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

Thursday, November 14, 2013

A Catch 22 for Banks? SARs and Ponzi Scheme Cases

Posted by Kathy Bazoian Phelps

   What is a bank’s worst nightmare? High on the list has to be the balancing act between (a) compliance with suspicious activity reporting, on the one hand, and (b) protection of information that could lead to civil liability for having become aware of suspicious activity, on the other hand. 

   Banks are required to report fraud and are subject to criminal and civil penalties if they do not. 31 U.S.C. § 5318. The government - and society - encourages banks to report fraud. As reported in an earlier blog post, “Banks, Please File Your Suspicious Activity Reports to Help Stop Ponzi Schemes,” governmental agencies are imposing hefty fines for the failure of banks to file SARs, and proposals are being floated in the government to ask for more accountability and prison terms for the bankers themselves.

   One would think that banks would be tripping over themselves to get SARs on file – immediately and frequently. Yet, the act of putting together a report that admits knowledge of suspicious activity could lead to civil liability on the part of the bank for having that knowledge. What is a bank to do?

   In Wiand v. Wells Fargo Bank, N.A., 2013 U.S. Dist. LEXIS 159756 (M.D. Fla. 2013), the receiver of the Arthur Nadel $168 million Ponzi scheme sued Wells Fargo Bank, alleging that the bank failed to comply with federal banking regulations and the bank’s own internal procedures, which allowed the Ponzi scheme to flourish. The receiver sought turnover from Wells Fargo Bank of certain documents that the bank had withheld from discovery on the basis of the SAR privilege. Wells Fargo sought to keep privileged a broad category of documents that extended well beyond the SAR itself.

   The SAR privilege provides that SARs filed by banks are confidential and subject to an “unqualified discovery and evidentiary privilege that courts have held cannot be waived.” Id. at *3 (citations omitted). Wells Fargo argued that “the SAR privilege covers not only a SAR and any information that could reveal the existence of a SAR, but also material prepared by the bank to detect suspicious activity, regardless of whether a SAR was ultimately filed or not.” Id. at *2. The documents that Wells Fargo sought to withhold from discovery were categorized as: (1) listings of transactions or copies of certain transactional documents relating to bank accounts, some with highlighted notations; (2) internal bank emails and reports; and (3) a series of email communications between another financial institution and the bank.

   The federal regulations are express and serious in protecting SARs from disclosure and providing assurances to banks in protecting that information. 31 U.S.C. § 5318 states:
Suspicious activity reports are confidential. Any bank subpoenaed or otherwise requested to disclose a suspicious activity report or the information contained in a suspicious activity report shall decline to produce the suspicious activity report or to provide any information that would disclose that a suspicious activity report has been prepared or filed citing this part, applicable law (e.g., 31 U.S.C. 5318(g)), or both, and notify the appropriate FDIC regional Office (Division of Supervision and Consumer Protection (DSC)).
   However, how far does that protection extend? Wells Fargo sought a broad interpretation of the statutory language, citing to comments in the Federal Register that the SAR privilege applies to "material prepared by the financial institution as part of its process to detect and report suspicious activity, regardless of whether a SAR ultimately was filed or not." 

   After in camera review of Wells Fargo’s privilege log and documents, the court permitted a few documents that were “evaluative” in nature and that were “intended to comply with federal reporting requirements,” including communications with another financial institution, to remain subject to the SAR privilege, but required turnover of the balance of the documents. 

   It was not clear from the decision whether Wells Fargo was seeking protection of these documents solely for purposes of complying with the Bank Secrecy Act’s secrecy requirements, or whether it was seeking to protect information that might lead to later civil liability for the bank. Regardless, the fight over how far the SAR privilege extends is an important high stakes battle, reminding banks to tread very carefully in these waters.

   Read about my new book, Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams, at www.ponzi-proof.com

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