(CN) - Finding it "implausible" that irregular banking activity could have tipped U.S. Bank off about the Ponzi scheme at Petters Co., the 8th Circuit dismissed claims from a trustee that lost $700 million.
Tom Petters, former head of Petters Co., was found guilty of running a massive $3.65 billion Ponzi scheme in 2009.
He represented that Petters Co. purchased excess consumer merchandise with financing from money raised via high-yield promissory notes to investors, to be repaid when retailers bought the merchandise.
But in fact Petters never bought or sold merchandise, and funded old promissory notes with money received from new investors.
The Palm Beach Funds collectively lost more than $700 million invested in Petters promissory notes.
Now in liquidation, the funds sued U.S. Bank NA via their trustee for allegedly aiding and abetting Petters' scheme, claiming the bank knew that Petters was not abiding by its stipulated direct payment system, designed to ensure the legitimacy of merchandise transactions.
The payment system was supposed to ensure that investor funds deposited into Petters' U.S. Bank account were directly paid to vendors, and investors were directly paid by retailers' payments for the merchandise.
Investors' funds actually went to sham vendors, however, and then into Petters' bank accounts. No purchasers made deposits into the account; instead, all incoming funds came from Petters Co.
Nevertheless, the 8th Circuit ruled against the funds Thursday.
"Not only did the collateral-account agreement indicate that exceptions to the direct payment system may be made, but it also left U.S. Bank with no discretion to refuse the aforementioned deposits that were made 'by or on behalf of' Petters Capital, a wholly owned entity of Petters Company," Judge Raymond Gruender wrote for a three-judge panel. "In light of this contractual provision in the collateral-account agreement, 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."
The court likewise saw no wrongdoing in U.S. Bank's alleged recoding of account statements to identify retailers, not Petters Co., as the source of funds deposited into the collateral account. The funds said Petters had requested the change, which took effect in 2006.
But at best this allegation raises only the possibility of misconduct, the court said. For the prior four years, 2002 to 2006, the account statements correctly reported that Petters Co. made all deposits into the account, according to the ruling.
"Inferring a wrongful scheme to conceal the noncompliance with the direct payment system when this fact had been fully disclosed for approximately four years without any questions from the recipients of the account statements is simply not plausible," Gruender said.