Lawsuit Against Bank Raises Third-Party Issues


A lawsuit against Wachovia Bank by a group of defrauded consumers raises some interesting issues related to third-party fraud liability. The question for consumers, investors, and executives is: What is the threshold for liability in fraud cases? What knowledge or actions had to be present in order for a person or company to be held liable for fraud?

In the old days, I think the answer to these questions was a bit clearer for the lay person. The person or entity committing the fraud was the one responsible and the one liable to repay victims. But as time goes on, victims have a tendency to look further and further for a party who can repay them.

Victims are looking for deep pockets. And the fact remains that those who steal from others almost always spend it all, so there is nothing to recover. The victims then turn to those with peripheral knowledge or participation and those with liability insurance or other deep pockets that may cover their losses.

Wachovia’s Role in the Fraud

According to reports, a group of consumers was defrauded of millions of dollars by a telemarketing company called Suntasia Marketing Inc. Suntasia was shut down in July of last year by the Federal Trade Commission.

The FTC reported that the company was using telemarketers to offer “free” trial memberships to buying groups and travel clubs. All victims had to do was give up their banking information in order to get this free trial. With banking information in hand, Suntasia took money out of victims’ bank accounts without authorization.

Wachovia Bank provided the accounts and services that Suntasia needed to carry out its fraud. On its face, it might appear that Wachovia didn’t do anything wrong merely by providing banking service to a rogue company. But there’s a catch. The victim group suing Wachovia says that the bank knew that Suntasia was committing fraud, and went along with it.

Why? Because each time a victim disputed a fraudulent withdrawal out of their bank account, Wachovia charged Suntasia a hefty fee.

The bank has denied any knowledge of the fraud committed by Suntasia, but recent documents revealed in the case suggest otherwise. Internal e-mails suggest that bank executives new of the fraud by the telemarketers and that employees were often warned to be on the lookout for such schemes. It also appears that federal agencies warned Wachovia and other banks about frauds being committed by telemarketers.

Consumer Motivation for Litigation

Banks have been notorious for being able to avoid prosecution and fines for what some say amounts to aiding in the crimes of fraudulent telemarketers. Consumers have therefore turned to lawsuits to seek justice.

And where there is evidence that a bank played an active role in a fraud by allowing it to continue (with the use of the bank’s accounts and systems) it probably makes sense to sue. Documents produced in the Wachovia case show that in 2005, a fraud investigator employed by the bank noted that 79 percent of electronic checks presented for payment by Suntasia were returned because they were unauthorized. Experts say that a returned check rate higher than 2.5 percent is a sign of potential fraud.

That may be compelling evidence. Certainly the bank’s systems flagged Suntasia’s accounts, and there was obviously reason for concern if a fraud investigator was looking into the matter. Other banks say they contacted Wachovia and told them that Suntasia was initiating fraudulent electronic checks and trying to take money from their customers’ accounts. According to reports, at least one bank says they asked Wachovia to shut down the accounts of Suntasia to stop the “improper activity.” Wachovia did not shut down the accounts.

Other Instances of Third Party Liability

To the lay person, the question of whether or not Wachovia played an active role in the Suntasia fraud may be clear. But in other cases, the issues get much more complex.

Consider the recent U.S. Supreme Court decision in the case of Stoneridge Investment Partners v. Scientific-Atlanta, et al.

Stoneridge sued Scientific-Atlanta and Motorola for their business dealings with Charter Communications, alleging that these companies played a part in investors being deceived. Charter was inflating revenue on its financial statements, and part of the fraud had to do with transactions done with the defendants in this case.

Charter would purchase cable boxes from the defendants at a $20 premium over the regular price, and the defendants agreed to return that money by purchasing advertising from the cable company. Charter booked the advertising money as revenue, but didn’t immediately book the purchase of the cable boxes as an expense. This caused the net income of Charter to be inflated while these transactions were occurring.

In this case, the Supreme Court decided that the cable box suppliers couldn’t be held responsible for the financial statement fraud of Charter, or for the fact that investors relied on the fraudulent financial statements.

Although the cable boxes were apparently the vehicle for the fraud, Scientific-Atlanta and Motorola did not appear to know about the fraud being committed within Charter and I question whether they even could have known about the fraud. While the transactions surrounding these cable boxes may appear a bit unusual, they do not constitute fraud so long as they are reported properly under the accounting rules.

And it appears that Scientfic-Atlanta and Motorola recorded the transactions properly on their books, so it doesn’t seem likely that they even considered whether or not Charter was doing the same.

It’s clear to me that the actions of the defendants in this case were far removed from the fraud being committed by Charter. They had no reason to suspect a fraud was occurring, and by merely participating in a transaction with a company committing fraud, it doesn’t mean they should be held responsible. The actions of Charter in committing their financial statement fraud were far removed from the transactions involving the cable boxes and advertising.

More Direct Involvement
Contrast the actions in the Charter case with those in the Wachovia case. According to reports, the bank officials appear to have been put on notice by other banks and law enforcement that fraud was being committed by Suntasia. Even an internal investigator pointed out significant problems with the account, problems that reeked of fraud.

The bank continued to provide services that it appeared to know were directly connected to a fraud, in that the fraud could not be committed without these services. Consumer complaints of unauthorized transactions, even in large numbers, did not convince bank officials to suspend doing business with a suspect customer. This is a big problem, I think, as the bank likely had direct evidence and knowledge of the crime.

Victims of fraud want to recover their money. They often don’t care who pays for the crime, as long as they get some or all of their funds back. But the courts must be careful to only hold responsible those third parties which played an active role in a fraud.

Big business with deep pockets can’t be held liable for every fraud scheme, simply because they did business with the organization committing the fraud. Third parties should only be held responsible when they had sufficient knowledge of the fraud and played an active role in making the fraud happen.

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