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TD Centre in Toronto on Jan. 4, 2021.

Fred Lum/The Globe and Mail

A US$4.5-billion lawsuit against Toronto-Dominion Bank (TD-T) over its role in providing bank accounts to offshore companies that were part of one of the world’s largest Ponzi schemes is going to trial in Toronto on Monday after a decade of legal wrangling.

The case hinges on whether TD, which is Canada’s largest bank by assets, is liable for huge losses owed to investors. The lawsuit alleges the bank failed to detect the fraud or heed alleged red flags about activity in accounts controlled by the fraud’s mastermind, Allen Stanford.

Those accounts, which TD kept open for most of two decades, helped Mr. Stanford move billions of dollars for clients who bought investment products through Stanford International Bank Ltd. (SIB) and a variety of offshore companies. Most of that money moved through the U.S. via TD, which served as a financial lifeline for Mr. Stanford’s Caribbean-based businesses.

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The lawsuit illustrates the risks banks face when engaging in the fraught intricacies of offshore banking, as well as the difficulty in assigning blame for crimes that make use of those financial networks. The billions of dollars in damages lawyers are seeking – which could include TD returning any profits it made from Mr. Stanford’s businesses over an 18-year span – would be a large sum even for a bank of TD’s size.

“Like everyone else, during the time that Stanford International Bank was a customer of TD, we had no knowledge of, and no reason to suspect any fraudulent activity was taking place,” TD spokesperson Paolo Pasquini said in an e-mail on Friday. “TD is not responsible for the fraud committed by Allen Stanford.”

Mr. Stanford is a Texas-born ex-billionaire who built a financial empire from his adopted home in the Caribbean, only to have it exposed as a massive US$7.2-billion fraud in 2009. Mr. Stanford is now serving a 110-year prison sentence in Florida. Among Ponzi schemes that have been prosecuted worldwide, only the one run by disgraced financier Bernie Madoff was larger.

The lawsuit was launched in 2011 by liquidators in charge of winding up Stanford International Bank, an offshore company Mr. Stanford owned in Antigua and Barbuda that played a key role in the scheme. Lawyers are seeking to recover as much as US$4.5-billion owed to Mr. Stanford’s 21,000 former clients, many of whom have only recovered pennies on the dollar so far.

One of those lawyers is Martin Kenney, an asset-recovery specialist based in the British Virgin Islands whose younger brother is Alberta Premier Jason Kenney. He is working in tandem with Toronto-based trial lawyers at Bennett Jones LLP.

“In opening and maintaining its relationship with SIB, TD Bank was negligent,” the lawyers allege in court filings.

In response, TD claimed in its own filing that it “could not have uncovered SIB’s fraud.” Although lawyers for the plaintiffs have cited an array of apparent red flags, “without 20-20 hindsight and without possessing the knowledge that SIB had been a Ponzi scheme fraud, there were no red flags at the material time,” the bank said.

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From 1991 until 2009, TD operated correspondent bank accounts for SIB and other companies Mr. Stanford owned. Correspondent banking is a common practice in which financial institutions provide accounts and other services – such as foreign exchange and lending – to foreign banks, helping connect them to the global financial system. But correspondent relationships have also drawn increasing scrutiny from regulators and law enforcement for being susceptible to money laundering and other financial crimes.

By the time the fraud led by Mr. Stanford was uncovered, SIB was TD’s largest correspondent banking customer anywhere in the world, the lawsuit alleges. In the preceding year, more than US$2.5-billion was credited to SIB’s account at TD, according to court filings.

Mr. Stanford and other insiders at his companies were convicted of looting the enterprise, which sold at least US$7.2-billion in financial products to investors over more than two decades. They made speculative investments, concealed billions of dollars in shareholder loans to Mr. Stanford, and misused funds to bankroll the extravagant lifestyles he and his executives lived, which included owning a small Caribbean island, private jets and helicopters, and luxury mansions, according to court filings.

TD was introduced to Mr. Stanford and his companies by another bank, and opened the first correspondent account in 1991. Lawyers for SIB’s liquidators allege that TD failed to do reasonable due diligence, guided by standards requiring banks to know their clients and guard against money laundering – both when the accounts were opened and for years after.

But TD contends that it did not breach any standards “that were applicable at the time.” More stringent rules to curb international financial crimes were only introduced in the later years of Mr. Stanford’s scheme.

Even so, the lawsuit alleges that TD saw some warning signs and chose not to act. For example, after TD bankers travelled to Houston in 2000 to do due diligence on SIB, one TD employee recommended further investigation because “something did not seem right,” according to court filings.

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Bankers from TD met with Mr. Stanford and staff at his companies in Toronto, Montreal, Houston, Memphis and Antigua. Lawyers for SIB’s liquidators allege that those visits “consisted primarily of expensive meals” and social events, including attending golf and cricket tournaments that Mr. Stanford hosted.

But TD rejects that claim, and said its staff had “substantive meetings” where they learned about SIB and Mr. Stanford’s other companies – “to the extent that such operations were not actively concealed by Mr. Stanford and the small circle around him.”

The trial is scheduled to take three months, with procedural matters and opening statements starting on Monday.

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