Three prominent banks must defend themselves against allegations of negligence and breach of fiduciary duty in connection with a mortgage-related Ponzi scheme run by a real estate attorney who milked hundreds of millions of dollars from the Orthodox Jewish community.
In a decision last week, the Second Circuit Court of Appeals threw out a lower court decision dismissing state law claims against Fleet Bank, N.A., Sterling National Bank and Trust Co. of New York and Republic National Bank of New York in connection with a scheme run by David Schick.
Starting in 1994, Schick arranged with several of his clients and other investors to use their money to bid on packages of mortgages.
A source familiar with the case said he needed “show money” to qualify as a bidder. He put it into various accounts with several banks with the understanding that, if his bid was not accepted, the money would not leave the bank. However, if his bid was accepted, he told investors he would “flip the deal” for a profit and share the funds with the investors. Although it sounds shaky, the source said, such activity is not illegal and Schick was initially quite successful.
However, the source said that things went awry when he had a problem with an insurance company in Florida and, needing cash to settle that issue, began to send funds from his New York accounts to Florida.
Facing a shortfall in the New York-based accounts, Schick then began taking money from later investors to pay off the earlier investors. The plan collapsed in 1996. However, as the plan began to implode, Schick bounced hundreds of checks. The source claimed the banks “passed Schick around” because his accounts were some of their largest and that they ducked their reporting duties for the overdrawn accounts by marking some checks “Refer to Maker.” New York law requires banks to report overdrafts on attorney fiduciary accounts.
Schick pleaded guilty to criminal charges in 1997.
However, Thomas J. Moloney, an attorney for Fleet Bank, which was acquired subsequently by Bank of America Corp., disputed that the banks had a responsibility to report the account activity. He said Schick opened up “normal commercial banking accounts” to do real estate deals, not attorney trust accounts that have a heightened reporting requirement.
Moloney also said Schick’s scheme was a scam, something the investors should have known. “It was an illegal scheme that they were proposing to do with him,” he said.
In reinstating the lawsuit, the court found that the plaintiffs who had deposits at the banks had stated a claim against the banks for negligence and aiding and abetting breach of fiduciary duty under New York law.
Schick’s investors have had limited success in recovering the funds they invested with him. New York attorney Edward S. Rudofsky said he represents 62 clients who lost $57 million by investing with Schick. He said his clients recovered about 30 percent of their investment after making claims under Schick’s bankruptcy, leaving them with a total loss of about $40 million.
Republic National Bank, which is now a subsidiary of HSBC Holdings PLC, and Sterling National Bank did not return calls for comment by press time.
