The RICO suit against Wachovia

Yesterday this post discussed a notorious telemarketing scandal in which a crooked Pennsylvania company, Payment Processing Center, wrote fraudulent (unsigned) checks drawn upon the accounts of many elderly victims of con artists. P.P.C. cleaned out the victims' bank accounts by running the fraudulent checks through its accounts in a Philadelphia branch of Wachovia Bank. Wachovia had many clues that P.P.C. was engaged in a racket--including warnings from other banks--but failed to close down P.P.C.'s accounts. Though federal authorities have not charged Wachovia in the scam, the bank is now facing a civil suit.

I've discovered further information about that suit, and about the relationship between Wachovia and P.P.C., which suggests that the matter is even more scandalous than I'd indicated in the original post.

Here is a press release about the Langer & Grogan civil suit leveled against Wachovia. It gives more information about the nature of the allegations than the news story I quoted in yesterday's post.

Specifically, Langer & Grogan is bringing a class action RICO lawsuit that accuses Wachovia of more than simply "failing to clamp down" on P.P.C. (as the news report had it).

Langer & Grogan, P.C. announced today that it had filed a RICO class action alleging that Wachovia Bank, N.A. had conspired with a payment processor, Payment Processing Center ("PPC"), in a scheme that facilitated fraudulent telemarketing directed primarily at the elderly involving tens of millions of dollars.

Thus, an alleged conspiracy between P.P.C. and Wachovia is at the center of the lawsuit.

The press release also draws attention to some further details about the relationship between Wachovia and P.P.C., which would seem to demonstrate that Wachovia was indeed actively conspiring with activities it knew to be fraudulent (rather than merely behaving with indifference or sloppiness regarding its duties to forestall fraudulent activities it stumbled across).

The complaint alleges that Wachovia had a special agreement with PPC which granted Wachovia expanded refund and charge back rights. The complaint alleges that Wachovia knew that the banking services it provided were an essential element in PPC's scheme.

In fact, Wachovia itself exposed these special arrangements to scrutiny in federal court in 2006 as part of its filings related to the US Attorney's seizure of P.P.C.'s assets. Now, that was a tactical mistake, wasn't it? The mere fact that Wachovia had to make special arrangements to cope with P.P.C.'s particular problems is pretty good evidence that Wachovia actively conspired with P.P.C.

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Here are the details of this special arrangement. As I said in yesterday's post, the US Attorney in Philadelphia had frozen P.P.C.'s accounts at Wachovia, and Wachovia wanted federal judge Timothy Rice to hand the money back to Wachovia. The Bank claimed that it had deposited the money in P.P.C.'s accounts only on a provisional basis, until the checks in question could clear with the other banks they were drawn upon. Thus the money that was frozen in the P.P.C. accounts would have reverted to Wachovia, the Bank argued, once it became clear that the checks had been refused by the other banks.

All of this is spelled out in gruesome detail in a second judgment rendered in 2006 by Judge Rice (PDF), who rejected most of Wachovia's claims for the restoration of those frozen monies.

In court pleadings, Wachovia had argued that it should be given back all the frozen money, including those funds that Wachovia had failed to reclaim from the P.P.C. accounts even several weeks after the unsigned checks were deposited. Normally, as Judge Rice noted, a bank will rescind provisional payments for bad checks within a week.

To support its rather tenuous claim for recovering all of P.P.C.'s frozen assets, Wachovia told the court that it had a special arrangement with P.P.C. that permitted it to retrieve a provisional deposit for up to a month (if I read Rice's judgment correctly) after P.P.C. initially deposited a bad check. In other words, Wachovia got from P.P.C. permission to nullify provisional payments for a considerably longer period than the norm.

On the face of it, then, that special arrangement appears to show that Wachovia recognized that P.P.C. had a special problem--a high proportion of P.P.C.'s unsigned checks got refused, or got challenged a short time later. And, indeed, as I commented yesterday, in 2005 fully 59% of P.P.C.'s unsigned checks were refused and returned to Wachovia.

Thus, on the face of it, Wachovia appeared to be aware that far too many of P.P.C.'s checks were no damned good. (Wachovia certainly knew that P.P.C. was a clearinghouse for telemarketers requesting funds.)

Oh, and incidentally, Judge Rice wasn't much impressed with Wachovia's claim that this special arrangement ought to permit it to reclaim millions of dollars from P.P.C.'s frozen accounts. Rice granted reimbursement to Wachovia only for checks deposited in the 7 days before the Feds froze P.P.C.'s accounts.

