Banks may be tapped for Ponzi victims

With $3.5 billion in losses, Tom Petters' Minnetonka-based Ponzi scheme was one of the largest the U.S. has seen. But it wasn't unique.

Dozens of other smaller schemes have deflated in recent years, and some attorneys are looking at new ways to get money for victims. Their target: the banks that handled the big inflows and outflows of cash.
Steven Berk, a former federal prosecutor and attorney with the U.S. Securities and Exchange Commission, has four civil cases pending against banks where Ponzi schemers had their accounts. He argues the banks aided the scams that bilked people out of millions of dollars. They knew — or should have known — what was really going on.
"It's not easy to steal that amount of money," he said. "You can't do it alone."
Berk is seeking judgments against Bank of America in three of the cases and JP Morgan Chase in the fourth. Those cases are still moving through the courts and haven't been resolved.
The banks that did business with Petters Co. Inc. aren't facing similar lawsuits, and they haven't been charged with a crime related to the case. At Petters' trial in St. Paul last fall, the banks weren't described as knowing what was going on with the billions flowing through various accounts controlled by Petters' businesses or by him personally.
But the flows of cash were massive, and for victims, getting some money back remains a priority. Petters was convicted and was sentenced to 50 years in prison. He is
appealing both the sentence and conviction.
Victims are waiting to see a final proposed schedule for restitution in the case. They also may receive money from a related bankruptcy case.
At Petters' criminal trial, prosecutors showed that $35.3 billion flowed through a Petters Co. Inc. account at Marshall & Ilsley Bank from 2001 to 2008. Other Petters shell companies that played key roles in the scheme flowed $12 billion each through Anchor Bank in Minnesota and First Regional Bank in California between 2002 and 2008.
The totals for each bank include — at least in part — the same funds that moved through the other banks as the cash was moved around to make Petters Co. Inc. look like a legitimate business.
An MI spokeswoman said that in 2009, the Wisconsin-based bank was a party to civil lawsuits in Texas and Florida, apparently with claims similar to the ones Berk is pursuing. Both cases were dismissed. The bank didn't comment on specific questions about the Petters case.
Anchor Bank didn't return a call seeking comment. First Regional Bank was closed by regulators on Jan. 29, and the Federal Deposit Insurance Corp. was named as its receiver.
The cases Berk is involved with aren't all apples-to-apples comparisons to what was going on in the Petters case. While Petters convinced investors that his companies were dealing in large quantities of consumer electronics, some of the cases Berk is working on describe deeper bank involvement in the day-to-day operations of the suspect businesses.
One of Berk's cases stems from a $370 million Ponzi scheme that Nicholas Cosmo is accused of running in Long Island, N.Y., until it collapsed in early 2009. Cosmo, who is awaiting trial, allegedly told investors he provided short-term loans for construction projects. While he would loan $1 million to a developer in an actual deal, he'd then collect $60 million from investors, giving them all the same investment pitch, according to court documents.
He used the excess money to pay high returns to early investors and reward the brokers who helped him bring in new money.
A federal civil suit in the case targets Cosmo's bank, the Bank of America. The bank assigned one or more of its representatives to work "directly out of Cosmo's office," the civil suit alleges. The suit also claims that Bank of America had "actual knowledge" that Cosmo was commingling investor money, diverting investor money to his own accounts and "not engaging in any legitimate business."
Proving such cases can be difficult, as banks argue they were duped as well. It also can be a challenge to portray investors as victims, experts say.
"Part of the problem with these cases is that victims don't look all that sympathetic, because they're trying to get these high returns," Berk said. "My response is it was part of the culture."
The chance of success for such lawsuits, in general, probably has as much to do with the broader economic climate as it does with any change in how such a claim against a bank would be viewed by a judge or jury, said Ryan Murphy, an attorney with Fredrikson & Byron in Minneapolis.
For example, he said, in good economic times, a jury might decide that a firm is doing well and should have to pay damages. In tough times, they're more familiar with hard-luck stories and may not be so sympathetic.
Berk acknowledges that the types of cases he is pursuing traditionally haven't enjoyed much success, and the banks have been able to avoid liability. "But given the near collapse of the banking system, I think the courts will be more aggressive," he said.
In legal filings related to the Petters case, there have been accusations that some investors must have known how Petters Co. Inc. was able to pay interest rates of 20 percent or better on some if its promissory notes.
And in a proposed restitution order for victims that came out a few weeks ago, it became clear some well-known investors didn't appear on the list because it was determined they had actually made money on the deals. Those gains are expected to be the target of separate "clawback" actions by the court-appointed receiver in the Petters case.
Those clawbacks are seen as one of the best bets to get back significant funds for victims. Some Petters investors have said they're expecting to get back 20 cents to 30 cents on the dollar, at best.
John Welbes can be reached at 651-228-2175.