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Friday, June 14, 2024 | Back issues
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Millennium Ponzi Scam Isn’t a JPMorgan Problem

(CN) - A group of investors burned by the Millennium Ponzi scheme cannot sue JPMorgan Chase for allegedly aiding and abetting the fraud, the 9th Circuit ruled Tuesday.

The federal appeals court in San Francisco affirmed dismissal of a consolidated action that sought to hold JPMorgan Chase responsible for the alleged sins of its Washington Mutual subsidiary.

The Securities and Exchange Commission said in a 2009 complaint that Canadian attorney William J. Wise and his partners had duped 375 investor out of some $68 million since July 2004.

The scheme, operating out of Wise's Caribbean-based Millennium Bank, allegedly misled investors into buying high-yield certificates of deposit issued by subsidiaries in Switzerland, offering returns that were up to 321 percent higher than legitimate bank-issued CDs.

Wise originally started out in North Carolina, but moved the operation to Napa, Calif., after drawing suspicion. In Napa, Wise's associates, Jacqueline and Kristi Hoegel, would regularly deposit large checks in bulk at the Napa WaMu branch and immediately wire large sums to 'known banking and tax havens,'" the ruling states. Eventually, two WaMu employees began assisting the Hoegels, helping them to pass audits and install a cash-management transfer system in their office so they could make wire transfers without going through the bank, according to the ruling.

The Federal Deposit Insurance Corporation seized WaMu in 2008 as it unraveled, and JPMorgan Chase bought the troubled bank three days later. The Millennium Ponzi scheme didn't unravel until several months later. A receiver eventually took control of the Millennium companies after the SEC filed its complaint in 2009.

Soon after, four investors who lost money in the scheme sued JPMorgan Chase, claiming that Washington Mutual and later JPMorgan had helped Wise defraud them.

A San Francisco federal judge dismissed the case after finding that the plaintiffs had failed to exhaust their administrative remedies under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which governs cases involving FDIC receivership.

The court refused to find that "independent misconduct" by JPMorgan Chase saved the claims even if the claims against WaMu were barred.

A three-judge panel of 9th Circuit affirmed Tuesday, but for different reasons.

The panel agreed with the lower court that FIRREA governed WaMu's alleged actions; however, the plaintiffs' claims based on JPMorgan's "post-purchase actions" do not fall under that law.

Nonetheless, the panel found that the investors had failed to state a specific claim against JPMorgan, relying instead on "conclusory allegations."

"Each of plaintiffs' specific allegations concern prepurchase misconduct by WaMu," Judge Carlos Lucero wrote for the court, sitting by designation from the 10th Circuit. "The complaints do allege, however, that the Millennium Ponzi scheme continued until March 2009, several months after JPMorgan purchased WaMu."

But such "conclusory allegations regarding JPMorgan fall short of stating a claim for relief that is free from FIRREA's exhaustion requirements," Lucero added. "The sole allegation regarding JPMorgan is that unidentified 'practices continued' after acquisition; plaintiffs fail to allege a single specific act taken by the purchasing bank. Further, we note that each of the named plaintiffs who allege specific dates of their CD purchases transferred funds to the Millennium Ponzi scheme principals prior to WaMu's failure. Without any allegations explaining how the amorphous 'practices' of JPMorgan might relate to named plaintiffs' injuries-which had already occurred by the time WaMu failed - we cannot discern a properly pled claim based on the purchasing bank's misconduct."

The panel also affirmed the lower court's refusal to reconsider the issue and its denial of the plaintiffs' request to amend their complaint.

The plaintiffs' lead attorney, Niall McCarthy of Cotchett, Pitre & McCarthy, in Burlingame, Calif., did not immediately reply to a request for comment.

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