Zayed v. Associated Bank, N.A.

Filing 50

ORDER granting 15 Defendant's Motion to Dismiss (Written Opinion). Signed by Senior Judge David S. Doty on 9/30/2013. (PJM)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 13-232(DSD/JSM)
R.J. Zayed, in His Capacity
As Court-Appointed Receiver
For The Oxford Global Partners,
LLC, Universal Brokerage FX,
and Other Receiver Entities,
Plaintiff,
ORDER

v.
Associated Bank, N.A.,
Defendant.

Brent Elswick, Esq., Brian W. Hayes, Esq., Russell J.
Rigby, Esq., Tara C. Norgard, Esq. and Carlson, Caspers,
Vandenburgh, Lindquist & Schuman, PA, 225 South Sixth
Street, Suite 4200, Minneapolis, MN 55402; D. Timothy
McVey, Esq. and McVey & Parsky LLC, 30 North LaSalle,
Suite 2100, Chicago, IL 60602; Keith A. Vogt, Esq. and
Stadheim & Grear Ltd., 400 North Michigan Avenue, Suite
2200, Chicago, IL 60611; Robert P. Greenspoon, Esq.,
William W. Flachsbart, Esq. and Flachsbart & Greenspoon,
333 North Michigan Avenue, Suite 2700, Chicago, IL 60601,
counsel for plaintiff.
Alex C. Lakatos, Esq., Paul W. Hughes, Esq. and Mayer
Brown LLP, 1999 K Street N.W., Washington, D.C. 20006;
Charles F. Webber, Esq. and Faegre Baker Daniels, LLP, 90
South Seventh Street, Suite 2200, Minneapolis, MN 55402,
counsel for defendant.

This matter is before the court upon the motion to dismiss by
defendant Associated Bank, N.A. (Associated Bank).

Based upon a

review of the file, record and proceedings herein, and for the
following reasons, the court grants the motion.

BACKGROUND
This receivership action arises out of a criminal Ponzi scheme
committed using Associated Bank accounts.

The scheme principals

included, among others, Trevor Cook and Patrick Kiley.

Cook and

Kiley used several corporate entities to perpetuate their scheme.1
The scheme purported to guarantee investors a return in excess of
10% annually through foreign currency trading with Crown Forex,
S.A., a Swiss company.

Compl. ¶ 3.

Cook pleaded guilty and Kiley

was convicted by a jury for their roles in the scheme.

Id. ¶ 1.

On December 11, 2009, Chief Judge Michael J. Davis appointed R.J.
Zayed as the Receiver for the Receivership Entities.2
The Receiver alleges that in late 2007, former Associated Bank
Associate Vice President Lien Sarles3 met with Kiley at his home
office

in

Burnsville,

Minnesota.

Id.

¶¶

34-35.

Shortly

thereafter, Kiley opened his first account at Associated Bank:
account # 5601 under the name Universal Brokerage FX Management

1

These include Oxford Global Partners, LLC; Oxford Global FX,
LLC; Oxford FX Growth, L.P.; Universal Brokerage FX Management,
LLC; Market Shot, LLC; and other entities controlled by them
(collectively, Receivership Entities). See Compl. ¶ 2.
2

On April 4, 2013, Zayed recused himself from this matter.
ECF No. 34, at 1. Chief Judge Davis authorized Tara Norgard, Brian
Hayes and Russell Rigby “to act on behalf of the Receiver and in
his capacity as the Receiver, with all powers appertaining
thereto.”
Id. at 3.
The court refers to these individuals
collectively as the Receiver.
3

Sarles’
Compl. ¶ 34.

brother,

Michael
2

Behm,

was

employed

by

Kiley.

LLC.

Id. ¶ 36.

account

The Receiver alleges that the documents for that

contained

several

intentional

falsehoods.

Id.

The

Receiver further alleges that the falsehoods were designed to avoid
Associated Bank’s duties under the Bank Secrecy Act/Anti-Money
Laundering legislation.

Id. ¶¶ 36-37.

The scheme principals next opened account # 1705, registered
to Crown Forex LLC.

Id. ¶ 33.

The account was opened as a

“Checking/Money Market” account rather than as an investor account.
Id. ¶ 47.

The Receiver alleges that, in order to avoid regulatory

issues, Associated Bank advised Cook and Kiley not to open the
account in the name of the foreign-domiciled Crown Forex, S.A. Id.
¶ 38.

