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Mansor v. JPMorgan Chase Bank, N.A.

United States District Court, D. Massachusetts

April 26, 2016





This putative class action arises out of a 150 million dollar Ponzi scheme, which was perpetrated by an entity known as Millennium Bank and its principal, William Wise (“Wise”), and was implemented using accounts that had been opened at Washington Mutual Bank (“WaMu”). The plaintiffs, Edmund J. Mansor and Roberta M. Mansor (the “Mansors”), claim that they and other similarly situated investors were victims of the Millennium Bank fraud. In September 2008, WaMu was acquired by the defendant, JPMorgan Chase Bank, N.A. (“JPMorgan” or “Bank”). By their claims in this action, the Mansors are seeking to hold JPMorgan liable for assisting Wise and his associates in carrying out their fraudulent scheme after the Bank allegedly learned of their unlawful activities, and for failing to alert law enforcement and shut down the Millennium-related accounts before the perpetrators could transfer and abscond with investor deposits. After this court dismissed the First Amended Verified Class Action Complaint without prejudice, the Mansors filed a Second Amended Verified Complaint (Docket No. 340) (“Complaint”) against JPMorgan. By their present Complaint, the Mansors have asserted claims against the defendant, on behalf of themselves and all others similarly situated, for aiding and abetting common law fraud (Count I) and for negligence with knowledge of fiduciary relationship (Count II).

The matter is presently before the court on the “Defendant’s Motion to Dismiss Second Amended Complaint and Motion to Strike.” (Docket No. 345). By its motion, JPMorgan is seeking an order, pursuant to Fed. R. Civ. 12(b)(1), 12(b)(6), 9(b) and 12(f), dismissing the Complaint with prejudice and striking all allegations that reflect the plaintiff’s use of privileged information. In the alternative, JPMorgan requests that the court enter an order limiting the scope of the proposed class so that it includes only “those investors (1) who were actually defrauded by Millennium Bank, and (2) whose funds were deposited with [JPMorgan] (as opposed to some other bank) between October 8, 2008 and February 26, 2009 and whose injuries were caused by [the defendant].” For all the reasons detailed below, the defendant’s motion is ALLOWED IN PART and DENIED IN PART. The plaintiffs’ claim for negligence shall be dismissed, but the motion is otherwise denied. However, nothing herein shall preclude JPMorgan from challenging the scope of the proposed class again at a later stage in the proceedings.


Scope of the Record

When ruling on a motion to dismiss, the court must accept as true all well-pleaded facts, and give the plaintiffs the benefit of all reasonable inferences. See Cooperman v. Individual, Inc., 171 F.3d 43, 46 (1st Cir. 1999). “Ordinarily, a court may not consider any documents that are outside of the complaint, or not expressly incorporated therein, unless the motion is converted into one for summary judgment.” Alt. Energy, Inc. v. St. Paul Fire & Marine Ins. Co., 267 F.3d 30, 33 (1st Cir. 2001). “There is, however, a narrow exception ‘for documents the authenticity of which are not disputed by the parties; for official public records; for documents central to plaintiffs’ claim; or for documents sufficiently referred to in the complaint.’” Id. (quoting Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993)).

In the instant case, the plaintiffs have attached a large number of documents as exhibits to their Complaint. Generally, under the applicable standard, it would be appropriate for the court to consider such documents in connection with the motion to dismiss. See Giragosian v. Bettencourt, 614 F.3d 25, 27-28 (1st Cir. 2010) (“In assessing a rule 12(b)(6) motion to dismiss, [court] may consider, in addition to the complaint itself, a limited array of additional documents such as any that are attached to the complaint”). However, the defendants have moved to strike Exhibits 9 through 14B, as well as all of “the allegations drawn therefrom, ” on the grounds that they are privileged, or potentially privileged, under the Bank Secrecy Act (“BSA”) and related regulations. (Def. Mem. (Docket No. 346) at 5-6). Because this court finds that the challenged material is not privileged, the motion to strike is denied.

