Second Circuit Upholds Dismissal of Madoff-Related Claims against Bank Executives
The U.S. Court of Appeals for the Second Circuit upheld a lower court dismissal of claims alleging that a bank's CEO and 12 other executives ignored irregular transactions arising directly from Bernard Madoff's Ponzi scheme.
The appeals court determined that plaintiff shareholders failed to prove that the defendants "utterly failed to implement any reporting or information system or controls" that could have detected the Ponzi scheme. Claims were dismissed on the ground that plaintiffs "failed to allege with particularity facts sufficient to excuse [their] failure to make demand upon the Board prior to filing" their action.
Commentary
The case was brought as a derivative action under state corporate law (the appeals court addressed questions regarding federal jurisdiction in the matter). The plaintiffs generally alleged that the bank failed to implement anti-money laundering controls that would have detected Madoff's fraud. Quoting a recent Delaware Chancery Court opinion, the appeals court noted that to succeed on their claims, the plaintiffs would have had to show not just that the defendants "could have, should have, had a better reporting system," but that they had "nosuch system" (emphasis in original).