E. GRADY JOLLY, Circuit Judge:
Plaintiffs, receivers of seven insurance companies (the "Receivers"), appeal the grant of summary judgment in favor of Dreyfus Service Corporation ("DSC"). Throughout the 1990s the insurance companies' assets were looted through a complex fraud scheme perpetrated by the now infamous felon, Martin Frankel. In the underlying suit, the Receivers sought to impose tort and civil RICO liability on DSC, the investment company through which Frankel funneled the insurance companies' funds before moving them to his Swiss bank account. Had DSC properly discharged its duties, the plaintiffs argued, it would have uncovered Frankel's scheme and their losses would have been averted. They also alleged that by deliberately turning a blind eye to Frankel's obviously suspicious activities DSC effectively joined Frankel's conspiracy, thus becoming liable for treble damages under the civil recovery provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO").
The district court, after thoroughly reviewing New York and federal law, granted summary judgment in favor of DSC on each claim. As to the state tort claims, the court concluded that no duty ran to the insurance companies for eight of the accounts, and that the Receivers could not demonstrate causation for the remaining five. As to the federal RICO claim, the court concluded that a reasonable juror could not find that anyone at DSC was deliberately indifferent to Frankel's money laundering activities.
We agree with the district court except for one aspect: New York law does impose on DSC a duty—in this case running only to the named subaccounts—to ensure that the transactions it processes on behalf of its customers are authorized. We believe the Receivers have raised fact questions sufficient to survive summary judgment as to whether this duty was properly discharged by DSC's reliance on the insurance companies' actions and Frankel's representations, and whether a breach of this duty caused the insurance companies' losses. The district court was correct, however, in concluding that the Receivers have not stated a viable theory of recovery in
We therefore affirm the judgment of the district court as to the tort claims against the LNS accounts and the RICO claims. We vacate the district court's judgment as to the tort claims against the named subaccounts and remand for further proceedings.
From 1989 to 1991, Frankel fraudulently solicited $11 million for investment in a venture he called Creative Partners. He quickly dissipated $5 million of those funds for his personal use. In order replenish the funds so as to avoid detection, Frankel began searching for a bank to purchase and loot, engaging John Jordan, a Tennessee lawyer, and John Hackney, a Tennessee businessman. When that proved unsuccessful, the parties contrived a scheme to purchase and loot insurance companies. They recruited, among others, accountant Gary Atnip to assist in the plan.
Before acquiring his first insurance company, Frankel anonymously purchased a registered broker-dealer firm called Liberty National Securities, Inc. ("LNS"). Because the SEC had imposed a lifetime ban on Frankel for prior fraudulent activities, Frankel enlisted yet another co-conspirator to act as the figurehead of LNS and required him to keep the company registered and in good standing with the SEC and NASD. With LNS in place, Frankel moved to acquire his first insurance company, purchasing Franklin American Corporation ("FAC"), parent company of the Franklin American Life Insurance Company ("FAL"). Frankel then positioned his co-conspirators in key management positions. Hankney was made the president, chief executive officer, and chairman of the board of directors of both FAC and FAL; Atnip became both companies' chief financial officer; and Jordan served as both companies' counsel. Each understood the purpose of the purchase was to loot FAL; each was paid well for his continuing participation. With the companies' management in on the scheme, all Frankel had to do was have Hackney liquidate the company's existing portfolio, put LNS in charge of investing the company's liquid assets, and transfer the money to his personal account while LNS fabricated monthly statements reflecting holdings in U.S. Treasury bonds. Within a year, Frankel caused, through the series of transfers discussed below, nearly $25 million of FAL's assets to be liquidated and sent to a Swiss account under his control. All the while Frankel's cohorts led FAL's employees and customers and state insurance regulators to believe that FAL's assets were being invested in U.S. Treasury securities through LNS.
