R.J. Zayed v. Associated Bank, N.A.

913 F.3d 709

• Court: Court of Appeals for the Eighth Circuit
• Decided: January 10, 2019
• Docket: 17-1250
• Status: Published

Opinions

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 at 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, 106 S.Ct. 2505 , 91 L.Ed.2d 202 (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 limited liability company. Cook explained that he did not think Sarles thought this was improper or fraudulent:

[Sarles] certainly understood it was ... a different entity, but ... I don't think that he thought there was a fraud going on. ... I think it's common that businesses have all kinds of holding companies and sub entities and different entities. ... [W]e told him that ... the Crown Forex, LLC account was part of Crown Forex, and it was on their books, so I'm not so sure I'd say [Sarles] knew something, you know, fishy was going on.

Sarles himself testified that he believed that in order for foreign business entities to open a bank account, "they have to have a domestic entity." He was merely following policy for foreign-owned corporations, and nothing in the record suggests Sarles thought that it was in any way illegitimate or fraudulent to open the Crown Forex account under the name of a domestic entity.

The Crown Forex LLC account was opened as a "checking/money market" account. The Receiver argues that opening this type of account was intended by Sarles to help the scammers avoid detection. He claims that Sarles should have selected an account type that indicated fiduciary status or that it held investor funds. But the Receiver has not pointed to anything in the record that shows that Associated Bank had such specific types of accounts, much less policies requiring their use. In fact, the portfolio specialist who actually prepared the account opening form selected 3 the "checking/money market" option from a list of account types that also included "savings, time deposit, [and] loan account." The record does not support the claim that the Crown Forex account was nefariously opened as a checking account by Sarles or anyone else at Associated Bank to avoid detection and further the Ponzi scheme.

The Receiver also places great emphasis on the fact that Sarles opened the Crown Forex LLC account for Cook without receiving proof that the company was registered with the Minnesota Secretary of State. Sarles received all the necessary documentation, except for the proof of registration, but did receive an application for articles of incorporation which he was told was being submitted to the state. Sarles testified that he:

receiv[ed] the application that was completed that was en route to be filed with the Secretary of State, therefore, the rapport and trust that I believed I had, I was providing above and beyond customer service to execute the client's request by opening up the account with the assumption I'd be receiving the state certificate within that two week period or so it takes to generate from the Secretary of State.

The account opening form, under the section for "documentation provided," listed "[r]eport from a state registration information website," although the specialist who opened the account was not sure if she typed that response or selected it from a drop-down menu as "the one option that closest describe[d] the one item [of documentation] that we ha[d]." Sarles did not follow up on the missing paperwork. He said that after the Ponzi scheme was uncovered, he learned that Crown Forex LLC was never registered with the state. Of the eight accounts opened by the scammers at Associated Bank, only the Crown Forex LLC account and an account for Basel Group LLC were opened without certifying that the entities were registered with the state. Concluding that Sarles opened the Crown Forex and Basel Group accounts because he knew that Cook and others were engaged in a Ponzi scheme, rather than simply out of an effort to please an important client, would require speculation and is not a reasonable inference.

The Receiver also emphasizes that Sarles socialized with the scammers. The precise extent of that socialization is disputed, but none of the evidence supports an inference that Sarles learned about the Ponzi scheme through it. Interestingly, the Receiver also resorts to arguing that Sarles had knowledge of the Ponzi scheme because the scammers would sometimes quote lines about greed from movies like Wall Street and Boiler Room . This argument borders on absurdity and illustrates the lack of meaningful evidence that Sarles had knowledge of the Ponzi scheme. Quoting lines from movies about greed and scheming does not reveal one to be running a Ponzi scheme any more than quoting lines from The Godfather reveals one to be a mobster.

The receiver also claimed that Sarles duped a contractor who worked for the scammers into signing a blank account opening form. This assertion is unsupported by the record. The contractor never claimed the form was blank or that he was misled. The form he signed made him a signatory so he could cash checks and get a company credit card, as he had with their Wells Fargo account, in order to purchase supplies for the maintenance of the mansion in which the scammers conducted their business.

Another basis for the Receiver's claim that Sarles knew about the Ponzi scheme is the allegations by one of the scammers that Sarles was present at certain meetings. Pettengill claimed that around April 2008 he saw Sarles in attendance at an investment seminar at the Van Dusen mansion, although Sarles testified that he never attended any such seminars. The Receiver claims that a sophisticated banker like Sarles must have known that the investment pitch was a scam. But Pettengill admitted that Sarles did not say or do anything that would lead him to believe that Sarles did not believe the investment pitch or knew it was fraudulent.

