Time to Pay for the Ponzi, Receiver Says

LOS ANGELES (CN) — A court-appointed receiver sued City National Bank and a senior vice president and branch manager, claiming he oversaw one of one of the biggest Ponzi schemes in California history and eased out of it before the $400 million scheme collapsed.

From the late 1990s until 2014, Nationwide Automated Systems pulled off a massive con, promising investors 20 percent annual returns for buying ATM machines at $12,000 to $19,000 apiece. The company claimed more than 31,000 machines had been purchased, generating millions each month, though only about 250 were ever bought.

The only real income came from new investors and after the scheme collapsed, Joel Gillis and Edward Wishner, who ran NASI, were sent to federal prison: Gillis, 75, for 10 years and Wisher, 77, for nine years. They also were ordered to pay nearly $125 million in restitution.

On Wednesday, the court-appointed receiver for the NASI scam sued City National Bank, its corporate parent the Royal Bank of Canada, and Patrick Fitzwilliam, a senior vice president and manager of its Woodland Hills branch. Receiver William J. Hoffman also sued Fitzwilliam's wife, wife Betty Saleh Fitzwilliam, in Superior Court.

The 39-page lawsuit claims that among other things, Fitzwilliam soothed investors' fears and deterred internal investigation.

Hoffman claims in the nine-count complaint:

That Fitzwilliam wrote a recommendation letter for NASI, stating that it maintained a balance of more than $4 million, when it did not.

That in the spring of 2009, NASI told a concerned investor to speak with Fitzwilliam, who told the investor that NASI was receiving nearly $1 million each month from the thousands of machines it owned, though it did not.

That in 2013, when NASI was short of money, he tried to get the company on the stock exchange in London using GXG Markets, a stock exchange known for underwriting fraudulent securities. Fitzwilliam wrote a letter to the president of GXG Markets, saying: "To date, we have never experienced any issues or problems with any of their accounts and enjoy having their relationship here at City National Bank."

That Fitzwilliam hid problems from auditors. For instance, when City National Bank's compliance department asked for the number, location and ownership of the ATMs, he made it up.

That he hid bounced checks from being detected and delayed doing anything to stop the problems, even after the SEC began investigating.

Fitzwilliam and his wife put $360,000 of their own money into the Ponzi, Hoffman says, to boost NASI's coffers when it was running low. They cashed out in 2009, getting $240,000 back out after a similar Ponzi scheme involving ATMs was uncovered in Manhattan and the two men behind it faced nine federal counts of wire fraud. Before the NASI con fell apart in 2014, Fitzwilliam and Saleh got their remaining $120,00 back as well, according to the complaint.

Hoffman says the fraud should have been easy for the bank to recognize. Deposits from investors came in the same amounts, typically $12,000, but sometimes $19,000, while deposits from legitimate ATM service providers were lacking. Despite this, thousands of "rent" checks were going out to investors each month.

"Even a cursory review of the account history readily revealed that legitimate ATM transaction revenue represented only a tiny fraction — less than 2 percent — of NASI's actual revenue," the complaint states.

The bank failed to act even after the SEC filed an enforcement action against NASI and others for the Ponzi scheme and placed CNB on notice on Sept. 18, 2014, Hoffman says. Not only did the bank fail to investigate, it didn't discipline Fitzwilliam either.

"This was fraud, plain and simple," said Debora Vrana, City National Bank's senior vice president for media relations. "Investors were misled, and so were we. Beyond that we do not comment on pending litigation."

Fitzwilliam and his wife, who "is a sophisticated violator of investment law in her own right," have a history, the complaint states. Saleh was a licensed investment adviser, starting in 1991 at UBS Paine Webber before making a few jumps and winding up at Wedbush Morgan Securities, where she lost her license for falsifying and destroying documents, along with other securities laws violations. To evade the impending civil judgments, Saleh and her husband fraudulently transferred assets to her father, Hoffman says.

The couple have other legal problems. A similar class action suit, filed on March 18 in Los Angeles Federal Court, includes charges of financial elder abuse. Those plaintiffs estimate the class has 1,700 members.

Neither Fitzwilliam nor Saleh could be reached for comment.

Hoffman seeks at least $125 million in damages for negligence, aiding and abetting fraud, conspiracy to commit fraud, breach of fiduciary duty and conversion.

He is represented by Michael Newhouse of the Newhouse Law Group and Thomas Girardi with Girardi Keese. Neither replied to emails seeking comment.

City National Bank is represented by J. Michael Hennigan with McKool Smith.

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