BMO Harris Must Faces $3.5 Billion Trial Over Ponzi Scheme

(Bloomberg) -- BMO Harris Bank, a unit of Bank of Montreal, must face billions of dollars in investor claims tied to a massive Ponzi scheme run by former client Tom Petters, a judge ruled.

A request by BMO Harris to have the case thrown out before trial was rejected Friday by a federal judge in St. Paul, Minnesota. The claim was brought by a court-appointed trustee seeking to recover money for a group of hedge funds that were victimized in the fraud.

Petters, a Minnesota businessman, convinced investors he and his associates were financing the purchase of consumer electronics for resale to big-box retailers, but he never bought any and used money from new investors to pay returns to older ones. Prosecutors pegged losses at $3.5 billion. Petters was convicted of fraud in 2009 and sentenced to 50 years in prison.

“BMO disagrees with and is disappointed by the district court’s ruling, and we are considering all options at our disposal,” Paul Gammal, a spokesman for the bank, said in an emailed statement.

Gammal said the allegations relate to a period before BMO’s involvement. Petters originally used an account at National City Bank, which was acquired by M&I Marshall and Ilsley Bank in 2001. M&I was in turn bought by BMO in 2011.

Friday’s ruling by U.S. District Court Judge Wilhelmina Wright upholds an earlier one by U.S. Bankruptcy Judge Kathleen Sanberg in favor of the trustee, who is seeking $3.5 billion. Sanberg is overseeing the bankruptcy of Petters Company Inc.

In July, Sanberg ruled that BMO “intentionally destroyed and failed to preserve” evidence of emails and other communications between the Petters company and its bank. She sanctioned BMO by saying the trustee could tell the jury about the destroyed evidence and also introduce documents over the bank’s objection. Wright has yet to rule on BMO’s appeal of that ruling.

The case is Kelley v. BMO Harris Bank N.A., 19-cv-01756, U.S. District Court, District of Minnesota (St. Paul).

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