Lawrence v. Bank of America: Allegations of Actual Knowledge of Ponzi Scheme Fall Short

In Lawrence v. Bank of America, D.C. Docket No. 8:09-cv-02162-VMC-TGW, 2012 LEXIS 777 (11th Cir. Jan. 11, 2012), putative class action plaintiffs alleged “(1) common law fraud; (2) conversion; and (3) breach of fiduciary duty” against Bank of America (“BOA”). These causes of action stemmed from allegations that BOA was aware of, and “substantially assisted in,” a Ponzi scheme by one of its account holders.  The Eleventh Circuit Court of Appeals affirmed the district court’s holding to dismiss the initial complaint and denied the plaintiffs leave to amend their complaint.

Through his company, Diamond Ventures LLC, Beau Diamond (“Diamond”) allegedly engaged in a Ponzi scheme and deposited millions of dollars from investors into an account at BOA. By upgrading the account to the Premier Banking Division which could “provide daily updates on major deposits and wire transfers,” the plaintiffs alleged BOA should have been on alert that only $15,400,000 of the $37,600,000 deposited was invested in foreign exchange companies. Additionally, Diamond described his business to BOA as an “investment club,” even though BOA prohibited such “clubs.”

Under the federal securities laws, there is no cause of action for aiding and abetting violations of the antifraud provisions. See Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). In order to survive a motion to dismiss for aiding and abetting under state law, a plaintiff must show “(1) an underlying violation on the part of the primary wrongdoer; (2) knowledge of the underlying violation by the alleged aider and abetter; and (3) the rendering of substantial assistance in committing the wrongdoing by the alleged aider and abettor.”

The court held that the plaintiffs’ allegations were too weak to infer that it was plausible the bank had “actual knowledge” of the scheme, in spite of the alleged “atypical” transactions. Even though BOA authorized numerous large transactions by Diamond, it was not required to “investigate” them under Florida law.

The plaintiffs attempted to strengthen the inference of actual knowledge by showing that a BOA representative advised another bank customer that Diamond’s clients were “happy with their investment,” and consequently, that customer transferred money to Diamond Ventures. The court found that this “amendment would have been futile” because the positive comments do not “necessarily establish [BOA’s] participation in a Ponzi scheme.”

The primary materials for this case may be found on the DU Corporate Governance website.

Susan Beblavi