What is the BMO Bank Controversy?

The BMO Bank controversy primarily revolves around a significant lawsuit alleging that BMO Harris Bank aided and abetted a multibillion-dollar Ponzi scheme orchestrated by Thomas J. Petters. The core of the dispute involved a substantial financial verdict against the bank, which was later reversed on appeal.

Background of the Thomas J. Petters Ponzi Scheme

Thomas J. Petters, a prominent Minnesota businessman, orchestrated one of the largest Ponzi schemes in U.S. history. His elaborate fraud, which collapsed in 2008, involved convincing investors to finance phantom purchases of consumer electronics, which he claimed would then be resold to big-box retailers. In reality, no such electronics existed, and new investor money was used to pay off earlier investors, a classic hallmark of a Ponzi scheme. The scheme defrauded investors out of billions of dollars over more than a decade. You can learn more about the scheme on Wikipedia's page for Tom Petters.

BMO Harris Bank's Alleged Involvement

BMO Harris Bank, a subsidiary of Canadian-based BMO Financial Group, was accused of playing a role in facilitating Petters' scheme. The lawsuit, brought by the trustee appointed to recover funds for the victims of the Ponzi scheme, claimed that the bank, through its operations, aided and abetted the fraudulent activities. This accusation stemmed from the alleged failure of the bank to identify and report suspicious transactions related to the scheme, despite red flags that purportedly should have alerted them.

The Legal Battle and Initial Verdict

The trustee for the Petters' scheme victims pursued legal action against BMO Harris Bank. After a lengthy legal process, a significant verdict was reached:

• Initial Verdict: A jury found BMO Harris Bank liable and awarded \$563 million in damages. This verdict reflected the jury's belief that the bank had indeed aided and abetted the multibillion-dollar Ponzi scheme.

The Appeal and Reversal

Following the initial verdict, BMO Harris Bank appealed the decision. The case proceeded to the Eighth Circuit Court of Appeals, where a panel of three judges reviewed the case.

The Eighth Circuit panel ultimately reversed the \$563 million verdict against BMO Harris Bank. The primary reason for this reversal was a crucial legal defense:

• In Pari Delicto Defense: The Eighth Circuit panel ruled that the bank should have been allowed to use the "in pari delicto" defense. This Latin legal term translates to "in equal fault" or "in equal wrong." In essence, this defense argues that if both parties to a dispute are equally at fault for the wrongdoing, neither party should be able to recover damages from the other. In the context of the Petters scheme, the bank's argument was that the entity suing them (the trustee, representing the scheme's interests) was also tainted by the scheme's illegality, and thus, should not be able to recover from the bank.

Here's a summary of the legal outcomes:

The reversal by the Eighth Circuit means that the legal proceedings may continue, or the case could be remanded for further consideration, potentially with the "in pari delicto" defense being applied, which could significantly alter the outcome for the bank.