Who is responsible when bank accounts are used for fraudulent purposes? It’s a Matter of Trial After the Marin County Ponzi Deal

As the unraveling of the late Ken Casey’s vast Ponzi scheme, spanning dozens of North Bay income properties and more than 1,200 investors, continues in bankruptcy court, a separate legal battle escalates between some of these investors and the bank hosting Casey’s trading accounts.

An audit after Casey’s death in May 2020 and subsequent investigation by the Securities & Exchange Commission found that the scheme left Marin County Resident Investment Firms, the Professional Investor Security Fund and professional financial investors , underfunded since at least 2015.

Rather than paying returns, part of the $350 million raised from investors was used to pay for lavish living, the auditors concluded. The investigations culminated in mid-2020 filings for bankruptcy by the two companies, the sale of most properties in late 2021 for $436 million and the sentencing of Lewis Wallach, the top surviving executive, in September. 2021 to 12 years in prison for embezzlement. of $26.7 million.

The separate legal battles stem from four investors — Shela Camenisch, Dale Dean, Luna Baron and Eva King — who sued Umpqua Bank in federal court in August 2020, two months after the ruse was discovered. They accuse the Oregon-based institution, whose Novato branch was where Casey’s businesses did their banking, of ‘aiding and abetting’ the plot to transfer funds from new investors to pay existing investors.

Named after 1920s postage stamp speculator Charles Ponzi, this type of investment fraud in which money from subsequent investors is used to pay previous investors and often program organizers, according to the SEC. The plot requires new investments to remain solvent.

Umpqua said in a statement that it does not publicly comment on the cases currently in dispute.

The bank’s lawyers in that case, at McGuireWoods in San Francisco, have twice asked the San Francisco court to dismiss the case, rejecting the claim that the bank had “actual knowledge” of the Ponzi scheme or provided “substantial assistance” to the plot.

Both motions were denied, most recently on January 20. But in his denial order, Judge Richard Sheeborg wrote that it was a “narrow question” whether the plaintiffs could prove their case. Some details of both parties’ depositions of the bank and Casey company executives remain under court seal or have yet to be filed.

On February 8, the four investors filed for certification of the case as an expanded class action. Umpqua has until the end of March to respond, and the plaintiffs to respond by the end of May. A federal court hearing on the matter is scheduled for early June in San Francisco.

Attorney Linda Lam of Gibbs Law Group, the Oakland firm prosecuting the class action, said one of the reasons for wanting to involve more plaintiffs in the case was to simplify the recovery process for investors, whose a number are retirees who have invested significant savings in Casey’s businesses. .

“Many look to this lawsuit for a continuation of recovery, and that can only happen if it continues with class certification,” Lam said.

The 70 rental units and commercial properties that were part of Casey’s portfolio were valued at the start of the bankruptcy filing at $555 million, but were sold for $436 million to cover outstanding financing payments and other debts. When all is resolved with corporate breakups, investors are estimated to have lost up to $100 million.

The Novato case underscores a major challenge the banking industry has faced over the past two decades of high-profile Ponzi cases, including Bernie Madoff’s $65 billion scheme uncovered in 2008 and the $8 billion conspiracy by R. Allen Stanford discovered the following year. Both cases resulted in lawsuits against banks that provided services to their businesses.

And Ponzi schemes have been uncovered at an increasing rate in recent years. Sixty such conspiracies involving $3.25 billion were exposed by state and federal officials in 2019, the largest sum since 2010 and double what was found in 2018. NBC News reported based on website data PonziTracker.

The years following the Madoff case saw an evolution in lawsuits by investors against depository institutions that handled the accounts, according to Waller Lansden attorneys Dortch & Davis, writing for a Bloomberg Banking Report. A first legal approach was to challenge a long-standing rule that banks generally have no obligation to protect non-customers. In the Casey case, it would be the investor clients.

This escalated into legal claims that the banks “knowingly aided and abetted the schemes”, but the burden of proof for this may be high, the lawyers wrote.

And other litigation tactics have included underscoring the duties of depository institutions under laws intended to curtail criminal syndicates and, in recent decades, international terrorism. These include the Bank Secrecy Act and anti-money laundering rules such as mandatory reporting of suspicious activity, including money movements above certain thresholds, such as $10,000.

Despite the overall high standard of proof, some cases result in bank settlements. Umpqua himself settled the Ponzi lawsuits, for $30 million in 2010 and $11 million in 2019, according to Oregon Dispatches.

As a precaution, software vendors are stepping up efforts to bring pattern detection and artificial intelligence learning capabilities to a bank’s account monitoring to “red flags” of suspicious activity, which would be noted for review by facility staff. The Umpqua lawsuit over the Casey accounts alleges the bank failed to act on warnings found by its software.

Jeff Quackenbush covers wine, construction and real estate. Prior to The Business Journal, he wrote for Bay City News Service in San Francisco. He graduated from Walla Walla University. Contact him at [email protected] or 707-521-4256.

Shawanda H. Saldana