Further, the account listed Crown Forex’s business address

as 5413 Nicollet Avenue, Suite 14, Minneapolis, Minnesota, rather
than the Burnsville home office.

Id. ¶ 40.

Associated Bank also

inaccurately stated on account documents that “Crown Forex LLC is
a

Limited

Minnesota.”

Liability
Id.

Company

recognized

under

the

laws

of

The Receiver alleges that Sarles was aware that

Crown Forex LLC did not exist.

Id. ¶ 45.

On June 8, 2009, the fraud principals opened Associated Bank
account # 8733 under the name Basel Group LLC.

Id. ¶ 61.

Despite

the fact that Basel Group LLC was not a registered corporation,
Associated Bank indicated on account documents that it had verified
the legitimacy of the LLC on a state registration website.

3

Id.

In

total, the Receivership Entities opened seven bank accounts with
Associated Bank in 2008.
into the accounts.

Id. ¶ 29.

Id. ¶ 33.

Over $79 million was deposited

The Receiver alleges that Sarles

assisted investors in wiring funds into the accounts.

Id. ¶ 45.

During the operation of the scheme, Cook transferred millions of
dollars from investor accounts into his personal accounts.

Id.

Sarles and Associated Bank approved these transfers. Id. ¶¶ 53-56,
60.
The Receiver alleges that Associated Bank ignored unusual
patterns of transactions in the Receivership Entities’ accounts and
failed to report suspicious activity.
Associated

Bank’s

Monitoring

Department

Id. ¶ 48.
threatened

In 2009,
to

freeze

account # 1705 for lack of proper documentation, but took no
further action.

Id. ¶ 57.

Moreover, on June 25, 2009, Cook

withdrew $600,000 in cash from one of the accounts.

Id. ¶ 63. The

Receiver also alleges that Associated Bank prepared cashier’s
checks that included inaccurate remitter information.

Id. ¶ 64.

On April 19, 2013, the Receiver filed this action, alleging
claims for aiding and abetting fraud, aiding and abetting breach of
fiduciary duty, aiding and abetting conversion and aiding and
abetting false representations and omissions.
moves to dismiss.

4

Associated Bank

DISCUSSION
I.

Standard of Review
To survive a motion to dismiss for failure to state a claim,

“‘a complaint must contain sufficient factual matter, accepted as
true, to state a claim to relief that is plausible on its face.’”
Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009)
(quoting Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)). “A claim
has facial plausibility when the plaintiff [has pleaded] factual
content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Iqbal, 129 S.
Ct. at 1949 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556
(2007)).

Although a complaint need not contain detailed factual

allegations, it must raise a right to relief above the speculative
level. See Twombly, 550 U.S. at 555.

“[L]abels and conclusions or

a formulaic recitation of the elements of a cause of action” are
not sufficient to state a claim.

Iqbal, 129 S. Ct. at 1949

(citation and internal quotation marks omitted).
The court does not consider matters outside the pleadings
under Rule 12(b)(6).

See Fed. R. Civ. P. 12(d).

The court,

however, may consider matters of public record and materials that
are “necessarily embraced by the pleadings.”

See Porous Media

Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999) (citation
and internal quotation marks omitted).

5

II.

Aiding and Abetting Claims
Where, as here, aiding and abetting claims are premised on an

underlying fraud, the plaintiff “must state with particularity the
circumstances

constituting

the

fraud

....

Rule

9(b)’s

particularity requirement for fraud applies equally to a claim for
aiding and abetting.”
F.3d

659,

663

(8th

E-Shops Corp. v. U.S. Bank Nat’l Ass’n, 678
Cir.

2012)

(citations

omitted).

The

particularity requirement enables defendants to respond promptly
and specifically to potentially damaging allegations of fraud. See
Bank of Montreal v. Avalon Capital Grp., Inc., 743 F. Supp. 2d
1021, 1028 (D. Minn. 2010).

The requirements of Rule 9(b) are read

“in harmony with the principles of notice pleading,” and the level
of particularity required depends upon the nature of a case.
Schaller Tel. Co. v. Golden Sky Sys., Inc., 298 F.3d 736, 746 (8th
Cir.

2002)

(citation

and

internal

quotation

marks

omitted).

However, “[c]onclusory allegations that a defendant’s conduct was
fraudulent and deceptive are not sufficient to satisfy the rule.”
Id. (citation and internal quotation marks omitted).

