TD bank successfully defended an action brought against it by a customer in a Ponzi scheme case in McDonald and Dickson v. TD Bank, 2021 ONSC 3872. The result came after a 43 day trial before Justice Conway in Toronto on the Commercial List. This case is important in setting out the scope of a bank’s obligations to a client who has been defrauded by an insider of the client.
SIB was an offshore bank operating in Antigua. It was solely owned by Allen Stanford. TD was the primary domestic correspondent bank for SIB for 18 years, offering on-shore US dollar banking services to the Antiguan bank. Stanford operated an $8 billion Ponzi scheme through SIB using its TD bank account. The Ponzi scheme collapsed during the 2008 financial crisis. SIB was found liable for billions of dollars in damages to Stanford’s Ponzi victims. After the collapse of the Ponzi scheme, SIB’s court-appointed liquidators commenced a claim against TD alleging knowing assistance in breach of fiduciary duty, and negligence. The underlying theme of the causes of action is that TD should have been on guard to protect SIB from “insider abuse” by the sole owner and controlling mind of SIB.
SIB alleged that TD did not act on various red flags associated with Stanford/SIB over the years. Those alleged red flags included: SIB was solely owned by one person; FINCEN had published a general warning about banks in Antigua; the US Senate produced a report outlining the criminal misuse of correspondent banks by offshore banks, particularly those situated in Antigua; there was an article in the US media that noted Stanford was using his financial and political clout to subvert banking laws in Antigua, threatening to make it a haven for money launderers; and that TD in 2006 reviewed in detail its relationship with SIB and failed to identify any problems in the course of that review. It was admitted by SIB that TD has no actual knowledge of Stanford’s fraud.
Justice Conway found that Stanford’s fraudulent scheme was elaborate, highly sophisticated, and highly concealed. SIB had around 100 employees who were unaware of the fraud and thought they were working at a legitimate financial institution. SIB had strong AML policies, in part to help avoid outside scrutiny that would have exposed the Ponzi scheme. Justice Conway found that no one at TD had any reason to believe that Stanford was operating a Ponzi scheme through SIB. SIB’s “red flags” only appeared to be red flags with the benefit of hindsight.
Justice Conway dismissed SIB’s claim for knowing assistance. TD did not have actual knowledge of Stanford’s breach of fiduciary duty to SIB. It was also neither reckless nor willfully blind. There was no evidence on the record that TD had a basis to believe that Stanford might breach his fiduciary duty and misappropriate SIB’s assets for his own use.
Justice Conway also dismissed SIB’s claim for negligence. Established cases concerning the duty of care of banks owe to their own customer concern a duty of care in the execution of particular transactions. The duty proposed in this case was for TD to have, over time, recognized that SIB was at risk of “insider abuse”, to make inquiries, and to shut down the account. Justice Conway rejected the imposition of such a duty. TD’s duty was to process transactions pursuant to SIB’s instructions, which it did. TD’s duty did not extend to a duty to monitor the internal operations of SIB, unless there were clear indicia to put the bank on notice of fraudulent conduct. Even if she had found that a duty of care existed, Justice Conway would have found that TD met the standard of care with respect to each of the red flags identified by SIB.