“[W]hen considering a motion to strike, those portions of a complaint that make use of privileged [information] may be removed from the complaint.” Sims v. Roux Labs., Inc., Civil Action No. 06-10454, 2007 WL 2571941, at *1 (E.D. La. Aug. 31, 2007). See also Otero v. Vito, No. 5:04CV211DF, 2005 WL 1429755, at *1-2 (M.D. Ga. Jun. 15, 2005) (striking information from Amended Complaint on grounds of privilege). Here, however, JPMorgan cannot establish that the challenged documents and allegations are privileged under the controlling authority. On December 23, 2013, this court issued a detailed order in which it ruled that the exhibits at issue were not shielded by the BSA or its implementing regulations, and that the plaintiffs were free to rely on them in connection with the present litigation. (See Docket No. 190 at 4-5, 30-31). JPMorgan subsequently challenged that ruling by filing a petition for a writ of mandamus with the First Circuit Court of Appeals, and on August 21, 2015, the First Circuit issued a decision denying JPMorgan’s petition. See In re JPMorgan Chase Bank, N.A., 799 F.3d 36, 37 (1st Cir. 2015).

Significantly, in its decision, the First Circuit questioned whether the BSA’s disclosure limitations would apply at all to parties, like the named plaintiffs, who represent neither a reporting financial institution nor a government entity. See id. at 41-42. It also questioned whether the Act’s disclosure limitations would apply at all to the factual circumstances presented in this case. See id. at 42-43. More importantly, the First Circuit ruled that even assuming the BSA’s disclosure limitations were to apply in this case, the documents JPMorgan was seeking to protect, including documents attached to the present complaint, would “fall outside the scope of that so-called ‘privilege.’” Id. at 43. Thus, the court found that “none of the documents at issue constitute a draft [suspicious activity report (“SAR”)], and none of the documents reflect the decision-making process as to whether a SAR should be filed, the process of preparing a SAR, or an attempt to explain the content of a SAR post-filing.” Id. at 44. It also rejected JPMorgan’s “invitation to view the ‘privilege’ as extending to any document that might speak to the investigative methods of financial institutions.” Id. In light of these rulings, JPMorgan cannot establish that any of the documents attached to the Complaint, or any allegations drawn therefrom, are privileged or “potentially privileged” under the law of this Circuit. Therefore, its motion to strike the plaintiffs’ exhibits and allegations is denied.[1] The relevant facts, viewed in the light most favorable to the plaintiffs, are as follows.

WaMu’s Alleged Role in the Millennium Bank Ponzi Scheme

As described above, this case arises out of the fallout from a $150 million Ponzi scheme known as “Millennium Bank, ” which was carried out by Wise and two of his associates, Jacqueline Hoegel and her daughter, Kristi Hoegel (collectively, the “Hoegels”). (Compl. at Introduction & ¶ 8). The scheme, which was directed mainly at U.S. citizens, involved the sale of bogus certificates of deposit (“CDs”) bearing unrealistically high interest rates. (Id. ¶¶ 9-10). In order to carry out their fraudulent activities, Wise and the Hoegels set up three fictitious limited liability companies under the names “UT of S, LLC, ” “United T of S, LLC” and “Sterling I.S., LLC.” (Id. ¶ 11). Allegedly, they also used the accounts and services of two WaMu bank branches located in Napa, California to negotiate, launder and ultimately abscond with millions of dollars of deposits that they had collected from unsuspecting investors. (See id. ¶¶ 12, 15-17). The Mansors claim that between April 2008 and January 2009, they paid a total of $215, 000 to Wise and the Hoegels, all of which was deposited into the Millennium accounts. (Id. ¶¶ 50, 54). They further claim that they and other similarly situated investors were victims of the Millennium Bank fraud. (See id. ¶¶ 49-50, 54-55).

According to the plaintiffs, employees working in WaMu’s two Napa, California branches acquired specific knowledge of the illegal activities, and willingly assisted the perpetrators of the Millennium Bank fraud in carrying out their Ponzi scheme. (See id. ¶¶ 13-32). Thus, the plaintiffs allege that the Hoegels, acting at Wise’s direction, sought out the managers of the two branches, Tamara Williams (“Williams”) and Bianca Groves (“Groves”), and fostered close relationships with both women so that Williams and Groves would want to cooperate and assist them with their unlawful account activities. (Id. ¶ 13). Wise, too, visited the Napa branches and got to know Williams and Groves. (Id. ¶ 15). Initially, however, Wise devised a fictitious storyline to tell to the WaMu employees. (See id. ¶ 14). Specifically, Wise and the Hoegels allegedly informed Williams, Groves and their respective staff members that they “did not sell securities or other investment products, but were an intermediary for wealthy clients, who desired to invest without divulging their identity, much like a trust company.” (Id. ¶ 14). The plaintiffs claim that despite the alleged storyline, Williams and Groves were able to “observe[ ] on a daily basis the activities being carried out by the Millennium perpetrators, ” and thus gained specific knowledge regarding their fraudulent conduct. (Id. ¶ 18). They also claim that the two women routinely assisted Wise and the Hoegels by facilitating requests to wire investor funds from the Millennium accounts to other locations. (Id. ¶ 15).