To satisfy

the heightened pleading requirement, a plaintiff must set forth the
“who, what, when, where, and how” of an alleged fraud.

United

States ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 556
(8th Cir. 2006) (citation omitted).

In other words, a plaintiff

must plead “the time, place and contents of false representations,
as well as the identity of the person making the misrepresentation

6

and what was obtained or given up thereby.”

BJC Health Sys. v.

Columbia Cas. Co., 478 F.3d 908, 917 (8th Cir. 2007) (citation and
internal quotation marks omitted).
To state a claim for aiding and abetting under Minnesota law,
a plaintiff must show (1) a primary actor committed a tort that
caused injury to the plaintiff, (2) the aider and abettor knew4
that the primary actor’s conduct constituted a tort and (3) the
aider and abettor substantially assisted or encouraged the primary
actor in committing the tort.

See Witzman v. Lehrman, Lehrman &

Flom,

(Minn.

601

N.W.2d

179,

187

1999);5

see

also

In

re

Temporomandibular Joint (TMJ) Implants Prods. Liab. Litig., 113
F.3d 1484, 1495 (8th Cir. 1997).

The elements of knowledge and

substantial assistance are analyzed in tandem. Witzman, 601 N.W.2d
at 188.

That is, “where there is a minimal showing of substantial

assistance, a greater showing of [knowledge] is required.”
(citation and internal quotation marks omitted).

Id.

Associated Bank

argues that the Receiver has not adequately pleaded that it had
knowledge of the underlying fraud or that Associated Bank provided
substantial assistance or encouragement to the fraud principals.6

4

Under Rule 9(b), knowledge “may be alleged generally.”
Shops Corp., 678 F.3d at 663 (citations omitted).

E-

5

Minnesota has adopted the Restatement definition of aiding
and abetting. Witzman, 601 N.W.2d at 187.
6

Associated Bank also argues that the complaint should be
dismissed based on the doctrines of in pari delicto, res judicata
(continued...)
7

A.

Knowledge

“An aider and abettor’s knowledge of the wrongful purpose is
a crucial element in aiding or abetting cases.” E-Shops Corp., 678
F.3d at 663 (citation and internal quotation marks omitted).
However, “where the conduct is not a facial breach of duty, courts
have been reluctant to impose liability on an alleged aider and
abettor for anything less than actual knowledge that the primary
tortfeasor’s conduct was wrongful.”
(citations omitted).
shown

by

Witzman, 601 N.W.2d at 188

In other words, “[w]hile knowledge may be

circumstantial

evidence,

courts

stress

that

the

requirement is actual knowledge and the circumstantial evidence
must demonstrate that the aider-and-abettor actually knew of the
underlying wrongs committed.”

Varga v. U.S. Bank Nat’l Ass’n, No.

12-3180, 2013 WL 3338750, at *6 (D. Minn. July 2, 2013) (emphasis
in original) (citations and internal quotation marks omitted); see
also El Camino Res. Ltd. v. Huntington Nat’l Bank, 712 F.3d 917,
923 (6th Cir. 2013) (requiring, under Restatement definition of
aiding

and

abetting,

that

bank

must

have

more

than

“strong

suspicion of wrongdoing”).
Nowhere

in

the

complaint

does

the

Receiver

allege

Associated Bank had actual knowledge of the Ponzi scheme.

that

Rather,

the Receiver alleges, among other things, that (1) Sarles met with

6

(...continued)
and prudential standing. Because the complaint fails to state a
claim, the court does not reach these arguments.
8

Kiley

before

the

scheme

participants

opened

accounts

with

Associated Bank, (2) Associated Bank advised Cook and Kiley not to
open an account in the name of the foreign-domiciled Crown Forex
S.A., (3) Sarles was aware that Crown Forex LLC did not exist, and
(4) Associated Bank falsely stated that it verified the existence
of Basel Group LLC with the state registration website.

Moreover,

the Receiver argues that knowledge should be inferred because
Associated Bank operated the bank accounts in an atypical manner.
See K & S P’ship v. Cont’l Bank, N.A., 952 F.2d 971, 977 (8th Cir.
1991) (“[I]f

the

method or

transaction

is atypical

or lacks

business justification, it may be possible to infer the knowledge
necessary

for

aiding

and

abetting

liability.”

