Huntington Bank must pay $81M for 2002-04 fraud scheme

Last year, we reported about a bankruptcy court’s ruling that Huntington National Bank failed to act in good faith when it allowed a company’s money to continue funneling through Huntington accounts months after fraud was suspected.

The March 2011, ruling, authored by Hon. Jeffrey Hughes of U.S. Bankruptcy Court for the Western District of Michigan, said the bank could be required to pay up to $73 million in recoverable transfers to a trustee representing lenders defrauded by the now-defunct CyberNET Engineering (d/b/a Cyberco).

On Aug. 1, 2012, Hughes’ final report to U.S. District Court for the Western District of Michigan — based on his July 23, 2012, opinion — was issued, and it awarded the trustee approximately $81 million. The total includes approximately $9 million interest from the date that each fraudulent transfer was received by Huntington from September 2002 through October 2004.

The fraudulent deals started out small — less than $1 million — but by 2004, they rapidly got larger. In all, up to 40 finance companies and banks were bilked out of up to $90 million.

Douglas Donnell of Mika Meyers Beckett & Jones PLC in Grand Rapids, who represented the trustee, told Michigan Lawyers Weekly last year that enough red flags had sprouted up along the way to give Huntington cause to drop Cyberco’s credit line.

One of them was highlighted in Hughes’ March 2011 opinion, where the bank’s then-regional security officer discovered in April 2004 that Cyberco head Barton Watson had served three years in prison for securities fraud, but didn’t tell his superiors or others investigating Cyberco until four months later.

“That’s almost a textbook definition of willful blindness,” Donnell told Lawyers Weekly at the time. “You can’t stick your head in the sand and pretend like you don’t know anything when, in fact, in this case, you did know it.”

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Suit alleging law school’s misleading post-grad numbers dropped

A $300,000 class-action lawsuit against The Thomas M. Cooley Law School was dismissed by U.S. District Judge Gordon Quist on Friday.

The lawsuit, filed August 2011 by 12 Cooley graduates, alleged they were misled by Cooley’s post-graduate employment reports.

In granting Cooley’s motion to dismiss, Quist noted that while the school’s employment and salary figures were “vague and incomplete,” the students should have relied on more than statistics when making their decision to enroll.

“Plaintiffs and prospective students should have approached their decision to enter into law school with extreme caution given the size of the investment,” Quist wrote. “With red flags waiving and cautionary bells ringing, an ordinary prudent person would not have relied on the statistics to decide to spend $100,000 or more.”

In addition, the graduates alleged fraud and negligent misrepresentation on Cooley’s part, and violated the Michigan Consumer Protection Act.

But Quist said the MCPA applies to “providing goods, property, or service primarily for personal, family or household purposes.” As such, “the MCPA did not apply because the plaintiff purchased the services for a business or commercial purpose,” he wrote.

Besides saying that the plaintiffs unreasonably deduced that the “percentage of graduates employed” statistic included only graduates who were employed in full-time legal positions, Quist wrote that it was unreasonable to believe Cooley’s stated average starting salary of $54,796 represented a figure for all its graduates. That figure represents the average salary of graduates who responded to the school’s survey and chose to reveal their salaries.

$295M settlement reached in state’s potential class action against Bear Stearns

In what Attorney General Bill Schuette is calling “good news for Michigan taxpayers,” a national class-action securities fraud lawsuit against Bear Stearns and Deloitte & Touche has been settled for $295 million.

Hon. Robert Sweet, U.S. District Judge for the Southern District of New York, granted preliminary approval to the proposed suit, in which Michigan was court-appointed lead plaintiff.

As part of the deal, the defendants will pay investors nationwide — including State of Michigan Retirement Systems (SMRS) — after being misled about the value and risks of Bear Stearns’ mortgage-backed assets.

The amount SMRS will receive as part of the settlement will be finalized Sept. 19.

In a statement, Schuette called the settlement “good news for Michigan taxpayers. … [This] demonstrates our commitment to holding accountable any bank or investment firm that violates the public trust.”

Michigan contended that Bear Stearns and auditor Deloitte & Touche misled the state’s pension fund and other investors about risky exposure to the U.S. housing market and subsequent write-downs to its assets, which led to Bear Stearns and its stock collapsing.

