Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 25 years experience prosecuting and defending claims for clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases on under standard fee and alternative fee arrangements. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring an expert on fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Wednesday, February 22, 2012

Madoff Trustee Asks the Second Circuit to Overturn Standing Rulings

Posted by Kathy Bazoian Phelps

Irving Picard, the trustee in the SIPA bankruptcy proceeding of Bernard L. Madoff Investment Securities, LLC, has asked the Second Circuit Court of Appeals to overturn two decisions from the Southern District of New York dismissing his common law claims against financial institutions that had done business with Madoff.  In both decisions, Picard’s claims were dismissed for lack of standing.
In the first, District Judge Jed Rakoff dismissed Picard’s claims against HSBC Bank and others for unjust enrichment, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty for failing to adequately investigate Madoff Securities despite “myriad red flags and indicia of fraud.”  Picard v HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011).  Judge Rakoff relied on two principles in dismissing Picard’s claims.  First, under Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416 (1972), a bankruptcy trustee lacks standing to pursue claims on behalf of the estate’s creditors because the trustee stands in the shoes of the estate and not the creditors.  Second, under Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991), a bankruptcy trustee lacks standing to bring a claim that is barred by the in pari delicto doctrine.  Judge Rakoff rejected Picard’s several attempts to overcome these obstacles, calling them “convoluted.”  454 B.R. at 29.
In the other decision, District Judge Colleen McMahon dismissed similar claims against JPMorgan Chase Bank, UBS AG and others.  Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011).  Judge McMahon relied on the same propositions, which she stated were “convincingly established in Judge Rakoff's recent opinion and equally applicable here[.]”  460 B.R. at 91.
Picard’s response to these rulings in his appeals to the Second Circuit is broad and comprehensive.  In his briefs filed on February 16, 2012, he argues:
·   A SIPA trustee has standing to sue as a bailee of customer property, and the SIPC has standing to sue as a subrogee of customers’ claims.
·   A SIPA trustee has exclusive standing to assert common law causes of action that generally affect all customers.
·   The District Court erred in applying Wagoner to divest the trustee of standing to assert common law claims, because -
o  Wagoner is not applicable to a SIPA trustee.
o  A SIPA trustee is appointed to restore the customer property estate.
o  In pari delicto does not apply to a SIPA trustee who proceeds on behalf of the customer property estate.
·   SIPA authorizes the SIPC to pursue equitable and statutory subrogation claims against third-party tortfeasors.
·   The District Court erroneously dismissed the trustee’s state law claim for contribution against the defendants.
On the issue of in pari delicto, Picard argues that the Supreme Court decision in Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985), supports the position that “[a] SIPA trustee who seeks to recover assets for the benefit of a debtor’s customers should not be impeded by the doctrine of in pari delicto.  In Bateman, the Court held:

[A] private action for damages in these circumstances may be barred on the grounds of the plaintiff's own culpability only where (1) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public. “in pari delicto should not interfere with enforcement of securities laws and protection of the investing public.”

Bateman at 310.

As Picard noted:

Given the nature of the Trustee’s appointment, the policy concerns underlying in pari delicto are absent here.  The Trustee is, of course, not a wrongdoer himself.  Further, the Trustee is the only party who can assert claims to redress damage to the customer property estate. . .  By imputing Madoff’s wrongdoing to the Trustee, the District Court impeded the Trustee’s duties and powers under SIPA and his right to assert common law claims to redress the harm JPMC inflicted upon the customer property fund.
In summary on the in pari delicto argument, Picard states, “The Trustee should not be burdened with the inequitable imposition of a doctrine intended to admonish wrongdoers. The Trustee is not a wrongdoer, fraudster or criminal.”
The Second Circuit’s resolution of these important issues will impact not only Madoff’s victims, but also potentially the victims of the countless other current and future Ponzi schemes.
Picard’s briefs can be downloaded here in pdf format.

Thursday, February 16, 2012

Aiding and Abetting Claims Against Banks in Ponzi Cases Are Alive and Well

Posted by Kathy Bazoian Phelps

Just when it seemed that courts were dismissing most claims for aiding and abetting against banks in Ponzi cases, a jury verdict of $67 million came down against the bank used by the infamous Ponzi schemer, Scott Rothstein.  In Coquina Inv. v. TD Bank, the jury found that the evidence established aiding and abetting liability – that the bank actually knew of the fraud and substantially assisted the perpetrator. 

The Ponzi Book has a thorough discussion on aiding and abetting claims against financial institutions and others.  See generally The Ponzi Book, § 7.08.  While the standards for imposing liability are clear, the cases are uneven in applying those standards to financial institutions.  As to the knowledge element, some courts find that actual knowledge of mere improprieties or atypical banking procedures is not sufficient for aiding and abetting fraud.  Others find that allegations that a bank “utilized atypical banking procedures” are sufficient to allege actual knowledge. 

