The bankruptcy trustee overseeing the recovery of funds in the $3.65 billion Ponzi scheme by Tom Petters filed suit Wednesday against a key bank, accusing it of playing a significant role in "aiding and abetting" the fraud by ignoring Petters' huge deposits.
The lawsuit by Doug Kelley against BMO Harris Bank is his most aggressive attempt yet to seek damages since filing a flurry of clawback lawsuits more than two years ago against various individuals and organizations that benefited from Minnesota's largest Ponzi scheme.
Kelley contends in the suit that M&I Bank, now owned by BMO Harris, was complicit in the illegal operation engineered by the former Wayzata businessman. Specifically, M&I ignored multiple red flags to protect a lucrative banking relationship, as more than $35 billion flowed through an account controlled by Petters from 2003 to 2008, according to the lawsuit filed in U.S. Bankruptcy Court in St. Paul.
"M&I should have been put on notice just by the sheer volume of money going into the account," Kelley said in an interview.
The suit seeks at least $68 million, Kelley said, and total damages could be considerably higher depending on when the bank had actual knowledge of the scheme's existence.
Jim Kappel, a spokesman for Chicago-based BMO Harris Bank, said in a statement Wednesday that the claims "are completely without merit," and the bank will vigorously defend itself.
The suit is part of a wave of lawsuits nationally, some of them successful, by Ponzi victims targeting the banks that swindlers used to perpetrate their frauds.
The former M&I Bank was home of the principal bank account that Petters Companies Inc. (PCI) used to finance its fraudulent inventory scheme for more than five years.
The suit includes three counts - aiding and abetting fraud, aiding and abetting breach of fiduciary duty and civil conspiracy.
The lawsuit calls the account's deposit activity "astronomical" and "frenzied."
"M&I was never provided a valid business reason for such a staggering amount," the lawsuit says. "Without the substantial assistance that M&I provided, the Ponzi scheme would have been discovered earlier by law enforcement authorities and victims of the Ponzi scheme."
Petters and his associates, including lieutenant Deanna Coleman and document forger Robert White, were raising money from investors by purporting to sell consumer electronics to big-box retailers. Although the M&I account was supposed to receive payments from retailers for disbursement to lenders and investors, no such deposits occurred, the suit states.
Instead, funds from new investors and lenders were used to pay off older investors and investor-lenders. Indeed, two-thirds of the deposits in the account were from two money-laundering fronts set up by Petters and run by associates Larry Reynolds and Michael Catain, and most of the other deposits were from lenders.
The lawsuit notes that $68.4 million was transferred into personal accounts of Petters.
"M&I never inquired, nor was it ever provided, a valid reason for these transfers," the suit states.
BMO Harris has been fighting a similar fraud lawsuit in Florida bankruptcy court over the Petters account at M&I. Lawyers in that case are seeking damages of at least $1.3 billion, excluding punitive damages. In its motion to dismiss the case, the bank argued it was simply a conduit for the funds and that Petters fooled M&I just as he fooled everyone else. The Florida case is ongoing.
M&I was a wounded bank when BMO Harris bought it in 2011, inheriting the Petters trouble. It was Wisconsin's largest bank and a big Twin Cities lender but had suffered major losses on commercial and residential real estate loans, particularly in Arizona and Florida.
BMO Harris and its parent, BMO Financial Group in Toronto, are owned by the Bank of Montreal, one of Canada's largest banks.
A central feature of the Minnesota and Florida lawsuits is the deposit control agreement that M&I Bank signed with PCI. Under terms of the agreement, M&I would transfer deposits from retailers into special accounts for lenders and investors.
But, said Kelley, the bank "never had any intent of implementing it and enforcing it in any way."
Generally, banks can't be held liable simply because they fail to catch a depositor running a Ponzi scheme, said Michael Budwick, the lawyer for Barry Mukamal, the bankruptcy trustee for the hedge funds in Florida that have sued M&I Bank. It's different if the bank assumed a specific duty to the victim or knew of the wrongdoing and somehow assisted.
Proving fraud, however, requires proving the bank had actual knowledge of what was going on.
"It's a very heavy burden legally," said Helen Davis Chaitman, an attorney with Becker & Poliakoff in New York who represents victims of Ponzi king Bernard Madoff.
But not impossible.
A number of cases have been settled favorably for victims against banks in smaller Florida schemes, Budwick said.
Earlier this year the Toronto-Dominion Bank paid $170 million to settle claims by burned investors that it assisted in the Ponzi scheme of Fort Lauderdale lawyer Scott Rothstein, who is now in prison.
"That was a humongous success," Davis Chaitman said.
Former Madoff clients have filed a class action lawsuit against JPMorgan Chase & Co., claiming the bank was complicit in hiding Madoff's fraud and owes them at least $19 billion. The bank has moved to dismiss and the case is pending.
Petters is serving a 50-year sentence in federal prison at Leavenworth, Kan. White is serving a five-year sentence, and Coleman, the principal whistleblower in the case, has returned to private life after serving a prison sentence just short of a year.