With a new decision settling the issue, businesses run the risk of being held liable for the conduct of their customers with the potential for increased Ponzi scheme related litigation following the Pennsylvania Supreme Court’s approval of a cause of action for aiding and abetting fraud.
In David Marion, et al. v. Bryn Mawr Trust Co., the Court examined a Ponzi scheme involving the sale of fraudulent certificates of deposits. To facilitate his fraud, the schemer had opened deposit and wire transfer accounts with Bryn Mawr Trust Company (“BMT”), eventually becoming one of the bank’s largest customers. When BMT was sued by a court-appointed receiver for aiding and abetting the fraud, the trial court granted summary judgment in favor of BMT, pointing to the absence of a statute or Supreme Court case recognizing the cause of action.
The Supreme Court reversed the trial court decision, recognizing that in Pennsylvania, individuals and entities can be liable for aiding and abetting frauds of which they have actual knowledge. While acknowledging that this cause of action targets those individuals and entities adjacent to schemers, the Court noted “[m]any frauds, especially complex commercial frauds, cannot be perpetrated without the active assistance of secondary actors such as accountants, lawyers, bankers, analysts, etc.” Additionally, these secondary actors are more likely than schemers to have the deep pockets necessary to ensure victims are made whole and are thus often an attractive target for litigation.
The Court’s decision did limit the reach of this new cause of action; confirming – consistent with the majority of jurisdictions across the country – that actual knowledge is required to establish liability under this tort and rejecting a “should have known” standard. Citing thirteen cases in a variety of jurisdictions and the Restatement as examples of requiring actual knowledge, it noted that “a negligence scienter would effectively oblige banks like BMT and other entities who engage in a high volume of commercial transactions with numerous customers to engage in costly and intrusive monitoring and investigations of their customers’ activities.”
As a result of this decision, victims of fraud have a new avenue to pursue relief from the banks, accountants, lawyers, analysts, and other secondary actors in Pennsylvania who knowingly assist fraudsters. While plaintiffs will be hard-pressed to prove actual knowledge on summary judgment, defendants are not immune from costly discovery and motions practice during the pendency of litigation.