Fifth Circuit Finds Duty On Investment Company To Ensure That Customer Transactions It Processed Were Authorized

The receivers of a number of insurance companies argued that the insurers’ assets were looted through a complex fraud scheme perpetrated by Martin Frankel, and they sought to impose liability on the investment company through which Frankel funneled the insurance companies’ funds before moving them to his Swiss bank account. Had the investment company properly discharged its duties, the receivers argued, it would have uncovered Frankel’s scheme and their losses would have been averted.  

The district court granted summary judgment in favor of the investment company, but the Fifth Circuit Court of Appeals has just reversed. In its decision, the appellate court ruled that applicable New York law imposed a duty on the investment company – running only to the named subaccounts –  “to ensure  that  the  transactions  it  processe[d]  on  behalf  of  its  customers  [were] authorized.” It added that the receivers had raised a fact question as to whether, given the nature of the transactions at issue, this duty had been properly discharged by the investment company’s reliance on Frankel’s representations and the insurance companies’ deposits into these accounts.  It further concluded that a jury could find that an inquiry into Frankel’s authorization to redeem funds to foreign bank accounts would have prevented some of the insurance companies’ losses. Thus, the appellate court remanded the case to the district court for further proceedings relating to the customer accounts.

The case is Chaney v. Dreyfuss Service Corp., No. 08-60555 (5th Cir. Jan. 25, 2010).