Allegedly, both Williams and Groves observed and commented upon the large volume of checks that were deposited into the Millennium Bank accounts. (Id. ¶ 18). According to the plaintiffs, those checks contained memos describing the terms and interest rates of CDs, which the Millennium Bank investors believed they were purchasing. (Id. ¶¶ 18-19). In addition, Williams and Groves allegedly were able to see that Wise and the Hoegels used none of the incoming funds for any legitimate banking or other investment activity. (Id. ¶ 18). Instead, they simply transferred funds from the WaMu accounts to various offshore accounts that were held in their own names, or in names of various family members. (Id. ¶ 17).

As described in the Complaint, Groves and Williams also were instrumental in enabling Wise and his associates to carry out their fraudulent enterprise. For instance, the plaintiffs claim that in early 2008, Williams informed Kristi Hoegel that she had received calls from bank investigators who were performing audits of the Millennium accounts and requesting information about the nature of Wise’s business. (Id. ¶ 19). Allegedly, Williams voiced concern about the volume of checks that were being deposited into the Millennium accounts, as well as the memos on the faces of the checks relating to the terms and interest rates of CDs, and she advised Kristi regarding steps she could take to “get the investigators ‘off your backs.’” (Id. ¶¶ 19-20). In addition, Williams allegedly expressed a desire to assist Wise and the Hoegels “‘so you won’t get caught[, ]’” and suggested ways in which they could adjust their banking activities in order to reduce their presence at the WaMu branches and avoid further scrutiny. (Id. ¶¶ 20-23). In particular, the plaintiffs claim that Williams encouraged Wise and the Hoegels to install remote wiring services, which would enable them to wire funds directly from their office. (Id. ¶ 21). She later advised Kristi Hoegel to contact Groves and apply for a Remote Deposit Capture (“RDC”) system, which would allow Wise and the Hoegels to deposit investor checks into the Millennium accounts without the need to visit either of the WaMu branches. (Id. ¶¶ 22-23). A remote wire transfer service was installed, under Groves’ supervision, in the spring of 2008, and an RDC system was installed on about September 16, 2008. (Id. ¶¶ 21, 24).

Within days after the RDC system was installed in Millennium Bank’s Napa office, checks deposited through the system were being returned. (Id. ¶ 25). Kristi Hoegel allegedly inquired about the problem, and was referred to a Business Treasury Services Specialist in Seattle, Washington, who advised her to take the returned checks to a WaMu branch for deposit. (Id. ¶ 25). The Services Specialist also informed Kristi that if the checks were returned at the branch level, she would need to find out “what restraint or department has some kind of note on your account and get it removed.” (Compl. Ex. 3). Allegedly, Kristi then contacted Williams, who determined that a restraint had been placed on the Millennium accounts, as well as on personal accounts that Kristi and Jacqueline Hoegel maintained at WaMu. (Compl. ¶ 26). According to the Complaint, Williams then promised Kristi that she would get the restraints removed. (Id.).

The plaintiffs claim that suspicious activity in the Millennium accounts triggered alerts within WaMu’s internal monitoring system, and led to periodic investigations by personnel in WaMu’s investigatory units beginning as early as 2006. (Id. ¶¶ 33-34). Those units included WaMu’s Financial Intelligence Unit (“FIU”), which was located in Stockton, California, and its Anti-Money Laundering Operations Unit (“AML Ops Unit”), which was located in San Antonio, Texas. (Id. ¶ 33). As a result, various individuals working in WaMu’s FIU and AML Ops Unit allegedly learned of the suspicious deposits and wire activity in the Millennium Bank accounts. (See id. ¶¶ 34, 38). Nevertheless, they took no action to disrupt the suspicious activity or to protect the Millennium Bank investors.