As to substantial assistance, some courts find that ordinary business transactions can satisfy that element if the bank actually knew those transactions were assisting its customer in the fraud.  Other courts find that the mere fact that the customer used the bank account to perpetrate a fraud, without more, does not by itself rise to the level of substantial assistance.  Many courts have been disposing of aiding and abetting claims on the motions to dismiss.

Recently, however, the jury in Coquina v. TD Bank found the Rothstein’s bank liable for fraudulent misrepresentation and aiding and abetting, with a price tag of $16 million each.  Interestingly, the jury also found, by clear and convincing evidence, that the bank's acts were intentional and therefore justified punitive damages in the amount of $17.5 million on each claim.

So what did TD Bank do to cause a jury to find the bank liable for $67 million?  Pre-trial and post-trial pleadings filed in the case reflect numerous allegations against the bank for flagrant wrongful conduct.  In particular, Coquina alleged that the bank vice president Frank Spinosa was front and center in the fraud.  Specifically, the amended complaint filed on January 16, 2012, alleged:

·    “TD BANK Regional Vice President Frank Spinosa conferred with Coquina’s
representatives on different occasions, both in person and via telephone, confirming that the funds that ROTHSTEIN said were held for Coquina were being maintained in a TD BANK account for the sole and exclusive benefit of Coquina.”

·    “[Spinosa] confirmed that there were irrevocable restrictions on the Coquina Account that limited disbursements only to Coquina. Spinosa also confirmed that the terms and restrictions on that account were exactly as he had specified in the two ‘lock letters’ previously sent to Coquina.”

·    “TD BANK officials repeatedly provided bank records, including account balances, verifications, signed letters, and other documents confirming that the funds in the victim’s trust account were secure in that account.”

The Joint Pre-Trial Order in the case further elaborated on the wrongful conduct of the bank:

·    “On August 17, 2009, because Coquina wanted additional assurances regarding the safety of its investments, Coquina received a letter signed by Rothstein and TD Bank’s Regional Vice President Frank Spinosa stating that the funds relating to the settlements Coquina purchased were being maintained in a separate TD Bank account . . ., that the account was irrevocably restricted, and the funds in the account could only be distributed to Coquina’s account at AmericanBank in Corpus Christi, Texas. At the time, TD Bank knew that the restrictions described in the letter were false.”

·    “In addition, on August 17, 2009, Regional VP Spinosa and Rothstein spoke on the telephone with Coquina’s representatives. Spinosa confirmed that the RRA-Coquina account was restricted as described in the letter, and that this account held $22 million. These representations were false because the account could not be restricted and the account’s actual balance at the time was only $100.”

·    “Coquina received another letter signed by Regional VP Spinosa, confirming the restrictions on the Coquina account as described in the August 17th letter.”

·    “[Spinosa] also confirmed that there were millions of dollars in the account. That was a lie. Based on Spinosa’s representations to Coquina in the meeting and those in the second letter, Coquina made additional investments totaling $9 million.”

Perhaps the jury was most influenced by Spinosa’s response to these allegations – he invoked the Fifth Amendment and refused to answer questions.

After the trial, the Miami Herald edition of January 18, 2012, quoted the foreperson of the jury, “It was clear cut for us . . .  We were all surprised at how much stuff they allowed to go through, all the deposits and transfers.  At any point, someone could have stopped it.”

The Amended Complaint, the Joint Stipulation, the Jury Instructions, the Jury Verdict, and the Judgment from Coquina v. TD Bank are available here.  (This single PDF file is bookmarked for your convenience.)

Welcome to the Ponzi Blog!

Posted by Kathy Bazoian Phelps

As the publication of The Ponzi Book approaches next month, decisions in Ponzi scheme cases continue to roll out on a nearly daily basis.  The Ponzi Book covers the waterfront and is the single legal resource that attorneys and others involved in Ponzi scheme cases can use in navigating their way through these complex cases.  With 22 chapters, over 800 pages, and over 3500 footnotes, you would think there was little left to say.  Yet new decisions in the ever growing number of Ponzi scheme cases are published daily, and readers need to be able to stay up on the latest law in these cases.

It is in this dynamic setting that this blog is launched.  The main goal of this blog is to provide readers of The Ponzi Book and the blog with updates on new Ponzi decisions and other developments of interest.  With as much Ponzi litigation as there is across the country now, there is no doubt there will be plenty of new decisions to review. 

Please register your email address or subscribe to a feed so that you can keep current.  At the same time, I look forward to your comments and to a healthy exchange of ideas and views on the unique and challenging issues that arise in the litigation that is necessary to unravel Ponzi schemes.  Please post your comments and feel free to contact me at kphelps@ThePonziBook.com with your ideas and suggestions.