Drug-immunity law bans AG’s Vioxx-Medicaid suit, MSC rules

Merck Corp. took Vioxx, a pain-relief drug, off the market in 2004 (not soon enough, many lawsuits claimed) because the drug had the unintended side-effect of increasing the risk of heart attacks.

Under Michigan’s 1996 drug-manufacturer immunity law, MCL 600.2946(5), Michigan residents could not press Vioxx-related product-liability claims against Merck.

A divided Michigan Supreme Court has upheld a Court of Appeals decision, issued earlier this year, which held that the immunity law also barred the state attorney general’s 2008 suit against Merck under Michigan’s Medicaid False Claims Act for the $20 million the state paid for Vioxx prescriptions dispensed to Medicaid patients.

The attorney general alleged “that because Merck misrepresented the safety and efficacy of Vioxx in its marketing and because Michigan reimbursed providers who prescribed or dispensed Vioxx, Michigan would not have incurred such expenses but for Merck’s fraudulent activity.”

The COA majority in Attorney General State of Michigan, et al. v. Merck Sharp & Dohme Corp., characterized the attorney general’s suit as a product liability action and held that MCL 600.2946(5) barred the suit.

Over the weekend, Chief Justice Robert P. Young Jr., and Justices Stephen J. Markman, Mary Beth Kelly and Brian K. Zahra sided with the COA majority and denied the state’s application for leave to appeal.

Justices Michael F. Cavanagh and Diane M. Hathway would have granted leave. So would have Justice Marilyn Kelly, who said that the suit was a fraud claim, pure and simple, and had nothing to do with product liability:

MCL 600.2945(h) defines a “product liability action” as “an action based on a legal or equitable theory of liability brought for the death of a person or for injury to a person or damage to property caused by or resulting from the production of a product.”

The Court of Appeals majority held that plaintiffs’ allegations fall within this statutory definition because they assert legal and equitable theories of liability for damage to property resulting from the production of a product. Essentially, the court held that plaintiffs’ alleged financial damages in the form of payments to Medicare patients amount to “damage to property.”

This defies common sense and a rational understanding of the statutory phrase “damage to property.”

Kelly said the dissenting COA judge had it right:

As dissenting Court of Appeals Judge FITZGERALD noted, “[w]hen examined in the proper context of a product liability statute, it is clear that ‘damage to property’ means physical damage to property caused by a defective or unreasonably dangerous product.”

Think about this way, Kelly continued:

Product liability cases are generally brought by or on behalf of people who have suffered injury or damage to their physical property because of the use of a product.

Hence, if a customer buys a product and it burns down his or her house, that person may bring a product liability action. However, if that same customer buys a product, such as fireworks, with the expectation that it will blow up, and it does not work as promised, no product liability action lies.

The latter hypothetical situation is analogous to the instant case. Plaintiffs are attempting to recover money spent for a product that allegedly did not live up to defendant’s representations.

This case is not a product liability action because no physical injury is claimed.

AG arrests 3 in Ponzi scheme

Attorney General Mike Cox announced yesterday the arrest of three men accused of swindling 125 Michigan senior citizens in a Ponzi scheme. According to a press release from Cox’s office, the trio sold the seniors — some of whom reported losing their life savings — time-shares in foreign resort properties. The problem is that they sold more time-shares than the amount that were available.

The men were operating in multiple states, and allegedly took in some $350 million, including some $9 million in Michigan.

From the announcement:
Jeffrey Ron Mitchell, 39, of Walled Lake, Robert Valeri, Sr., 59, of South Lyon, and Robert Antonio Valeri, Jr., 32, of Canton allegedly participated with Indiana resident and scam mastermind Michael Kelly in a massive Ponzi scheme, selling time shares in the form of an unregistered security called a “Universal Lease” through a company called Resort Holdings International. 

They are accused of targeting senior citizens and retirees with marketing efforts that illegally promoted the lease as a safe investment opportunity with the promise of large monetary returns. 

While seniors purchasing the lease were allegedly given the option to use the vacation property during specified times over a 25 year term, they were also given the option of having a purported third-party management company arrange for the rental of the unit during the same time period for a guaranteed 9 percent return–whether the unit was rented or not.  They were encouraged to elect the latter option and everyone who purchased the lease did. In reality, Kelly also controlled the third-party management company.

 Read the entire release here.