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Zions Bank accused of facilitating fraud in California Ponzi scheme

(Courtesy Utah Stories) Zions Bancorporation is accused of facilitating a ponzi scheme in California that defrauded more than $100 million from victims.

The following story was written and reported by Eric Peterson of The Utah Investigative Journalism Project  in partnership with Utah Stories.

 

Before he pled guilty to running a $125 million fraud and being labeled a “scammer extraordinaire” by the FBI, Deepal Wannakuwatte was known as a charming entrepreneur who owned his own tennis team. He mixed sports and scheming, making friendly serves on local tennis courts and serving up lucrative business pitches to wealthy retirees between matches.

Wannakuwatte ran a Ponzi scheme in California through his company, International Manufacturing Group—one where money from new investors goes to interest payments from older investors—for nearly a decade before the scam imploded in 2014. He’s now serving a 20-year sentence for fraud. During his years of lying, he had promised to bring hundreds of jobs to the area, raided retirement funds from victims, and even defrauded a Native American tribe in Washington state. At his sentencing, one devastated victim called Wannakuwatte a “sociopath.”

At the sentencing, California U.S. District Judge Troy Nunley lamented that “there is no way I can make the victims whole.” Sadly, as is often the case in Ponzi schemes, the money is long gone by the time justice is served. But investors have now decided there is another party that can make them whole—Zions Bancorporation. While these types of cases are difficult to prove, lawyers found evidence the bank closely monitored the fraud accounts—and profited off of them.

The bank was the parent company over California Bank & Trust, a major subsidiary that operated 90 branches throughout California. In a 2017 class-action lawsuit, investors are seeking upward of $100 million from the bank for allegedly facilitating the scam. The investors’ lawsuit was originally dismissed in California’s District Court, but that decision was reversed by California’s 9th Circuit of Appeals in June 2019.

“We contend that the bank knew no later than 2009 that IMG was defrauding investors,” says Michael Denver, attorney for the plaintiffs in the civil suit. By not going to authorities, his lawsuit alleges the bank profited off the scam’s survival.

“It was self-preservation that caused the bank to cease further lending to IMG. It was also self- preservation that kept IMG’s depository accounts open until 2014 so CB&T could be repaid all of its loans and pocket a $3 million profit,” the class action complaint reads.

If the Glove Fits

Wannakuwatte presented a deceptively simple pitch—that his company, International Manufacturing Group, had connections in Asia to ship surgical gloves wholesale, and that he also had a contract with the Department of Veterans Affairs worth $100 million. So the more investors he got, the more gloves he could buy and sell. The problem was that it was a lie. He had a VA contract but it was only worth $25,000. In order for the scheme to last for years, he needed bank loans to help keep paying interest to his original investors.

Wannakuwatte developed what the lawsuit describes as “close” and “unusual relationships” with CB&T bank staff. One loan officer would even cheerily talk about her recent vacations with Wannakuwatte in emails (“Even got a tan!” she wrote in one).

While Wannakuwatte had charmed many executives at CB&T, his business was rife with red flags. According to the class action complaint, the bank was aware that he was running a supposed international shipping business and yet his invoices showed items only being shipped domestically.

Then there was the fact that while IMG purported to be a successful company, it had to take out repeated loans from CB&T to stay afloat, totaling at one point over $21 million.

In the black and white world of banking law, it turns out that greenbacks tend to move through gray areas of the law. As Zions Bancorporation would argue in court, they had no responsibility to monitor what was going on in IMG’s accounts. But the 9th Circuit Court of Appeals found that claim unconvincing because of what the bank did when it realized IMG was struggling to pay back its bank loans.

In 2009, the bank decided to stop lending to CB&T and created a special “lockbox” account and required IMG to deposit all funds from the latex glove business into the account to make good on their loans. The appellate judges argued this made it so the bank now was actively watching the account and that it was then very plausible for them to recognize that the company was engaged in fraud.

Paper Chase

The bar was raised high against liability for bankers in a 1994 Supreme Court case, Central Bank of Denver v. First Interstate Bank of Denver, which found that a third party to a scam like a bank would have to purposely and knowingly assist in the scam to be held liable. But such cases aren’t unheard of. In fact, in 2015, an Ohio bank was found liable for $72 million for a Ponzi scheme that operated within its accounts.

The international law firm of Dorsey & Whitney recently hosted a panel event for bankers at a conference in Minnesota in September 2019 on this topic. Attorney Beth Forsythe, with the firm, explained that banks can be put in a tough spot because juries are unsympathetic to banks. She also pointed out that just because a bank has different documented clues about what a scammer is up to, that doesn’t mean all the pieces of the puzzle are in one place.

“There’s a disconnect,” Forysthe said. “Different documents may be in different parts of the bank but they may not be on the same person’s desk.”

Zions would not provide comment for this article. However, the bank’s publicly filed documents give some indication as to how they’ve viewed CB&T over the years. In the company’s most recent (August 6, 2019) quarterly filing, the company acknowledged it was facing four separate lawsuits based on the IMG fraud. It also indicated it was increasing its legal reserve fund by as much as $50 million.

But the company’s filings from 2009, however, speak much more positively of their California branches. Back then, when the company was suffering like other financial institutions because of the recession, Zions filings praised CB&T for its stability and its “proactive” management.

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