JPMorgan secures dismissal of lawsuit brought by victims of Ponzi scammer Renwick Haddow

JPMorgan Chase & Co. (NYSE:JPM) and JPMorgan Chase Bank have managed to secure dismissal of a case launched against them by hundreds of victims of Ponzi scammer Renwick Haddow. The banks have been accused of helping Haddow.

Earlier today, Judge Naomi Reice Buchwald of the New York Southern District Court signed an order granting the defendant banks’ motion to dismiss.

Let’s recall that the plaintiffs – Hongying Zhao and 244 other individuals, have brought this action against JPMorgan Chase Bank, N.A. (JPMC) and its holding company JP Morgan Chase & Co.  The First Amended Complaint asserts the following claims against both defendants: (1) knowing participation in a breach of trust, (2) aiding and abetting embezzlement, (3) aiding and abetting breach of fiduciary duty, (4) aiding and abetting conversion, (5) aiding and abetting fraud, (6) unjust enrichment, (7) commercial bad faith, and (8) gross negligence.

The defendants have filed a motion to dismiss the FAC pursuant to Federal Rule of Civil Procedure 9(b) and 12(b)(6).

The Complaint’s primary allegation is that defendants were willfully blind to the fact that non-party Renwick Haddow and his company “Bar Works” were perpetrating a fraud on their investors. On or about February 4, 2016, Haddow opened depository bank accounts for two Bar Works entities at JPMC (the “622 account” or the “379 account”). The plaintiffs mention several examples of account activity that they allege alerted or should have alerted JPMC to the fraudulent nature of the Bar Works enterprise. According to the Complaint, transaction activity from Haddow’s accounts at JPMC generated tens of thousands of dollars in transaction fees for the bank. The plaintiffs further allege that fees associated with the transactions constituted a “large percentage of the wired amount.” As a result of JPMC’s actions, plaintiffs allege that they lost nearly $17 million in capital that they had invested in Bar Works.

In her ruling, the Judge first turned to plaintiffs’ knowing participation in a breach of trust (Count I) and aiding and abetting breach of fiduciary duty (Count III) claims. Central to Counts I and III is the existence and breach of a fiduciary relationship, the Judge said. However, neither the Complaint nor the brief in opposition to defendants’ motion to dismiss clearly articulate plaintiffs’ theory under which a fiduciary relationship existed between plaintiffs and either Haddow or the Bar Works entities.

Even assuming that there was a fiduciary relationship between investors and Haddow, these claims fail for the additional reasons that plaintiffs do not adequately plead that defendants had actual knowledge of that relationship, the Court says. A necessary predicate of actual knowledge of a breach of fiduciary duty is knowledge of a fiduciary relationship itself. Plaintiffs allege that defendants knew that Haddow and/or Bar Works “were using the 622 Account and the 379 Account as fiduciary accounts,” and that Bar Works had failed to “invest customer property pursuant to [the PPM], which defendants had seen”.

The Judge noted that merely stating that JPMorgan knew Haddow was using the bank’s accounts as fiduciary accounts is plainly conclusory (and elides the fact that the JPMC accounts were ordinary depository accounts rather than specially designated fiduciary or trust accounts). Also, the mere fact that JPMorgan had access to the private placement memorandum (PPM) is irrelevant without sufficiently particular factual allegations that the PPM contained specific indications that the relationship between Haddow and/or Bar Works and investors rose to the level of fiduciary.

The Judge also said that the plaintiffs fail to adequately allege that JPMorgan had actual knowledge of any breach of obligations running from Haddow or Bar Works to plaintiffs. The plaintiffs’ argument that JPMorgan’s knowledge of frequent withdrawals, wire transfers to accounts in countries recognized as money laundering havens, and the single transfer recall request constitute “actual knowledge” of a breach of fiduciary duty or fraudulent scheme was also found to be unpersuasive.