Victims of fraud claim the banks ignored the unusual activity on the fraudster’s accounts. They allege that the fraudster used J.P. Morgan Chase TD HSBC and M&T banks to carry out the scheme because they would “look the other way and ignore the activity and notifications from Anti-Money Laundering monitoring system”
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A New York federal judge Friday tossed an investor suit alleging JPMorgan Chase & Co. and others enabled a $40 million Ponzi scheme carried out by Philip Barry, finding that the suit, first brought in state court, met the requirements for dismissal under the Securities Litigation Uniform Standards Act.
The suit alleged Barry used bank accounts at JPMorgan, M&T Bank Corp., HSBC North America N.A. and Commerce Bank, which was later acquired by TD Bank N.A., to conduct his illegal scheme, and that the banks had a fiduciary duty to investors to stop him.
But the plaintiffs brought their claims in New York state court under state law, opening them up to dismissal under SLUSA, which stipulates that class actions over misrepresentations in connection with the purchase, sale or holding of covered securities cannot be brought under state law, U.S. District Judge Margo K. Brodie ruled Friday.
“Each of plaintiffs’ claims against defendants is integrally tied to Barry’s underlying fraud,” Judge Brodie wrote. “This is sufficient to find that each of plaintiffs’ claims rests on a material misrepresentation or omission, within the terms of SLUSA.”
The plaintiffs, a group of 74 Ponzi scheme victims, first brought the suit in October 2011 in the Supreme Court of New York, alleging the bank aided and abetted Barry’s fraud. The defendants moved the case to federal court that December.
From January 1978 through February 2009, Barry operated Leverage Group, Leverage Option Management Inc. and Northern America Financial Services, through which he induced the plaintiffs invest their money, according to the complaint. Barry was convicted In November 2010 of one count of securities fraud and 33 counts of mail fraud.
The plaintiffs allege in their complaint that Barry, operating through Leverage, told investors that he would use their funds to trade in options and other securities, promised them investment returns, and fabricated fake quarterly statements. The plaintiffs say Barry used accounts at the defendant banks to conduct large dollar transactions by check, routinely made large cash withdrawals, and wrote at least 1,623 checks that were returned for insufficient funds between 2004 and 2009.
They claim the banks failed to fully comply with regulatory duties to institute programs to “know your customer,” monitor Barry’s account activity, investigate suspicious activity in the accounts, and take action in light of the evidence of illegal activity being conducted through the accounts.
When the banks moved to dismiss the suit on the grounds that it was precluded by SLUSA, the plaintiffs argued their claims did not fall under the law because the securities Barry claimed to have purchased during the scheme were not “covered securities.”
The plaintiffs, in a motion to remand the case to state court, said they would have invested even if Barry had not promised to buy securities, but Judge Brodie was not convinced.
“In support of the motion to remand, plaintiffs attempt to shoehorn their allegations into an entirely different factual pattern, arguing that Barry was merely operating a bank and not trading on behalf of depositors,” she said.
The plaintiffs are represented by Nicholas I. Timko of Kahn Gordon Timko & Rodriques PC.
JPMorgan is represented by Alan H. Scheiner, Adam David Weiss and Andrea Likwornik Weiss of Levi Lubarsky & Feigenbaum LLP.
The case is Marchak et al v. JPMorgan Chase & Co. et al., 11-cv-5839, in the U.S. District Court for the Eastern District of New York.
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