Bank Sued for Profits From Ponzi Scam

MADISON, Wisc. (CN) – The receiver for an $80 million Ponzi scheme sued Security Financial Bank for any profits it made from the scam.
     Plaintiffs Patrick Finn and Lighthouse Management Group, receiver for First United Funding LLC and Corey N. Johnston, sued Security Financial Bank in Federal Court.
     Johnston, of Lakeville, Minn., pleaded guilty to running the Ponzi scheme and in 2011 was sentenced to 6 years in prison for bank and tax fraud.
     Johnston ran the $80 million scam since 2002, “by overselling participations, selling loan participations in loans that did not exist, and by engaging in other fraudulent conduct,” the complaint states. “This conduct enabled First United Funding to make payments to Security Financial Bank, including when borrowers were in default on their loans, and to support Johnston’s lavish lifestyle.”
     Johnston sold more than 100 percent participation in at least 10 loans arranged through First United Funding, the receiver said. Johnston sold loan participations to banks after selling them to other banks.
     Lighthouse Management Group was appointed receiver of First United Funding and Johnston’s non-exempt assets. Minnesota’s Dakota County Court authorized the receiver to “investigate and pursue any and all claims that First United or the receiver may have against any third party, including but not limited to, fraudulent transfer and illegal distribution claims.”
     Lighthouse claims that Security Bank’s profits from First United Funding and Johnston’s “criminal enterprise constitute fraudulent transfers as to the receiver, First United Funding, and First United Funding and Johnston’s creditors, who are the victims of the Ponzi scheme. These victims had claims at the time the Receiver was appointed in excess of $90,000,000. Accordingly, the receiver respectfully requests that this court enter judgment avoiding the Security Bank’s profits so that funds may be recovered by the receiver in order to compensate First United Funding and Johnston’s creditors.”
     Lighthouse previously sued Security Financial Bank in Dakota County Court, in an identical complaint, to preserve its claim from expiring under the statute of limitations.
     Lighthouse has received a judgment of $1,235,388 from a lawsuit against Alliance Bank in Dakota County Court.
     Johnston is serving his sentence in a federal prison in Duluth. He is set for release in August 2016.

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