Regional Bank Must Face Suit Over Ponzi Scheme

(CN) - A federal judge in Minneapolis refused to dismiss a lawsuit against Associated Bank in which the Green Bay, Wisconsin-based financial institution is accused of helping a convicted felon and others carry out a $79 million Ponzi scheme.

In an order issued on Tuesday, U.S. District Judge David Doty ruled that R.J. Zayed, a receiver appointed to located assets from the fraud scheme, can continue to press his case against the bank because its former associate vice president facilitated the alleged activities.

According to court documents, Trevor Cook, Patrick Kiley, and others allegedly used corporate entities that guaranteed investors lucrative returns via foreign currency trading with a Swiss company, Crown Forex S.A.

In 2007, these receivership entities opened accounts with multiple financial institutions, including at least seven with Associated Bank N.A., whose then-Associate Vice President Lien Sarles falsified documents to mask the true nature of the accounts, the complaint states.

Sarles told Cook and Kiley to open an account in the name of Crown Forex LLC - a fake, domestic entity - rather than Crown Forex S.A., to avoid regulatory issues, the receiver claims.

Associated Bank then allegedly prepared an account application stating that it got the LLC's documentation from a "[r]eport from a state registration website," as well as another form calling Crown Forex a "limited liability company recognized under the laws of Minnesota."

Over the next two years, the receiver says, investors deposited over $79 million, which Sarles then helped Cook and Kiley transfer to other accounts related to the scheme.

Sarles allegedly approved over $3 million in transfers to Cook's personal accounts, despite knowing Cook had no signatory authority over the account, the complaint states.

Even after Swiss authorities froze the S.A. accounts, Sarles kept approving the transfers, as well as a $600,000 withdrawal Cook made on June 25, 2009, to buy a yacht, the receiver says.

Around the same time, Associated Bank prepared $3.2 million in cashier's checks that included inaccurate remitter information, according to the complaint..

The U.S. Securities and Exchange Commission brought civil actions against Cook, Kiley, and others in Minneapolis federal court on Nov. 23, 2009.

Chief U.S. District Judge Michael Davis then appointed Zayed, a former assistant U.S. Attorney, as receiver for the Oxford Global Partners LLC, and the other receivership entities.

Cook pleaded guilty and Kiley was convicted by a jury for their roles in the scheme.

After Zayed recused himself from the matter on April 4, 2013, Davis authorized Tara Norgard, Brian Hayes and Russell Rigby to act on the receiver's behalf.

The receiver filed suit later that month, alleging claims for aiding and abetting fraud, breach of fiduciary duty, conversion, and false representations and omissions.

The court dismissed the action five months later, for failure to adequately plead knowledge or substantial assistance on the part of Associated Bank.

But the Eighth Circuit reversed and remanded the case, prompting Associated Bank to again move to dismiss it.

In denying the motion on Tuesday, Judge Doty tossed aside the claim that pari delicto - the principle that "a plaintiff who has participated in wrongdoing may not recover damages resulting from the wrongdoing" - bars the action.

"'Because this case involves a Ponzi scheme, the receivership entities are considered victims of the fraud and thus creditors of the Ponzi scheme,'" Doty wrote, quoting Davis' June 22, 2012, opinion. "Thus, it would defeat one of the purposes for which the receiver was appointed to bar this action based on in pari delicto."

Doty also rejected the claim that argues that res judicata bars the suit because the receiver stands in privity with plaintiffs in a similar case dismissed in Wisconsin federal court.

In that case, Grad v. Assoc. Bank N.A., "the plaintiff investors were seeking recovery on their own behalf," Doty wrote. "In contrast, the receiver 'represents the interest of the compan[ies] in receivership.' Thus, the receiver is pursuing this action to redress injury to the receivership entities, even though doing so will necessarily benefit the individual investors. This difference in interests is sufficient to preclude a finding of privity."

In response to the ruling, Norgard said on behalf of the receiver, "We are pleased with the court's order denying Associated Bank's motion and look forward to litigating this case."

Associated Bank's VP and Public Relations Manager Jennifer Kaminski said "At this time, we cannot provide more detailed comments due to the pending litigation."

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