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Wells Fargo Ponzi Suit Airs Bank Risk in Law Firm Trust Accounts

July 21, 2022, 9:30 AM

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at a bank’s response to curious account activity from one of Nevada’s fastest-growing law firms, which was really a Ponzi scheme. Sign up to receive this column in your inbox on Thursday mornings.

Matthew Beasley told Wells Fargo & Co. his solo law practice would collect about $350,000 a year when he set up a firm trust account at a branch in Las Vegas in 2017.

Instead, the account resembled that of one of the fastest growing law firms in the US. It took in $30 million in February alone, and deposits more than doubled in 2020 and 2021 after tripling in 2019.

Beasley wasn’t running a successful law firm—he was operating a nearly $500 million Ponzi Scheme, according to federal prosecutors. He faces criminal charges and the US Securities and Exchange Commission has named him in a civil complaint.

Now Wells Fargo is in the crosshairs of Beasley’s investors. The group filed a class-action complaint this month alleging the bank aided the scheme.

The case raises questions: What responsibilities do banks have to oversee law firm trust accounts? How much do they need to know to be held liable for fraudulent activity?

The type of account Beasley used is called an IOLTA, which stands for “interest on lawyer trust accounts.”

Lawyers use IOLTAs to hold client funds for court fees and other payments, including drawing down retainers. Account interest goes to legal aid programs.

State bar authorities somewhat oversee the accounts, performing occasional, random audits. Banks must notify the bars when lawyers do overdrafts.

Wells Fargo missed red flag after red flag in Beasley’s IOLTA account, his investors allege. These included the mismatch between what he said the account would generate and how much it collected.

Beasley paid his firm more than $17 million from the account over a roughly four-year span after telling the bank he usually earned six figures, according to the investors.

He routinely withdrew large chunks of cash, something lawyers are warned against doing, and wrote checks to local car dealerships.

Other red flags included deposited checks earmarked as “investments”—something an IOLTA account normally wouldn’t hold.

“Wells needs to explain what went wrong,” said Daniel Girard, a lead lawyer for Beasley’s investors, in a statement. “IOLTAs are limited purpose trust accounts, they are not checking accounts or investment escrow accounts.”

Wells Fargo declined to comment on the litigation. Its response to the lawsuit is due early next month.

‘Disparity’

The biggest issue in the suit, based on complaint allegations, “is the disparity between the lawyer’s type of practice and the alleged utilization of the account,” said Josh J.T. Byrne, a member of Marshall Dennehy’s professional liability department.

Showing that Wells Fargo had actual knowledge of the fraud will be a main hurdle for Beasley’s investors.

The bank’s sophisticated software and trained bank personnel monitored account activity, the investor complaint alleges.

Employees in at least one Wells Fargo branch alerted a corporate group in the bank to the account’s suspicious behavior but were told multiple times to continue to process transactions, the investors claim.

An SEC forensic accountant testified that over the life of the account he could not identify any transactions consistent with making payments to tort plaintiffs or their lawyers—or signs the money was a result of settlements reached with insurance companies.

The SEC civil complaint against Beasley and nine other defendants in April alleges the group persuaded more than 600 investors they’d receive annual returns of 50% or more stemming from lawsuit settlements.

Ponzi Schemes

Wells Fargo is far from the first bank to be accused of assisting a Ponzi scheme.

TD Bank was targeted after Florida lawyer Scott Rothstein’s more than $1 billion Ponzi scheme unraveled in 2009. Like Beasley, Rothstein told investors they were financing soon-to-be-paid lawsuit settlements at high interest rates.

TD Bank reportedly paid a $170 million settlement in 2012 for claims brought by Rothstein’s investors.

The SEC filed a complaint against TD Bank and a former executive, Frank Spinosa, for violating securities laws, leading to a $15 million civil fine.

Spinosa was sentenced to 30 months in prison for conspiring with Rothstein, including by drafting fraudulent documents.

More recently, the US Court of Appeals for the Ninth Circuit (which covers Nevada) in 2019 revived a claim brought by investors in a Ponzi scheme seeking compensation from California Bank & Trust.

The opinion held the investors had made a “plausible” claim that California Bank & Trust had “actual knowledge” of the fraudulent scheme, including by alleging the bank knew the scheme’s underlying business—importing rubber gloves—generated no revenue.

The parties moved to settle that case last month with a $14 million payment.

There’s at least one early lesson in all of this for banks doing business with lawyers: It pays to be skeptical about rapidly growing law firms.

As the investor complaint points out, Beasley’s high income “made him an outlier in Nevada among lawyers practicing family and personal-injury law.”

Beasley in a four-hour standoff during his arrest in March allegedly admitted to the scheme. (He faces criminal charges for assaulting officers, as he allegedly brandished a firearm before FBI agents shot and injured him.)

In his alleged confession he reportedly told the FBI his “bank records will make it all clear,” according to a court transcript from his criminal case.

Whether those same records will now implicate Wells Fargo remains to be seen.

Worth Your Time

On Big Law and Abortion: Roughly two-thirds of the 70 largest law firms with Texas offices have not publicly said whether they will cover employees’ costs to travel for abortions, now that the procedure is largely banned in the state, Meghan Tribe and Maia Spoto report.

On Baker McKenzie: Former Manhattan District Attorney Cyrus Vance Jr. is building a cybersecurity practice in his second act at Baker McKenzie, hiring a colleague from his old office this week as he pushes a public-private collaborative response to cybercrime.

On Big Law and Politics: Sen. Ron Johnson (R-Wis.) won’t support a Perkins Coie attorney’s nomination to be a US attorney in his state over now-deleted tweets, Madison Alder reports. The controversy could sink Sopen Shah’s confirmation.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Chris Opfer at copfer@bloomberglaw.com; John Hughes at jhughes@bloombergindustry.com