Pettengill also claimed that Sarles attended a meeting in April or May 2008 at which the scammers discussed segregating client accounts. A closer look at this claim shows that it does not support an inference that Sarles knew the scammers were engaged in fraud. Pettengill himself said that he did not know client funds were being used to make up the shortfall in money until months after this meeting. Prior to the meeting, the scammers had been advised by their attorneys to "repaper" their client accounts by segregating their single, pooled bank account into separate client accounts. According to Pettengill, it was discussed that Associated Bank would facilitate the wire transfers from the Swiss Crown Forex account, back to the U.S. Crown Forex account, then back again into segregated client accounts in Switzerland. But Pettengill admitted in his deposition that the manner in which the transfers were to be done - by performing multiple transfers in order to cover up the shortfall of money in the Swiss account - was never disclosed to Sarles. Pettengill claimed that it was "implied" that they were covering up a shortfall of money, although he provides no support for this assertion. Even assuming Sarles knew there was a shortfall in the Swiss Crown Forex entity, and that the scammers wanted to avoid disclosing that, it does not follow that Sarles knew their enterprise was a Ponzi scheme or that they were engaged in tortious conduct. If true, this should have been a red flag, but it does not show actual knowledge. Moreover, Pettengill never claimed the scammers discussed in Sarles's presence using new clients' money to make up for the shortfall in the Swiss Crown Forex account. Pettengill's testimony is insufficient to support an inference that Sarles knew the scammers were engaged in tortious conduct.

The Receiver also claimed Sarles improperly approved transfers of money between bank accounts for the scammers. Specifically, he claims that Sarles approved transfers at Cook's behest from the Crown Forex accounts, on which Kiley and Smith - but not Cook - were signatories, into accounts on which Cook was a signatory. Only three of the transfer forms cited by the Receiver, however, actually reference Cook. Assuming that Sarles authorized these transfers for Cook, there is still no evidence that the account signatories did not approve of these transfers. Smith would at times transfer money by forwarding emailed directions from Cook to the bank. Even if Sarles had transferred money at Cook's behest on an account on which Smith was the signatory, this would only show that he was being sloppy with formalities when he knew that Cook and Smith (and the other scammers) were working together - it would not show that Sarles knew there was a Ponzi scheme afoot. Additionally, in June 2009, Cook requested a $600,000 withdrawal from the Oxford Global account, on which he was a signatory. The withdrawal was approved only after Sarles contacted his supervisor and the bank ensured that all procedures had been properly followed. Nothing about these transfers or the withdrawal suggest that Sarles knew about the Ponzi scheme.

The Receiver argues that in 2009, money continued to flow in and out of the Crown Forex account, even "after Sarles had learned that Swiss authorities had shut down Crown Forex, S.A., rendering the sole investment vehicle of the scheme obviously impossible." But the record contains no evidence to support the claim that Sarles knew the Swiss entity had been shut down. In fact, the Receiver's own expert report states that if Associated Bank had the proper due diligence procedures, it would have learned of this information, but does not claim that anyone at the bank actually did learn of it.

Finally, the Receiver argues in his brief that just before Sarles was fired, "the Bank itself began a drumbeat of instructions to Sarles to delete emails - prohibiting him from using the email account unless he did so," and that "[n]othing indicates that Sarles failed to destroy these documents, as the Bank instructed him to do." Examination of these emails shows they are not the nefarious messages the Receiver makes them out to be. Rather, they are standard notifications that the storage on Sarles's email inbox was full, sent by the bank's Microsoft Exchange Server. Moreover, prior to these notifications and Sarles's termination, his email inbox was preserved and reviewed by a bank security officer, which revealed "[n]othing out of the ordinary." The characterization of these emails by the Receiver to this Court is, at best, misleading. Sarles's full inbox does not show him to be aware of the Ponzi scheme or that the bank was attempting to cover anything up.

In sum, the evidence cited by the Receiver simply does not support a reasonable inference that Sarles or anyone at Associated Bank had actual knowledge of the scammers' torts. Nor does looking to all the circumstantial evidence collectively allow for such a conclusion without resorting to speculation and conjecture. After all, "in law as in mathematics zero plus zero equals zero." Henderson v. Kennedy , 253 F.3d 12 , 19 (D.C. Cir. 2001).

