Investors who claim Umpqua Bank aided and abetted a $300 million Ponzi scheme perpetrated by one of its northern California borrowers have won a key legal battle.U.S. District Court Judge Richard Seeborg denied the bank's motion for summary judgment, which keeps the case alive. He also certified the case as a class action, which increases the number of plaintiffs and potential damages.Linda Lam, the Oakland attorney leading the plaintiff's case, said the trial should get underway in 2023, she said.With nearly $30 billion in assets, Umpqua is the largest bank headquartered in Oregon.
It has grown swiftly over the years through a rapid-fire series of acquisitions.The bank said it was 'disappointed' in the ruling adding that the bank was misled by its borrower.The controversy centers around a company called Professional Financial Investors, which invested in commercial real estate in Marin and Sonoma counties. Umpqua Bank inherited PFI as a customer in 2012 when it acquired Circle Bank, a tiny six-branch commercial bank based in Novato, California.The company was revealed as a fraud in 2020 after the death of Kenneth Casey, PFI founder and top executive. An attorney hired by Casey's widow 'immediately recognized PFI was insolvent,' the judge stated in his ruling, and could not repay its investors as promised.The U.S.
Securities and Exchange Commission and the Department of Justice opened investigations. Lewis Wallach, Casey's second in command, admitted to embezzling more than $26 million of investors' money. He is currently serving 12 years in prison.PFI investors targeted Umpqua Bank.
But holding a lender responsible for the bad acts of its borrower is no easy task under California law. Investors needed convincing evidence that Umpqua officials were complicit rather than hoodwinked.Lam, attorney for the investors, argued the red flags were abundant.Umpqua's own fraud-detection software issued 146 alerts of suspicious activity at PFI between 2018 and 2020, the judge noted in his opinion.Records at the Novato branch clearly laid out the flow of funds from PFI's account to Casey's personal account. The opinion cites an email from an Umpqua operations manager sent to the Novato branch after the fraud had been uncovered.
'Holy moly, I see transfers were allowed,' the manager wrote.Normally, Umpqua prohibits customers from transferring funds from business to personal accounts unless they get authorization from a bank employee.'Umpqua is a sophisticated bank that has internal policies and controls,' Lam said. 'We aim to prove that employees overrode those controls. It wasn't that they weren't paying attention.'Umpqua argues that it had no reason to doubt PFI or its executives.Wallach testified that his company began as a legitimate business and operated as such for two decades, the bank said in a statement.
'PFI only began defrauding investors many years later, after it already had accounts at Umpqua's predecessor bank and had done business with them for many years,' the bank said.Wallach also testified that no one at Umpqua knew about the scheme and that, in fact, 'his company worked hard to actively hide that information from the bank because they knew that if Umpqua found out, it would have immediately shut them down.'Umpqua staffers' faith in PFI was undeterred even when outsiders began asking difficult questions. After an attorney for a PFI investor showed up in the Novato branch complaining about the firm's business practices, an Umpqua banker sent an email to PFI warning them. 'They got nothing from us,' the banker added.