CHICAGO (CN) - An Indiana casino had no way of knowing that a frequent gambler was paying his debts by stealing millions from his company, the Seventh Circuit ruled.
Sheldon Player was the owner of Equipment Acquisition Resources, a machinery manufacturer and refurbisher, until company creditors discovered he was defrauding them.
Player and his wife, Donna Malone, alleged made $17 million in fraudulent transfers from the company, much of which Player then spent at Horseshoe Hammond Casino.
From February 2007 to August 2009, Player made over $8 million in payments to Horseshoe, and was known to sometimes spend over fifty hours per week at the casino.
Player also "walked with chips," leaving the casino with chips rather than cashing them in, or "passed chips," the practice of giving chips to a third party to cash. Both of these practices can be used to avoid triggering the $10,000 reporting requirement.
An investigation found that Player made false statements on his Horseshoe credit application, understating his debt by $2 million and overstating his salary by more than three times. Horseshoe was aware that Player misrepresented his debt, but still extended him credit, gradually reaching a limit of $450,000.
The casino also accepted payments from an account in the name of "Donna Malone doing business as EAR," despite knowing that it was a business account.
When the fraud was discovered, Equipment Acquisition Resources entered Chapter 11 bankruptcy, and shareholders elected William Brandt chief restructuring officer.
Brandt filed a motion to compel production of documents related to any internal investigation Horseshoe may have performed regarding Player's gambling activities, arguing that numerous "red flags" should have alerted Horseshoe that it was receiving fraudulent transfers.
But a federal judge denied the motion, and the Seventh Circuit affirmed the ruling Wednesday.
"We are not convinced that these red flags are sufficient to impose a duty on Horseshoe to investigate transfers from EAR to Player. Most of these red flags only relate to Player and lack a clear connection to EAR. Even Brandt's own experts testified that nothing about Player's gambling activities would have alerted Horseshoe to EAR's fraud," U.S. Circuit Judge Joel Flaum said, writing for the three-judge panel.
And even if Horseshoe had investigated Player, it could not have uncovered the fraud upon EAR, the court continued.
"At the time of these transfers, EAR's creditors and advisors, who had complete access to EAR's books and records, were unaware of the ongoing fraud and financial distress. It took FTI Consulting, a forensic accounting firm, nearly three months to discover the fraud," Flaum said.
The court said Horseshoe is an "innocent third party, not the money-washing transferee," and cannot be found responsible for closing its eyes to fraud upon EAR's creditors.
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