Though we’ve been involved with several billion dollar lawsuits, they are relatively few and far between. So when a Palm Beach Finance Partners bankruptcy trustee filed suit against BMO Harris for $24 billion last month, we had to take a look. How does a financial institution ignore such an obvious and blatant criminal act? It might have something to do with the bank putting their own financial interests over protecting their patrons’ funds and doing what’s right.
The September 18 lawsuit follows a massive alleged Ponzi scheme choreographed by former Wayzata, Minnesota businessman Thomas Petters, who scammed billions from lenders. Petters and co-conspirators persuaded lenders to purchase fictional consumer electronics destined for resale to retailer giants like Wal-Mart, Costco and Best Buy at a profit. In actuality, Petters spent the lenders’ advances on other lenders, payments to cohorts and his extravagant lifestyle.
A statement on the allegations involved in the suit include claims we are hearing more and more frequently. “M&I was complicit in the scheme, serving as a critical lynchpin ‘legitimizing’ Petters’ plot and facilitating it. M&I had actual knowledge of Petters’ fraud and provided substantial assistance, helping it flourish. Among other things, M&I knew Petters was fraudulently representing to lenders that their loan repayments were being funded from monies received from large retailers when in fact monies raised from defrauded lenders were used to pay other lenders, including the Palm Beach Funds.”
Let’s take a look at some background. Tom Petters was previously an internationally renowned businessman connected with several successful companies, including Polaroid, Fingerhut and Sun Country Airlines, somewhat similar to Bernie Madoff who once served as Chairman of NASDAQ. The difference is, Thomas Petters allegedly conducted his criminal scheme through a single bank account!
Back in 1999, Tom Petters opened an account with a small M&I predecessor bank in Edina, Minnesota. The Florida bankruptcy trustee’s lawsuit alleges that, from 1999 through 2008, over $37 billion in defrauded funds was deposited into Petters account and then swept right back out, sometimes on the day of deposit. M&I was acquired by BMO Harris in 2011.
Allegations assert that the bank had to have knowledge of the massive and frequent transfers. This alone may not have been enough to warrant investigation, but the trustee’s allegations that Christopher Flynn, Senior Vice President of the bank, attended regular meetings with Petters seems to necessitate a closer look.
It was at these meetings that Petters allegedly told Christopher Flynn the money came from selling electronics overstock from places like Sony to big-box retailers Wal-Mart, Best Buy and Costco. Flynn was even allegedly asked to contribute funds and given fraudulent purchase orders, facts that could be detrimental to the bank’s defense.
The trustee also claims that M&I knowledgably organized a “charade” meeting in order to conciliate a creditor of Petters. The trustee alleges the M&I knew where Petters money was coming from and which retailers were supposedly purchasing the electronics. The bank also allegedly knew there were no deposit receipts or wires originating from Best Buy, Wal-Mart or any of the other named retailers.
In 2005, the M&I branch installed a system to automatically detect money laundering conduct and alert employees to suspicious activity. This system allegedly warned the bank of Petters activity, yet the bank failed to follow through with its legal duty to file Suspicious Activity Reports (SARs) with FinCEN, the Treasury Department’s law enforcement department.
After the number of sizeable and withdrawals and deposits, the bank must have had knowledge that no transactions were being made with the named retailers and that Petters was involved in fraudulent activity. The question becomes, is M&I liable to third parties like Petters creditor, Palm Beach Investment Partners?
More and more banks involved in Ponzi schemes are evidently ignoring fraudulent activity going on right under their noses. A number of high-profile banks have been in trouble for supporting money laundering for Ponzi schemes, terrorist groups or drug cartels. Though these banks may not be participating intentionally, victims affected by the illegal activity are increasingly successful in lawsuits against involved financial institutions.
In a recent case, a Ponzi scheme organized by SureInvestment and a Mr. Benjamin Wilson resulted in Morgan Stanley’s having to pay $280,000 as a fine for overlooking obvious signs and warning signals, including SureInvestment’s claiming 3000% return on investments. It has yet to be determined whether the victims of the Wilson scheme have standing to sue Morgan Stanley in this case.
According to an article in the Wall Street Journal, a BMO Harris representative stated, “There is no merit to these claims and we will defend ourselves vigorously.”
For more information on investment losses and recovery, contact attorney Brian Mahany at (414) 704-6731.