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Two Federal Suits Highlight Retail Banks' Potential Liability in Ponzi Schemes
The National Law Journal
February 06, 2009
A pair of federal lawsuits against Sovereign Bank and its Spanish parent company Banco Santander S.A. highlight the legal battles surrounding retail banks' liability in Ponzi schemes, including the Bernard Madoff scam.
A new case in the Southern District of Florida against Banco Santander tries to pin liability on the company for its investment management company Optimal Investment Services S.A., which had a sub fund heavily invested in Madoff's company. In Massachusetts, a lawyer and receiver for defrauded investor-clients is seeking a retrial of a case against Sovereign Bank and officials for allowing convicted Ponzi scheme operator and former Boston radio station owner Bradford Bleidt to keep funds from investor-clients in a standard bank account. Inversiones Mar Octava Limitada v. Banco Santander, No. 1:09-cv-20215, (S.D.Fla.); Fine v. Sovereign Bank, No. 1:06-cv-11450 (D. Mass.)
Madoff faces a federal trial for allegedly running a Ponzi scheme that defrauded investors of $50 billion, while cases against so-called feeder funds, fund executives and auditors pile up in state and federal courts.
The Jan. 26 Florida case is a purported class action against Banco Santander, Optimal Investment, accounting firm PricewaterhouseCoopers International Ltd., Optimal's transfer agent HSBC Securities Services (Ireland) Ltd. and its custodian HSBC Institutional Trust Services (Ireland) Ltd. Claims against Banco Santander include violations of federal securities laws, breach of fiduciary duty, gross negligence, negligent misrepresentation and unjust enrichment.
On Jan. 27, the Madrid-based Banco Santander offered to settle with private banking clients that invested in Optimal Strategic U.S. Equity fund and were affected by the Madoff fraud.
Banco Santander offered to issue preferred securities to the clients, but the offer is "misleading and coercive" because it requires the customers to release the bank from claims and to keep their money at the bank, said, plaintiffs' co-counsel Michael A. Hanzman of Hanzman Gilbert in Coral Gables, Fla.
"We have no objection to offers being extended if they disclose all relevant facts and they're not coercive," Hanzman said.
Hanzman and his co-counsel firm Labaton Sucharow of New York announced that the court would hold a hearing on the plaintiffs' emergency motion to enjoin
Banco Santander's settlement offer on Feb. 18 or Feb. 19.
Naming Banco Santander "raises a host of legal issues about the flow of fees and information" between the bank and its Optimal subsidiary, but the plaintiffs believe there's a basis for the claim. "We look forward to obtaining more information on the bank's activities as the case progresses," Hanzman said.
Samuel Danon, a Miami litigation partner at Richmond, Va.-based Hunton & Williams who represents Banco Santander, did not return a call for comment.
In the Massachusetts case, Boston solo practitioner David J. Fine filed a preliminary motion for a new trial on Jan. 2 in U.S. Court for the District of Massachusetts. Fine is a receiver for investor-clients of Bleidt, who confessed to the U.S. Securities and Exchange Commission (SEC) in 2004 that he stole more than $32.6 million from 125 investor-clients in the course of about 20 years.
On Dec. 23, the jury ruled in favor of the bank on negligence and breach of fiduciary duty claims. Fine said that he's in the process of finalizing the motion for a new trial.
Fine said Sovereign Bank is liable because the manager of the branch where Bleidt deposited his money knew that Bleidt was an asset manager and should not have allowed him to deposit clients' money in an ordinary business account.
According to the complaint, Sovereign Bank should have known that a bank account that an investment adviser deposits investor-clients funds into is required to follow SEC requirements for such accounts.
"This clearly was the wrong kind of account," Fine said. Sovereign Bank's attorney Patrick T. Voke, a Boston litigation partner at Richmond, Va.-based LeClair Ryan, said that a jury ruling in the other direction would have made banks "policemen for the activities of its customers."
"What we were able to do was to convince a jury that is not what banks are supposed to do," Voke said. "They take on a role with their own customer, they don't take on the obligation or responsibility to monitor what their customers are doing with their own customers. The jury said we're not going to put that responsibility on banks."
Fine countered that there are well-established legal principles that indicate a bank manager would be liable if he knew the money in Madoff's bank account came from investor-clients who gave it to Madoff for investment purposes.
"There's no need for there to be any expansion in banks' responsibility or obligation," Fine said.
In a separate SEC case, Bleidt was sentenced to 11 years and three months in prison in December 2005 and was ordered to pay $31.7 million plus $9.5 million in interest in restitution. Securities and Exchange Commission v. Bleidt, No. 1:04-cv-12415 (D. Mass.)
Although the Boston and Florida cases involve disparate factual situations, the similarity is that Sovereign Bank ignored red flags about Bleidt and that Banco Santander ignored red flags about Madoff, Fine said.
"Here's a Ponzi scheme and there are people who lost money as a result, and the bank is being called to account notwithstanding it wasn't the bank that stole the money," Fine said. "They're similar in that way."