Frankel, however, did not stop there. In 1993, Frankel routed the proceeds from looting FAL back through FAC, causing FAC to purchase a second insurance company: Family Guaranty Life (FGL). Frankel's co-conspirators were again placed in key management positions, LNS began "managing" FGL's assets, and Frankel started liquidating and siphoning off assets into his Swiss account. This same pattern was repeated five more times. In 1994 and 1995, Frankel had FAC purchase Farmers and Ranchers Life Insurance Company (FRL), International Financial Services Life Insurance Company
Dreyfus Service Corporation (DSC), a registered broker-dealer and the provider of shareholder services for the Dreyfus family of mutual funds, became an instrument of the scheme—unknowingly—in 1994 as part of the process by which Frankel transferred funds from the insurance companies to his personal account in Switzerland. Shortly after purchasing FGL, Frankel, using the alias Eric Stevens, opened two accounts with DSC. The first, a retail money market account, was opened by Frankel on behalf of LNS, Inc.—an alias for Liberty National Securities, Inc.—upon completion of a written application. This allowed Frankel to trade in various Dreyfus mutual funds with LNS, Inc. as the registered shareholder. Frankel funded this initial account with $1.1 million from FGL's Tennessee bank accounts. One day later, he redeemed all but $15 and had the proceeds wired to a New York bank and ultimately to his Swiss bank account. This pattern of large purchases from the insurance companies' bank accounts and rapid redemptions to Frankel's personal accounts abroad would continue throughout Frankel's relationship with DSC.
A few months later, Frankel closed his retail account and opened his second account, a "master account," also in the name of LNS, Inc. but this time in DSC's institutional cash management fund. Through this master account, Frankel was permitted to open subsidiary subaccounts in which shares were registered either in the name of LNS, Inc. or in a name other than that of the master account holder. Between October 1994 and May 1999 Frankel opened twelve such subaccounts. Five bore the name of LNS, Inc. Two designated "International Financial Corporation" as the registered shareholder, using its taxpayer identification number and address. The remaining five were opened using the initials, taxpayer identification numbers, and addresses of the insurance companies.
To say that DSC's efforts to identify the origin, legitimacy, or ultimate destination
In 1999, Frankel's house of cards finally collapsed. Insurance regulators realized they were supervising looted insurers and swept into action. Each company was placed in liquidation or receivership in its state of domicile with each state's insurance commissioner being named liquidator or receiver. The Receivers, as representatives of the insurance companies' estates, sued over 70 parties. Their individual claims were ultimately joined into the current action. In 2001 each plaintiff added DSC, alleging negligence and a RICO conspiracy claim. Nearly all other defendants have defaulted, settled, or entered bankruptcy. After years of discovery, DSC filed a motion for summary judgment and the Receivers filed two motions for partial summary judgment.
The thorough and conscientious district court reasoned that as to the bulk of the DSC accounts, DSC did not, under New York law, owe a duty to the insurance companies to protect against Frankel's looting of their assets. Furthermore, as to the accounts to which a duty might run— those subaccounts bearing the initials of the insurance companies—the Receivers failed to raise a genuine issue of material fact as to whether had DSC properly discharged its duty the Receivers' losses would have been averted. The court also rejected the Receivers' RICO conspiracy charge, finding that no reasonable juror could conclude that anyone at DSC was aware of a high likelihood that money laundering was taking place. The district court thus granted summary judgment in favor of DSC on all claims made by each Receiver, further denying all other pending motions as moot. The Receivers timely appealed, arguing that the district court erred both in its application of New York and federal law and by improperly resolving questions of fact against the Receivers.
We review the district court's grant of summary judgment de novo, applying the same standard as the district court.
The Receivers primarily argue negligence—that DSC's failure to monitor for suspicious activity or verify redemption authority breached duties of care that it owed to the insurance companies, causing their losses. Having already determined in its disposition of an earlier motion that New York law applied, the district court decided the summary judgment motion on the basis of New York's tort law without objection from either party. On appeal both parties have briefed New York law. Even had either party preserved an objection to this choice of law, see Kucel v. Walter E. Heller & Co., 813 F.2d 67, 74 (5th Cir.1987), we believe it was proper to apply New York substantive law under Mississippi's "center of gravity" test.
To determine issues of state law, we look to the final decisions of that state's highest court. See, e.g., Six Flags, Inc. v. Westchester Surplus Lines Ins. Co., 565 F.3d 948, 954 (5th Cir.2009). "In the absence of such a decision, we must make an Erie guess and determine, in our best judgment, how that court would resolve the issue if presented with the same case." Id. (internal quotation marks removed). "In making an Erie guess, we defer to intermediate state appellate court decisions, unless convinced by other persuasive data that the highest court of the state would decide otherwise, and we may consult a variety of sources, including the general rule on the issue, decisions from other jurisdictions, and general policy concerns." Travelers Cas. & Sur. Co. of Am. v. Ernst & Young LLP, 542 F.3d 475, 483 (5th Cir.2008) (internal citations and quotation marks removed). "Our task is to attempt to predict state law, not to create or modify it." Herrmann Holdings Ltd. v. Lucent Techs., Inc., 302 F.3d 552, 558 (5th Cir.2002) (internal quotation marks removed).
