Marin County Ponzi scheme-related lawsuit moves forward - North Bay Business Journal

Legal papers filed in a case in which investors seek to recover damages from a bank for a Ponzi scheme include a deposition from a bank official about fund transfers between business and personal accounts by the operators of the two Novato firms that orchestrated the fraud.

"Holy moly, I see transfers were allowed," an Umpqua Novato employee messaged the branch manager, according to court documents.

With a U.S. District Court hearing date slated for Aug. 25 in San Francisco, the discovery phase that produced this deposition has ended, as Professional Financial Investors and Professional Investors Securities Fund investors pursue a class action suit against Umpqua and its Novato branch. This is where the firms' Novato founder, the late Ken Casey, and convicted CEO Lewis Wallach of Encino conducted banking activity in what authorities refer to as a "classic" $330 million Ponzi scheme.

Casey died of a heart attack in May 2020, prompting an audit called by his widow that led to investigations by both the U.S. Securities and Exchange Commission and law enforcement. It also triggered a Marin County property selloff of PFI and PISF properties valued at $436 million, as well bankruptcy filings by the two companies and a 12-year prison sentence for Wallach.

While accused of living lavish lifestyles that include the purchase of Judy Garland's Malibu mansion at the expense of others, the men once representing PFI and PISF, were alleged to have bilked more than 1,200 investors in property dealings run out of the Ignacio Boulevard offices. Some investors plugged their life's retirement savings into the 'rob-Peter-to-pay-Paul' document practice that went on between 2014 and 2020.

Four investors — Shela Camenisch, Dale Dean, Luna Baron and Eva King — who collectively lost more than $600,000, are named plaintiffs in the class action suit filed in August 2020 that places blame with Umpqua Bank.

The suit alleges the bank was aware of the scheme.

Plaintiffs seek to show the managers knew about the fraudulent activity happening in the branch of the Oregon-based bank.

The lawsuit makes specific references to the Novato bank's accounts manager, June Weaver, who handled PFI and PISF business. She left the bank shortly after Casey died, authorities stated. The plaintiffs' attorney deposed Weaver in the case, asking specifically about transfers.

"When asked whether $400,000 was an unusually large amount of a shortfall for PFI, Weaver answered 'no,'" according to the court deposition.

In the lawsuit's deposition related to the "holy moly" reference, branch manager A.J. Vasquez told prosecutors that the branch's solutions manager Erika Brines discovered the "Novato branch was regularly helping Casey transfer investor funds to his personal bank accounts."

An email and call requesting comments from Brines and Vasquez, who are still with the bank, were unanswered and declined, respectively. Vasquez referred the inquiry to the corporate office, which provided the following statement: "Umpqua looks forward to responding to the plaintiff's allegations in court and (is) confident in the merits of our case. As already noted in previous filings, PFI's former president has testified that he did not know of anyone at Umpqua who knew about the scheme and that PFI worked hard to keep it hidden from the bank."

Umpqua filed a motion for summary judgment to have the case ruled in its favor due to claims the plaintiffs have insufficient evidence of wrongdoing by the bank itself. A judge had denied its request for dismissal filed in October 2020.

In January 2021, Judge Richard Seeborg's order denying dismissal stated, "Umpqua is required by law to conduct extensive customer due diligence, especially for high-risk and high-net worth customers like Casey."

The plaintiff attorney Linda Lam of Gibbs Law in Oakland told the Business Journal: "All banks are required to due diligence against fraud. Umpqua definitely had the procedures in place. We aim to prove the bank must have known."

The Federal Deposit Insurance Corporation (FDIC), an independent agency created to instill confidence in the nation's financial system, advises banks to be on the lookout for frequently overdrawn accounts known to be red flags for Ponzi schemes.

Since the massive 2008 Ponzi scheme involving New York financier Bernard Madoff, the U.S. Securities & Exchange Commission took deliberate steps to reduce the chances that such frauds would occur or not go undetected.

The SEC has beefed up the enforcement division, improved the handling of complaints, cooperated more with insiders, specified risk assessment procedures, established a whistleblower program and adopted new safeguards including third-party reviews to protect investors' assets.

Yet on a state level under California Financial Code Section 1451, banks are directed to assume that transfers drawn by authorized signers on an account, including checks and transfers made to the authorized signer personally, are "drawn for a purpose authorized by the depositor and within the scope of the authority conferred upon such person," according to FindLaw.com.

But to what extent plausible deniability applies remains a question.

Despite losing his CPA license in 1997 and being convicted a few decades ago of 21 counts of bank fraud, Casey was able to carry out the scheme with Wallach holding the title as president, according to the plaintiffs. He told prosecutors at the time that a friend of Casey's, who ran Novato Community Bank before becoming Circle Bank, allowed the companies to proceed with their business activity.

Umpqua Bank bought the community bank in 2012.

Susan Wood covers law, cannabis, production, tech, energy, transportation, agriculture as well as banking and finance. For 27 years, Susan has worked for a variety of publications including the North County Times, Tahoe Daily Tribune and Lake Tahoe News. Reach her at 530-545-8662 or susan.wood@busjrnl.com.