Banks Aiding Fraudulent Schemes

A bank is likely liable to victims of a fraudulent scheme if an employee at the bank provided ordinary banking services (such as opening a bank account) when the employee knew that those services would be used to help a fraudulent scheme. This blog post discusses some cases alleging that banks are liable for aiding a fraudulent scheme.

Camenisch v. Umpqua Bank

Camenisch v. Umpqua Bank is a case brought by alleged victims of a Ponzi scheme carried out by Ken Casey through two companies he controlled: Professional Financial Investors, Inc. and Professional Investors Security Fund. The investors sued Umpqua Bank, which was the financial institution that handled all of the alleged Ponzi scheme’s bank accounts.

In their complaint, the investors alleged that circumstantial evidence demonstrated that Umpqua Bank knew that the bank accounts it handled were being used to perpetrate a Ponzi scheme. That circumstantial evidence included:

• Before opening the bank accounts at issue, Ken Casey had pled guilty to numerous counts of financial fraud in a different fraudulent scheme that he had run.
• Ken Casey personally kept close control over PFI and PISF bank accounts, which was unusual given that the accounts were very large; they accepted and transferred hundreds of millions of dollars.
• The bank account statements showed that money deposited from new investors was being comingled with other investors’ funds, which were being used to pay existing investors, and were being used to pay Casey’s personal expenses.

Umpqua Bank filed a motion to dismiss, arguing that the allegations in the complaint were not sufficient to show that Umpqua Bank knew that the accounts at issue were being used to perpetrate a Ponzi scheme. The court denied the motion to dismiss but noted that the question “may be somewhat close.”

After discovery was completed, Umpqua Bank filed a motion for summary judgment, contending that Plaintiffs did not have evidence sufficient to support their claims. The court denied the motion for summary judgment and detailed a plethora of evidence that Plaintiffs had cited in opposition to the motion for summary judgment. For example, Plaintiffs showed that Umpqua’s automated system generated more than 100 red flags for the accounts at issue, which would have prompted Umpqua to review the activity and see that money raised from new investors was being used to pay back previous investors. Moreover, a banker at Umpqua transferred money between the Ponzi scheme’s different accounts on her own initiative to cover short falls. That banker’s written messages to other Umpqua employees also suggested she knew of fishy activity in the accounts.

The case is set for trial in February of 2025.

In re Woodbridge

Woodbridge was a fraudulent enterprise that raised $1.2 billion in real estate investments while running a Ponzi scheme. Comercia handled the bank accounts for Woodbridge. Plaintiffs claimed that Comercia processed over 10,000 internal transfers totaling $1.6 billion among related Woodbridge accounts and hundreds of millions of dollars in transfers to vaguely denominated attorney trust accounts.

Comercia moved to dismiss the aiding and abetting claims. The court denied the motion. The court noted that plaintiffs’ allegations of Comercia’s “close business relationship with Shapiro, its awareness of banking activity inconsistent with Woodbridge’s stated business model, and Shapiro’s disbursements and personal expenditures from investors funds” and that “a bank’s decision to ignore suspicious activity or red flags is sufficient to demonstrate actual knowledge” under California law.

The case settled for $54.2 million. In the motion to the court for approval of the settlement class, the plaintiffs stated that they estimated the damages were “as high as $500 million or more,” so the settlement recovery represented “at least 10% of best-case scenario damages” and “a much higher percentage of plausibly recoverable damages.”

In re Silvergate (FTX)

Silvergate is a bank that operated a “Silvergate Exchange Network” that allegedly facilitated the famous FTX cryptocurrency Ponzi scheme run by Sam Bankman-Fried. Specifically, Silvergate created a payment network that allowed participants to send money instantly to other network participants at any time, in part by eliminating the due diligence time built into traditional bank transfers. The network allowed FTX’s customers to trade fiat currency for crypto and vice-versa nearly instantaneously.

The FTX Ponzi scheme operated several bank accounts at Silvergate and used Silvergate’s payment network. Some of those accounts accepted money from FTX’s customers. When FTX’s customers were deposited into FTX’s accounts, FTX credited FTX customer accounts with e-money corresponding to the amount on FTX’s internal ledger system even though the money remained in FTX’s own accounts.

Silvergate moved to dismiss the complaint, and the court denied the motion, finding that the investors had adequately pleaded that Silvergate had actual knowledge of the FTX fraud. Silvergate argued that the investors had only pleaded that there were red flags in the FTX bank accounts, rather than adequately pleading that Silvergate had actual knowledge of the fraud.

The court disagreed and noted that “the Ninth Circuit has suggested that a bank’s decision to ignore suspicious activity or red flags is sufficient to demonstrate actual knowledge.”

Chang v. Wells Fargo Bank

A Ponzi scheme called Equitybuild solicited investors by promising them returns generated by investments in real estate investment programs. It then used the money it raised to improperly pay back previous investors and siphon the money to its principals, while only using a small fraction of the money for any legitimate operations. Investors brought a putative class action against Wells Fargo, which operated the bank accounts for Equitbuild.

Wells Fargo moved to dismiss the claims, arguing that the investors had not adequately alleged that Wells Fargo had actual knowledge of the Ponzi scheme. The court denied the motion to dismiss. The court noted that, according to Plaintiffs’ allegations Wells Fargo had manually processed a number of wires that on their face indicated that they deposited investors proceeds in the Equitybuild accounts maintained by Wells Fargo. Moreover, the account statements reflected that the investor proceeds were used to make payments to Equitybuild’s principals and pay for their living expenses.

The case later settled for $3.75 million after the parties had engaged in extensive discovery, and the defendant maintained that there was “no evidence” for Plaintiffs’ allegations. $3.75 million represented 3.75 percent of the $100 million of the investors’ estimated total possible recovery.

Nielson v. Union Bank of California

In Nielson, the plaintiffs alleged that the defendant bank (Union Bank of California) knew that their customer was engaged in fraud and nevertheless breached its fiduciary duty to its customers, the plaintiffs.

Union Bank of California moved to dismiss the complaint, arguing that the plaintiffs had failed to allege the bank had actual knowledge of the fraudulent scheme. In denying the motion to dismiss, the court stated: “The complaint details the manner in which the Ponzi scheme operated, describes Slatkin’s fraudulent transactions, and outlines the Banks’ involvement in these activities. It alleges, in particular, that the Banks utilized atypical banking procedures to service Slatkin’s accounts, raising an inference that they knew of the Ponzi scheme and sought to accommodate it by altering their normal ways of doing business. This supports the general allegations of knowledge.”