty noted that judicial intervention might be warranted if a "paramount public interest supports the enforcement of a public policy which overrides considerations of a benefit inuring to the wrongdoer.” Associated Bank argued that, because the Receiver stands in the shoes of the receivership entities, both it and the receiver were at least equally culpable for any alleged losses and thus the suit was prohibited by the in pari delicto doctrine.
In rejecting this argument, Judge Doty first observed that the appointment of an equity receiver over a corporation removes the wrongdoer and thus negates any in pari delicto argument. Kelley v. College of St. Benedict, 901 F. Supp. 2d 1123, 1129 (D. Minn. 2012). Further noting that the receiver was granted authority to bring all claims on behalf of the receivership entities pursuant to the order appointing receiver, Judge Doty held that it would
defeat one of the purposes for which the Receiver was appointed to bar this action based on in pari delicto.
While Associated Bank pointed to caselaw purportedly absolving similar participating entities from blame that had not benefited from the scheme, Judge Doty held that the preliminary stage of proceedings prevented the court from "determining the extent to which Associated Bank participated in and benefited from the Ponzi scheme."
Next, Associated Bank argued that the doctrine of res judicata operated to bar the suit based on a Wisconsin court's 2010 dismissal of an action brought against the Bank by several Cook victims. That doctrine prevents relitigation of claims and issues previously decided in a prior case. The Bank argued that the investors' suit, brought in 2009 and alleging similar claims based on the Bank's alleged failure to detect Cook's scheme, precluded Zayed's suit.
Judge Doty switftly dealt with this argument, noting that the first requirement in a res judicata analysis that there exist "an identity between the parties or their privies in the prior and present suits." While the Bank argued that the receiver and the investors were in privity, Judge Doty explained that the receiver and the investors had different interests: the investors were seeking recovery on their own behalf, while the receiver was pursuing the action on behalf of the receivership entities even though the ultimate result might benefit the investors. This difference alone precluded a finding of privity.
Judge Doty's Order is below: