O’Dell v. Berkshire Bank, 5:24-cv-00652 (N.D.N.Y.)
On October 31, 2024, the Northern District of New York dismissed a putative class action against Berkshire Bank (“Berkshire”) with prejudice.[1]
I. Facts
O’Dell involved the standard story of a Ponzi class action against a bank, in which investors lost money through a Ponzi scheme—perpetrated by a non-party alleged fraudster who ran sham business operations—after the fraudster was unable to continue soliciting new investors to sustain the scheme following his hospitalization from an illness. At the time the scheme collapsed, the fraudster filed for bankruptcy as he could no longer attract investors to the scheme, owing approximately $90 million to his investors. With the fraudster unlikely to provide full restitution in a bankruptcy action, Plaintiff decided to file a putative class action lawsuit against the fraudster’s bank, Berkshire. Plaintiff alleged a single claim of aiding and abetting fraud in violation of New York State law. Berkshire moved to dismiss on the basis that Plaintiff’s complaint (the “Complaint”) failed to state a plausible claim under the stringent pleading requirements of Rule 9(b).
II. The Decision
Under New York law, a complaint for aiding and abetting fraud requires a plaintiff to prove that: a fraud existed, the defendant knew of the fraud, and the defendant provided substantial assistance in furtherance of the fraud. Neither party disputed Plaintiff’s allegations with respect to whether a fraud existed.
a. Actual Knowledge
New York law provides that a plaintiff must plead “actual knowledge” of the fraud to survive a motion to dismiss. Properly pleading actual knowledge requires allegations creating a strong inference that defendant actually knew of the wrongful actions, not that the defendant should have known of the wrongful conduct.
Plaintiff made several allegations regarding the circumstances he claimed demonstrated actual knowledge: Plaintiff alleged that the fraudster’s account at Berkshire was the largest and most active account at the branch. Plaintiff also alleged that Berkshire was required to conduct diligence on—and scrutinize—customers who engaged in a large number of transactions, and such diligence should have informed Berkshire of the irregular, unusual banking activity. Additionally, Plaintiff alleged that Berkshire’s Know Your Customer (“KYC”) and Anti Money Laundering (“AML”) programs created obligations on Berkshire to monitor its customers’ transactions and, thus, should have led Berkshire to identify the fraud.
The Northern District of New York rejected the notion that these allegations met the exacting standard of creating a strong inference of actual knowledge. The Court highlighted that precedent demonstrated that far more egregious circumstances than those alleged in the instant action had led to dismissal. Specifically, Second Circuit precedent demonstrated that allegations of actual knowledge are insufficient even when they involve a bank employee having a close relationship with a fraudster, “ben[ding] the rules for the perpetrator,” and misrepresenting the fraudster’s accounts when questioned about them.
The Northern District of New York determined that alleging generally that there are internal processes that banks follow for compliance purposes is not enough, nor does a fraudster having the largest account at a bank lead to a strong inference of actual knowledge. Accordingly, the Court held that “plaintiff’s complaint offers speculation as to Berkshire’s knowledge . . . . But the mere fact that [Berkshire] should have known [the fraudster] was conducting a Ponzi scheme is insufficient to demonstrate actual knowledge for purposes of a common law claim of aiding-and-abetting fraud.”
b. Substantial Assistance
In addition to Plaintiff’s failure to adequately allege actual knowledge requiring dismissal, the Court also examined the allegations regarding substantial assistance and determined that Plaintiff’s claim would fail on that ground even if actual knowledge were plausibly alleged. The Complaint alleged that Berkshire substantially assisted the scheme by not investigating red flags and performing routine banking services for the fraudster. As the Court observed, courts within the Second Circuit consistently hold that banks not investigating red flags and providing routine banking services—such as opening accounts and approving transfers—do not sufficiently allege substantial assistance. The Court further noted that none of the allegations in the Complaint even identified a specific red flag involving the fraudster that Berkshire knew or should have known. As a result, the Northern District of New York dismissed Plaintiff’s sole claim of aiding-and-abetting.
c. Dismissal with Prejudice
After holding that the Complaint must be dismissed, the Court denied Plaintiff leave to amend the Complaint on the basis that Plaintiff provided no indication that amending the pleading would cure the Complaint’s defects. The most crucial aspect of Plaintiff’s failure—beyond failing to comply with the local rules to show how Plaintiff would amend the complaint—was the absence of any “indication in [Plaintiff’s] papers about what, if any, additional facts or circumstances might be alleged to cure the defects identified” in the Court’s decision. Accordingly, the Court dismissed the aiding-and-abetting claim with prejudice.
III. O’Dell’s Impact
The Northern District of New York’s decision demonstrates that plaintiffs alleging aiding-and-abetting fraud claims against banks cannot succeed by alleging general compliance processes and procedures should have—or must have—led to the Bank acquiring actual knowledge of a fraudster’s scheme. The allegations in a complaint must provide a strong inference that banks actually knew of the conduct rather than circumstances indicating that the bank should have known. Moreover, the Court joins the majority of other courts holding that routine banking services simply do not rise to the level of substantial assistance.
[1] Disclosure: McGuireWoods represents Berkshire in this matter.