JPMorgan’s Acquisition of WaMu

On September 25, 2008, the United States Office of Thrift Supervision seized WaMu and placed it into receivership with the Federal Deposit Insurance Corporation (“FDIC”). See Yeomalakis v. F.D.I.C., 562 F.3d 56, 59 (1st Cir. 2009). On that same day, the FDIC sold certain of WaMu’s assets to JPMorgan. See id. Those assets included the Millennium Bank accounts, as well as the two Napa branches where Wise and the Hoegels had allegedly been carrying out their fraudulent banking activities. (Compl. ¶ 28). Accordingly, all of the Napa branch employees, including Williams and Groves, became employees of JPMorgan. (Id. ¶ 29). Within days of the acquisition, Williams allegedly called Kristi Hoegel to inform her that Williams had been successful in getting the restraints removed from all of the Millennium-related accounts. (Id. ¶ 30). During the conversation, Williams allegedly “voiced her concerns about all of them ‘getting caught.’” (Id.).

In connection with its acquisition of WaMu’s assets, JPMorgan took control of WaMu’s FIU and AML Ops Unit, including investigative files that had been compiled by those units as part of their investigation of the Millennium-related accounts. (See id. ¶¶ 33-34). In addition, two WaMu compliance managers, Casey Stein (“Stein”) and Richard Alaniz (“Alaniz”), assumed supervisory authority over JPMorgan’s ongoing investigations into the Millennium accounts. (Id. ¶ 34). According to the plaintiffs, JPMorgan’s investigative units completed a review of those accounts on October 8, 2008. (Id. ¶ 43). They further claim that “JPMorgan had specific and actual knowledge of Millennium’s fraudulent activities” by that time. (Id. ¶ 43). Specifically, the plaintiffs allege that by October 8, 2008, JPMorgan knew that Wise and Kristi Hoegel had opened accounts in the names of two of the limited liability companies at a WaMu branch in Las Vegas, Nevada, and that internal monitoring systems within the Bank had detected “voluminous and unusual deposits and outgoing domestic and international wire activity” in those accounts. (Id. ¶¶ 51-52). They further allege that despite its discovery, the Bank failed to take any affirmative steps to notify law enforcement or to shut down the Millennium-related bank accounts. (Id. ¶ 45).

The plaintiffs acknowledge that JPMorgan placed new restraints on the Millennium accounts in October 2008, and again in January and February 2009. (Id. ¶ 31). Each time, however, Kristi Hoegel allegedly contacted Williams, and Williams allegedly took steps to have the restraints on the accounts removed. (Id.). According to the plaintiffs, “[t]here is no doubt that [Williams] knew and understood that Wise, and the Hoegels were involved in a fraudulent, illegal enterprise at that time, but elected to help them anyway.” (Id. ¶ 32). Therefore, they claim that Williams, now an employee of JPMorgan, knowingly assisted the perpetrators of the fraud in carrying out their unlawful enterprise.

Continuing Investigations of the Millennium Bank Accounts

The record establishes that suspicious activity in the Millennium accounts continued to trigger investigations by the Bank’s AML Ops Unit, and that by late February 2009, JPMorgan had compiled a 441-page file containing the results of an investigation for the period from October 8, 2008 to February 20, 2009. (See id. ¶¶ 39-40). As a result of that investigation, Stein and other members of the AML Ops Unit learned of unusual activity in the accounts involving the “rapid movement of funds and international wire transfers to countries with an increased risk for potential money laundering.” (Id. ¶ 39). They also determined that a large portion of the funds that were deposited into those accounts “were being redistributed to Wise, Hoegel, and their apparent relatives[.]” (Id.). As Stein later described in a Declaration that he provided to the Securities and Exchange Commission (“SEC”):

The UT of S, LLC Account activity reflects many “remote items deposits” and customer deposits in significant amounts, followed by large outgoing domestic and international wires to various individuals, including Wise, Hoegel, apparent family members, and entities and businesses controlled by Wise and/or the Hoegels. The remote items deposited in the UT of S, LLC Account consist of transit checks from various individuals. The memo lines on the checks typically include references to “CD” and interest rates ranging from 6.75% to 10%.

(Compl. Ex. 9 ¶ 5).

