Judge Dismisses Most Claims Against Bank Arising From Nadel Ponzi Scheme

by Tara Arick on April 9, 2013 · 0 comments

in Banking

- From LexisNexis® Mealey’s™ Daily Legal News.

A federal judge in Florida on April 5 dismissed aiding and abetting claims the receiver of imprisoned Ponzi schemer Arthur Nadel brought against Wells Fargo Bank NA and Wachovia Bank NA, finding that the receiver has not shown enough proof that Wachovia knew about Nadel”s fraudulent transactions (Burton W. Wiand, et al. v. Wells Fargo Bank N.A., et al., No. 12-0557, M.D. Fla.).

U.S. Judge James D. Whittemore of the Middle District of Florida made the ruling in the suit the receiver, Burton W. Wiand, filed against the bank and Timothy Ryan Best, a former Wachovia vice president.

Nadel pleaded guilty in February 2010 to securities crimes in association with running a group of hedge funds, established under his Scoop Capital LLC and Scoop Management Inc.

companies, as a Ponzi scheme. He was sentenced to 14 years in prison and ordered to repay $ 162 million.

Receiver”s Allegations

In the instant suit, Wiand alleged that Wells Fargo and Wachovia offered certain financial services to Nadel that should have alerted the banks to Nadel”s fraudulent activity. The services included funding mortgages to Nadel despite his allegedly poor credit, an alleged commingling of Wachovia funds across his accounts, the transfer of funds between nonprofit and business accounts and large transfers between personal and business accounts.

In his second amended complaint, filed Dec. 28, 2012, Wiand contended that Wachovia had actual knowledge of Nadel”s fraud. Wiand alleged that Wachovia looked at Nadel”s financial history before funding mortgages for him and that his transactions registered in Wachovia”s fraud-alert system. According to Wiand, Wachovia also engaged in certain transactions involving Nadel”s hedge funds.

The defendants moved to dismiss on Jan. 11. They argued that Wiand”s four counts for aiding and abetting should be dismissed because Wiand failed to state a claim upon which relief can be granted.

No ‘Strong Inference’

“Plaintiffs alleging aiding-and-abetting liability for a bank”s participation in a Ponzi scheme sometimes rely on ‘red flags” or procedural infirmities that should have alerted the bank to potentially unscrupulous activity by its customer,” Judge Whittemore said. “These ‘red flags,” however, are insufficient to establish a claim for aiding and abetting because ‘although they may have put the banks on notice that some impropriety may have been taking place, those alleged facts do not create a strong inference of actual knowledge” of wrongdoing. Lerner v. Fleet Bank, N.A., 459 F.3d 273, 294 (2d Cir. 2006). As a corollary to that proposition, banks that conduct routine banking services, even for transactions or activities that appear atypical upon review, are not required to investigate the account holder”s transactions. [Lawrence v. Bank of Am. N.A. (455 Fed. Appx. 907 [11th Cir. 2012])] (citing Home Fed. Sav. & Loan Ass”n of Hollywood v. Emile, 216 So. 2d 443, 446 (Fla. 1968); 0″Halloran v. First United Nat”l Bank of Fla., 350 F.3d 1197, 1205 (11th Cir. 2003)).

The judge added that Lawrence “is not binding authority” but said “its factual similarity makes it persuasive when analyzing whether Receiver”s allegations of actual knowledge are plausible.”

“The only factual allegation approaching actual knowledge is Wachovia”s ‘participation” in certain hedge funds, but even that allegation falls flat,” Judge Whittemore said. “In Paragraphs 63 and 64 [of the second amended complaint], the Receiver alleges that Wachovia ‘participated” in ‘derivative transactions” which were ‘related to” Scoop Real Estate and Viking Fund through an ‘affiliate” of the bank. These paragraphs provide no details concerning the affiliate, the transactions, the information received, or how the transactions were related to the hedge funds. The paragraphs fail to plausibly allege that Wachovia had actual knowledge of Nadel”s wrongdoing through participation in the investments.”

The judge also rejected Wiand”s alternative argument that actual knowledge may be alleged through facts demonstrating “reckless conduct,” explaining that Wiand”s claims “are rooted in Florida tort law, not federal securities law” and that “the requirement of actual knowledge has long been a part of Florida law.”

Fraudulent Transfer

Judge Whittemore went on to dismiss Wiand”s claim for negligence, explaining that the second amended complaint does not provide a plausible, factual basis to conclude that Wachovia “[knew] that an actual misappropriation is intended or is in progress.” He also dismissed Wiand”s fraudulent transfer claim as to Best “because there is cause of action for aiding and abetting a fraudulent transfer when the alleged aider-and-abettor is not a transferee.”

However, the judge found that Wiand states a claim against Wachovia for fraudulent transfer, finding that “his allegations of red flags and fraud alerts . . . plausibly raise the question of whether Wachovia ‘had actual knowledge of such facts or circumstances as would have induced an ordinarily prudent person to make inquiry,”" quoting Wiand v. Waxenberg (611 F. Supp. 2d, 1319 [M.D. Fla. 2009]).

Lastly, Judge Whittemore ruled that Wiand has sufficiently stated a claim for unjust enrichment. The judge found unpersuasive the defendants” arguments that the claim fails because fees charged in connection with the deposit accounts cannot be recovered through an unjust enrichment claim and because Wiand has a legal remedy.

Wiand is represented by Jonathan Betten Cohen, Sean P. Keefe and Terry Alan Smiljanich of James, Hoyer, Newcomer & Smiljanich in Tampa. The defendants are represented by Beth A. Cronin, Dale W. Cravey and Marie Tomassi in St. Petersburg, Fla., and Charles M. Harris Jr. and Marvin E. Barkin in Tampa, all of Trenam Kemker.

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