Keywords: Ponzi scheme, JPMorgan, FIRREA, FDIC, certificates of deposit, CDs, WaMu
In the wake of the savings and loan crisis of the 1980s, the US Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), to give the Federal Deposit Insurance Corporation (FDIC) power to take all actions necessary to resolve the problems posed by a financial institution in default. In furtherance of those efforts, the statute grants the FDIC authority to act as receiver of a failed institution for the protection of depositors and creditors, and provides detailed procedures to allow the FDIC to consider certain claims against the estate. Specifically, FIRREA bars "any claim relating to any act or omission of [a failed bank]" unless the claim is first presented to the FDIC.
Answering a question of first impression, the US Court of Appeals for the Ninth Circuit recently affirmed the dismissal of Ponzi scheme allegations against JPMorgan, finding that the investor-plaintiffs had failed to exhaust FIRREA's administrative remedies. The decision in Benson v. JPMorgan Chase Bank, 673 F.3d 1207 (9th Cir. 2012) is of interest to any member of the banking community, particularly those that purchased entities that were operating under FDIC receivership, or those that may be placed into FDIC receivership themselves.
According to the plaintiff-investors, in 2004, Canadian attorney William Wise initiated the "Millenium Ponzi scheme," which purportedly involved the sale of at least $68 million worth of certificates of deposit (CDs). Wise promised the CD investors high rates of return, but the CDs allegedly were fraudulent. The plaintiffs claimed that Wise and his colleagues regularly deposited large checks at a Washington Mutual (WaMu) branch office in Napa, California, and then immediately wired large sums of money to various banking and tax havens to enrich themselves. The plaintiffs also claimed that WaMu knowingly provided banking services to companies controlled by Wise, despite having actual knowledge of the fraud.
On September 25, 2008, the FDIC was appointed receiver of WaMu. That same day, JPMorgan acquired most of WaMu's assets and liabilities pursuant to a purchase and assumption agreement. The alleged Ponzi scheme ended in March 2009, when the Securities and Exchange Commission filed an action against Wise.
The plaintiff-investors sued JPMorgan in a California district court, alleging that JPMorgan, which purchased most of WaMu's assets and liabilities from the FDIC, was liable as WaMu's successor-in-interest. The plaintiffs also claimed that JPMorgan was liable based on its own misconduct after the WaMu purchase.
In affirming the district court's dismissal of the claims, the Ninth Circuit held that the plaintiffs were required to exhaust their claims against JPMorgan under FIRREA. The Ninth Circuit explained that, when a claim is based on the conduct of a failed institution, FIRREA applies not only to the failed bank itself, but also to its successors. The court found that plaintiffs' complaints largely relied upon WaMu's alleged wrongdoing, and thus plainly related to "any act or omission of a [failed bank] for which the FDIC has been appointed receiver" within the meaning of FIRREA's exhaustion requirement. The court thus found that plaintiffs were required to exhaust the requisite administrative remedies and, as a result, their claims were jurisdictionally barred.
The Ninth Circuit also held that a plaintiff may sue based on a purchasing bank's own wrongdoing without attempting to exhaust FIRREA administrative remedies. The court explained that where a purchasing bank aided and abetted a fraudulent scheme after the purchase of a failed bank, such a claim would not "relate to" any act or omission of the failed bank within the meaning of FIRREA. Nevertheless, the Ninth Circuit held that the Benson plaintiffs had failed to adequately state such a claim for JPMorgan's independent conduct following its purchase of WaMu's assets and liabilities.
The Ninth Circuit has now joined the Sixth, Eleventh and DC circuits in concluding that a claim asserted against a purchasing bank based on the conduct of a failed bank must be pursued under FIRREA before being brought in court. It is important to note, however, that this protection is limited to claims based on the actions of the purchased, and not the purchasing, institution.
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