To establish a claim for negligence under New York law, the Receivers must prove: "(1) that [DSC] owed them a
Of the thirteen accounts opened at DSC by Frankel, eight bore the name, address, and taxpayer identification number of LNS or IFC (the holding company created by Frankel for use in purchasing insurance companies) (collectively, the "LNS accounts"). The five remaining accounts— all subaccounts organized under LNS's master account—bore the name, address, and taxpayer identification number of one of the insurance companies. The district court found that the insurance companies were customers as to their named accounts but not as to the LNS accounts. On appeal, the Receivers accept these conclusions. DSC, on the other hand, agrees that the insurance companies were not customers as to the LNS accounts, but vigorously challenges the district court's conclusion that the insurance companies were customers of the named subaccounts. Because the parties are in agreement that the insurance companies were not customers vis-à-vis the LNS accounts, we need not consider the issue. We need only consider whether the district court was correct in concluding that the insurance companies were customers as to the named subaccounts. We turn to that now.
The record establishes that the named subaccounts were opened via the phone by Frankel pursuant to LNS's master account agreement with DSC and the subaccounts were funded by deposits from the insurance companies' bank accounts. All account activity, prior and subsequent to funding, was directed by Frankel, including the provision of outgoing wire instructions. The insurance companies never communicated with DSC and, indeed, DSC argues that it was unaware that the names on the accounts referred to independent entities. On the strength of these facts, DSC argues that at all times LNS was its only customer.
But DSC's discussion of its relationship with the insurance companies is less than forthright. It is undisputed that the accounts were opened in abbreviated versions of the insurance companies' names using their real taxpayer identification numbers and addresses. It is also undisputed that the account holders were, in fact, separate and distinct legal entities and that DSC contacted them directly via monthly statements, albeit only by mail.
We recognize that DSC's relationship with the insurance companies was not that of a typical bank and its customers; in a very real sense they were strangers to DSC. This fact complicates any attempt to impose on DSC duties the New York courts have utilized to protect banks' traditional customers with whom there is a clear relationship. Certainly there are no cases explicitly including subaccount holders such as the insurance companies. But neither have we been made aware of any case definitively excluding the insurance companies from New York's "customer" jurisprudence. We thus consider as a matter of first impression whether New York courts would include such entities as customers.
Under New York law the imposition of a duty is a question of public policy. The court determines the parties to whom the duty runs "by balancing factors, including the reasonable expectations of parties and society generally, the proliferation of claims, the likelihood of unlimited or insurer-like liability, disproportionate risk and reparation allocation, and public policies affecting the expansion or limitation of new channels of liability." In re New York City Asbestos Litig., 5 N.Y.3d 486, 806 N.Y.S.2d 146, 840 N.E.2d 115, 119 (2005). Although not explicit, it is clearly the fear of imposing on banks endless, unpredictable liability that drives New York's distinction between a bank's customers and non-customers. See Century Bus. Credit Corp. v. N. Fork Bank, 246 A.D.2d 395, 668 N.Y.S.2d 18, 19 (N.Y.App. Div.1998) (stating that requiring a bank to monitor its customers' accounts for the benefit of its customers' creditors would "unreasonably expand banks' orbit of duty"); Hamilton v. Beretta U.S.A. Corp., 96 N.Y.2d 222, 727 N.Y.S.2d 7, 750 N.E.2d 1055, 1061 (2001) (explaining that duties must be precisely defined to avoid imposing potentially "limitless liability"); Eisenberg v. Wachovia Bank, N.A., 301 F.3d 220, 226 (4th Cir.2002) (noting that to extend a bank's duties of care to non-customers would "expose banks to unlimited liability for unforeseeable frauds").
