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

Kathy is a senior business trial attorney with more than 28 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about 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

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.)

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