Four years after settling allegations by the U.S. Department of Justice that it turned “a blind eye to criminal conduct occurring under its nose,” a North Carolina bank is facing a lawsuit from victims of a $40 million Ponzi scheme who claim that the bank allowed the scheme to thrive. CommunityOne Bank (“CommunityOne”), based in Asheboro, North Carolina, was named in a lawsuit filed by 30 victims of the “Black Diamond” Ponzi scheme which resulted in a 40-year federal prison term for its mastermind, Keith Simmons. The lawsuit, which seeks recovery of the estimated $10 million in losses suffered by the 30 investors as well as punitive damages, alleges that CommunityOne failed to inform investors of Simmons’ fraudulent activity and conspired to violate the federal anti-racketeering law.
Simmons operated Black Diamond, a foreign currency venture that touted potential investors with promises of extravagant returns and guaranteed results. The scheme, which ran from 2007 to 2009, ultimately raised more than $35 million from hundreds of investors. However, there were no lucrative foreign currency ventures, and Simmons instead simply used new investor funds to pay the outsized returns. In addition, Simmons misappropriated millions of dollars for his own use, including the purchase of nearly $5 million in real estate, the formation of a real estate company, and the acquisition of an interest in an Extreme Fighting Championship venture. Following Simmons’ arrest in 2009, nearly a dozen individuals - including Simmons - were subsequently sentenced for prison for varying terms for their role in the scheme.
From 2007 to 2009, Simmons conducted his scheme using a single bank account at CommunityOne, where he deposited approximately $35 million in investor funds. During the same period, Simmons also caused withdrawals of roughly that same amount consisting of investor distributions and withdrawals for Simmons’ personal benefit. While the bank’s systems flagged Simmons’ account on numerous occasions for potentially fraudulent or suspicious activity, the bank did not take any action or close Simmons’ accounts until his arrest in 2009. Banks like CommunityOne were required to institute and enforce policies aimed at money laundering and potentially fraudulent activity pursuant to the Bank Secrecy Act, which includes a requirement mandating the filing of a Suspicious Activity Report (“SAR”) for certain potentially illegal activities.
In 2011, the Department of Justice announced that CommunityOne had agreed to settle charges that it had failed to maintain an effective anti-money laundering program, which included allegations that the bank failed to file required SARs related to Simmons’ banking relationship. The bank entered into a deferred prosecution agreement ("DPA") with the government, under which the bank, after paying $400,000 in restitution to the victims of Simmons' scheme, was able to have the criminal charges dismissed after two years. According to Justice Department officials, CommunityOne failed to file a single SAR relating to Simmons’ banking relationship despite the fact that the bank’s computer software had continually flagged Simmons’ accounts for potential wrongdoing. Those same prosecutors noted that other banks had terminated the accounts of hedge fund managers who acted as “feeder funds” to Simmons’ scheme. The then-acting U.S. Attorney for the Western District of North Carolina, Anne Tompkins, remarked that
This bank’s failure to detect and report a ponzi scheme cost it 16 percent of its value. Other financial institutions should heed this warning: the Bank Secrecy Act applies to more than just drug and terrorist financing.”
While the investors bringing the suit against CommunityOne reportedly recouped a portion of their losses in the $400,000 settlement paid by CommunityOne, their attorney indicated that the vast majority of their losses remain outstanding.