(citation

and

internal quotation marks omitted)).
Even

accepting

this

combination

of

allegations

as

true,

however, they do not adequately plead that Associated Bank had
actual

knowledge

of

the

scheme

principals’

fraud,

breach

of

fiduciary duty, conversion or false representations and omissions.
Rather, such allegations amount to an argument that Associated Bank
should have known of the underlying fraud based on numerous red
flags.

See Compl. ¶ 74 (“Had Associated Bank investigated any of

the numerous red flags it had before it as raised by several
employees, Associated Bank would have uncovered and prevented the
Ponzi scheme from flourishing.”).

Such a theory of liability is

not viable in an aiding and abetting claim.

9

See K & S P’ship, 952

F.2d at 977 (“A plaintiff’s case against an aider, abetter, or
conspirator may not rest on a bare inference that the defendant
must have had knowledge of the facts.” (citation and internal
quotation marks omitted)).

As a result, the complaint does not

adequately plead that Associated Bank had “actual awareness of
[its] role in the fraudulent scheme.”

Id. (citation and internal

quotation marks omitted).
B.

Substantial Assistance

Associated
adequately

Bank

pleaded

next

that

argues

that

Associated

the

Bank

Receiver

rendered

has

not

substantial

assistance to the fraudulent scheme.

To demonstrate substantial

assistance,

that

a

plaintiff

must

“show

the

secondary

party

proximately caused the violation, or, in other words, that the
encouragement or assistance was a substantial factor in causing the
tort.”
455,

Id. at 979 (citation omitted); see Camp v. Dema, 948 F.2d

460

(8th

Cir.

1991)

(applying

Minnesota

law).

“Some

affirmative step is required, because the mere presence of the
particular defendant at the commission of the wrong, or his failure
to object to it, is not enough to charge him with responsibility.”
Am. Bank of St. Paul v. TD Bank, N.A., 713 F.3d 455, 462 (8th Cir.
2013) (citation and internal quotation marks omitted) (applying
Minnesota

law).

In

other

words,

“[l]iability

is

based

on

[defendant’s] affirmative acts, not acts it should have taken.”
Id. at 463.

10

“To determine what constitutes substantial assistance, courts
generally consider ... the nature of the act encouraged, the amount
of assistance given, the aider-and-abettor’s presence or absence at
the time of the tort, its relation to the primary actor, and its
state of mind.”

Varga, 2013 WL 3338750 at *7 (citations omitted).

Moreover, “the conduct in question must be undertaken with some
degree of knowledge (1) of its wrongful purpose and (2) that it is
aiding the tortfeasor.”

Id. (citations and internal quotation

marks omitted).
Taking all of the allegations in the complaint as true, the
Receiver

has

not

adequately

pleaded

that

substantially assisted in the fraudulent scheme.
allegations
approved

of

substantial

fraudulent

assistance

transfers

after

-

that

ignoring

Associated

Bank

The Receiver’s
Associated
red

flag

Bank
and

suspicious activity - generally do not provide a basis for a
finding of substantial assistance.

See In re Agape Litig., 681 F.

Supp. 2d 352, 365 (E.D.N.Y. 2010) (noting that, under Restatement
definition of aiding and abetting, “[t]he caselaw is clear that
opening accounts and approving transfers, even where there is a
suspicion of fraudulent activity, does not amount to substantial
assistance” (citation omitted)).

Moreover, as already explained,

the Receiver has not pleaded facts sufficient to demonstrate that
Associated Bank had actual knowledge of its wrongful purpose or
actual knowledge that it was aiding the scheme participants in

11

their

tortious

behavior.

Indeed,

the

relationship

between

Associated Bank and the Receivership Entities was an arms-length,
commercial

relationship.

See

Witzman,

601

N.W.2d

at

189

(“[S]ubstantial assistance means something more than the provision
of

routine

professional

services.”

(citations

and

internal

quotation marks omitted)). As a result, the Receiver has failed to
plead a plausible claim fo substantial assistance.
In sum, after considering the elements of knowledge and
substantial assistance in tandem, the court determines that the
Receiver has not pleaded a plausible claim of aiding and abetting
against Associated Bank.

Therefore, dismissal is warranted.

CONCLUSION
Accordingly, based on the above, IT IS HEREBY ORDERED that the
motion to dismiss [ECF No. 15] is granted.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated:

September 30, 2013
s/David S. Doty
David S. Doty, Judge
United States District Court

12