There is no such risk here. The funds in the accounts were registered to the insurance companies. The addresses and taxpayer identification numbers utilized in opening the accounts made it abundantly clear that the named entities were separate and distinct from LNS. Recognizing this fact, DSC sent the insurance companies monthly statements and confirmations of account activity. In short, the insurance companies in this case were well enough known to DSC that imposing the limited duties of care flowing to customers would hardly be crippling; nor would it "unreasonably expand" banks' "orbit of duty." Century Bus. Credit Corp., 668 N.Y.S.2d at 19. We accordingly disagree
We have thus concluded that the insurance companies were customers of DSC for the purpose of the named subaccounts; as we have noted, it is conceded that the insurance companies were not customers of DSC with respect to the accounts in the name of LNS. We will now consider DSC's respective obligations to the insurance companies, first as non-customers, then as customers.
As a general matter, "[b]anks do not owe non-customers a duty to protect them from the intentional torts of their customers." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 286 (2d Cir.2006) (internal quotation marks omitted); see also Renner v. Chase Manhattan Bank, 1999 WL 47239, at *13 (S.D.N.Y.1999) (finding it "well settled" that a bank owes no duty to non-customer third-parties to prevent its customers from defrauding them). This principle is true even as to fiduciary accounts. See Home Sav. of Am., FSB v. Amoros, 233 A.D.2d 35, 661 N.Y.S.2d 635, 637 (N.Y.App.Div.1997) ("[A] depository bank has no duty to monitor fiduciary accounts . . . to safeguard the funds in those accounts from fiduciary misappropriation.").
Like most, this rule is not without exception. New York courts have recognized that a bank may be held liable for its customer's misappropriation where (1) there is a fiduciary relationship between the customer and the non-customer, (2) the bank knows or ought to know of the fiduciary relationship, and (3) the bank has "actual knowledge or notice that a diversion is to occur or is ongoing." Id. The Receivers urge us to apply this theory to their case.
Whether there was a fiduciary relationship is a question of fact. See Penato v. George, 52 A.D.2d 939, 383 N.Y.S.2d 900, 904-05 (N.Y.App.Div.1976). Generally, a fiduciary relationship exists where "a party reposed confidence in another and reasonably relied on the other's superior expertise or knowledge." Wiener v. Lazard Freres & Co., 241 A.D.2d 114, 672 N.Y.S.2d 8, 14 (N.Y.App.Div.1998). Not every broker-customer relationship qualifies, but fiduciary duties can arise where the broker is empowered with discretion. See Indep. Order of Foresters v. Donald, Lufkin & Jenrette, Inc., 157 F.3d 933, 940 (2d Cir.1998); Press v. Chem. Inv. Servs. Corp., 988 F.Supp. 375, 386-87 (S.D.N.Y. 1997). LNS's relationship with the insurance companies was, of course, discretionary. They deposited funds in the DSC accounts at the direction of LNS expecting LNS to use the funds to engage in bond trading on their behalf. Although a few individuals were aware of the fraud, most were not. There was more than enough evidence for a jury to find that a fiduciary relationship existed between the insurance companies and LNS—the broker-dealer with which they entrusted their funds.
The parties' briefs demonstrate substantial disagreement over the proper approach to prong two—whether the bank knows or ought to know of the fiduciary relationship. DSC argues that under New York law this prong can only be met by actual knowledge and that the Receivers' attempt to extend this duty to situations
We are inclined to agree with the Receivers. DSC is correct in pointing out that in every case cited by the Receivers, the nature of the misappropriated funds was not in dispute. See, e.g., Lerner, 459 F.3d at 281 n. 2. Only once has a New York court stated that a bank "knew or ought to have known" of the fiduciary nature of the funds it accepted, and that was in dictum. See Fid. & Deposit Co. of Md. v. Queens County Trust Co., 226 N.Y. 225, 123 N.E. 370, 372 (1919) ("The conclusion that the facts permit . . . [is] that the defendant knew or ought to have known that the funds deposited in the trustee account were trust funds. . . ."). However, neither has DSC pointed to a case expressly requiring subjective knowledge that the funds are fiduciary. Recognizing that it is an open question, we think the better rule—the one that would be chosen by New York's Court of Appeals—is that a plaintiff need only demonstrate that the bank ought to have known given the facts before it.