2. Constructive Knowledge

The Receiver alternatively argues that he need not show that Associated Bank had actual knowledge of the scammers' torts to impose aiding and abetting liability, but that "constructive knowledge" is sufficient. We disagree, but in any event, the summary judgment record here is insufficient to support a finding of constructive knowledge.

The Receiver rests his constructive knowledge argument on a single reference in the Minnesota Supreme Court's opinion in Witzman , in which the Court stated while discussing aiding and abetting liability that "some courts" have found that a defendant may be deemed to have constructive knowledge of a tort "where the primary tortfeasor's conduct is clearly tortious or illegal," where "[the] defendant [has] a long-term or in-depth relationship with that tortfeasor," and "where the conduct is [ ] a facial breach of duty." 601 N.W.2d at 188 . After making this observation, however, the Court in Witzman applied an actual knowledge test. Id. We agree with the district court in Varga , 952 F.Supp.2d at 857 , that under Minnesota law, "[c]onstructive knowledge will not suffice."

Even assuming that constructive knowledge could be sufficient, it cannot be imputed to Sarles and Associated Bank on this record. The actions of the scammers known to Associated Bank were not "clearly tortious or illegal." Rather, what was later revealed to be a fraud was a sophisticated Ponzi scheme that went undetected for years. Nor did Sarles or Associated Bank have "a long-term or in-depth relationship" with the scammers. The professional relationship between the scammers and Sarles and the bank, even with Sarles's socializing, does not meet this standard. Nor was the Ponzi scheme "a facial breach of duty." On its face, it appeared to be a legitimate investing business. Thus, a finding of constructive knowledge could not be supported by this record, even if constructive knowledge was sufficient under Minnesota law to impose aiding and abetting liability.

B. Substantial Assistance in the Scheme

In addition to showing actual knowledge, a plaintiff must show that a defendant provided substantial assistance to the primary tortfeasor in order to impose aiding and abetting liability. Witzman , 601 N.W.2d at 188-89 . This element is evaluated in tandem with the knowledge requirement. Id. Thus, the weaker the evidence of knowledge is, the greater the showing of substantial assistance must be. See id. "[C]onduct that inadvertently advances the [underlying tort] does not amount to substantial assistance." Varga , 764 F.3d at 841 (quoting Camp , 948 F.2d at 460 ). In addition, " '[s]ome element of blameworthiness' must be present in the defendant's assistance." Id.

The Minnesota Supreme Court has said that in the context of professionals, " 'substantial assistance' means something more than the provision of routine professional services." Witzman , 601 N.W.2d at 189 . The Court in Witzman said that allegations against the defendant, an accounting firm, involved nothing more than the "performance of routine accounting duties," and went on to say: "If we were to recognize that such routine services constitute substantial assistance, then it would be the rare accountant indeed who would not be subject to automatic liability merely because his client happened to be a tortfeasor." Id. The same could easily be said of banks.

While the Receiver's claim fails because of the lack of evidence of actual knowledge, we also conclude that no reasonable factfinder could conclude that Associated Bank provided substantial assistance to the scammers in the commission of their torts. The evidence that the Receiver claims shows substantial assistance is largely the same evidence it claims shows knowledge. The substantial assistance element is found wanting for many of the same reasons as the knowledge element. The record shows nothing beyond the provision of routine banking services or, at worst, sloppy banking. The bank provided nothing beyond its standard professional services to assist the scammers in perpetrating their Ponzi scheme. No reasonable factfinder could conclude that Associated Bank provided substantial assistance to the scammers' tortious conduct.

III. Conclusion

To show a genuine dispute of material fact, a party must provide more than conjecture and speculation. The Receiver has not done so. We affirm.

1 After this case was filed, the receiver, R.J. Zayed, was granted leave to recuse himself from the case and withdrew; three other attorneys were appointed to act in his capacity as receiver in this litigation. As in our prior opinion in this case, "the Receiver" is used to refer to the office of receiver and not any particular person. Zayed v. Associated Bank, N.A. (" Zayed I "), 779 F.3d 727 , 729 n.1 (8th Cir. 2015).

2 The Honorable David S. Doty, United States District Judge for the District of Minnesota.

3 There is some evidence that Sarles directed (or that a banker in his position would typically direct) the selection of the account type. Assuming Sarles was responsible for the choice of account type, this fact still does not support the Receiver's allegation of actual knowledge.