Bank Must Face Claims of Propping Investor Fraud

TAMPA, Fla. (CN) - A company that claims it was defrauded of the $30 million it invested in unscrupulous HMO affiliates can sue a bank over alleged sham loans, a federal judge ruled.

Caledonian Bank & Trust Limited, as trustee for Vicis Capital Master Fund, accuses Fifth Third Bank of aiding and abetting fraud and civil conspiracy in the Middle District of Florida.

Vicis claims that Fifth Third provided sham loans to a defunct HMO named Quality Health Plans (QHP), its corporate affiliates, and its owners and directors, described in the court record as the Khans.

These loans allegedly misrepresented the state of financial affairs at the QHP entities to Vicis, which then invested $30 million with it by late 2009.

Vicis says Florida eventually discovered that QHP had engaged in a similar $10 million sham "loan" transaction with another institution to create phantom capital.

A state agency then liquidated QHP in November 2011, exposing the misconduct of the Khans and the QHP entities, according to the complaint.

Vicis says several members of the Khan family were indicted for insurance fraud after trying to hide the impairment of QHP's capital.

It was through the discovery process in a related lawsuit against the Khans that Vicis allegedly discovered the existence of the sham loans and letter of credit.

In its motion to dismiss, Fifth Third argued that aiding and abetting is not a recognized cause of action under Florida law.

U.S. District Judge James Moody disagreed Tuesday.

After finding that the claim indeed has a footing in the Sunshine state, Moody also said that Vicis has adequately pleaded the count so far.

Vicis properly alleged the existence of an underlying fraud, and says the bank knew of it and provided substantial assistance to advance the commission of the fraud, according to the eight-page ruling.

Moody reached the same decision on the conspiracy claim, finding that the complaint alleges an agreement between Fifth Third, the Khans and QHP to do an unlawful act - misrepresenting QHP's solvency and compliance with the minimum capital requirement. That in turn allegedly resulted in Vicis' $30 million loss.

The bank has until Oct. 1 to file an answer to the amended complaint.

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