By using the language "ought to have known" we mean that, like the third prong of New York's test for finding banks liable for fiduciary misappropriation, the defendant must be chargeable with the knowledge by having access to "[f]acts sufficient to cause a reasonably prudent person to suspect" that a fiduciary relationship underlies the funds and by failing to inquire as to the status of the funds. Norwest Mortgage, Inc. v. Dime Sav. Bank of New York, 280 A.D.2d 653, 654, 721 N.Y.S.2d 94 (N.Y.A.D.2001). Generally this will not be the case unless the facts support the "sole inference" that the funds being deposited are held in a fiduciary capacity. See Lerner, 459 F.3d at 287-88; Bischoff v. Yorkville Bank, 218 N.Y. 106, 112 N.E. 759, 761 (1916). We stress that banks are generally not obligated, under New York law, to investigate whether funds deposited with them are fiduciary in nature. See, e.g., Century Business Credit Corp. v. North Fork Bank, 668 N.Y.S.2d at 19.
That being said, we agree with the district court that knowledge that a third party's funds are being deposited into an account is certainly not enough, alone, to show that the bank ought to have known that the funds were fiduciary. See Renner v. Chase Manhattan Bank, 1999 WL 47239 (S.D.N.Y.1999); Tzaras v. Evergreen International Spot Trading, 2003 WL 470611 (S.D.N.Y.2003). That leaves the Receivers in the uncomfortable position of arguing that DSC ought to have known that the funds were fiduciary from other information it actually knew.
Undaunted, the Receivers argue that a jury could have found that DSC ought to have known that the funds deposited into the LNS accounts were fiduciary for the following reasons. First, all of the transfers into the LNS accounts came from bank accounts owned by the Insurance Companies or their affiliates, as plainly indicated by the transfer documents handled by DSC personnel. Second, the master accounts used by Frankel not only anticipated use by, but were indeed "targeted" toward, customers who would use the accounts in a "fiduciary" capacity. Third, Frankel opened five separate LNS subaccounts. Fourth, as soon as Frankel was informed that he could open accounts in the name of third parties he began to do so while at the same time continuing to push funds through the LNS accounts.
Notwithstanding these assertions, we are unconvinced that, with respect to the LNS accounts, the Receivers have raised a fact question that should be sent to the jury. It is undisputed that DSC's institutional accounts were marketed to fiduciaries and non-fiduciaries alike. It is similarly uncontested that the structure utilized by Frankel to invest in DSC's institutional funds—one master account with a number of subaccounts—is equally consistent with investment by an individual investor or a broker acting as an intermediary and thus handling funds as a fiduciary. That third-party funds are being invested under the primary account holder's name in a fund often used by fiduciaries is simply not enough, especially in the light of New York courts' decisions in Renner and Tzaras, for a reasonable jury to conclude that DSC ought to have known that LNS controlled the deposited funds as a fiduciary.
Before moving on, we should also refer to the Receivers' suggestion that the many "red flags" suggestive of money laundering gave rise to an obligation on behalf of DSC to investigate Frankel's account activity; and that in discharging this duty DSC would have discovered the fiduciary relationship between LNS and the insurance companies as well as Frankel's misappropriation. Some early cases articulating the duty of banks to prevent fiduciary misappropriation do use broad language regarding New York's duty of inquiry. See Fid. & Dep. Co. of Md., 123 N.E. at 372-73 ("If a person has knowledge of such facts as would lead a fair and prudent man, using ordinary thoughtfulness and care, to make further accessible inquiries, and he avoids the inquiry, he is chargeable with the knowledge which by ordinary diligence he would have acquired."). Later cases, however, make clear that any duty to investigate account activity can arise only if the institution knows or ought to know of the fiduciary nature of the funds of which it is in possession and there is a pattern of suspicious activity in the account. See Lerner, 459 F.3d at 287-88; Norwest Mortgage, Inc., 280 A.D.2d at 654, 721 N.Y.S.2d 94. The Receivers have cited no cases suggesting some broad duty for financial institutions to monitor all their accounts for suspicious activity and to investigate that activity upon discovery. We will certainly not act to impose such an expansive obligation.
