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

Kathy is a senior business trial attorney with more than 30 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. She also handles SEC and CFTC whistleblower claims. 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

Tuesday, October 16, 2012

Banks Beware: Aiding and Abetting Claims in Ponzi Cases Are Still Alive and Well

Posted by Kathy Bazoian Phelps

Aiding and abetting claims against banks in Ponzi scheme cases continue to gain traction in the case law. The district court in which a jury awarded a verdict of $67 million against TD Bank for aiding and abetting Scott Rothstein’s Ponzi scheme denied the bank’s post-trial motion for a new trial, to amend the judgment, or for remittitur. Coquina Invs. v. Rothstein, 2012 U.S. Dist. LEXIS 139947 (S.D. Fla. Sept. 28, 2012).

In denying the motion, the court first reviewed the testimony of the witnesses at trial. Based on that evidence, the court found:

Coquina presented sufficient evidence of the existence of an underlying fraud—Rothstein’s Ponzi scheme in which Coquina invested. Coquina presented sufficient evidence for a reasonable jury to find that TD Bank, through Spinosa, Caretsky and other TD Bank employees, knew about the fraud and ignored numerous “red flags” with respect to the RRA accounts. Coquina also presented sufficient evidence for a jury to find that TD Bank provided substantial assistance to advance the commission of the fraud by making misrepresentations to Coquina about purported account restrictions and the amount of money in its accounts, ignoring red flags and placing notes on the RRA accounts to prevent other TD Bank employees from taking phone calls about the accounts.

The court also sustained the jury’s verdict on Coquina’s claim of fraudulent misrepresentation against the bank:

White [a partner in Coquina] testified that Coquina decided that it would not make additional investments without assurances from TD Bank that the trust account would be restricted and the proper amount of money was in the trust account. On August 17, 2009, Coquina representatives Damson and Klein met with Spinosa to obtain assurances about the RRA account and the amount of money deposited in Coquina’s trust account. There is sufficient evidence for a jury to find that, relying on Spinosa’s assurances, Coquina decided to make further investments totaling $24 million with Rothstein. Coquina put forth sufficient evidence for a reasonable jury to find that Spinosa’s statements were in fact false, i.e., it was not possible for TD Bank to restrict the accounts in the manner described in the “lock letters” and the amount of money Spinosa said TD Bank was holding for Coquina in RRA trust accounts (i.e., $22 million) was inaccurate. Coquina also put forth sufficient evidence (through, at a minimum, Spinosa’s, Klein’s, and White’s testimonies) for a jury to find that Spinosa made these statements to induce Coquina’s reliance.

The court also rejected TD Bank’s other claims of error relating to evidentiary issues, the adverse inference issue relating to Spinoza’s Fifth Amendment claim, the jury instructions, and the propriety of punitive damages.

Not surprisingly, TD Bank has filed an appeal. For more information about the jury verdict against TD Bank, see my blog of February 16, 2012, Aiding and Abetting Claims Against Banks in Ponzi Cases Are Alive and Well.

And the aiding and abetting decisions keep coming. Following the denial of TD Bank’s motion for a new trial, the court in Arreola v. Bank of America, N.A., 2012 U.S. Dist. LEXIS 144765 (C.D. Cal. Oct. 5, 2012), denied the bank’s motion to dismiss the plaintiffs’ aiding and abetting claim. The Ponzi scheme perpetrator, Juan Rangel, operating through Financial Plus Investments, Inc., targeted working class Spanish-speaking families and encouraged them to use the equity in their homes to invest in fraudulent notes carrying high rates of return. The scheme involved using straw buyers to purchase the homes of victims who were behind in their payments but still had equity. It also involved the payment of bribes to Dony Gonzalez, a Bank of America branch manager, in exchange for prematurely releasing the hold on funds before the required waiting period, authorizing the deposit of funds into the accounts of entities that were not the payees, and falsifying Verification of Deposit forms.

The complaint alleged claims of aiding and abetting several torts – breach of fiduciary duty, fraud, intentional misrepresentation and negligent misrepresentation. The opinion primarily addressed the claim of aiding and abetting breach of fiduciary duty.

In denying Bank of America’s motion to dismiss, the court held that the complaint adequately pled facts in support of the plaintiffs’ aiding and abetting claims. On the issue of whether Rangel owed a fiduciary duty to the plaintiffs, the court stated:

Here, Rangel specifically targeted vulnerable, distressed homeowners who were facing the loss of their homes. By assuring his victims that they would be able to continue living in their homes, Rangel earned their confidence, which he then exploited to transfer title or divert loan proceeds to Financial Plus. In appealing to Plaintiffs’ fundamental need for shelter and preying on their fear of losing their largest asset, Rangel went far beyond a mere arms-length transaction, and assumed a fiduciary duty to Plaintiffs.

On the issue of whether the bank had knowledge of the scheme, the court held, “The Complaint alleges that Gonzalez was a high level branch manager, and that he committed wrongful acts while in the course of conducting official bank business. . .  Gonzalez knew, at the very least, that the falsified Verification of Deposit forms were being used in connection with fraudulent mortgage applications.”

The court also considered the red flags that the bank ignored:

Plaintiffs allege that the bank knew that Rangel’s business accounts involved the receipt of investor funds, knew of the multiple internal “red flags” that Rangel’s banking activities triggered, and knew that Rangel was transferring money from investor-funded accounts to Rangel’s personal accounts in Mexico. . .  A common-sense reading of these allegations, taken together, sufficiently establish, at this stage, that the bank had actual knowledge of Rangel’s fraud.

Finally, the bank also argued that the plaintiffs’ claim of aiding and abetting negligent misrepresentation should be dismissed because aiding and abetting claims are limited to those based on intentional torts. However, relying on prior case law, the court rejected this argument.

The complaint in Arreola v. Bank of America, N.A. is available here.

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