Judge sides with banks in Ponzi scheme case

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Former Citizens Bank and Bank of America branch manager Derline Cunningham’s alleged complicity in Perry Santillo’s $100 million Ponzi scheme does not make the banks liable for Santillo’s crimes, U.S. District Judge David Larimer has ruled.

Not ready to drop the case despite the adverse ruling, his firm is “exploring options,” says Ben Widlanski of Kozyak Tropin & Throckmorton in Coral Gables, Fla. The lawyer is leading a class-action push seeking compensation from the banks for more than 600 investors Santillo defrauded. 

In the meantime, the FBI has questioned Cunningham, says attorney Mike Burger of Santiago Burger in Pittsford, who is working on the class-action lawsuit. Buffalo-based FBI spokeswoman Maureen Dempsey declined to comment. 

While lawyers pressing the class action have tagged Cunningham as a central player in the Ponzi scheme, she has not been charged criminally or targeted as a defendant in any civil action. 

Until recently, Cunningham was employed by Wells Fargo Bank as a loan officer in the bank’s Pittsford office. She is no longer employed by that bank, Wells Fargo Home Mortgage Division spokesman James Hines wrote in an email last week. He declined to elaborate. Wells Fargo is not implicated in the Ponzi scheme.

Cunningham did not respond to a request for comment. 

In October, Santillo pleaded guilty to money laundering and mail fraud, admitting to bilking scores of investors to whom he and confederates sold essentially worthless securities locally and around the country. In the scheme, Santillo used money from earlier investors to pay dividends to later investors while siphoning off generous amounts to fund a lavish lifestyle.

In court testimony, Santillo said he and several partners initially planned to run a legitimate enterprise they would build by purchasing books of business from other investment firms. However, he said, they hit a snag when they unwittingly bought a business that was Ponzi scheme, and then decided to keep running the fraudulent operation.

Santillo and confederates in the Ponzi scheme are separately targeted by a Securities and Exchange Commission civil action. Through that case, which is being tried in a New York City federal court, the SEC is seizing assets from Santillo and other partners in the scheme. Court documents filed in the SEC case show that those asset seizures are not likely to yield funds sufficient to make investors in the Ponzi scheme whole.

If Bank of America and Citizens Bank could be held liable, defrauded investors would stand to recover more. But Larimer’s ruling would seem to pose a significant barrier to the class action. 

Widlanski’s firm first filed a class action targeting the two banks in a Florida federal court. After withdrawing the Florida case, Widlanski says, he learned from Santillo of Cunningham’s role in the Ponzi scheme and, based on that information, his firm decided to reprise the case here. 

Rochester is where the Ponzi scheme was based and therefore is where the class action should be tried, Widlanski argued to Larimer in a July hearing on the banks’ summary judgment motion. Cunningham’s central role in keeping the scheme alive puts the banks squarely in the class action’s sights, Widlanski added.    

Larimer was unconvinced.

“Because plaintiffs have failed to plausibly allege that the defendant banks and individual

defendants had an agreement to engage in fraud, or that the defendant banks took overt actions in furtherance of that agreement, plaintiffs’ conspiracy claims must be dismissed,” the judge wrote in a decision handed down in October.

In oral arguments at the July hearing and in court briefs, Widlanski contended that as a branch manager Cunningham played a key role in keeping the Ponzi scheme going by repeatedly lying to American Express by overstating balances Santillo’s companies maintained at local Bank of America and Citizens Bank branches and falsely assuring investors that the Ponzi scheme was legitimate. When American Express grew suspicious and launched an investigation into the Ponzi schemers’ activities, Cunningham again backed the fraudsters.

But for Cunningham’s repeated misrepresentation of Santillo’s companies’ bank balances, American Express would have cut Santillo off long ago, ending the Ponzi scheme, Widlanski asserts. That Santillo’s crew followed Cunningham from Bank of America to Citizens when she changed employers bolsters the contention that she was a key player in scheme, he maintains. 

The contention that Cunningham was a linchpin of Santillo’s fraud operation and that without her support the scheme would have collapsed is “simply too speculative and conclusory to rise to the level of plausibility,” Larimer ruled.

At the July hearing, Widlanski, citing information he said he learned from Santillo in an interview conducted in Florida after the first class action was withdrawn, told Larimer that Cunningham extracted a $40,000 payment in the form of a never-repaid loan from Santillo by refusing to certify Santillo’s companies’ inflated bank balances to American Express until Santillo forked over the cash.

None of the above shows that the banks or even Cunningham herself knew the Ponzi scheme was a fraudulent operation, Larimer ruled.

The judge conceded that the activities Widlanski cites “clearly establish that Cunningham performed a series of atypical activities, willfully misrepresented the individual defendants’ account balances to American Express, and demanded a ($40,000) loan from the individual defendant.” 

Nevertheless, he concluded, those “atypical” activities did not prove Cunningham knew she was abetting a Ponzi scheme.

Might the banks that employed Cunningham have noticed the Ponzi scheme even if Cunningham did not? Perhaps, but such negligence would not make them legally liable, Larimer ruled.

“A bank’s negligent failure to identify signs of fraudulent activity … even where such signs converge to form a veritable ‘forest of red flags—is insufficient to impute actual knowledge of ongoing fraud,” the judge wrote.

Dismissing the class action’s claims against the banks with prejudice, Larimer shut out the possibility that he might revisit the matter. 

While signaling that his firm does not intend to let the case die, Widlanski declined to specifically outline a strategy for pursuing it.

Will Astor is Rochester Beacon senior writer.

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