This conclusion ends our inquiry into DSC's liability for funds deposited in the LNS accounts. Because DSC had no reason to know LNS controlled the funds as a fiduciary the insurance companies fall outside the scope of the duties owed by DSC with regard to fiduciary accounts. Because there is no independent obligation to investigate suspicious activity in non-fiduciary
As to the insurance companies' subaccounts, however, the insurance companies were customers of DSC. Although its scope is not well developed, New York law does recognize that banks and brokers owe a duty of care to their customers. See Dubai Islamic Bank v. Citibank, N.A., 126 F.Supp.2d 659, 667-68 (S.D.N.Y.2000) (collecting cases recognizing a duty of care to customers). The district court recognized that such a duty might exist, but decided this issue on the basis of a failure to demonstrate causation between DSC's alleged breach of its duties and the insurance companies' losses. Because it is impossible to decide whether the Receivers' losses would have been averted had DSC fulfilled its obligations without precisely identifying those obligations, we start by identifying the duties owed by DSC to the insurance companies.
The insurance companies' accounts with DSC were nondiscretionary (i.e., all trades required authorization). Because "[a] nondiscretionary customer by definition keeps control over the account and has full responsibility for trading decisions," a financial institution's duties are limited. de Kwiatkowski, 306 F.3d at 1302 (finding that no general duty of care exists between a broker and the holder of a nondiscretionary account). "On a transaction-by-transaction basis, the broker owes duties of diligence and competence in executing the client's trade orders, and is obligated to give honest and complete information when recommending a purchase or sale." Id. (emphasis added). Complementary to this duty to exercise diligence in the execution of trade orders is at least some duty to ensure that an individual purporting to trade on the customer's behalf is actually authorized to do so. See Dubai Islamic Bank, 126 F.Supp.2d at 667 (declining to dismiss, on a 12(b)(6) motion, claims that honoring unauthorized transfers out of a customer's account without attempting to verify authorization constituted negligence). This duty exists apart from any contractual obligations entered into by the parties, though it of course may also arise from or be satisfied by the parties' contractual arrangements. See Indep. Order of Foresters, 157 F.3d at 940-41 ("[W]here the terms of a nondiscretionary account require the customer's authorization on all transactions, a broker has a duty to obtain the client's authorization before making" trades).
Although this obligation would run to any transaction involving the subaccounts' funds, the circumstances of this case make it unnecessary to consider an institution's liability with respect to the management of assets within a nondiscretionary account by an unauthorized individual. To the extent that DSC violated a duty that caused the Receivers' losses, it must arise out of the execution of Frankel's redemption orders to foreign banks.
Having decided that DSC owed the insurance companies a duty to determine if the redemptions from its accounts were actually authorized, we must ask whether there is a triable issue of fact as to whether DSC breached that duty. We conclude that there is. DSC took no steps to verify that LNS was authorized to make such extraordinary redemptions from the insurance companies' accounts;
A jury reasonably could find that DSC's duty was discharged by its reliance on the insurance companies' repeated, voluntary transfer of funds into DSC accounts the insurance companies knew were established and controlled by Frankel.
But a jury could also reasonably find that DSC's personnel, in the exercise of common judgment without any special training, should have recognized these transactions as suspicious and extraordinary, particularly with respect to the funds of an insurance company. The jury could go on to conclude that DSC's fiduciary duty to its customer, under the circumstances as a whole, required more than turning a blind eye to these extraordinary transactions in reliance on the unverified word of Frankel. See Collision Plan Unlimited, Inc. v. Bankers Trust Co., 63 N.Y.2d 827, 482 N.Y.S.2d 252, 472 N.E.2d 28,
Whether DSC's actions, in the light of what it knew or should have known, properly discharged its duty to process only authorized transactions, or whether in the context of all the circumstances to which we have referred, DSC breached its duty in not making some further inquiry, is a question best left for the jury. See Di Benedetto v. Pan Am World Serv., Inc., 359 F.3d 627, 630 (2d Cir.2004) ("[I]n New York, breach is determined by the jury . . . in [all] cases where there arises a real question as to a defendant's negligence.. . .") (internal quotation marks, brackets, and citation omitted).
Assuming that DSC did fail in discharging its obligation to verify that the transactions were authorized, we turn to the basis upon which the lower court dismissed the subaccount claims—causation. The lower court held that there was insufficient evidence to support a jury finding that an inquiry of the insurance companies would have revealed the scheme and averted the losses. Almost certainly, according to the court, any inquiry would have gone to Hackney, Atnip, or Jordan, any of whom would have confirmed LNS's complete authority to act on the Insurance Companies' behalf with respect to the funds in the subaccounts. It dismissed the Receivers' arguments to the contrary as "speculation" insufficient to survive summary judgment. See Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1429 (5th Cir.1996) (en banc) ("[C]onclusory allegations, speculation, and unsubstantiated assertions are inadequate to satisfy the nonmovant's burden."). For the following reasons, we find ourselves in disagreement.
