Class action: Wells breached fiduciary duty, failed to catch Ponzi scheme

Wells Fargo is being dragged into Ponzi scheme litigation over its alleged failure to detect an insurance scam believed to have cost more than 1,000 victims hundreds of millions in losses.

Wells became the target of a class-action lawsuit filed in federal court in Miami on Tuesday over accusations that it did not do enough to discover and prevent a Ponzi scheme perpetrated by a group of its former clients. The plaintiffs' lawyers say the scam cost more than 1,000 victims upward of $300 million, and it all took place under Wells Fargo's watch.

The suit states Wells acted not only as the bank for various entities involved in the Ponzi scheme but also as the trustee and securities intermediary for insurance products that were central to the fraud. The class action, led by Fanny B. Millingston — a 79-year-old resident of Broward County, Florida — alleges the scam took place throughout the decade leading up to 2021.

"From its bird's-eye vantage point as the primary depository bank used by the scheme operators for the intake and outflow of investment funds to and from plaintiff and the class, Wells Fargo knew of and substantially assisted in the frequent transfers of those funds for improper purposes, which included round-trip, in-and-out transactions of new investor money to pay existing investors as well as the pilfering of those funds by the scheme operators," according to the plaintiffs' lawyers.

Their suit against Wells accuses it of aiding and abetting the breach of fiduciary duties, aiding and abetting fraud and unjust enrichment. Wells Fargo declined to comment.

The plaintiffs' lawyers allege the perpetrators ran their scheme through a complex network of Florida-based insurance-related businesses. They included Seeman Holtz — also known as National Senior Insurance — the Para Longevity Companies and the Centurion Companies.

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The suit accuses the alleged scammers of borrowing money from their victims through the sale of promissory notes, legally binding documents often giving their holders a guarantee of being paid by a certain date. The money needed for repayments was to come from the Seeman Holtz affiliates' substantial holdings in special insurance products known as "stranger-originated life insurance."

These products, called STOLIs for short, result from life insurance holders wanting to cash in on their policies before they die. These often elderly insurees do that by selling their policies to a third-party firm like one of Seeman Holtz's affiliates. That third party then becomes responsible for paying the premiums but also gets to collect the death benefits when the original holder dies.

Seaman Holtz and its affiliates, according to the class-action suit, promised the victims of the alleged Ponzi scheme that its proceeds from those death benefits would eventually be used to pay interest and principal on their promissory notes. Instead — as is the case in any classic Ponzi scheme — money from new investors was often simply shifted over to pay debts owed to existing investors, according to the plaintiffs' lawyers. The alleged perpetrators, the suit adds, "further looted significant sums through improper, exorbitant or fictitious fees and expenses."

Wells Fargo, according to the suit, was in a position to catch all of this. Wells, for instance, should have known from its "insider roles" as trustee and securities intermediary that the STOLIs used in the alleged scheme were in fact not being held, as promised, as collateral with third-party agents. The suit also states Wells "must have known" that the promissory notes being sold by the alleged perpetrators were not registered and that the people offering them were not licensed.

Bill Singer, a longtime securities lawyer and recently retired author of the Broke and Broker blog, said assertions about what a firm "should have known" or "must have known" can be difficult to prove in civil cases. It's doubly difficult in this case, Singer said, because Wells is supposed to have known about the activities of third-party clients it didn't directly control.

"The success or failure of the complaint will rest on the plaintiffs' ability to demonstrate by a preponderance of the evidence that Wells Fargo had a duty to monitor the transactions and, further, had a duty to alert the victims of any improper conduct," Singer said. "That's a lot of dots to connect."

Phone calls and emails to the plaintiffs' lawyers were not returned immediately.

Lawyers have seen success, though, arguing that large financial firms should bear some responsibility when fraudsters use their services in aid of Ponzi schemes. In February 2020, for instance, a FINRA arbitration panel ordered Bank of New York Mellon's Pershing subsidiary — one of the largest asset custodians in the industry — to pay $5.6 million in damages over a more than $7 billion Ponzi scheme run by R. Allen Stanford. Stanford, now serving a 110-year prison sentence, had used Pershing's clearing services for his Houston-based brokerage.

Seeman Holtz meanwhile has been the subject of numerous lawsuits. Florida's office of financial regulation, for instance, sued the firm and a long list of its affiliates in state court in July 2021 over the same alleged Ponzi scheme. The court in May 2023 appointed a receiver, Daniel J. Stermer, to oversee Seeman Holtz and its affiliated companies and enter into settlements "clawing back" money still owed to victims from various representatives of the firms.

The class-action lawsuit says Stermer found that many of the companies' assets had been stolen and "their bank accounts pilfered by the scheme operators." Stermer, who separately sued Wells Fargo in Florida state court on May 9, has himself determined that the firm was in a position to know something was awry.

Louis Straney, a regulatory expert at Arbitration Insight, said it's not uncommon for lawyers to go looking for other sources of victim restitution when they learn that the main perpetrators of an alleged scheme are unlikely to be able to pay.

"Especially if the money was spent on lifestyle issues, there's going to be a shortfall," Straney said. "So then anyone that's even associated with it becomes a potential target for recovery."

Straney agreed that the plaintiffs' lawyers could have a hard time making their case against Wells stick.

"If they had decent documentation and acted in a reasonable way," he said, "they may not have any liability whatsoever."