The New York Times once wrote that "You can't run a Ponzi scheme without a bank … Banks are in a unique position to notice what is going on before the money is all gone."[1] The Toronto-Dominion Bank (TD Bank) may now be wishing that it had heeded this warning. JPMorgan Chase probably does.

From the early 1990s until 2009, TD Bank was the primary provider of correspondent banking services to Stanford International Bank Limited (SIB), an Antiguan off-shore bank that sold certifications of deposit to thousands of investors around the world. Throughout that same period, Allen Stanford (Stanford), SIB’s chairman, perpetrated an $8 billion Ponzi scheme against SIB and its creditors. The scheme was the second largest of its kind, trailing only the scheme perpetrated by Bernie Madoff (Madoff). While Madoff was sentenced to 150 years in prison for his misdeeds, Stanford received a 110 year sentence and his scheme has given rise to litigation around the globe to recover funds for SIB’s creditors.

The Dynasty Action was on hold while the court dealt with preliminary issues related to statute of limitation issues raised by TD Bank in the Liquidators Action. Recently the Antiguan liquidators successfully obtained a dismissal of TD Bank's motion on those preliminary issues. Therefore, the Dynasty Action will now proceed in tandem with the Liquidators Action. TD Bank is defending two actions in Canada stemming from its provision of services to SIB. The first is being pursued by five of SIB’s approximately 21,000 creditors and seeks damages of approximately $20 million for those creditors’ investment losses (the Dynasty Action). The second is being pursued by the Antiguan liquidators of SIB (the Liquidators’ Action). The Liquidators’ Action seeks damages of $5.5 billion, representing the amount owed by SIB to all of its creditors due to the fraud. The factual bases of the Dynasty Action and the Liquidators’ Action are similar in important respects to the allegations made against JPMorgan Chase, the main banker to the Madoff scheme that has thus far paid $2.6 billion in connection to the Madoff fraud.

While a Canadian court initially struck important portions of the claim in the Dynasty Action, the same court recently allowed those previously struck portions to be re-incorporated based on a significant expansion of the available information about the SIB-TD Bank relationship that was obtained from the Antiguan liquidators. In allowing the amendments, the court noted the amended Dynasty Action claim alleges that, despite continuing unabated in its provision of services to SIB, TD Bank:

(i) knew and admitted it did not understand SIB’s business

(ii) knew SIB had no legitimate need for a correspondent bank in Canada;

(iii) knew Stanford was under SEC investigation;

(iv) knew SIB was transferring funds all out of proportion to its status as an Antiguan bank (and knew this was grounds for terminatin of the bank’s relationship);

(v) knew about the widespread public condemnation of the Antiguan banking system and questionable practices in Antiguan banks, including by Stanford;

(vi) knew something “was not right” at SIB and was “getting nervous” about it; and

(vii) knew a due diligence investigation was required (but failed to investigate).

TD Bank unsuccessfully pursued an appeal to the Court of Appeal, thereby setting the stage for TD Bank to face a trial on the merits in the Dynasty Action.[2]

In addition, in November 2015, the Liquidators' Action also enjoyed recent success. TD Bank moved for summary judgment on the basis that the claim was barred by the applicable two-year limitation period. However, the Canadian court rejected TD Bank’s position, refused to grant summary judgment and ordered that the liquidators’ $5.5 billion claim should continue to proceed towards trial in tandem with the Dynasty Action.

Madoff’s fraudulent scheme resulted in a 150 year prison sentence and payments of at least $2.6 billion by Madoff’s main banker. With Stanford behind bars for 110 years and the recent developments in the Dynasty Action and Liquidators’ Action, time may soon tell whether TD Bank will face liability for its role as the primary bank to SIB.

Originally published in ICC FraudNet.