If a bank employee uses her position to help a fraudster run a Ponzi scheme, should her employer be forced to repay the fraudster’s victims?
The U.S. legal system does not have a definitive answer. As an agent of the bank, an employee might make the bank responsible. But if the bank didn’t know what its “rogue” employee was up to, maybe it was as much of a victim as defrauded investors.
The question comes up in a class-action suit filed here in January. The court action seeks to recover funds from two banks whose local branches handled business for a ring accused of running a $100 million Ponzi scheme in which more than 600 investors lost an estimated $60 million.
In a July 22 hearing, attorneys representing Citizens Bank and Bank of America unsurprisingly argued on the side of no liability for their clients, while attorneys pressing a class action targeting the banks voiced an opposite view.
U.S. District Judge David Larimer, who is presiding, is not yet up to considering whether the buck stops with the banks. He is first weighing the banks’ motion to throw out the class-action suit.
At the hearing, Larimer seemed sympathetic to the banks’ position, but after hearing some three hours of argument, the judge pronounced himself not ready to grant their wish.
Phony investment scheme
The Ponzi scheme first came to light last year when the Securities and Exchange Commission hit the alleged perpetrators with an enforcement action and moved to seize their assets.
Perry Santillo and Christopher Parris, both of Rochester, along with Paul LaRocco of Ocala, Fla., John Piccarreto of San Antonio, Texas, and Thomas Brenner of Orville, Ohio, stand accused in the SEC action. Also targeted are three Rochester-based companies the alleged fraudsters ran: First Nationle Solution LLC, United RL Capital Services, and Percipience Global Corp.
According to the SEC, the alleged fraudsters bought books of business from financial services firms around the country and mined them to find prospects for phony investments.
Here is how the SEC in court papers describes the operation: “Santillo and Parris, or local sales people, including defendants Piccarreto, LaRocco, and Brenner, persuade these newly acquired clients—their victims—to withdraw their savings from traditional investments and invest in issuers controlled by Santillo, Parris or their associates.
“The defendants falsely claim that their investors’ money will be used to operate businesses in fields such as financial services, insurance, real estate development, and medical laboratories. In fact, any business operations for each issuer appear to be limited or non-existent.”
According to the SEC’s court papers, the alleged fraudsters followed a classic Ponzi scheme script: transferring funds collected from purchasers of their essentially worthless securities among a series of companies to disguise the fact they used money from investors to pay generous but phony dividends to other investors.
The accused fraudsters individually filed answers to the SEC’s June 2018 complaint denying any wrongdoing. Still, the SEC in fairly short order won court approval to seize their assets. It began to do in the fall. Money the SEC generates through those seizures is to be used to set up a fund to pay investors at least some of what they lost.
In fraud cases, recovering cash in anywhere near the amount victims lose often proves to be more problematic than catching the culprits. Victims often suspect that fraud perpetrators have salted away piles of recoverable cash in offshore accounts. But fraudsters often are more inclined to spend ill-gotten gain than save it.
In the local class action, the SEC contends, the alleged fraudsters’ scheme raised some $102 million and very little of that amount went into hard assets or legitimate investment vehicles that might be liquidated. Approximately $38.5 million of money the group took in went to pay earlier investors while $20 million went directly into the pockets of Santillo and his confederates, the agency calculates.
Court papers describe Santillo as misappropriating “at least $13.4 million” of investors’ money and spending some of it on ephemeral indulgences like a party at a Las Vegas nightclub where festivities included a performance of a song Santillo paid to have written, celebrating him as “King Perry,” a sovereign who wears “ten thousand dollar suits everywhere he rides; (popping) the champagne in L.A., New York to Florida; (and buying) another bottle just to spray it all over ya.”
A July 17 SEC court filing shows that the agency is set to recover $1 million and could see another $500,000 from ongoing business revenues that have been accumulating in an account held by Santillo’s attorney, Rochester criminal defense lawyer James Nobles. Meanwhile, banks that loaned money to Santillo and Brenner are claiming first dibs on properties the alleged schemers used as collateral for loans, other filings in the SEC case show.
Given the likelihood that investors in the alleged scheme will end up with less than they lost, it’s easy to see why banks would be an attractive target. As the Depression-era bank robber Willie Sutton is supposed to have retorted when asked why he stuck up so many banks, “it’s where the money is.”
