Silverman v. Citibank, N.A.

Background

Jason Nissen operated a Ponzi scheme through several companies, telling investors that their money would be used to purchase and resell event tickets. The complaint alleged that he instead used much of the money to repay other investors and enrich himself. Kenneth P. Silverman was the Chapter 7 bankruptcy trustee for the companies, and the Investors assigned their claims against Citibank to him.

Citibank was Nissen’s primary banking institution for much of the scheme. The complaint alleged that Citibank employees repeatedly identified suspicious transactions, received inquiries from the Federal Bureau of Investigation, and conducted fraud-investigation reviews. In November 2016, Citibank’s Fraud Investigation Unit recommended closing Nissen’s and the companies’ accounts, but the recommendation remained unresolved for nearly six months. During that period, Citibank relationship managers Josh Santana and Jack Crowley allegedly continued seeking overdraft approvals and other accommodations for Nissen and the companies.

The complaint also alleged that, after an investor questioned why it had received only one of two expected wire transfers, Nissen falsely claimed that Citibank had sent the money to the wrong account. Nissen forged a Citibank letter supporting that explanation. At a meeting arranged by Nissen, Santana allegedly confirmed the false explanation to the investor at Nissen’s request. Nissen later admitted that he had operated a Ponzi scheme, and Citibank closed the accounts.

Claims and Motion

Silverman asserted two claims for aiding and abetting fraud under New York law: one on behalf of the Company and one on behalf of the Investors. To plead aiding and abetting fraud, a plaintiff must allege a fraud, the defendant’s actual knowledge of that fraud, and substantial assistance that helped advance it. The court applied the heightened pleading standard for fraud, which requires the circumstances of the alleged fraud to be stated with particularity.

Citibank moved to dismiss under Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), and 9(b). It argued that the claim brought for the Company was barred by the in pari delicto doctrine, which generally prevents a party injured by its own intentional wrongdoing from recovering from another party whose conduct contributed to the loss. Citibank also argued that Silverman had not adequately alleged Citibank’s actual knowledge of Nissen’s fraud or substantial assistance in carrying it out.

The Company’s Claim

The court held that the Company’s claim was barred by the in pari delicto doctrine. Under New York law, an agent’s conduct and knowledge are generally attributed to the principal. Because Nissen’s fraud was alleged to have been committed through the Company and to have benefited it by attracting investments and prolonging its existence, the court concluded that Nissen had not entirely abandoned the Company’s interests. The narrow exception for fraud committed entirely against a company therefore did not apply.

The court dismissed the Company’s claim under Federal Rule of Civil Procedure 12(b)(6). It granted Silverman leave to replead that claim, requiring any amended complaint to be filed within fourteen days.

The Investors’ Claim

The court held that Silverman adequately pleaded that Nissen defrauded the Investors. It also held that the complaint adequately alleged Citibank’s actual knowledge. The court explained that Citibank’s suspicions and account investigations, standing alone, would not necessarily establish actual knowledge. But those allegations, considered together with the alleged delays in closing the accounts, the relationship managers’ conduct, their relationships with Nissen, and Santana’s alleged lie to an investor, supported a sufficient inference that Citibank knew Nissen was defrauding the Investors.

The court also held that the complaint adequately alleged substantial assistance. It distinguished merely maintaining accounts or processing routine transactions from Santana’s alleged intentional misrepresentation that a Citibank wire error had caused the missing payment. According to the court, that alleged lie could have concealed the fraud temporarily and supported an inference that Santana acted to advance it. The allegations therefore sufficiently connected Nissen’s fraud, Citibank’s alleged knowledge, and Santana’s alleged assistance.

Disposition

Judge Gregory H. Woods concluded that Citibank’s motion to dismiss was GRANTED in part and DENIED in part. The claim brought on behalf of the Company was dismissed without prejudice, and Silverman was granted leave to amend. The motion was denied as to the claim brought on behalf of the Investors, which was adequately pleaded at the motion-to-dismiss stage. The order did not decide whether Citibank ultimately aided and abetted the fraud; it decided only whether the Investors’ allegations were sufficient to continue the case.