Lawsuit Over Ponzi Scheme Seeks $1 Billion From M&I

By | April 2, 2012

(Source: Cary Spivak Milwaukee Journal Sentinel (MCT) — As the banker for a Minnesota man who ran a multibillion-dollar Ponzi scheme, MandI Bank should be forced to pay more than $1 billion to investors burned by the scheme, a lawsuit pending in Florida bankruptcy court charges.

Attorneys for the defrauded investors say MandI failed to spot telltale signs of the $3.7 billion scheme masterminded by Tom Petters, who is in federal prison in Leavenworth, Kan., after being convicted in 2009.

“That’s where the money to run the Ponzi scheme went through,” attorney Michael Budwick said. “The account that Petters Company Inc. maintained at MandI was used to perpetrate the Ponzi scheme.”

BMO Harris, the bank company that bought MandI last year, argues in court documents that the suit should be dismissed because the bank was merely the conduit for the money and has no liability for the losses caused by Petters’ scheme. BMO also argues that any fees MandI was paid to handle the accounts were earned.

A spokesman for BMO Harris declined to comment. Oral arguments over the bank’s motion to dismiss the case are scheduled for April 20.

The lawsuit, filed late last year, alleges that Petters could not have kept his Minneapolis-based fraud afloat had MandI enforced an agreement it signed that was designed to protect a Florida investor group that unwittingly helped finance the Petters scheme.

“If they did see it, they just turned a blind eye” to it, said Ann Gittleman, an attorney and forensic accountant at Kinetic Partners, a financial services company assisting Budwick in the lawsuit filed by the Palm Beach Finance Partners, the investor group that poured more than $1 billion into Petters’ operations.

Instead, the suit argues, MandI executives were focused on the revenue the bank company was bringing in by handling deposits from Petters’ companies.

“From Jan. 1, 2003, through Aug. 31, 2008, the astronomical sum of $35.35 billion was deposited into the MandI account” by the Petters companies, the lawsuit states.

Geoff Varga, global head of the corporate recovery and restructuring group for Kinetic Partners, called the sum a “staggering amount” that should have sparked additional scrutiny from bank executives.

“You would think that MandI would have looked deeper,” he said.

Petters, 54, was convicted of 20 counts of fraud, conspiracy and money laundering for offering investors high returns on loans to finance purchases of electronics and other goods for sale to big box retailers such as Costco and Sam’s Club – when, in fact, the merchandise didn’t exist. Owners of the two companies that posed as suppliers to Petters’ companies have also been convicted for their role in the scheme.

The Ponzi scheme was second in size only to the one perpetrated by Bernard Madoff. During his heyday, Petters hobnobbed with prominent politicians, was well-known for his philanthropy and owned Sun Country Airlines and Polaroid Corp.

The suit alleges that if MandI had followed standard banking practices and its own internal policies, the bank would have seen that the majority of the dollars going through the Petters accounts came from suppliers to his companies – a “fact which made no conceivable sense, was indicative of fraud and contradicted the explanations provided to MandI as to how the (Petters) business operated,” the lawsuit states.

“Had (MandI) been doing their job this fraud would have been uncovered before we put our first dollars in,” Varga said, referring to the Palm Beach fund group.

Suits typically fail

Victims in Ponzi schemes often sue banks alleging that the financial institutions should have caught the fraud, said Bill Singer, a New York securities lawyer who has worked for the National Association of Securities Dealers and the Financial Industry Association. The suits usually are unsuccessful, he said, noting that con artists go to great lengths to hide their actions from bankers as well as investors.

“Petters was engaged in a phenomenally complicated high-stakes fraud,” Singer said. “If it was so transparent, how come the FBI didn’t catch it, how come the investors didn’t catch it, how come the SEC didn’t catch it?”

On the other hand, Singer said, burned investors and creditors often argue that bankers may ignore signs of fraudulent activity because they don’t want to jeopardize the flow of revenue.

“A lot of banks may see troubling signs but . . . they tell their staff to sit on it because they have a lot money coming in from the client,” Singer said. “They don’t want to hear about any trouble, because once they hear about trouble they have to put something in writing and do something.”

Gittleman agreed suits against banks are difficult to win. “It’s very hard to sue a bank,” she said. “They have very good lobbyists in Congress and very good laws for them.”

But, she said, this case is different from most because of the control agreement signed by Palm Beach funds and the Petters companies in 2008. Petters suggested the agreement after investors in the Palm Beach funds raised concerns about the Petters companies’ operations.

“MandI owed a duty to Palm Beach funds,” Gittleman said. “They signed the agreement and put it to the side and never did anything.”

Instead, said Budwick, the investors’ lawyer, the bank ignored the agreement and couldn’t even locate it when investors started raising questions.

“MandI has it now because we gave them a copy of it in the summer of 2010,” after MandI officials told Budwick they could not find a copy of the agreement, he said.

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©2012 the Milwaukee Journal Sentinel

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Distributed by MCT Information Services

Source: Cary Spivak Milwaukee Journal Sentinel (MCT)

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