On February 26, 2009, Stein initiated the closure of the Millennium accounts on an expedited basis, and directed another Bank employee to notify Jason Richards, a Special Agent with the FBI. (See Compl. Exs. 26 & 29). One day later, Stein was informed that restraints had been placed on all of the accounts and associated customers. (Compl. Ex. 29). For some reason that is not explained in the Complaint, however, Stein then requested that the restraints be removed, and that the accounts be processed “as normal closures[.]” (Id.). The plaintiffs claim that the restraints were lifted, and the closures postponed, “again with [Williams’] direct involvement[.]” (Compl. ¶ 47). However, the record demonstrates that Williams did not inquire about the restraints until March 10, 2009, by which time the accounts had again been frozen. (See Compl. Ex. 28).

At Stein’s direction, on February 27, 2009, the Small Business Manager of the Bank’s Napa Valley branch conducted a physical inspection of UT of S, LLC’s office in Napa, California. (Compl. ¶ 39; Compl. Ex. 9 ¶ 7). During the inspection, the Small Business Manager observed that the UT of S office had no signage, but that the RDC machine was located on the premises. (Compl. Ex. 9 ¶ 7). The Small Business Manager also overheard a receptionist ask a caller if he or she wanted to roll over a matured CD into a new one. (Id.). Later that day, Stein resumed the investigation by placing a telephone call to Kristi Hoegel. (Compl. Ex. 9 ¶ 8). Stein reported that during the conversation, Hoegel confirmed that Wise was her boss, that Wise owned UT of S, and that UT of S owned Millennium Bank. (Id.). She also stated, among other things, that her business did not offer CDs, she was not licensed to offer CDs, and she did not know why the memo section of the checks that were deposited into UT of S, LLC’s account referred to CDs and interest rates. (Id.).

In the meantime, the SEC was conducting its own investigation of Millennium Bank, and on March 4, 2009, it served JPMorgan with a subpoena for documents relating to UT of S LLC and Sterling IS LLC. (Compl. Ex. 8). In response to the subpoena, JPMorgan provided the SEC with the results of its investigation into the Millennium accounts. (See Compl. ¶ 40). This included the contents of its 441-page investigative file. (Id.).

The record shows that by early March 2009, employees in JPMorgan’s investigative units were describing Millennium Bank as a Ponzi scheme, and were viewing Wise as a crook. In particular, on March 4, 2009, Gina Ward, a Compliance Specialist in JPMorgan’s AML Ops Unit, sent Alaniz an internet posting in which Millennium was characterized as “a 100% scam” and a “money laundering operation.” (Compl. Ex. 24). On March 5, 2009, Alaniz sent an email to Gina Ward in which he described Millennium Bank as a Ponzi scheme. (Compl. Ex. 23). On March 9, 2009, the Bank again froze the Millennium accounts on a temporary basis. (Compl. Ex. 9 ¶ 9). At that time, approximately $34, 500 remained in the accounts. (Id.).

On March 10, 2009, one day after the accounts were frozen, Williams contacted Stein to obtain information on how long the funds would be held. (Compl. Ex. 28). Williams was informed that the funds might be held until the end of the month. (Id.). In his Declaration, which was executed on March 23, 2009, Stein confirmed that “[t]he funds will be released and the account closed within the next several days.” (Compl. Ex. 9 ¶ 9). Nevertheless, the plaintiffs claim that during the month of March 2009, JPMorgan permitted $500, 000 of investor money to flow through the Millennium accounts and be transferred to Wise and the Hoegels. (See Compl. ¶ 48). Therefore, according to the plaintiffs, the Bank allowed Wise and his associates to defraud additional investors. (Id.).

The End of the Fraudulent Scheme

The Millennium Bank scheme finally came to an end on March 25, 2009, when the SEC filed a civil enforcement action against Wise and his associates in the United States District Court for the Northern District of Texas. (Id. ¶ 35). By that time, however, Millennium Bank investors had lost millions of dollars. (See id. ¶ 49). The plaintiffs allege that from the time of JPMorgan’s acquisition of WaMu on September 25, 2008 to the filing of the SEC action on March 25, 2009, Wise and the Hoegels allegedly deposited close to $17 million of investor money into the Millennium accounts. (Id.). They further allege that as a result of JPMorgan’s failure to notify law enforcement of the ongoing criminal activities, or to shut down the Millennium accounts, Wise and the Hoegels were able to drain the accounts and abscond with nearly all of those funds. (See id. ΒΆΒΆ ...

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