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On the general subject of the greed of Wachovia, it's worth noting that Frontline produced a documentary in Feb. 2003, "Tax me if you can", which detailed how certain corporations avoid paying taxes entirely. Wachovia was a star exhibit; although it earned $3.6 billion in profits in 2002, it paid no taxes because of the foreign tax shelters it uses. The most notorious of these was a sewer system it financed in the German city of Bochum.

It will be interesting to see whether this RICO suit can dent Wachovia's colossal bottom line.

Is the Noose tightening around Wachovia Bank?

The NY Times reports on an epidemic of financial fraud that has gone almost unchecked for years. These scams are perpetrated mostly on the elderly with the active or passive assistance of several (poorly) regulated service industries—especially banks. Of those banks, Wachovia appears to be the most culpable and certainly the most flagrant in its disregard for basic rules that would inhibit such fraud.

Last year, my wife and I talked my elderly neighbor out of falling for one such scam. He had mailed in an entry to an international "sweepstakes", and soon began to get all sorts of calls and mailings that he realized came from scam artists. One appeal for personal information, however, appeared to him to be legitimate because it carried what purported to be an official seal from a European government. It took us about an hour to dissuade him from responding to the letter.

This is just one of millions of such tales. Too many of them end badly, with elderly and frequently poor victims losing their life savings.

The greater scandal is this: Fraud on a massive scale has grown in the US despite regulations that, if properly enforced by the federal government, would hinder or prevent it. Slowly, US Attorneys in several states have begun to investigate and prosecute institutions that play a role in these scams. Yet many of the institutions continue to wash their hands of any responsibility, and still fail to abide by the rules that are in place.

The scams are possible because of the personal-database industry. Companies that collect and sell personal information are required by law to ensure that their customers are not engaged in fraud. Yet some of these companies engage in fraud in order to obtain personal information in the first place (advertising fake "sweepstakes", for example); and then sell their databases to others whom they know, or have strong reason to suspect, are fraudsters. In fact, the database merchants will sometimes advertise specific lists as a database of 'marks', 'suckers', 'pigeons'...call them what you want. They know perfectly well that some of their best-paying customers are running frauds, and the database merchants tailor some of their lists accordingly.

One of the worst of these, according to the Times, is infoUSA:

InfoUSA advertised lists of “Elderly Opportunity Seekers,” 3.3 million older people “looking for ways to make money,” and “Suffering Seniors,” 4.7 million people with cancer or Alzheimer’s disease. “Oldies but Goodies” contained 500,000 gamblers over 55 years old, for 8.5 cents apiece. One list said: “These people are gullible. They want to believe that their luck can change.”...

The banks and companies that sell such services often confront evidence that they are used for fraud, according to thousands of banking documents, court filings and e-mail messages reviewed by The New York Times.

Although some companies, including Wachovia, have made refunds to victims who have complained, neither that bank nor infoUSA stopped working with criminals even after executives were warned that they were aiding continuing crimes, according to government investigators. Instead, those companies collected millions of dollars in fees from scam artists. (Neither company has been formally accused of wrongdoing by the authorities.)...

But infoUSA has also helped sell lists to companies that were under investigation or had been prosecuted for fraud, according to records collected by the Iowa attorney general...

The Federal Trade Commission’s rules prohibit list brokers from selling to companies engaged in obvious frauds...The Direct Marketing Association, which infoUSA belongs to, requires brokers to screen buyers for suspicious activity.
But internal infoUSA e-mail messages indicate that employees did not abide by those standards.

The emails cited by the Times show that infoUSA executives were aware that they were selling databases to a convicted fraudster, yet the company continued to do so.

Perhaps you expect such companies to participate in fraud, but how about supposedly legitimate banks like Wachovia? It has become notorious for assisting in telemarketing fraud mainly because of its extraordinary willingness to accept and pass along unsigned checks drawn upon the bank accounts of the "pigeons".

Perhaps you thought a bank would not cash an unsigned check drawn on your account, and with many institutions you'd be right. But when a huge national bank such as Wachovia is putting its imprimis upon unsigned checks, a surprising number of banks have been willing to honor them. Thus Wachovia became a funnel by which money is siphoned out of accounts by scam artists.

