It is often not possible to immediately recover from fraudsters themselves, as they have spent their ill-gotten gains on lifestyle or other debts, or transferred the money into the control of unknown third parities. Recoveries against fraudsters themselves in some cases are long term projects. In such cases, fraud victims may seek recovery from those who intentionally or unwittingly assisted the fraudsters orchestrate their schemes. In this blog I will provide legal information on recovery against a fraudster’s banks.
Recovery of $67M against TD Bank in Ponzi scheme
The impetus for this blog came from a recently released story (July 29, 2014) Reuters reported wherein the 11th US Circuit Court of Appeals in Florida which upheld a jury verdict ordering TD Bank, a US branch of Canada’s Toronto-Dominion Bank, to pay victim investors $67M. TD was the banker for convicted Florida lawyer Scott Rothstein who ran a Ponzi scheme that resulted in losses of over $1B to investors.
By way of back story, Scott Rothstein was a prominent South Florida lawyer who purported to represent whistleblowers and victims of sexual harassment against high-value defendants. According to Rothstein, defendants paid large sums of money to his law firm to settle the cases against them, but with the proviso that the money be released to the victims over time, to be forfeited if the victims breached a confidentiality clause.
Rothstein recruited investors by claiming that a number of victims wanted money immediately, and were willing to forgo a large part of the settlement to get immediate payment. He assured investors that the settlement money had already been deposited into a TD Bank trust account administered by the law firm, so there was very little risk to their money. But, in fact, Rothstein’s law firm ran an elaborate Ponzi scheme. Many of the clients, defendants, and the settlements were fake, and Rothstein was using his investors’ money to finance his lavish lifestyle.
Scheme aided by TD Bank regional vice president
The scheme was aided by TD Bank regional vice president Frank Spinosa who assured investors that Rothstein’s account held millions of dollars when it actually only contained $100. He also signed “lock letters” claiming that the funds in the account could only be disbursed to investors, when in fact Rothstein was able to transfer funds to himself from that account.
One of the investor victims, Coquina Investments, subsequently sued TD Bank for their involvement in perpetuating the fraud. A jury found for Coquina and awarded it $67 million in compensatory and punitive damages as against TD Bank (they had a $6.7M loss). The Eleventh Circuit affirmed the judgment last week, stating: “We have no difficulty concluding that the adverse inferences drawn against TD Bank based upon Spinosa’s invocation that, while acting as TD Bank’s regional vice president, he had knowledge of Rothstein’s fraud and assisted in its perpetration.
The Court also found no error with the value of the jury’s damages award, or with the trial court’s imposition of sanctions for egregious discovery violations. The Court held: “For example, TD Bank’s witness testified that there were no AML alerts for Rothstein’s bank accounts until late September 2009 and less than five thereafter, when in fact, there were at least 150 pages of alerts spanning 2008 to 2009.” Given the overwhelming evidence that TD Bank, through Spinosa, knew of Rothstein’s Ponzi scheme, and the lack of regulatory punishment, the punitive damages award were justified.
Recovery of $17M against RBC in Ponzi scheme
Recovery as against a bank which failed to take proper measures to prevent fraud has also taken place in Canada. Back in 2012, CBC reported that the Royal Bank has reached a $17-million out-of-court settlement with dozens of victims of Montreal fraudster Earl Jones. The class-action lawsuit claimed that RBC was aware that Jones, a private financial adviser at the time, was using his personal account for his fraudulent dealings with his clients.
The Earl Jones fraud case had 158 victims. They alleged as against RBC that its Montreal West Island bank branch could have done more to stop Jones, who regularly deposited cheques with double endorsements and forged signatures. In other words, the victims alleged that RBC owed them a duty of care as it was foreseeable by RBC that Jones was using his account for investment transactions of third parties. The victims further alleged that RBC breached their standard of care, and that this breach, in part, caused their losses.
The deal is a “fair settlement, given the circumstances of this case,” said Joey Davis, a Montrealer who advocated on behalf of Jones’s victims, including his mother. Most of the victims were elderly, and a drawn-out court case would have exacerbated their ordeal. Several victims lost their life savings, and some lost their homes. The settlement recouped about half of their investments’ net worth. The recover was to be distributed on a pro rata basis to all claimants.
The Plaintiffs originally sought $40 million in the lawsuit. RBC said it is “pleased to have reached a negotiated settlement agreement, but denies any wrongdoing.”RBC has closely examined its role in providing Earl Jones with a bank account, and is satisfied that it was not negligent.” From RBC’s perspective, the settlement “seeks to address some of the financial difficulties the class-plaintiffs faced as a result of entrusting Mr. Jones with their financial affairs.” The RBC has previously claimed it was also a victim of Jones’s fraud.
Released from prison after 4 years because his crimes were not violent
Earl Jones, the primary fraudster, pleaded guilty in 2010 to two counts of fraud totalling roughly $50 million, in connection to scams that spanned nearly three decades. He was sentenced to 11 years in jail, after his fraud was uncovered during the summer of 2009. This case again came to light recently when, in March 2014, Jones was released from prison after serving four years because the Parole Board deemed him to be “low risk” to reoffend and his crimes were not violent (read more at CBC News).
Quite obviously, the Parole Board in Canada does not put much stock in the psychological damage fraudsters like Jones inflict, or in general deterrence. The former clients of Jones, who defrauded 158 clients out of $28 million in a Ponzi scheme, received class-action settlement cheques (read more).
To read more from Norm J. Groot, visit the website Investigation Counsel.