An Associated Bank official met with a man in the man’s home office in Burnsville, Minnesota in late 2007 and, shortly after, the man opened bank accounts at Associated Bank in the name of Universal Brokerage FX Management LLC and Crown Forex LLC, “a Minnesota limited liability company.”
Slight problem there.
There was no such thing as Crown Forex LLC, a Minnesota limited liability company.
Then, the man from Burnsville and his “business partners” decided to open an account for “Crown Forex S.A” at Associated Bank (that’s Société Anonyme, a foreign company corporate designation). Associated Bank officials apparently advised its customer against opening an account in the name of a foreign corporation because of regulatory requirements that would apply to a foreign bank account.
The whole thing, we know now, was a multi-million dollar Ponzi scheme. The principals all pled guilty to a complete fraud or were convicted. They’re in prison. Should the bank be liable to any extent for victims’ losses?
Sr. U.S. District Court Judge David S. Doty dismissed the case against the bank, which was brought by R.J. Zayed, the court-appointed receiver charged with mopping up the mess of the Ponzi scheme and charged with recovering as much money as possible to undo the harm of the crimes.
When charged with “aiding and abetting” a financial fraud, the Court reasoned, one looks at allegations of “knowledge” (what did the Bank know?) and one looks at “substantial assistance” (was the Bank’s role critical to the fraudulent scheme?).
The elements of knowledge and substantial assistance are analyzed “in tandem.” That is, where there is a minimal showing of substantial assistance, a greater showing of knowledge is required. The evidence pled by Zayed, the court held, did not rise to the level to justify a claim against the bank for “aiding and abetting” in the financial crime.
In the products liability context, we have a system of quasi-strict liability. That is, we have designed the legal system with the hope that product manufacturers (and others in the stream of commerce like aggregators, distributors, retailers, etc.) will optimize the balance between product safety and profitability by imposing the costs of accidents caused by their products on these businesses in the commercial stream. We apply quite a different standard on financial institutions and financial products. In fact, it is very difficult to fix liability on a lender for the bad acts of one of its account holders.
Trevor Cook and his criminal cronies, in essence, were selling a defective financial product — the financial equivalent of an unreasonably dangerous device. It was manufactured in their criminal minds but, to take the product to market, they needed Associated Bank’s help to manufacture it.
Some day, maybe the law will look at financial crimes like the law looks at products liability. Not any day soon, though.
If your consumer appliance is defective and injures you, you might have many different potential routes to financial recompense. If your 10%-per-year foreign currency trading investment blows up in your face, on the other hand, your avenues of recovery might be a single dead end.