Toronto-Dominion Bank TD-T has agreed to pay US$1.21-billion to settle a lawsuit from investors accusing it of contributing to one of the world’s largest Ponzi schemes.
The bank was accused of missing or ignoring red flags in a scheme led by Allen Stanford, a former Texas billionaire whose financial empire unravelled in 2009 to reveal a US$7.2-billion fraud. The litigation alleged that TD was liable for massive investor losses because it operated bank accounts for Mr. Stanford’s offshore companies for almost two decades.
TD has continually denied allegations of liability or that it knowingly neglected risks in Mr. Stanford’s business. The bank said in a statement that it “acted properly at all times.”
“TD elected to settle the matter to avoid the distraction and uncertainty of continuing a long legal proceeding,” the lender said in a statement.
Two other banks also agreed to settle the lawsuit while denying any liability. London-based HSBC Holdings Plc HSBC-N will pay US$40-million, and Texas-based Independent Bank Group Inc. IBTX-Q, formerly Bank of Houston, will pay US$100-million.
TD has also gone to court in Canada over the accusations. An Ontario judge dismissed the US$4.5-billion lawsuit in 2021. After a trial that lasted more than a month, the Ontario Superior Court of Justice decided “there is no basis to conclude that TD Bank knew or suspected” that Mr. Stanford was engaging in fraudulent behaviour, adding that the lender did not owe a duty of care to protect its clients from abuse by company insiders.
Mr. Stanford used TD accounts first opened in 1991 to move billions of dollars across borders for investors who bought products through Stanford International Bank Ltd., an offshore company in Antigua and Barbuda. He is serving 110 years in prison after looting investor money and using it for lavish purchases, including a Caribbean island, private jets, helicopters and mansions.
As part of the settlement, TD said it will post a legal provision of about US$1.2-billion after tax in its first-quarter financial results, to be released Thursday.
The financial blow comes as Canada’s banks are facing regulatory pressure to hold larger amounts of money as a cushion against turbulent economic times. Meanwhile, TD is putting its peer-leading excess capital to use by acquiring Tennessee-based First Horizon Corp. FHN-N and New York-based boutique investment bank Cowen Inc.
In December, Canada’s banking regulator increased the domestic stability buffer (DSB), requiring banks to store more capital during good economic times to limit the damage from downturns. The Office of the Superintendent of Financial Institutions (OSFI) also increased the maximum level to which the DSB can rise, opening the possibility of the minimum common equity tier (CET1) ratio, a key measure of a bank’s ability to cover sour loans, reaching 12 per cent from the current 11 per cent.
The legal settlement could lower TD’s CET1 ratio to about 15.9 per cent from 16.2 per cent – a “notable capital hit,” according to NBC Financial Markets analyst Gabriel Dechaine. By the second fiscal quarter, which ends April 30, TD’s ratio could fall to 11.6 per cent, including the impact of the acquisitions, he added.
Even so, TD should not have to raise equity, as it could instead rely on drumming up capital internally or by selling some of its stake in Charles Schwab Corp., Mr. Dechaine said.
TD is one of several banks to take large legal charges in recent months. In mid-February, Canadian Imperial Bank of Commerce said it had agreed to pay US$770-million after it was found liable for losses incurred by a New York hedge fund in debt deals related to the 2008 U.S. housing crisis.
On Friday, the bank released first-quarter earnings and recorded a 77-per-cent drop in net income, largely because of a legal provision of $1.17-billion announced before the bank finalized its settlement. But even after the capital hit, its CET1 ratio beat analysts’ expectations, landing at 11.6 per cent.
In November, a Minnesota bankruptcy court found the U.S. arm of Bank of Montreal liable for US$564-million in damages in a lawsuit related to another large Ponzi scheme. In its fourth-quarter earnings release in December, the lender set aside $1.14-billion in legal provisions as it prepared to appeal the decision.