Stanford Ponzi scheme, did banks promote fraud breaching fiduciary duty?

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In Rotstan c. Trustmark Nat’l Bank, the plaintiffs sued banks for assisting Stanford and its entities regarding a Ponzi scheme. No. 3:09-CV-2384-N, 2022 US Dist. LEXIS 10332 (ND Tex. Jan. 20, 2022). Stanford and entities under its control sold fraudulent Certificates of Deposit (“CDs”) issued by Antigua-based Stanford International Bank Limited (“SIBL”). The CDs paid relatively high interest rates, but the SIBL claimed that it only used funds raised from CD sales in low-risk, high-return funds. In reality, proceeds from the CD were used to fund Stanford’s extravagant lifestyle and to repay previous investors. In this lawsuit, the plaintiffs allege that the defendant financial institutions provided banking services that aided and abetted the Stanford scheme. The defendants filed a motion for summary judgment on several claims, including knowing participation in breach of fiduciary duty. The court first considered whether there was such a claim in Texas:

As the only remaining derivative liability claim, the OSIC alleges that the defendants knowingly participated in breaches of fiduciary duty that harmed Stanford investors. The Court examines the legal sufficiency of such a request. Texas has long recognized a claim for knowing participation in a breach of fiduciary duty. See Kinzbach Tool Co. v. Corbett-Wallace Corp.., 138 Tex. 565, 160 SW2d 509, 514 (Tex. 1942). Recent decisions by state and federal courts support its continued vitality. See, for example, Meadows v. Hartford Life Ins. Co.492 F.3d 634, 639 (5th Cir. 2007); D’Onofrio Vacation Publ’ns., Inc., 888 F.3d 197, 216 (5th Cir. 2018); Taylor vs. Rothstein Kass & Co., 2020 US Dist. LEXIS 17435, 2020 WL 554583, at *6 n.4 (ND Tex. February 4, 2020); Hunter buildings. & Mfg., LP v MBI Global LLC436 SW3d 9, 15 (Tex. App.—Houston [14th Dist.] 2014, pet. refuse). At least one of these cases rejects the applicability of authorities invoked by defendants in the context of a knowing breach of fiduciary duty. Milligan, Tr. for Westech Capital Corp. vs. Salamone, 2019 US Dist. LEXIS 143577, 2019 WL 4003093, at *1-2 (WD Tex. Aug. 23, 2019). Based on the foregoing, the Court finds that the plaintiffs’ fiduciary claims are recognized under Texas law.

ID. The court held that the plaintiff could raise claims of breach of fiduciary duty by Stanford entities against Stanford:

No fiduciary duty was owed directly to CD investors, but the OSIC can sue on behalf of Stanford entities. Defendants do not deny that Stanford and Davis had fiduciary duties to Stanford entities (of which they served as officers, directors, or both). Rather, the Banks argue that none of these actors owed any fiduciary duty to the Named Plaintiffs as creditors of SIBL. The plaintiffs do not address this argument in their reply brief, and the Court considers this argument to have been abandoned. Nevertheless, OSIC, as assignee in receivership, may enforce fiduciary duties owed by Stanford and Davis to Stanford Entities, including through a knowing participation claim under Texas law.

ID. The court then considered whether the actions of the defendant banks were sufficient to establish participation in the fiduciary breaches. The court held:

The defendants object that their “routine” banking services cannot constitute substantial assistance. In support of this proposition, they rely on Fifth Circuit case law that “essential” transactions cannot rise to the level of substantial assistance. See, for example, Amacker v. Renaissance Asset Mgmt. LLC, 657 F.3d 252, 257 (5th Cir. 2011); Abbott v Equity Grp., Inc.., 2 F.3d 613, 621 n.24 (5th Cir. 1993). Amacker, for example, argues that the mere fact of executing commodity transactions on behalf of a third party does not constitute substantial assistance in the context of a request for aid and abetment under the commodity trading law. 657 F.3d at 252. Thus, the question is whether plaintiffs’ evidence suggests that defendants did more than facilitate “essential” financial transactions. This Court has already drawn a distinction between common services — which can rise to the level of substantial assistance — and purely routine services — which do not. Command 9 [21]in Kneese v. Pershing LLC., Civil Action No. 3:10-CV-1908-N (ND Tex. published November 14, 2012). And courts determining whether the conduct constitutes substantial assistance consider whether the alleged helper exercised professional judgment or discretion in providing services to the primary offender. ID. at 9-10.

Plaintiffs identify evidence that Defendants engaged with Stanford in a meaningful and non-routine manner that involved the exercise of substantial professional judgment and discretion. One of the defendants provided unusual “bagging” services for CD Investors’ checks. Several of the defendants arranged unusual loans or otherwise provided revolving credit to Stanford or its entities. And several of the defendants have lent their reputations to Stanford, allowing it to open up new relationships or avoid the scrutiny of other financial institutions with which it has become involved. Although the latter two examples can properly be characterized as routine banking services, the Court finds that – viewed holistically – the suite of services that each defendant provided to Stanford is sufficient for a reasonable jury to conclude that the defendants provided substantial assistance in support of the wrongdoing of Stanford or Stanford entities.

ID. Finally, the court considered whether the defendant banks had the requisite knowledge of Stanford’s breaches of fiduciary duty:

To succeed on a claim of knowing participation in a breach of fiduciary duty, a plaintiff must prove “(1) the existence of a fiduciary relationship; (2) that the third party was aware of the fiduciary relationship; and (3) that the third party was aware that it was participating in the breach of that fiduciary relationship. meadows, 492 F.3d at 639. The defendants do not dispute that Stanford and Davis had fiduciary duties to SIBL or that the defendants were aware of this fiduciary relationship. Rather, the defendants argue that the record fails to establish a genuine question of fact as to their knowledge of any conduct constituting participation in the severance of those relationships.

Cases dealing with claims of knowing participation in a breach of fiduciary duty establish that the third party defendant must have had actual knowledge of the breach. See, for example, CBIF Ltd. P’ship c. TGI Friday’s Inc., 2017 Texas App. LEXIS 3605, 2017 WL 1455407, at *16 (Tex. App. — Dallas 2017); Seven Seas Petroleum, Inc. v. CIBC World Mkts. Society., 2013 US Dist. LEXIS 101112, 2013 WL 3803966, at *14 (SD Tex. 2013). The courts have made it clear that a less culpable mental state, such as implicit knowledge, will not suffice. See Franklin D. Azar & Assocs., PC v. Bryant, 2019 US Dist. LEXIS 147393, 2019 WL 5390172, at *4 (ED Tex. 2019). However, as with a request for aiding and abetting under the TSA, a requester may prevail against a request for knowing participation with circumstantial evidence alone. See Franklin D. Azar, 2019 US Dist. LEXIS 147393, 2019 WL 5390172 at *4 (denying summary judgment based on plaintiff’s circumstantial evidence). Therefore, evidence that could support a reasonable conclusion one way or the other on the issue of actual knowledge will be sufficient to defeat summary judgment.

ID. The court then reviewed the evidence of each defendant bank and concluded that an investigator could reasonably conclude that he had sufficient knowledge of the breaches of fiduciary duty to be held liable for knowingly participating in the breach of fiduciary duty.


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