There is no doubt that Frankel's co-conspirators included substantial portions of the insurance companies' upper management. But because not everyone was in on the fraud, and because of extensive reporting requirements, Frankel's ability to operate without detection depended less on his "domination" of upper management and more on Frankel's ability to control and manipulate the flow of information. It is difficult to say precisely what would have occurred had DSC properly discharged its duty. Almost certainly DSC would have discovered that LNS stood for Liberty National Securities and Frankel would have been outed as a broker rather than a real estate agent. There is some evidence that this alone could have altered the relationship between DSC, Frankel, and the insurance companies by triggering an additional set of DSC procedures.
We recognize that DSC has presented counter-evidence that the insurance companies were receiving funds from a Swiss account, suggesting that officials likely to receive DSC's inquiry, whether in on the fraud or not, would not have considered foreign transactions to be beyond the scope of LNS's authority. DSC has also presented evidence suggesting that any inquiry would have been passed up the chain of command to Frankel's co-conspirators who would have authorized the transactions.
Although undoubtedly a close call, at the summary judgment stage, and on the record before us, we cannot assume that efforts by DSC to verify the relationship
Put otherwise, we cannot hold, on the record before us today, that a jury would be unreasonable in concluding that inquiries from an outside source would have been directed, not to one of Frankel's few co-conspirators, but to one of the many other individuals unaware of the fraud. A jury might reasonably go on to conclude that it is more likely than not that such an individual would have alerted DSC that Frankel was a broker, not a real estate developer, that LNS was authorized only to invest insurance company funds in government securities, and that transferring the funds abroad exceeded this authority, thus stopping the diversion of funds to foreign banks. Within the bounds of reasonable disagreement it is up to the jury to decide the course of events had DSC properly discharged its duties, including how much, if any, of the insurance companies' losses would have been averted.
The Receivers also seek to recover under a RICO conspiracy theory. 18 U.S.C. § 1962(d).
Under the federal money laundering statute, 18 U.S.C. § 1956(a)(1)(B)(i), it is unlawful to conduct a financial transaction with knowledge that the proceeds involved are the product of unlawful activity and knowing that the transaction is designed to conceal or disguise the nature, location, source, ownership, or control of the proceeds. See United States v. Giraldi, 86 F.3d 1368, 1372 (5th Cir.1996).
The Receivers seem to grant that no one at DSC actually knew that money laundering was ongoing, arguing instead that the requisite knowledge can be established through the doctrine of deliberate ignorance. Deliberate ignorance exists where there is "a conscious effort to avoid positive knowledge of a fact which is an element of an offense charged . . . so [the defendant] can plead lack of positive knowledge in the event he should be caught." United States v. Restrepo-Granda, 575 F.2d 524, 528 (5th Cir.1978). It exists if (1) "the defendant was subjectively aware of a high probability of the existence of the illegal conduct" but (2) "purposely contrived to avoid learning of the illegal conduct." United States v. Faulkner, 17 F.3d 745, 766 (5th Cir.1994). Neither awareness of some probability of illegal conduct nor a showing the defendant should have known is enough, and so "[t]he circumstances which will support [a] deliberate indifference instruction are rare." United States v. Lara-Velasquez, 919 F.2d 946, 951 (5th Cir.1990). It requires conscious action in light of known facts amounting to a "charade of ignorance." Id. In short, "deliberate ignorance is reflected in a . . . defendant's actions which suggest, in effect, `Don't tell me, I don't want to know.'" Id. Deliberate ignorance is the legal equivalent of knowledge.
The record does not establish that any individual at DSC was subjectively aware of a high probability that Frankel was engaged in money laundering. Both parties agree that while Frankel's activity would have been suspicious to someone trained to recognize the "red flags" associated with money laundering, DSC's client specialists were not so trained.
The Receivers seek to avoid this conclusion by aggregating DSC's client specialists' experience with that of DSC's compliance officers through a "collective knowledge" theory. This argument was never raised to the district court and we need not consider it now. See Forbush v. J.C.Penney Co., 98 F.3d 817, 822 (5th Cir.
