New York Federal Court Holds Banks Were Not Liable for Ponzi Scheme Using Banks’ Accounts

The United States District Court for the Western District of New York recently dismissed class action claims against two banks alleging that the banks were liable for a decade-long Ponzi scheme that utilized the banks’ account.  See Heinert v. Bank of Am., N.A., 2019 WL 5287950 (W.D.N.Y. Oct. 18, 2019).  In the case, the plaintiffs claim that the individual defendants defrauded them from about $102 million as part of a Ponzi scheme.  According to the complaint, the individual defendants used accounts at the two defendant banks, where a branch manager who worked at both banks purportedly assisted with the fraud by “coordinating the opening of new accounts, expediting the availability of funds, lying to creditors, and placing quarterly calls to American Express on [a defendant’s] behalf, [and] falsely confirming that his accounts held sufficient funds to cover his debts, when they did not.”  Based on the branch manager’s alleged role, plaintiffs brought this action alleging that the banks aided and abetted the individual defendants in committing fraud and that the banks breached their fiduciary duties to the plaintiffs.  The banks moved to dismiss the complaint as against them.

The Court granted the banks’ motion to dismiss.  First, the Court dismissed the claim that the banks aided and abetted the underlying fraud, finding that there was no allegation that the banks themselves had actual knowledge of the Ponzi scheme.  “It is well settled in the Second Circuit that a bank’s negligent failure to identify warning signs of fraudulent activity, such as atypical transactions – even where such signs converge to form a veritable ‘forest of red flags’ – is insufficient to impute actual knowledge of ongoing fraud.”  Likewise, the Court found that there were no allegations that the branch manager herself knew of the underlying scheme, but instead only knew that she was being asked to perform “atypical activities” for the individual defendants.  Second, the Court found that the banks were not liable for a breach of fiduciary duty to the plaintiffs, finding that “banks do not owe non-customers a duty to protect them from the intentional torts of their customers . . . With billions of banking transactions occurring in New York alone, this would be the equivalent of making New York banks liable to the world’s banking public.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Anthony Lombardo at alombardo@riker.com