"See No Evil, Face No Liability"

Today's headline is lifted from New York Times finance columnist Floyd Norris' piece about Ponzi schemes. While a single individual may be behind a particular scheme, the money raised has to pass through a bank. As Norris writes,

In such a scheme, money that is supposed to be invested is really used to line the pockets of the Ponzi promoter or to pay previous investors. A lot of money has to flow through bank accounts, and it flows in ways that differ from what the promoter tells investors is happening. Banks are in a unique position to notice what is going on before the money is all gone. 

But do the banks notice? And even if they do notice, do they have to take action, or do they have plausible deniability?

Generally speaking, the courts have sided with the banks. Hence, "See no evil, face no liability." So there's actually an incentive to turn away and not look too carefully. Sigh.

If regulators do not go after banks, the banks are usually home free. Some bankruptcy trustees for collapsed Ponzi schemes have tried to sue banks to recover money for defrauded investors only to have judges rule that because the trustee is standing in the shoes of the fraudster, such suits are not permitted. But when investors try to sue the banks, they can run up against rules limiting class-action suits and a Supreme Court decision saying that only the government — not victims — can bring suits contending that a bank, or anyone else, aided and abetted a fraud.  

So Norris is interested -- and so am I -- in a joint regulatory action filed by the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Financial Crimes Enforcement Network (part of Treasury), in which a total of $52.5 million in fines was levied against TD Bank for "failure to file suspicious activity reports related to the massive Ponzi scheme orchestrated by Florida attorney Scott Rothstein." A .pdf of the 23 Sept press release can be found here.

The press release quotes Financial Crimes Enforcement Network director Jennifer Shasky Calvery: "In the face of repeated alerts on Mr. Rothstein's accounts by the Bank's anti-money laundering surveillance software over an 18 month period, the Bank did not do enough to prevent the pain and financial suffering of innocent investors."

Mr. Rothstein's $1.2 billion Ponzi scheme (he has pleaded guilty to most charges and is currently serving a 50-year sentence) was more than usually egregious. And so was TD Bank's involvement.

TD Bank initially disclaimed any responsibility, and it bitterly fought a suit filed by Coquina Investments, which lost more than $30 million in the scheme. The bank is appealing a jury verdict that ordered it to pay Coquina $67 million in damages, including $35 million in punitive damages.... It later turned out that lawyers for TD had withheld evidence in the case and misled the judge in a number of instances. As punishment, the judge ordered the bank to pay Coquina’s legal fees. 

The bank has since settled other cases filed by victims. Altogether, the mess has cost it $500 million, according to a report in The South Florida Business Journal, although the bank declined to confirm the figure.

Now Norris is concerned -- and so am I -- that the joint SEC and FinCEN action does not represent "a new attitude on the part of regulators to try to force banks to pay attention to possible Ponzi schemes" but only a response to a particularly over-the-top "mess".