(CN) - Wells Fargo must face claims that its predecessor helped the late Arthur Nadel pull off his $162 million Ponzi scheme, a federal judge ruled.
Nicknamed the "mini Madoff," Nadel was sentenced to 14 years in federal prison after pleading guilty to 15 counts of fraud connected to his massive, long-running scheme.
The Sarasota, Fla.-based hedge fund manager's arrest in January 2009 came just weeks after FBI agents charged Bernie Madoff with the largest financial fraud in U.S. history.
Both men were also committed to the Butner Federal Correctional Complex in North Carolina, but Nadel died there in April 2012 at age 80.
Nadel's decade-long scheme involved raising more than $350 million from investors through his management companies and siphoning those funds to his personal bank accounts.
Burton Wiand is the court-appointed receiver for Nadel's hedge funds: Scoop Real Estate LP, Valhalla Investment Partners LP, Victory IRA Fund Ltd., Victory Fund Ltd., Viking IRA Fund LLC and Viking Fund LLC.
In a 2012 federal complaint, Wiand accused Wells Fargo Bank and Ryan Best of concealing their knowledge of Nadel's fraud and helping him bilk investors.
Nadel's alleged misconduct occurred at SouthTrust Bank and its successor Wachovia, but Wells Fargo would be liable for such activity because it merged with Wachovia in 2008.
U.S. District Judge James Whittemore noted last week that Wiand's first complaint was partly dismissed for failure to state a claim, and that the receiver then filed a 76-page first amended complaint that was barred as an overly broad shotgun pleading.
To support claims in the second amended complaint that Wells Fargo and Best had actual knowledge of the Nadel scheme, Wiand specified that Nadel provided the bank with inaccurate information when opening accounts, that the bank should have recognized and been suspicious of Nadel's unusual transfer patterns, which involved commingling large amounts of cash.
Whittemore nevertheless dismissed the aiding-and-abetting claims because he found that the "red flags" Wiand cited cannot establish the bank's liability.
"Cases addressing the liability of banks for Ponzi schemes consistently hold that 'red flags' arising from suspicious activity giving rise to the presumption that the bank should have known about the Ponzi scheme are insufficient to allege aiding-and-abetting liability," Whittemore wrote (emphasis in original).
Whittemore refused, however, to nix negligence claims on behalf of the hedge funds Victory Fund Ltd. and Scoop Real Estate LP, because Wachovia owed a duty to those funds as its customers.
Whittemore dismissed negligence claims Wiand made against the bank related to the rest of Nadel's hedge funds, which were not customers of the bank. Wiand could not prove the bank had actual knowledge Nadel was diverting money from the funds, according to the ruling.
Wiand also lost his fraudulent transfer claims against Best, which argued that Nadel took out mortgage loans with Wachovia, and made payments on the loans, to defraud creditors during his Ponzi scheme. He green-lit such claims against Wells Fargo, however, after refusing to credit the bank's argument that the mortgage payments were not used to further Nadel's scheme.
The judge also upheld Wiand's unjust enrichment claim against the bank, finding that fees it charged in connection with the hedge fund accounts were sufficient to uphold the claim.
Whittemore also refused to strike allegations related to banking regulations and anti-money laundering laws.
"Upon consideration of the Second Amended Complaint as a whole, allegations concerning the regulatory scheme in which banks operate are not immaterial to the claims asserted, and no reason has been shown to invoke the 'drastic remedy' of striking those allegations," the ruling states.Follow @@cam_langford
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