Court Dismisses Claims That U.S. Bank Aided Petters Fraud

An appeals court upheld an earlier decision to dismiss the claims that an investment fund liquidator brought against U.S. Bank.

The liquidator of investment funds that collectively lost more than $700 million amid Tom Petters' Ponzi scheme accused U.S. Bank of aiding and abetting the fraud.

But an appeals court has now dismissed those claims against the Minneapolis-based bank.

Petters, who is serving a 50-year sentence, was found guilty of misleading investors into believing that funds invested in promissory notes in his company were used to finance the purchase of consumer electronics and other goods. Those goods were purportedly resold to retailers like Sam's Club and Costco—when in fact, no goods were actually bought or resold, and funds from new investors were used to pay previous investors.

According to court documents, investment funds known as the “Palm Beach Funds” collectively lost more than $700 million in the $3.65 billion fraud. Those funds are now being liquidated.

Geoffrey Varga, the liquidator of the Palm Beach Funds, settled a separate case that accused the funds' directors of breaching fiduciary duty. But he also sued U.S. Bank, accusing the institution of “aiding and abetting a breach of fiduciary duty, willful and wanton negligence, and gross negligence,” according to court filings.

The liquidator contended that U.S. Bank was aware that Petters was not abiding by a “direct payment system” that was designed to “prevent a third party from accessing investor funds and to ensure the legitimacy of the merchandise transactions.”

After his complaint against U.S. Bank was dismissed by a district court, Varga filed an appeal. Now, in a 14-page decision, the 8th Circuit court of appeals has affirmed the lower court's ruling, dismissing the liquidator's claims.

The court said it is “implausible to conclude that U.S. Bank knew that the failure to adhere to the direct payment system and continued investments in Petters company’s promissory notes constituted a breach of fiduciary duty” by the funds' directors. It also dismissed the claims of negligence.

To learn more about the case, read the appeals’ court’s findings here.

Separately, Doug Kelley, the receiver in Petters' bankruptcy case, has been executing a years-long effort to recover money for victims of the fraud scheme. That ongoing effort has reportedly cost more than $80 million in legal fees.