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Friday, March 1, 2024 | Back issues
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Firm, Bank Not Liable for Ponzi Scheme, Court Says

(CN) - A supervising securities firm and a bank are not liable for damages from a Ponzi scheme they were accused of facilitating, the 3rd Circuit ruled, overturning a judgment against them.

Robert Bentley, through his Pennsylvania securities firm Bentley Financial Services, began mismatching maturity dates, buying long-term certificates of deposit in the hopes that interest rates in short-term CDs would drop, and he could profit from the mismatch. The tactic is legal only if it's fully disclosed to investors, but shareholders said they were in the dark.

Bentley's decision to begin selling bogus CDs and issuing fake safekeeping receipts marked "the birthplace of Bentley's Ponzi scheme," according to the ruling.

When investors wanted their principal repaid, Bentley was forced to sell mismatched short-term CDs to new investors at higher interest rates than the ones on the original long-term CDs.

"Trying to escape the financial hole he was digging, Bentley pursued a strategy of aggressive maturity mismatching," Judge Thomas Ambro wrote. "He purchased long-term CDs, hoping that, if interest rates on short-term CDs went down, he could generate enough from the mismatch that he would no longer need to sell fictitious CDs to meet his obligations as they came due."

Florida securities firm Southeastern Securities was charged with supervising Bentley's securities transactions. But under the direction of owner Ted Benghiat, Southeastern only examined the non-CD aspects of Bentley's business, the ruling states.

Peninsula Bank and executive vice president Joseph Marzouca set up three warehousing transactions with Bentley and Benghiat in which Peninsula bought several million dollars' worth of CDs from Bentley in exchange for interest and a $100,000 fee split between Marzouca and Benghiat.

After the Ponzi scheme was exposed in September 2001, Bentley's receiver sued Benghiat and Marzouca, claiming they were responsible for letting the scheme go on "for as long as it did," because Marzouca had provided cash support and Benghiat had failed to properly supervise Bentley.

The federal appeals court in Philadelphia said the receiver had standing to sue, but found neither Benghiat nor Marzouca liable for damages to investors.

If Benghiat did breach a duty, it was to investors who bought the fake CDs, not to the company who sold them, Judge Ambro ruled. Benghiat did not have a duty to the company to prevent Bentley from defrauding investors, he added.

Also, the money put up by Peninsula Bank through warehousing transactions did not make Marzouca liable, because "there cannot be liability to a corporation for increasing short-term liquidity," even if the cash infusion put the company in a worse position, Ambro ruled. The cash influx did not cause the company's losses; Bentley did, the court ruled.

The 3rd Circuit panel reversed and remanded, instructing the lower court to rule for Benghiat and Marzouca.

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