BMO ordered to pay $563M in Petters fraud; it was the largest financial penalty by a Minnesota jury

BMO Financial Group must pay the bankruptcy trustee of Tom Petters $563.7 million in damages for the role a previous bank played in a multibillion-dollar fraud by a Minnesota businessman, a federal jury in St. Paul ruled Tuesday.

The verdict is believed to be the largest financial penalty ever handed down by a jury in a Minnesota courtroom, attorneys said. It is also the largest single verdict or settlement related to Petters’ fraud, the largest in Minnesota history.

“Today is a good day. This is a great result,” said Michael Collyard of Robins Kaplan, a Minneapolis law firm representing Doug Kelley, a court-appointed receiver in bankruptcy that ensued after the fraud scheme Petters collapsed in 2008.

Kelley has tried to recover about $3.7 billion lost in Petters fraud. In the BMO case, its lawyers asked the jury for a penalty of $1.9 billion.

“This money will go to real estate creditors and will improve their recovery,” Kelley said.

BMO said late Tuesday that it would appeal the verdict and penalty. “We believe we have a strong basis for appeal,” the company said.

When prejudgment interest is added, stretching back to when the case was filed in 2012, BMO could be liable for about $1 billion. The Montreal-based company said it will immediately set aside $1.12 billion Canadian dollars and take a charge against its fourth-quarter results in accordance with accounting standards.

The jury found BMO liable for the actions of the Milwaukee-based Marshall & Ilsley Bank, which it acquired in 2011. From about 2002 to 2008, Petters moved about $ 37 billion through a small business checking account at a branch of M&I in Edina.

Petters was sentenced to 50 years in prison for an elaborate Ponzi scheme that defrauded hundreds of people.

The evidence in the monthly trial showed that Petters’ account repeatedly triggered the bank’s internal alarm for money laundering activity over 39 months, but the bankers did not notify the regulator.

“If they had reported this to the Feds, I’m sure the FBI would have investigated and shut down Petters’ Ponzi scheme immediately,” Kelley said. “If the bank had blown the whistle, they could have stopped this death in its tracks.”

The FBI raided Petters’ Minnetonka office just weeks after his business partner reported the fraud in 2008.

In the scheme, Petters convinced investors that he was financing the purchase of consumer electronics that he then resold to retailers. But he used money from new investors to repay the old ones.

The case involving BMO is complicated by the size of the fraud and the difficulty of dealing with digital documents and evidence dating back to the mid-1990s. In 2019, a bankruptcy judge ordered BMO to destroy e-mails and other data related to M&I’s interactions with Petters.

In the trial that began last month before US District Judge Wilhelmina Wright, both sides called about two dozen witnesses, including former M&I bankers. An 11-person jury took up the case Friday evening and returned a verdict by mid-morning Tuesday.

The jury found BMO not liable on three of the four counts. But found the bank responsible for “assistance and abetting breach of fiduciary duty”.

Kelley said he thought he would be “best defended” on appeal.

“When they came back with the verdict, we felt really good,” he said. “Of course, there are many, many decisions made during the trial that the other side can point to, but we feel this is a solid decision.”

After being appointed receiver in Petters’ bankruptcy, Kelley put some of Petters’ largest business entities in bankruptcy, including Sun Country Airlines and Polaroid Corp. He also liquidated his property and filed several “clawback” lawsuits against hedge funds that profited from Petters’ crimes. .

In July 2021, a federal judge terminated the receivership and disbursed $722 million that Kelley had so far recovered on behalf of Petters’ victims and creditors.

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