But can banks be held liable?
The Rochester class-action plaintiffs’ claims against the banks are largely hung on a single factor, a series of actions allegedly taken by a bank official named Derline Cunningham, which, plaintiffs maintain, propped up a scheme that otherwise would have collapsed far sooner than it did.
Currently a mortgage consultant working out of a Wells Fargo Bank office in Pittsford, Cunningham previously managed a Bank of America branch in Rochester and later moved to a local Citizens Bank branch in the same capacity.
Reached by the Rochester Beacon this month, Cunningham declined to comment for this article.
The two banks’ culpability hinges “largely, although not solely, through the actions of a high-ranking employee, Derline Cunningham,” plaintiffs’ attorney Ben Widlanski of Kozyak Tropin & Throckmorton in Coral Gables, Fla., wrote in a Mar. 28 court filing
But for Cunningham’s multiple false representations of the alleged Ponzi schemers’ bank balances to their chief source of operating funds, American Express, the fraudsters’ decade-long scheme would have been nipped in the bud, Widlanski told Larimer. That Santillo moved his accounts from Bank of America to Citizens when Cunningham changed employers underscores her importance to the scheme, the attorney added.
Relating details that he says Santillo told him in an interview conducted last year in Florida, Widlanski further asserted that Cunningham at one point extorted a bribe from the alleged fraudsters.
In the privately conducted interview, Widlanski says, Santillo, who was not under oath, freely shared details of the alleged Ponzi scheme’s operation.
Relating those details in the January court complaint, Widlanski wrote that “shortly after the individual defendants moved their accounts to Citizens, Cunningham requested that Santillo and Parris ‘loan’ her approximately $40,000, and stopped responding to their instructions to lie to American Express until payment was made.” Once Parris and Santillo paid Cunningham the sum she had requested, she immediately resumed her participation in their fraudulent scheme.
“The ‘loans’ were not recorded, no terms—even repayment terms—were discussed, there was no written loan agreement, no stated interest rate, and Cunningham never repaid Santillo. According to Santillo, he understood Cunningham’s request for a ‘loan’ to be a quid pro quodemand, to which he acceded in order to maintain her complicity and vital assistance.”
The Rochester class action follows a similar lawsuit filed last year but dropped by Widlanski’s firm.
“This is a Rochester case. It belongs in Rochester,” Widlanski explained to Larimer, who wondered why the case had been dropped in Florida and refiled in Rochester.
The importance of Cunningham’s involvement and the complicity of banks she worked for in the alleged scheme came fully into focus only when Santillo shared that information in the Florida interview, Widlanski told the judge. The interview took place after his firm had dropped the Florida class action, the attorney added.
The banks’ lawyers painted a different picture, countering with case citations that they said showed a clear precedent for not holding banks responsible for employees’ conduct.
Indeed, in one such case a federal court had thrown out a claim against a bank even though its own employee had committed the fraud, argued Bank of America lawyer Pamela Miller, a litigator with the New York City firm O’Meleveny & Myers.
If retail banks could be held responsible for losses suffered by non-depositors just because fraudsters do their banking with them, it would wreak havoc on the U.S. financial system, Miller said.
Larimer seemed inclined to favor the banks’ point of view.
He wondered: How many tens of thousands of employees might an institution like Bank of America have? How easy or even possible would it be for such an institution to know what every single branch manager is up to? Is a branch manager high enough on the chain of command to warrant holding a bank responsible? If banks do not have fiduciary responsibility for non-depositors, why should they be held responsible for the actions of a rogue employee?
The court’s obligation is to follow the law and the law says the class action should be dismissed, Bank of America’s Miller insisted.
Miller was not wrong, but this is a special case, countered Widlanski. Cunningham did more than merely help the alleged fraudsters carry out their scheme. She was a central player.
“You seem to be interpreting Ms. Miller’s position as being that banks can never be held accountable,” Larimer told Widlanski.
“I do think that is her position, but that’s not the point,” Widlanski replied.
Courts have an obligation to initially consider a plaintiff’s claims as valid. The proper time and venue to hash out the questions raised at the hearing would be later in a jury trial, he argued.
Larimer reached no conclusion but promised to return a decision as soon as possible.
In the meantime, said the judge, “I have plenty to chew on.”
Will Astor is Rochester Beacon’s senior writer.