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US Bank Not Liable for Petters Ponzi Scheme

By Mark Wilson, Esq. on August 21, 2014 | Last updated on March 21, 2019

When is a bank liable for a customer's Ponzi scheme? Tom Petters started a company called Petters Capital, which he claimed purchased excess merchandise and sold it to companies like Sam's Club. Sounds great -- except he never did that. He faked purchase orders and paid old investors with the money he received from new investors. You know, like you do in a Ponzi scheme.

Petters defrauded a lot of big banks and investors in his $3.65 billion scheme. Palm Beach Funds, a private equity firm, lost $700 million, and it sure wasn't going to get it from Petters. Instead, it sued the bank where the money was kept in escrow before Petters transferred it to Palm Beach, on the theory that US Bank breached its fiduciary duties and committed all the kinds of negligence. The Eighth Circuit disagreed.

Here's Where the Bank Comes In

It's a pretty high bar, here. We're in Iqbal/Twombly territory, where "plausible" is still open for interpretation. Nevertheless, under any standard, Palm Beach Funds' attempt to hold US Bank liable is a real Hail Mary.

Geoffrey Varga, Palm Beach Funds' official liquidator, placed a lot of stock in the operation of a "direct payment system" where its money, once out of escrow, was transferred to a collateral account that was to be accessed by vendors and retailers. (Of course, this payment system was never followed because there were no vendors or retailers.) The direct payment system was also characterized as a request, not a requirement, so US Bank didn't breach any duties by not complying with a request.

That Depends on Your Definition of 'Plausible'

Central to Varga's argument was its allegation that US Bank "re-coded" transactions to state they came from vendors, not Petters' company. This claim, however, was contradicted by the record: in fact, US Bank had been listing Petters' company as the entity making transactions into the collateral account for four years. If US Bank had intended to conceal the true nature of the transactions, it was doing a pretty terrible job.

Varga's pleadings were long on allegations and short on facts: He claimed that "at unspecified times, unnamed US Bank employees made misstatements to unnamed individuals associated with the Palm Beach Funds," but naturally, this isn't The New York Times, where we can support an entire article with anonymous sources.

The court found that Varga's pleadings failed to state a claim under Twombly -- but really, he failed to state a claim under any circumstances. Palm Beach got duped to the tune of $700 million, it's going under, and US Bank has deep pockets. US Bank -- and many other large banks -- were just as duped as Palm Beach Funds.

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