The legal and reputational pummeling that TD Bank has been taking for what was found by a federal court to be knowing complicity in a customer’s money laundering and fraud scheme continues.
On Friday, August 31, before the Labor Day weekend, US District Court Judge Joan A. Lenard, in Miami, at the request of the parties ordered the dismissal of a case against TD Bank by New York-based Emess Capital, LLC. TD Bank agreed to settle the suit by paying Emess an undisclosed sum, dodging a trial in which the bank faced civil racketeering charges.
Emess had sued TD in May 2010 for $33.8 million, which it alleges was its net loss from a total of $60 million it had “invested” with TD customer, Scott Rothstein, a disbarred and now-imprisoned lawyer who scammed victims out of $1.4 billion in a Ponzi scheme. With court permission, Emess amended its complaint in May to allege that the bank had violated the federal Racketeer Influenced and Corrupt Organizations Act (RICO), which permits victims of racketeering to recover treble damages.
The Emess settlement takes one more case off the books for the huge global financial institution. It is one of many cases brought by victims of Rothstein’s fraud that the bank has faced since the scheme exploded into public view on October 30, 2009.
The Canadian bank has already paid, or has been found liable to pay, hundreds of millions of dollars in court losses or settlements with other Rothstein victims. One of them, Coquina Investments, won a $67 million jury verdict in Miami federal court last January. Of that sum, $35 million represented punitive damages the jury awarded to the Texas company.
In the aftermath of the Coquina trial, TD Bank settled with another collection of Rothstein victims, known as the Razorback Group, for a reported $170 million in February of this year.
In the overall scheme of things, these amounts are minor for TD Bank, an institution that has a net worth of $28 billion and assets of $650 billion. But the sums it has paid to the victims do not take into account the reputational harm it has suffered.
Absence of regulators is a mystery
A lingering question in all these Rothstein-related cases is the whereabouts of the Office of the Comptroller of the Currency, the primary United States regulator of the multinational institution. Now, one month away from the third anniversary of the explosion of the Rothstein mega-fraud, the OCC has yet to take any public regulatory action or to impose any penalty against the institution.
David Mandel, of Mandel & Mandel, in Miami, a former federal prosecutor, represented Emess and would have tried the case before Judge Lenard had it gone to trial He also represented Coquina Investments. The bank is represented by McGuireWoods.
The settlement follows a court-ordered mediation session in New York before Layn Phillips, a former US District Judge.
Rothstein used ‘independent verifier’ to make conning of victims credible
Emess Capital, LLC is an investment group based in Brooklyn. Its investors were first introduced to Rothstein in June 2009 by Michael Szafranski, an accountant and Rothstein associate, who lured investors to the scheme acting as an “independent verifier,” according to the Emess complaint filed by Mandel.
The entire settlement was sealed by Judge Lenard at the request of the parties.
Settlement with Emess may have topped $100 million
Although the amount of the settlement was not disclosed, the tea leaves surrounding the case and reliable factors from the other cases that the Rothstein fraud spawned lead to the logical and probable conclusion that TD Bank will pay nearly $100 million to be rid of the Emess claim.
First, Mandel was armed with the $67 million Coquina trial victory in which the jury awarded more in punitive damages, $35 million, than Mandel requested in actual damages, $32 million.
Second, Judge Lenard’s approval of Mandel’s request that he be allowed to seek treble damages under RICO gave him an additional tool to augment the novel “aiding and abetting fraud” count that worked well in the Coquina case. The potent federal RICO weapon would have allowed the jury to triple the $34 million in actual damages the Emess complaint alleged.
In the aftermath of the Coquina case, Mandel obtained a finding by US District Judge Marcia Cooke that the bank knew of the Rothstein fraud while it was underway and provided substantial assistance to Rothstein in his scheme. Whether the Emess jury would have been able to learn about this is an open question, but the finding would likely have helped Mandel in arguing motions and suggesting jury instructions to Judge Lenard.
TD management, employee actions are financial crime textbook training fodder
The Emess complaint alleges that TD management-level employees in South Florida helped direct the Rothstein scheme is many ways, including:
- directing bank employees to clear Rothstein deposits almost instantly, in violation of TD policy,
- directing employees to conduct investor “shows” with false letters on TD Bank stationery and false account balances for Rothstein to use in deceiving his “investors,”
- directing that deposits be “released” to Rothstein from wire and fraud department review, despite money laundering and fraud alerts that were sounding,
- directing that new accounts be opened without complying with TD’s “New Application Management System” and know your customer requirements,
- directing the opening of new accounts without determining their purpose to guard against fraud and money laundering,
- directing the transfer of money between lawyer trust accounts and which were being operated in violation of TD policy,
- directing employees to cover overdrafts in Rothstein accounts by transferring funds between lawyer trust accounts,
- directing employees to give Rothstein and others bank account information by e-mail in violation of TD policy,
- failing to inform Rothstein victims of insufficient funds in their accounts that would enable them to withdraw their money,
- providing “lock letters” to Rothstein victims purporting to restrict activity in their accounts.
Rothstein cases lay groundwork for new liability risks for financial institutions
The cases arising from the Rothstein fraud against TD Bank have established, for the first time, that a financial institution may be held liable for the losses suffered by the victims of a money laundering and fraud scheme of its customers if it ignores the mandates of its anti-money laundering and fraud compliance programs.
The trial transcript in the Coquina Investments case against TD Bank, including the jury instructions Judge Cooke gave, and the pleadings and court hearing transcripts in the Emess case, may come to serve as a template for fraud victims and their lawyers throughout the United States.