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Banks and Brokerage firms can be liable for aiding and abetting ponzi schemes

Banks and Brokerage firms can be liable for aiding and abetting ponzi schemes

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By Scott L. Starr

Ponzi schemers rarely have the ability to carry out their nefarious conduct alone; instead, they need the assistance of brokers and banks to handle a variety of financial transactions.  Under some circumstances, these banks and brokerage firms may ultimately be found liable for aiding and abetting the Ponzi scheme.

By way of example, Starr Austen & Miller a few years back represented a large group of Ohio investors who had invested in excess of $30 million with a local insurance salesman who was operating a Ponzi scheme. The Ponzi schemer ran all of the transactions through his brokerage account he held with a large national brokerage firm. When the Ponzi schemer opened up the account he represented that he had a net worth of a million dollars and annual income of $150,000.  This investor profile was never updated. Nevertheless, in a few short years he was depositing and trading tens of millions of dollars a month.  The local brokerage’s branch office was earning substantial fees on the trading activity.

Banks and brokerage firms typically attempt to defend these types of cases by arguing that the victims of the Ponzi scheme were not their customers and therefore they owed no duty to the victims.  The court in the example described above, after noting the brokerage firm ignored its own money laundering policies, denied the broker’s motion for summary judgment concluding the brokerage firm could be held liable for aiding and abetting the Ponzi schemer.  A significant settlement was thereafter obtained.

Recently, a California Federal Judge denied Wells Fargo Bank’s motion for summary judgment in a $135 million Ponzi scheme carried out by real estate investment firm Equity Build Inc.  The Court preserved the aiding and abetting fraud claims and aiding and abetting breach of fiduciary duty claims, finding there was sufficient facts alleging the bank’s actual knowledge of the wrong doing to allow the case to go forward.  The case is Chang et al. v Wells Fargo Bank N.A., 4:19-cv-01973 in the U.S. District Court for the Northern District of California.

Claims against banks and brokerage firms for aiding and abetting the Ponzi schemer are very factually sensitive and will always present strong challenges from the defense because so much is at stake.  If you or a loved one has been the victim of a Ponzi scheme and the schemer is now broke and headed to prison, your only potential avenue for recovery may be against a bank, brokerage firm, or perhaps an accountant who aided and abetted the schemer in some way.  We have handled a number of these cases in the past here at Starr Austen & Miller and would be interested in investigating your particular case to see if aiding and abetting liability exists.  Contact our office to discuss your situation.

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The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence, ponzi schemes and breach of trust.

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