Dive Brief:
- A jury in a Minnesota bankruptcy court Tuesday ordered BMO Harris Bank to pay $564 million in damages in connection with a Ponzi scheme orchestrated by a client of a bank BMO acquired.
- BMO plans to “file a number of post-trial motions … to reverse the verdict or reduce the damages, and we intend to pursue all avenues” to overturn the outcome, including appealing the case to the 8th U.S. Circuit Court of Appeals, the bank said in a statement.
- The bank will take a C$1.12 billion ($833.6 million) charge from the judgment — a total that includes interest payments it may have to make. That will result in a $617.8 million after-tax charge to be recorded in this year’s fourth quarter, BMO said.
Dive Insight:
The jury found BMO Harris — the U.S. arm of Canadian lender Bank of Montreal — liable for aiding and abetting breach of fiduciary duty, but not liable on three other counts, including aiding and abetting fraud.
The $564 million payout breaks down to $484.2 million in compensatory damages and $79.5 million in punitive damages. The compensatory damages total roughly one-quarter of the $1.9 billion sought by a trustee in bankruptcy proceedings for companies controlled by Tom Petters, who was convicted in 2009 of masterminding a $3.7 billion Ponzi scheme and sentenced to 50 years in prison.
"It has been a long, 14-year road to this verdict, and we are extremely pleased with the jury's decision to hold BMO Harris Bank accountable for its role," Michael Collyard, a partner at Robins Kaplan who represented the plaintiffs, told American Banker in a statement. "This is a fantastic result for the trust pursuing recovery for the people who lost money in this fraud.”
Collyard said the prejudgment interest his client seeks could boost the award to more than $1 billion, according to The Globe and Mail. Collyard added he intends to seek 10% annual interest.
BMO Harris, however, asserted it is entitled to recover about 21% of the amount paid to the trustee.
“We are confident that we have strong grounds for appeal,” the bank said, adding the verdict “is not supported by the evidence or the law.”
Tuesday’s ruling spotlights the risks banks take when acquiring other institutions — and the culpability they may endure after they absorb them.
Bank of America, for example, last month agreed to pay $1.84 billion to bond insurer Ambac Financial Group to settle a lawsuit connected to securities backed by loans underwritten by Countrywide Financial, which the bank bought in 2008.
The lawsuit against BMO Harris originated in 2012 and sought to recoup $1.9 billion — an amount the trustee based on sums Petters transferred from an account at Milwaukee-based Marshall & Ilsley Bank, which BMO bought in 2011.
That money became unavailable for repayment to creditors when the fraud was uncovered in 2008, the trustee said, according to Reuters.
The trustee argued that Marshall & Ilsley facilitated what was, at the time, the largest Ponzi scheme in history — since surpassed by the Bernie Madoff scam.
The bank stood by as Petters moved tens of millions of dollars into and out of his corporate and personal accounts, the trustee alleged. The pattern of money movement was wholly inconsistent with what Marshall & Ilsley understood to be the business model of Petters’ companies, the trustee asserted.
In 2019, a bankruptcy court judge ruled that Marshall & Ilsley destroyed computer backup tapes in 2010 and 2011 that likely contained documents and memos concerning the Petters accounts.
BMO Harris employees in 2014 found some tapes that may have contained evidence, but falsely told the court that the tapes were gone, the judge said.
The bank “has failed to be candid and has fought discovery at every step … has lied to this court and has attempted to hide evidence on several occasions,” the judge said, according to The Globe and Mail.
BMO Harris has denied the allegations.
During a civil trial that began last month, a district court judge told jurors they could draw an adverse inference about BMO Harris because of the finding that certain evidence had been destroyed, American Banker reported. But, at the same time, jurors were not required to make that connection.
Tuesday’s ruling comes as BMO awaits regulatory approval of its proposed $16.3 billion acquisition of Bank of the West from BNP Paribas. BMO has continued to expect that the deal would close by the end of this year.