Even if we were to consider it, we note that, as a general rule, where "an essentially subjective state of mind is an element of a cause of action" we have declined to allow this element to be met by a corporation's collective knowledge, instead requiring that the state of mind "actually exist" in at least one individual and not be imputed on the basis of general principles of agency. Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir.2004); see also United States v. Philip Morris USA Inc., 566 F.3d 1095, 1122 (D.C.Cir.2009) (distinguishing "collective knowledge" from "collective intent" and questioning the latter's "legal soundness"); Restatement (2nd) Agency § 275, comment b. The first prong of our deliberate ignorance doctrine clearly falls within this category.
The Receivers' more supportable argument is that DSC's management knew that structuring DSC's policies in the way they did—requiring minimal information for account openings; taking no steps to verify this information; segregating transactional and compliance personnel; randomly assigning client specialists; systematically refusing to train client specialists to identify suspicious account behavior; all as part of a larger effort to compete on the basis of liquidity—created a high probability that its funds would be used for money laundering. Refusing to implement policies capable of identifying money laundering under these circumstances constituted "purposeful contrivance"—in other words, DSC's management knew its customers would take advantage of its structure to engage in money laundering, knew what steps would likely detect it, but declined to take these steps.
Though not directly on point, cases cited by the Receivers seem to provide some support for such a theory. See Ga. Elec. Co. v. Marshall, 595 F.2d 309, 319 (5th Cir.1979) (finding that violation of an OSHA regulation is "willful" when a corporation acts with complete indifference to its occurrence by failing to educate its employees). Certainly, failing to ask questions in the face of highly suspicious activity may be enough, in some situations, to satisfy the purposeful contrivance prong of the test. United States v. Nguyen, 493 F.3d 613, 622 (5th Cir.2007) ("Not asking questions can be considered a purposeful
Because the Receivers have presented no theory by which DSC could be properly charged with knowledge of Frankel's money laundering, summary judgment was appropriate on the Receivers' RICO conspiracy claim.
We conclude. As to the LNS accounts and subaccounts the Receivers have failed to present evidence that DSC knew or should have known of the fiduciary relationship between LNS and the insurance companies. New York law thus imposed no duty of care on DSC as to the funds passing through those accounts. The district court's judgment in this respect is affirmed. The Receivers have, however, demonstrated that they were DSC's customers as to five of the subaccounts and, consequently, we have considered DSC's liability in that context. New York law imposes a limited duty on DSC to ensure that the transactions it processed on their behalf, as its customers, were indeed authorized. The Receivers have raised a fact question as to whether, given the nature of the transactions at issue, this duty was properly discharged by DSC's reliance on Frankel's representations and the insurance companies' deposits into these accounts. We further conclude that, on the record before us, a jury could find that an inquiry into Frankel's authorization to redeem funds to foreign bank accounts would have prevented some of the insurance companies' losses. Thus, the district court's judgment in this respect is vacated, and the case is remanded for further proceedings on this claim relating to the customer accounts.
As to the RICO claims, we find the Receivers' arguments to be without merit. RICO conspiracy liability is based on the knowing participation in and facilitation of activities in violation of RICO.
For these reasons, the judgment of the district court dismissing the complaint is AFFIRMED in part and VACATED in part, and the case is REMANDED for further proceedings not inconsistent with this opinion.
AFFIRMED in part; VACATED in part; and REMANDED.
It is undisputed that DSC was acting as a "securities intermediary" and that none of the statute's three enumerated exceptions applies.
However, having found that the insurance companies were customers as to these accounts, it is clear that they are not "person[s] having an adverse claim" under this provision. See Powers v. Am. Express Fin. Advisors, Inc., 82 F.Supp.2d 448, 453 (D.Md.2000) ("One cannot view Powers as an `adverse claimant' under [Md. Commercial Law Code] Section 8-115, as she is simply one of two entitlement holders. . . ."); 8 Lawrence's Anderson on the Uniform Commercial Code § 8-102:4 [Rev.] at 654 (3d ed. 1994) ("[T]he claim of a customer against his or her broker is not an adverse claim."). This section would likely protect DSC as to LNS account activities (at least those taking place after this provision was implemented), but it cannot be thought to protect DSC against claims by its own customers that DSC failed to discharge its duty to ensure that transactions were authorized.
Section (c), the section which Frankel was convicted of violating, provides that: