Wells Fargo Settles Florida Ponzi Case For $3.175 Million
Just before a jury was set to deliberate following a 16-day trial, Wells Fargo agreed to pay $4 million to settl claims it aided and abetted a Florida Ponzi scheme that caused tens of millions of dollars in losses to thousands of victims. Jonathan Perlman, the receiver appointed over companies previously operated by George Theodule, reached the settlement with Wells Fargo over claims that Wachovia, a bank purchased by Wells Fargo, turned a blind eye to a massive Ponzi scheme conducted by George Theodule that targeted the Haitian community and caused tens of millions of dollars in losses. The settlement is notable not only because of the historic difficulty in holding financial institutions liable for their involvement in Ponzi schemes, but also because it will allow Perlman to begin distributing funds to Theodule's defrauded investors.
The Scheme
Theodule owned and operated several companies, including Creative Capital Concept$, LLC ("Creative Capital") and Creative Capital Consortium, LLC ("CCC"). Using these companies, and a variety of other entities and investment clubs he formed, Theodule told potential investors in the Haitian community that he was a financial expert and could double their money in just 90 days. As if these exorbitant returns were not enough, Theodule also told potential investors that part of his trading profits were used for a variety of humanitarian purposes, including the funding of start-up businesses in the Haitian community as well as contributing to business projects in Haiti and Sierra Leone. Based on these representations, Theodule is said to have raised more than $30 million from as many as 2,500 investors from July 2007 to December 2008.
However, authorities alleged that Theodule's claims of trading success were completely false, and that in reality, Theodule was operating a massive Ponzi scheme. Theodule's trading records showed trading losses of at least $18 million, and the remainder of investor funds were diverted to support Theodule's lavish lifestyle that included exotic car collections, motorcycles, rings, and even trips to Vegas. Theodule wasarrested in August 2013 and was later sentenced to a 12-year prison sentence after pleading guilty to a single count of wire fraud.
Wells Fargo's Involvement
Theodule initially maintained a banking relationship with Washington Mutual ("WaMa"), but began looking for a new bank after WaMu informed Theodule his accounts would be closed due to suspicious banking activity. Thereafter, Theodule moved his accounts to Wachovia (which was later acquired by Wells Fargo) where he proceeded to open thirty-six accounts in the ensuing five weeks. Significant investor funds began pouring into the accounts, which Wachovia classified as "investment business" accounts, and Theodule also began making large withdrawals of investor funds. Perlman alleged that Wachovia ignored obvious red flags, failed to conduct the requisite due diligence, and even made special accommodations for Theodule's benefit including the delivery of large amounts of cash through the drive-through window. Perlman alleged that internal bank documents showed the bank's knowledge of suspicious activity, including a decision to freeze one of the accounts that essentially acted as a funnel for investor deposits to Theodule's main account. This freeze was subsequently removed four days later after a Creative Capital employee faxed the bank a business plan.
From May 9, 2008 to July 31, 2008, Theodule deposited over $10 million while simultaneously withdrawing a similar sum. On July 24, 2008, Wachovia informed Theodule's wife, who was President of one of Theodule'scompanies, that it was closing several accounts on the basis that there was:
“no evidence of any investing going on and that funds were merely washing through the account from hand to hand.”
Most of the accounts were closed in the ensuing weeks.
Litigation
Perlman sued the bank in December 2010, later amending the complaint to assert various causes of action including aiding and abetting breach of fiduciary duty, aiding and abetting conversion, negligence, wire transfer liability, and recovery of fraudulent transfers. The court later dismissed the negligence, wire transfer liability, and aiding and abetting fraudulent transfer claims, but allowed the remaining counts to survive. However, the court later granted Wells Fargo's motion for reconsideration on the basis of several decisions finding no liability on the part of financial institutions in similar scenarios, and dismissed all claims.
Perlman successfully appealed this decision to the Eleventh Circuit Court of Appeals, which found thatPerlman had adequately alleged a "plausible inference of actual knowledge by Wells Fargo of the Ponzischeme which it then aided and abetted by permitting the fraud to continue through the use of its accounts after it had actual knowledge of the scheme.” A trial took place on April 20, 2015, lasting for over two weeks before the parties reached a settlement on the eve of jury deliberations.
The settlement comes on the heels of similar settlements reached by Perlman with other financial institutions tied to Theodule's scheme, including a $2.75 million settlement with Bank of America and a $1.25 million settlement with TD Ameritrade. Perlman also has a pending lawsuit against OptionsXpress in which he is seeking $13.9 million.
The settlement is noteworthy as it marks one of the largest recoveries from banks in Ponzi litigation. Additionally, an attorney representing Perlman announced that the funds realized from the settlement would allow the receiver to begin returning funds to victims through a claims process.
The Receiver's website is here.
A copy of the Receiver's amended complaint is below: