Bankruptcy Judge Linda Riegle on Monday ruled that attorneys for investors failed to show that Wells Fargo Bank knowingly aided USA Capital in defrauding investors.
USA Capital, a hard-money lender handling almost $1 billion in assets for several thousand individual investors, solicited money from investors to use for making loans to developers.
The company became insolvent and filed for bankruptcy in 2006. USA Capital maintained bank accounts at Wells Fargo. Plaintiffs’ attorney William Reid said evidence showed that bank employees knowingly aided and abetted in fraud at USA Capital.
The lawsuit, which was filed in bankruptcy court, sought a $99 million judgment from the giant bank.
Attorneys for the bank persuaded Riegle that the plaintiffs had presented inadequate evidence to win their case. The judge said she would recommend that a federal judge dismiss the case, although Riegle hadn’t started the second half of the trial in which the defense presents evidence.
“I find in favor of Wells on all the allegations,” the judge said. “I have great empathy with the investors.”
However, “I have to find the facts and the laws the way I see them.”
The plaintiffs were required to prove that Wells Fargo employees knew they were assisting USA Capital in wrongdoing, not just that bank employees were negligent.
In addition, Riegle said, the plaintiffs had to prove that the bank’s actions caused a loss to them to win the case.
“This requires more than (bank) suspicion of wrongdoing,” she said.
The case focused on evidence showing how insiders at USA Capital diverted money from the Diversified Trust Deed Fund.
In the most dramatic allegation, the plaintiffs argued that USA Capital “kited” an $11.4 million check to avoid an $8.3 million overdraft at a separate USA Capital account at Nevada State Bank.
Wells Fargo guaranteed the $11.4 million check for USA Capital,. However, Riegle said, a USA Capital employee convinced Wells Fargo that the matter stemmed from an error.
In addition, the plaintiffs also contended that money from a bank account with investment money was commingled with money in a bank account that contained interest and principal paid by borrowers for investors.
The plaintiffs claimed that USA Capital was conducting a Ponzi scheme in which old investors were paid with money from new investors. The judge said the bank was unaware that USA Capital was carrying out a Ponzi scheme.
While part of the case revolved around Wells Fargo operations in Las Vegas, Reid argued that a Wells Fargo branch in Temecula, Calif., was involved in civil racketeering. The California branch agreed to transfer investor money at USA Capital through a sequence of bank accounts and eventually to USA Capital Investment Partners, a private company owned by USA Capital owners Joe Milanowski and Tom Hantges.
Reid called it a “textbook case” of money laundering.
The judge said the Temecula bank employee was unaware that USA Capital was laundering money. The bank had no idea “that culpable insiders were looting the funds,” Riegle said.
Contact reporter John G. Edwards at jedwards
@reviewjournal.com or 702-383-0420.