Banks seek summary judgment in eight-year-old Ponzi scheme class

Steve Korris May 1, 2009, 1:24am


South Carolina lawyer Fred Thompson claims Wells Fargo and Fifth Third banks should have stopped a Ponzi scheme involving bond issues for nursing homes, but in eight years he hasn't produced any evidence that the banks knew about the scheme.

Now the banks seek summary judgment from Madison County Circuit Judge Daniel Stack, arguing that their role as indenture trustees didn't involve oversight.

At a hearing on March 24, Fifth Third's Scott Kane said Thompson sued the banks because he couldn't recover from those who carried out the scheme.

"The problem is, all the bad guys are gone," Kane said. "The people who actually did the bad acts are gone.

"That doesn't mean, however sympathetic the plaintiffs are, that you look around and say, who's left? Another innocent party that's a bank."

He said, "Let's get the money from them because banks have lots of money. That's not the law.

"Banks don't have lots of money these days either."

In 2001 Thompson sued Marion Bass Securities and 30 other defendants in connection with seven bond issues for nursing homes in Wisconsin, Indiana and Michigan.

The nursing homes had defaulted in 1998, causing a loss to bond holders that Thompson estimates at $39 million.

Thompson's lead plaintiff, Al Kellerman, moved to certify a class action on behalf of 649 investors in 2,013 transactions.

Through the years bankruptcies and settlements have trimmed the list of defendants.

Robert Mitchell, attorney for a Chicago nonprofit group that sponsored the nursing homes, frustrated Thompson's claim by dying.

Stack hasn't ruled on class certification, and at his hearing he invited lawyers to argue that before debating summary judgment.

"I'm talking about figuring out a way to get in somebody's pocket and take their money and make off with it in the night," Thompson said.

"The first one led to the second to the third to the fourth to the fifth to the sixth and on the seventh one they took the money and they bellied them all up at the same time."

Thompson said the banks violated pre-default duties and post-default duties.

"Of course they have post-default default issues here," he said.

Stack said, "You still have to show that these indentures trustees had knowledge of it. Is that correct?"

Thompson said, "Yes sir."

Stack said he would try to get an order out in the next few weeks.

He turned to summary judgment and Schroeder said, "These bonds that we have talked about are unrated risky bonds."

She said that in Indiana trust proceedings and Wisconsin receivership proceedings, courts blessed everything Wells Fargo did.

She said Thompson alleged that Wells Fargo possessed actual knowledge of an organized plan to divert and commingle funds for private profit.

"There has been no evidence that my client had actual knowledge and that it was part of any conspiracy or Ponzi scheme as Mr. Thompson called it," Schroeder said.

She said entities are no longer in business but individuals are available to be deposed.

"As long as payment was being made Wells Fargo didn't care who made it," Schroeder said.

Kane said, "We were part of the first transaction and nothing else."

"There is no fact whatsoever in the record that we participated in anything ongoing much less an ongoing scheme," Kane said.

"Fifth Third didn't steal money. Fifth Third didn't get any money as part of this scheme. It didn't get any Ponzi funds from investors."

Kane said it was entitled to modest fees most of which it waived in Indiana court.

Thompson said, "There is plenty of evidence that the train was going to derail later."

"If in fact they had done their job most of these bondholders would not have suffered the loss that they suffered," Thompson said.

He said Wells Fargo gained information day by day and project by project.

He said Kane made a fascinating argument.

"I am entitled to ignore all that," Thompson said. "I didn't know it and even if I knew it I am entitled to write a bond for anybody that I want to.

"Once you know something, you can't not know it."

Stack said, "Two things, Mr. Thompson. First of all, you allege that these banks knew that this was going on. Is there evidence of that other than just the bare allegation?

"Number two, is it your position that as soon as they knew – or do you have a 'should have known' standard? But once they knew, that their duties changed under their indenture?"

Thompson answered the second question but not the first.

"Certainly their duties with regard to the ongoing promotion and formation change immediately," Thompson said.

Stack said, "What were they supposed to do?"

Thompson said, "First of all the future promotion is not covered by an indenture. They would have an obligation to withdraw.

"Gilmore and Bell actually refused to participate in the Michigan undertaking because they didn't like the smell of it."

Gilmore and Bell, one of the remaining defendants in the suit as bond counsel, had sent Dean Nichols to the hearing for a contingency like this.

"Judge, I object," Nichols said. "They were asked to participate in another bond and they declined.

"There is no evidence as to why they declined."

Thompson said, "I withdraw the part about the smell test."

He said Fifth Third should have exercised requirements "to invoke various indentured trustee remedies with regard to finances which would have reverberated and would have protected the downstream purchasers."

He said the numbers underlying the Michigan bond issue were stretched.

Stack asked if the bank had an obligation to investigate that.

Thompson said no.

Schroeder and Kane each grabbed a last chance to challenge Thompson.

Schroeder said, "You asked Mr. Thompson, is there any evidence of what the banks knew? He never answered your question."

Kane quoted Thompson's crack about writing a bond for anyone.

"That's the fundamental disconnect here," Kane said. "Fifth Third is not the writer of the bond."

"We're not the ones calling people up on the phone and saying buy this bond."

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