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Zayed v. Associated Bank, N.A.

United States Court of Appeals, Eighth Circuit

January 10, 2019

R.J. Zayed, In His Capacity As Court-Appointed Receiver For The Oxford Global Partners, LLC, Universal Brokerage FX, and Other Receiver Entities Plaintiff - Appellant
v.
Associated Bank, N.A. Defendant-Appellee

          Submitted: May 17, 2018

          Appeal from United States District Court for the District of Minnesota

          Before SHEPHERD, KELLY, and GRASZ, Circuit Judges.

          GRASZ, CIRCUIT JUDGE.

         Over a period of several years, a group of scammers based in Minnesota swindled investors out of more than one hundred million dollars in a prolific Ponzi scheme utilizing numerous business entities. A receiver[1] was appointed to take charge of what assets remained in the business entities that were used to perpetrate the scheme and to recover any assets he could for the victims of the fraud. The Receiver sued Associated Bank, N.A., which provided banking services to some of the scammers' entities, accusing the bank of aiding and abetting the Ponzi scheme. At issue in this appeal is whether the district court[2] correctly concluded there was not sufficient evidence to reasonably infer the bank knew about and assisted the scammers' tortious conduct. Because a conclusion that the bank aided and abetted the Ponzi scheme could only be reached through considerable conjecture and speculation, we affirm the district court.

         I. Background

         From 2006 to 2009, five individuals - Trevor Cook, Christopher Pettengill, Jason Beckman, Gerald Durand, and Patrick Kiley ("the scammers") - perpetrated a Ponzi scheme that took in over $193 million from investors and returned only $49 million (all from new investors' money). See United States v. Beckman, 787 F.3d 466, 474 (8th Cir. 2015) (discussing the scheme in an appeal from some of the scammers' criminal convictions). The scammers used a number of business entities that went by several variations of names that included "UBS," "Universal Brokerage," "Oxford," "Crown Forex," and "Basel Group." See id. at 475, 488; Zayed v. Associated Bank, N.A. ("Zayed I"), 779 F.3d 727, 730 (8th Cir. 2015). They told potential investors that their investments would be held in segregated accounts, completely liquid, and invested in a currency exchange program through a Swiss company, Crown Forex, S.A. Zayed I, 779 F.3d at 730. Eventually, the scammers were caught and ultimately sentenced to lengthy prison terms for various crimes including wire and mail fraud and money laundering. See Beckman, 787 F.3d at 477.

         When the fraud was uncovered in 2009, the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission filed civil actions against the scammers and their entities. In those civil actions, the district court appointed a receiver, granting him the power to take control over the scammers' entities and assets and to bring legal actions in order to discharge his duties.

         In 2013, the Receiver filed suit against Associated Bank for allegedly aiding and abetting the torts of fraud, breach of fiduciary duty, conversion, and negligent misrepresentation. The allegations underlying these claims centered on one former Associated Bank employee, Lien Sarles. Sarles helped open accounts for the scammers and then serviced those accounts at the bank. The Receiver alleged Sarles knew about and assisted in the scheme.

         Later that year, the district court granted Associated Bank's motion to dismiss, concluding that the Receiver had not sufficiently pled a plausible claim that the bank aided and abetted the scammers' tortious conduct. On appeal, this Court reversed the district court's dismissal, concluding the Receiver's pleadings were sufficient to survive a motion to dismiss. See Zayed I, 779 F.3d 737.

         After remand and discovery, Associated Bank moved for summary judgment. The district court granted the motion, concluding there was insufficient evidence that Associated Bank knew of and provided substantial assistance to the scammers' tortious conduct. The Receiver filed a timely appeal.

         II. Discussion

         The Receiver argues on appeal that the district court erred in granting summary judgment to Associated Bank. Summary judgment is appropriate where a party shows "there is no genuine dispute as to any material fact" and the party "is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A dispute of fact is "genuine" if a factfinder could reasonably determine the issue in the non-moving party's favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factfinder's decision is reasonable if it is based on "sufficient probative evidence" and not on "mere speculation, conjecture, or fantasy." See Williams v. Mannis, 889 F.3d 926, 931 (8th Cir. 2018) (quoting Barber v. C1 Truck Driver Training, LLC, 656 F.3d 782, 801 (8th Cir. 2011). "We review an order granting summary judgment de novo." Oppedahl v. Mobile Drill Int'l, Inc., 899 F.3d 505, 509 (8th Cir. 2018).

         The Receiver's claims against Associated Bank are for aiding and abetting the torts of conversion, breach of fiduciary duty, fraud, and negligent misrepresentation - all under Minnesota law. Aiding and abetting is not an independent tort, but a theory of liability under which a party may be held jointly and severally liable for the underlying tort. See Leiendecker v. Asian Women United of Minnesota, 848 N.W.2d 224, 228 n.2 (Minn. 2014); Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 185-86 (Minn. 1999).

         Under Minnesota law, a plaintiff must show three things to hold a defendant liable for aiding and abetting a tort: first "the primary tortfeasor must commit a tort that causes an injury to the plaintiff," second "the defendant must know that the primary tortfeasor's conduct constitutes a breach of duty," and third "the defendant must substantially assist or encourage the primary tortfeasor in the achievement of the breach." Zayed I, 779 F.3d at 733 (quoting Witzman, 601 N.W.2d at 187).

         The parties do not dispute the first element, that the scammers committed torts. The question in this case is whether Associated Bank knew that the scammers were engaged in the tortious Ponzi scheme, and substantially assisted the scammers in achieving that scheme. See id. at 733.

         A. Knowledge of the Ponzi Scheme

         1. Actual Knowledge

         Under Minnesota law, the scienter (knowledge requirement) for aiding and abetting is "actual knowledge." Varga v. U.S. Bank Nat. Ass'n, 952 F.Supp.2d 850, 857 (D. Minn. 2013) aff'd, 764 F.3d 833 (8th Cir. 2014) (applying Minnesota law). The evidence necessary to sufficiently show actual knowledge "depends in part on the particular facts and circumstances of each case." Witzman, 601 N.W.2d at 188. "[W]here there is a minimal showing of substantial assistance, a greater showing of scienter is required." Id. (quoting Camp v. Dema, 948 F.2d 455, 459 (8th Cir.1991)). Courts consider "[f]actors such as the relationship between the defendant and the primary tortfeasor, the nature of the primary tortfeasor's activity, the nature of the assistance provided by the defendant, and the defendant's state of mind." Id.

         "While knowledge may be shown by circumstantial evidence, 'courts stress that the requirement is actual knowledge and the circumstantial evidence must demonstrate that the aider-and-abettor actually knew of the underlying wrongs committed.'" Varga, 952 F.Supp.2d at 857 (quoting Wiand v. Wells Fargo Bank, N.A., 938 F.Supp.2d 1238, 1244 (M.D. Fla. 2013)). A plaintiff must show more than "awareness of the conduct in question . . ., that it raised 'red flags,' . . . or even that it amounted to gross negligence," but must show that the defendant "was aware of the wrongfulness of the challenged conduct." Id. at 858 (citing Camp, 948 F.2d at 459, 463; Wiand, 938 F.Supp.2d at 1244; Witzman, 601 N.W.2d at 188).

         The summary judgment record contains no direct evidence Sarles or anyone at Associated Bank knew of the Ponzi scheme. In fact, all of the direct evidence was to the contrary. The Receiver's own expert witness agreed that "[there was] nobody at the bank who put this information together and determined there was a Ponzi scheme going on." Associated Bank's expert stated that he agreed with the Receiver's expert that "there is no one at Associated Bank who actually concluded . . . that the [scammers' entities] were engaged in a Ponzi scheme." David Martens, Associated Bank's regional security officer, testified based on his extensive law enforcement experience that he believed Sarles's actions were attributable to "sloppy banking" rather than anything "nefarious." Two of Sarles's coworkers testified that they did not observe anything that would indicate to them that Sarles knew about the Ponzi scheme. Ryan Rasske, Associated Bank's Director of Risk and Financial Crimes, testified that he had not uncovered any evidence that Sarles or anyone at Associated Bank knew of the Ponzi scheme. Furthermore, an employee of one of the scammers testified that she had no evidence Sarles knew of the Ponzi scheme. One of the scammers, Pettengill, said that Sarles was not part of the fraud. Another scammer, Cook, testified that Sarles "knew nothing about what was going on."

         Given this absence of direct evidence, the Receiver attempted to amass circumstantial evidence that he claimed showed that Sarles had actual knowledge of the Ponzi scheme. But none of the circumstantial evidence compiled by the Receiver points to anything more than "sloppy banking" by Sarles or "red flags" that, with the benefit of hindsight, should have prompted further investigation or inquiry. Even on this twenty-seven volume, six-thousand page record, the leap cannot be made to infer that Sarles or anyone at Associated Bank actually knew about the Ponzi scheme without resorting to speculation and conjecture. See Williams, 889 F.3d at 931 (discussing the summary judgment standard).

         Sarles first met Kiley, one of the scammers, around December 2007 when Sarles pitched him on switching his business's banking services to Associated Bank. Sarles, who held the position of assistant vice president at Associated Bank, had the primary job duties of "marketing, opening new commercial accounts, and providing account management and services to new and existing commercial customers." Sarles first opened an account for Kiley for the entity Universal Brokerage FX Management, LLC in January 2008. Between then and June 2009, Sarles opened a total of eight accounts at Associated Bank for Kiley and fellow scammer Cook for different entities.

         In June 2008, Sarles opened an account for "Crown Forex LLC" for Cook. The Receiver argues that the fact this account was opened in the name of a domestic entity shows that Sarles knew about the Ponzi scheme and was attempting to help the scammers avoid detection. According to Cook, he intended to open an account for Crown Forex, S.A., the Swiss investing entity, but Sarles suggested that he open it under the name of a domestic ...


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