Ontario Superior Court dismisses $4.5B negligence claim against TD Bank related to fraudulent Ponzi scheme

“Hindsight is 20/20” says the Ontario Superior Court of Justice in dismissing lawsuits against TD Bank relating to the Stanford Ponzi scheme, a USD $7 billion fraud that spanned over 18 years.

In her June 8, 2021 judgment, the Honourable Madam Justice Conway concluded that TD Bank did not know or have any reason to suspect that Mr. Stanford was a fraudster who was operating a Ponzi scheme at the relevant time. Justice Conway consequently dismissed both actions advanced against TD Bank for knowing assistance in breach of fiduciary duty and negligence.

The actions brought

On March 6, 2012, Robert Allen Stanford, the former chairman of Stanford International Bank Limited (SIB), an offshore bank in Antigua and Barbuda (Antigua), was found guilty by a federal jury of operating a "massive Ponzi scheme" in which billions of dollars of investors' money were misappropriated and financial records falsified. On June 14, 2012, Stanford was sentenced to 110 years in prison. As part of the global fallout of the Ponzi scheme, two actions were brought before the Ontario Superior Court of Justice against TD Bank in connection with its role as a US dollar correspondent bank for SIB.

As described by Justice Conway, correspondent banking involves the provision of services by the correspondent bank to another bank (the respondent bank) to facilitate the movement of funds, exchange of currencies and settlement of obligations. A correspondent bank effectively acts as an agent to process payments or other transactions for the respondent bank and its customers.

The joint liquidators alleged that TD Bank failed to adhere to the fundamental principles of Know Your Client, due diligence and basic banking practice when it opened the correspondent banking account for SIB, a solely-owned offshore bank operating in Antigua. Further, the joint liquidators alleged that TD Bank was reckless or willfully blind to the risk of misappropriation, and was therefore liable to SIB for knowing assistance in breach of fiduciary duty, and alternatively in negligence. The joint liquidators claimed that TD Bank’s failure to close the SIB account enabled Mr. Stanford to sell high-yield certificates and receive funds into the correspondent account which enabled him to perpetuate the Ponzi scheme and misappropriate assets. Had the account been closed, the joint liquidators alleged, Mr. Sanford would not have been able to continue misappropriating SIB’s assets. Purchasers of the high-yield certificates of deposits brought personal claims for knowing assistance in breach of fiduciary duty on the same basis.

The court’s analysis

The two causes of action at issue in this case were knowing assistance in breach of fiduciary duty and negligence.

Knowing assistance in breach of fiduciary duty

The plaintiffs in both actions admitted that TD Bank had no actual knowledge of the fraud perpetrated by Mr. Stanford. The key question at issue was instead whether TD Bank was reckless or willfully blind to Mr. Stanford’s breach of his fiduciary duty to SIB. Indeed, the case law is generally settled that “actual knowledge” includes “willful blindness and recklessness” under both common law and civil law. However, mere constructive knowledge will not suffice and the defendant must actually know the facts that make its conduct reckless or makes its blindness willful.

In her reasons, Justice Conway held that there was nothing in the record that supported the conclusion that TD Bank was reckless or willfully blind. There was no evidence that TD Bank had a basis to believe Mr. Stanford might breach his fiduciary duty and misappropriate SIB’s assets. Justice Conway held:

[141]      Although it is now known that Mr. Stanford was a fraudster, there is no basis to conclude that TD Bank knew or suspected that Mr. Stanford was breaching his fiduciary duty to SIB but continued to allow him to use TD Bank’s banking facilities. Nor is there any basis to conclude that TD Bank became aware of the need to inquire about whether Mr. Stanford was defrauding SIB but chose not to ask questions. [emphasis added]

Negligence

Justice Conway disagreed with the bank’s submission that no duty of care should arise unless the bank had actual knowledge of the fraud. Justice Conway notably made a distinction between the duty of care owed to a customer versus a non-customer. More specifically, Justice Conway distinguished the case from 1169822 Ontario Limited v. The Toronto-Dominion Bank, 2018 ONSC 1631 on the basis that that case involved a bank’s duty to a non-customer. Given that in this case the joint liquidator acted on behalf of SIB, a customer of TD Bank, the case involved a duty of care to its own customer. The judge outlined the fact that the existing case law recognized a duty of a bank to its customers at each of the following two stages: account opening and ongoing operation of the account. Given that SIB was a customer of TD Bank, Justice Conway considered the principles and analytical framework set out in Livent as being applicable. 

The joint liquidator’s position that TD Bank was liable for negligent performance of a service was considered by Justice Conway as being a “novel duty of care” since it was seeking to impose upon a bank a duty of care to protect its customers from insider abuse. According to the joint liquidators, at some point, the risk of insider abuse increased to the point that TD Bank had a duty to review the relationship, shut down the account, and cease to provide services to the customer. In the negligence analysis, Justice Conway held that the claim failed at the duty of care stage since the required proximity was not established. The judge explained that, although TD Bank had undertaken to comply with the banking procedures that applied to the operation of a correspondent account, that did not extend to monitoring the internal operations of the customer. Justice Conway noted that such an undertaking to operate a correspondent account should not extend to protecting the customer from insider abuse, unless there was clear evidence that the correspondent bank was on notice that the account was being used for nefarious purposes, or that fraudulent conduct might be in issue. Justice Conway concluded that no such evidence was demonstrated and added that TD Bank did not assume the role of a regulator, auditor or insurer:

[161]       To hold otherwise would expand the role of the bank well beyond what it undertook to do in acting as a correspondent bank. The bank undertook to provide banking services. It did not assume the role of a regulator, auditor or insurer.  Given the nature of the bank’s undertaking, there was also no basis for SIB to reasonably rely on TD Bank to protect it from insider abuse. 

In summary, the court concluded that there was no duty of care owed by TD Bank to protect SIB from insider abuse in these circumstances. Further, that even if TD Bank owed a duty of care to SIB, it did not fall below the standard of care of a reasonable banker.

Takeaways

In assessing the factual evidence, Justice Conway made it clear that she had to bear in mind that the events in question started 30 years ago, and spanned a period of 18 years (between 1991 and 2009). More specifically, she noted that “hindsight is 20/20” and one should assess the evidence from the perspective of the facts as they were known at the relevant time.

In this case, Justice Conway concluded that the plaintiffs were presenting the events potentially giving rise to liability on the part of TD Bank in a nefarious light. According to the judge, viewed in the context of the time without the later discovery that Mr. Stanford was a fraudster, there were far more innocuous explanations for the events in question.

This comment is key. It would be inappropriate to use hindsight to impose liability on a financial institution based on years of after-the-fact forensic examination and tracing of funds by a third party, such as a regulator or a liquidator/monitor. In this case, it took years for the joint liquidators to understand the Stanford Ponzi scheme structure with all its investigatory powers.