Bank of Montreal BMO-T faces a multibillion-dollar lawsuit in the United States related to one of the biggest Ponzi schemes in history. Its shockingly bad behaviour in court could put its shareholders at greater risk of footing the bill if it loses. And neither of these things are well-known to those shareholders.
Many Canadians are in the dark about this because BMO only began to disclose information about the lawsuit – which it inherited through the purchase of a U.S. bank – in its securities filings in the second half of 2021, nine years after the suit was filed.
The lagging and limited disclosure reveals little about what seems to be a big problem with the way the bank is conducting itself in the U.S. legal system. BMO has been sanctioned twice in the past decade by U.S. judges for failing to turn over evidence to opposing parties in lawsuits, with judges in both cases using the word “lie” to describe what BMO had done.
It’s entirely possible that BMO could prevail in the suit, or emerge with minimal financial damage. But its behaviour should give its shareholders pause, given that it is now buying California-based Bank of the West, adding the potential for more U.S. business disputes.
In a statement, spokesperson Paul Gammal said “BMO’s reputation is built on its commitment to high standards of business conduct and financial disclosure.” He also said BMO “continues to vigorously defend itself against unmeritorious allegations about the banking relationship between a company engaged in fraud and a bank that BMO acquired several years after public disclosure of the fraud. … We look forward to presenting the facts to the court.”
First, let’s examine the recently disclosed lawsuit, in which the main allegations have yet to be proven in court.
BMO’s U.S. subsidiary, BMO Harris Bank N.A., bought Milwaukee-based M&I Marshall and Ilsley Bank in 2011. M&I, in turn, had purchased a bank that counted Minnesota businessman Thomas Joseph Petters among its clients.
In 2008, Mr. Petters’s world crumbled when it was revealed he was running what was, pre-Madoff, the biggest Ponzi scheme in history, estimated by U.S. federal authorities at US$1.9-billion over 15 years. He was convicted and sentenced to 50 years in federal prison.
The trustee in the bankruptcy of Mr. Petters’s companies sued BMO Harris Bank in 2012. BMO, still standing and with deep pockets, was an obvious target for those attempting to recover money for Mr. Petters’s victims. The trustee is asking for US$1.9-billion in compensatory damages. Interest charges could double any award. Punitive damages could add billions more, although BMO could escape with a much smaller payment, or none.
The amount sought is more than the bank’s total earnings in the fourth quarter of the past year, so a finding against the bank could wipe out a quarter’s worth of profit and lead to a drop in share prices.
The trustee argues that M&I facilitated the Ponzi scheme, standing by as Mr. Petters moved tens of millions of dollars in and out of his corporate and personal accounts. The pattern of money movement was wholly inconsistent with what M&I understood to be the business model of Mr. Petters’s companies, the trustee alleges.
In a lawsuit, the opposing parties engage in discovery – the sharing of relevant information that helps each build its case. It is here that BMO seems to have a problem. The trustee filed a motion asking for sanctions against BMO Harris Bank, and Judge Kathleen Sanberg agreed in July, 2019, ruling the bank “intentionally destroyed and failed to preserve [evidence] in bad faith.”
She found M&I destroyed computer backup tapes in 2010 and 2011 that likely contained documents and memos sent between its bankers and Mr. Petters. The judge said it happened outside the bank’s standard retention policy and after a “litigation hold” was ordered to preserve evidence.
In 2014, BMO Harris Bank employees found some tapes that might have contained evidence – but then falsely told the court all tapes were gone, according to Judge Sandberg’s pre-trial ruling on the trustee’s request for sanctions. The judge said the bank failed to tell its outside lawyers about the tape discovery, and the lawyers made false statements to the court after they found out.
BMO Harris Bank, the judge ruled, “has failed to be candid and has fought discovery at every step … has lied to this court and has attempted to hide evidence on several occasions.”
The judge’s ruling, importantly, restricts BMO’s defense in the upcoming trial and allows the jury to hear about the evidence destruction, which might result in higher financial damages to the bank. (BMO is appealing this ruling.)
It might be unfair to single out BMO for this case – if it weren’t for a strikingly similar evidentiary problem in Wisconsin, where a contractor sued M&I/BMO in 2016 for missed payments on a condo construction venture. A state circuit court sanctioned BMO for violations of discovery, noting in its ruling that BMO gave “disingenuous” and “egregious” responses to the plaintiff and to the court.
According to the ruling, BMO Harris Bank delayed turning over evidence and produced two witnesses unable to answer the plaintiff’s questions about the facts in the case. One of the witnesses lied on the stand, the circuit court found.
“BMO continues to thumb its nose at the rules of discovery in civil proceedings in this case,” the judges wrote. “Lie, lie, lie, shift blame on somebody else, anybody else but themselves, and say nope, didn’t happen, when the evidence is in their computer system, in their files, it is in the minds of their employees who aren’t produced for deposition, who aren’t made available to speak the truth.” (The Wisconsin Supreme Court upheld the ruling last year.)
In response to questions from The Globe and Mail about BMO Harris Bank’s conduct, Mr. Gammal said: “BMO approaches litigation with integrity and a commitment to high ethical standards, including by partnering with expert outside counsel.”
Companies often disclose lawsuits and legal matters in their securities filings without identifying them. But Canada’s securities regulators say the “commencement” of legal proceedings should be disclosed when they are material – when they can reasonably be expected to have a significant effect on the market price.
Mr. Gammal said BMO included the matter in its disclosures for the third quarter of 2021 “after being advised that a trial would take place in the first half of 2022.” The date was postponed, and BMO believes it will occur “no earlier than late 2022.”
BMO’s financial disclosure and its conduct in the court cases have a common theme: It was as if the lawsuits didn’t exist, or weren’t to be taken too seriously. The strategy didn’t work with the judges, and now the Ponzi lawsuit seems to pose a meaningful risk to the company.
It’s a shame BMO wasn’t in more of a sharing mood much, much earlier – let’s hope the shareholders don’t pay the price.
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David Milstead