In all, Wachovia accepted $142 million of unsigned checks from companies that made unauthorized withdrawals from thousands of accounts, federal prosecutors say. Wachovia collected millions of dollars in fees from those companies, even as it failed to act on warnings, according to records.

In 2006...an executive [of Citizens Bank] wrote to Wachovia that “the purpose of this message is to put your bank on notice of this situation and to ask for your assistance in trying to shut down this scam.”

But Wachovia, which declined to comment on that communication, did not shut down the accounts.

Banking rules required Wachovia to periodically screen companies submitting unsigned checks. Yet there is little evidence Wachovia screened most of the firms that profited from the withdrawals.

In a lawsuit filed last year, the United States attorney in Philadelphia said Wachovia received thousands of warnings that it was processing fraudulent checks, but ignored them. That suit, against the company that printed those unsigned checks, Payment Processing Center, or P.P.C., did not name Wachovia as a defendant, though at least one victim has filed a pending lawsuit against the bank.

In Februrary, the US District Court in Philadelphia issued a permanent injunction against P.P.C.:

Fraudulent telemarketers use third-party payment processors like PPC to facilitate the banking procedures by which money is taken without authorization, often on a recurring basis, from victims’ bank accounts. In a civil action captioned United States of America v. Payment Processing Center, LLC, et al., Civil Action No. 06-00725 (JP), the U.S. Attorney’s Office for the Eastern District of Pennsylvania obtained a permanent injunction that terminates PPC’s operations, imposes a receivership over its assets, and establishes a multi-million dollar restitution fund for victims of PPC and fraudulent telemarketers...

U.S. Attorney Patrick L. Meehan described the permanent injunction as a warning to payment processors and others operating fraudulent schemes behind the facade of performing legitimate business...

The case began in February 2006, when the U.S. Attorney’s Office obtained a temporary restraining order against PPC and its owners, alleging that they were processing consumer payments for an international network of fraudulent telemarketers. In a civil action brought under the Anti-Fraud Injunction Statute, 18 U.S.C. §1345, the United States alleged that telemarketers duped tens of thousands of victims from across the United States, including many senior citizens, with false and misleading offers of goods and services, and manipulated consumers to disclose personal bank account information. Fraudulent telemarketers transmitted consumers’ bank account information to PPC. PPC then created unsigned bank drafts – checks without signatures – based upon the consumers’ fraudulently obtained bank account information. Using accounts at Wachovia Bank, PPC processed the unsigned bank drafts for payment. All the while, the United States alleged, the defendants knew that the telemarketers had obtained consumers’ bank account information through fraud, misrepresentations, and trickery, or that it remained indifferent the telemarketers’ illegal conduct.

You might get the sense that Wachovia knew that PPC was engaging in fraud. Certainly it should have known. In 2005, according to the Times, 59% of the unsigned checks from PPC that Wachovia sent on to other banks, were rejected and returned to Wachovia. Another bank would close an account when such obvious signs of fraud were presented.

But not Wachovia.

To get some sense of just how shamelessly Wachovia has behaved, consult this federal court ruling from June 2006. Wachovia was claiming that the government could not freeze more than $2 million in P.P.C.'s bank account with Wachovia because other banks had refused to honor the checks that it had passed along. Thus Wachovia tried to convince the court that the $2 million really belonged to Wachovia, not P.P.C.

Funny how scrupulously Wachovia was able to keep track of that money trail, once the open-secret of fraud was no longer secret from the Feds.

You won't be surprised to learn that, although the US Attorneys have so far steered clear of indicting Wachovia in such scams, the civil suits have begun.

A Philadelphia law firm said Thursday it filed a complaint in federal court accusing Wachovia Corp. (WB) unit Wachovia Bank NA of failing to clamp down a fraudulent telemarketing scheme even after another bank allegedly warned it of the scam.

Langer & Grogan PC said deceptive telemarketers obtained banking information from victims and then had now-defunct payment processor Payment Processing Center issue demand drafts for deposit in a series of Wachovia accounts.

The law firm said Wachovia continued to accept drafts from Payment Processing Center even after a second Philadelphia bank warned that it had been flooded with unauthorized drafts from the payment processor.

It couldn't happen to a nicer bank. I used to live near Charlotte, NC (where Wachovia is headquartered), and occasionally chatted with my neighbor, a long-time banking executive.

We made darned sure we kept our money out of the hands of Wachovia, and we'll continue to do so. It's been a good policy for us.